Cost And Revenue Management In Hospitality Industry

Cost Driver and Cost Behaviour

The main assertions of the report are based on understanding of cost and revenue management in hospitality industry. The concepts included for the assertions include cost, strategic pricing, revenue management, cost control techniques and analytical reasonings. Some of the main discussion of the computational aspect are based on case study of “Event Hospitality & Entertainment Limited”. The report has been segregated into three parts. The first section of the report deals with excerpt taken from the income statement for evaluating and identifying the cost drivers and differentiating them as per fixed and variable costs. The second part of the report has investigated the income statement and presented a vertical analysis is thereby stating the recommendation for the business on how they will be able to increase the business sales by reducing cost simultaneously. The final section has emphasised on the cost drivers and suggest which should be adopted by the business (Kapi?, 2014).

The interpretation of information of the income statement has identified the fixed cost for hotel as “rent for premises, Internet, advertisement and insurance”. The rationale of selecting these items as fixed cost is due to the fact that they remain constant even with an increase or decrease in the occupancy rate. The main driver for the fixed cost rent is identified with total number of property in possession of the “Event Hospitality & Entertainment Limited” (McLaughlin et al., 2014). The main cost driver for Internet is dependent on the speed and network operator, advertisement is based on media selection such as video advertisement or picture advertisement. Based on the risk covered by the company the insurance cost will vary accordingly (Babad et al., 2015). On the other hand, the variable costs such as “full-time housekeeping expense, casual housekeeping expense, electricity, water expenses, laundry expenses and Netflix subscription” will completely depend on the total occupancy rate or in other terms number of guests in the hotel. Henceforth, the cost driver for the variable expenses is determined with occupancy rate (Mahal & Hossain, 2015).

The vertical analysis performed by the excerpts taken from income statement has been considered with the expenses, gross margin and profit before tax as a percentage of total revenue on by the company in each day of the week. This analysis has clearly shown the net profit or loss generated out of the revenue and the proportion of expense incurred in terms of total revenue earned on each day of the week (Kapian & Anderson, 2014). Based on the various analysis and synthesis of information in a quantitative manner it can be clearly seen that the housekeeping expenses are the most significant expense incurred by the company in revenue generation. This is inferred with housekeeping expenses percentage of 92.47% from Monday to Tuesday, 67.25% from Wednesday to and Thursday50.44% from Friday to Sunday (NICE, 2016).

Behaviour of Cost

It needs to be discerned that as per the present proposal a significant amount of profit on Monday and Tuesday is lost due to high amount of housekeeping expense. It needs to be further noted that the housekeeping expense is dependent on occupancy rate. On both Monday and Tuesday the occupancy rate is 50% whereas there are six casual housekeepers working on that day. Due to lesser amount of occupancy rate on these days, the company can significantly reduce the total number of casual housekeepers from 6 to 4 (Barros & Ferreira, 2017). In this way, the company will be able to reduce the total number of housekeeping expense on Monday and Tuesday when the occupancy rate is only 50%. Due to the minimised amount of housekeeping expenses on Monday and Tuesday, the gross margin and profits earned on that day will significantly improve (Novozymes et al., 2016). Henceforth, it can be clearly depicted that by using the cost driver occupancy rate/number of guests, there is a considerable amount of scope converting losses into profits. On rest of the days, the profit trend is depicted with a linear growth and henceforth, it is not necessary to change any cost driver for the expenses incurred on these days as this can hamper the quality and customer service (Hofmann & Bosshard, 2017).

Conclusion

The various depictions made on Cost Driver and Cost Behaviour has stated that the rationale of selecting fixed cost is due to the fact that they remain constant even with an increase or decrease in the occupancy rate. The main driver for the fixed cost rent is identified with total number of property in possession of the “Event Hospitality & Entertainment Limited”. Additionally, the various analysis and synthesis of information in a quantitative manner it can be clearly seen that the housekeeping expenses are the most significant expense incurred by the company in revenue generation. The company can significantly reduce the total number of casual housekeepers from 6 to 4 on Monday and Tuesday. Due to the minimised amount of housekeeping expenses on Monday and Tuesday, the gross margin and profits earned on that day will significantly improve. 

References

Babad, Y. M., Balachandran, B. V., BITTENCOURT, O. N. D. A. S., Bornia, A. C., Botelho, E., Brimson, J. A., … Lembeck, M. (2015). Activity-based costing for hospitals. The Accounting Review, 5(3), 3–34. https://doi.org/10.1111/j.1467-6281.2012.00366.x

Barros, R. S., & Ferreira, A. M. D. S. da C. (2017). Time-driven activity-based costing. Qualitative Research in Accounting & Management, 14(1), 2–20. https://doi.org/10.1108/QRAM-10-2015-0095

Hofmann, E., & Bosshard, J. (2017). Supply chain management and activity-based costing. International Journal of Physical Distribution & Logistics Management, 47(8), 712–735. https://doi.org/10.1108/IJPDLM-04-2017-0158

Kapian, R. S., & Anderson, S. R. (2014). Rethinking activity-based costing. Technology. Retrieved from https://www.homeworkmarket.com/sites/default/files/q1/26/11/abc-_company_article.pdf

Kapi?, J. (2014). Activity Based Costing – ABC. Business Consultant / Poslovni Konsultant, 6(32), 9–16. Retrieved from https://poslovnikonsultant.ba/

Mahal, I., & Hossain, M. A. (2015). Activity-Based Costing (ABC) – An Effective Tool for Better Management. Research Journal of Finance and AccountingOnline), 6(4), 2222–2847.

McLaughlin, N., Burke, M. A., Setlur, N. P., Niedzwiecki, D. R., Kaplan, A. L., Saigal, C., … Kaplan, R. S. (2014). Time-driven activity-based costing: a driver for provider engagement in costing activities and redesign initiatives. Neurosurgical Focus, 37(5), E3. https://doi.org/10.3171/2014.8.FOCUS14381

NICE. (2016). Costing Report. Rehabilitation after Critical Illness Costing Report, (February), 1–39. Retrieved from www.nice.org.uk/guidance/CG155%0Awww.nice.org.uk/CG83%5Cnwww.nice.org.uk

Novozymes, Børsen, Drury, C., Brealey, R. A., Myres, S. C., Allen, F., … Raiborn, C. a. (2016). Time-driven activity-based costing. Journal of Accounting Research, 18(2), 23–51. https://doi.org/10.1287/mnsc.1100.117

References