Activity-Based Costing: a Case Study on a Taiwanese

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Activity-Based Costing: a Case Study on a Taiwanese
Hot Spring Country Inn’s Cost Calculations
Wen-Hsien Tsai
Department of Business Administration
National Central University, Chung-Li, Taiwan, ROC
Jui-Ling Hsu
Department of Business Administration
National Central University, Chung-Li, Taiwan, ROC
Department of International Trade
Ta-Hwa Institute of Technology, Hsin-Chu, Taiwan, ROC

Abstract

The aim of this paper is to analyze the operational costs of a hot spring inn in the Yang-Ming-Shan area of Taiwan. The activity-based costing method was used to compute lodging, hot spring use and meal serving costs per customer. This paper overcomes all the obstacles to implementing full-scale ABC-based accounting to this hot spring country inn. In this case, products, defined as hot spring use, lodging and meal serving are used as the cost objects. We define five activity centers: the cleaning activity center, the customer service center, the cooking and foodservice center, the reception service center and the management center. Finally, we use the ABC method to calculate the costs of hot spring use, lodging and meal serving as NT$ 31.64, NT$ 306.21 and NT$ 67.28 per customer respectively in the busy winter seasons. The paper also compares the ABC method with the traditional costing method and concludes that the ABC method is practical and appropriate for such a hot spring country inn and yields more accurate information for cost management and pricing decisions.

Key Words: Activity-Based costing, Country Inn, Hot Spring, Cost Analysis

1. Introduction

Researchers in management accounting have traditionally been, above all, interested in the accounting systems of large manufacturing companies. Most accounting researchers interested in service production have conducted their research in non-profit seeking, public-sector organizations (Pellinen 2003, p. 217). Outside the non-profit sector, the number of studies on the management accounting practices of service organizations (profit seeking) have remained very limited (Brignall et al., 1991; Sharma, 2002). More unfortunately, non-traditional lodging, (i.e. the B&B industry), is totally lacking in management accounting research, in contrast with the traditional lodging industry, which is quite well-researched.

The aim of this paper is to illustrate how activity-based costing (ABC) can be applied to a hot spring country inn in order to obtain information on activities and products for decision making purposes. ABC is a cost-accounting method that allocates resource costs to products using a two stage procedure on the basis of activity consumption by drivers. It’s a method which can overcome many of the limitations of traditional cost systems which can distort product cost because they allocate the overhead costs to products mainly by direct labor hours (or volume-related measures). This is particularly prone to result in distortions in cases where there is a large overhead ratio or a high degree of product diversity.

The country inn style of non-traditional lodging, especially suitable for ABC application, has various products such as lodging, hot spring use and dining which belong to different market segments. The indirect costs of this inn constitute an important proportion of the total costs (53.46%). In such a typical situation, the valuing of products of this inn may be distorted by a traditional accounting system. This article portrays an attempt to apply the ABC model to a hot spring country inn where the managers normally use a traditional accounting method to acquire product cost information. Our case study is presented in the hope of contributing to management accounting research in the non-traditional accommodations area.

In addition to the introduction, there are four main sections in this paper. The subsequent section reviews previous research in management accounting for the lodging industry. The third...
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