Cost unit identification, overhead treatment and its implications in the local hotel industry

Abstract

Intense competition in the Maltese hotel industry, makes the management accounting concepts of cost unit identification and overhead treatment, crucial elements of hotel management accounting systems. They are used in the planning, control and decision making functions of a hotel. From published and unpublished sources, it was identified that hotels are split into profit centres (accommodation, food and beverage, and other services) and cost centres (maintenance, sales an<l marhting, water and electricity, and administration). Revenue is apportioned between profit centres, which direct costs are traced to cost centres. Indirect costs are allocated to their respective cost centres. No overhead system (traditional or activity based) is in place to re-allocate or apportion such overheads using volume based measures or cost drivers to such profit centres. Such practice is referred to as the uniform system of accounts. The most common cost units used were customer bed nights and rooms sold. The research was of a qualitative nature, with the main research tools being a questionnaire and an accompanying in-depth interview to clarify the important sections of the questionnaire. The primary objective behind this study was to investigate overhead treatment and cost unit identification in the local hotel industry. The population consisted of hotels in the four and five star sectors. The respondent hotels' revenue and cost structure was identical to the Uniform System of Accounts, although some of them were not aware of the system. The most common cost units in use were, customer nights and rooms sold, depending on the cost in question. Adopted overhead treatment techniques have consequent implications. Although the system used in practice is ideal to evaluate managerial performance, it may be difficult to evaluate divisional performance. Fixed costs are taken as uncontrollable, with the main priority being cost containment. Cost management ideas such as target costing, kaizen costing and activity based management are not applied. Also certain benefits, offered by implementing an activity based costing system, such as ABC as resource consumption models (highlighting cost of unused capacity) and ABC profitability maps are lost. Limitations of applying certain theoretical concepts in practice are outlined. However, there are various ways how practice can approach theory within such constraints. Qualitative factors which might not be considered in theory are also outlined in the study.