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 section presents the ABC model. The fourth section illustrates the
implementation of ABC in a specific case. The fifth section compares results of the ABC
method and the traditional method. Some conclusions are presented in section six.
2. Literature review
Poorani and Smith (1995, p. 58, 63) observe: “The hotel and the B&B industry have
very different financial aspects arising from contrasting ownership motives. In the hotel
industry the emphasis is on maximizing profitability whereas the B&B industry has been
traditionally characterized by innkeepers who embarked on inn-keeping as a second career
to satisfy lifestyle goals. But the current economic environment has blurred that distinction.
Hoteliers are trying to be more sensitive to customers’ needs and create an environment for
personalized service. Meanwhile, many entrepreneurs are entering the B&B segment with
strictly financial motives”. Their investigations attribute financial characteristics to the B&B
industry and find that innkeepers in USA with midsize and larger operations not only were
highly successful in reaching their career goals but also achieved their economic objectives
as measured by return on investment and equity. However, notwithstanding the importance
of financial aspects, the studies in cost structure of the B&B industry anywhere in the world
were rare. One reason is the inn’s private-ownership arrangements; others are the
fragmented industry structure and the lack of systematic cost and revenue data.
Unlike the situation in the B&B industry, there have been a large number of studies
in the hotel industry. In the management accounting side of the tourism industry, research
has been conducted both in tourism management research and in accounting research.
Studies have been carried out in passenger transportation (Dent, 1991; Rouse et al., 2002),
restaurants (Ahrens and Chapman, 2002), and hotels (Downie, 1997; Edgar, 1998; Noone
and Griffin, 1999; Mia and Patiar, 2001; Pellinen, 2003). Downie (1997, p310) emphases
the importance of considering how accounting information can be analyzed to support
marketing decisions more effectively. Noone and Griffin (1999, p111-128) designed a
customer profitability analysis (CPA) integrating activity-based costing (ABC) and customer
segments in order to find profit yield in a hotel. Mia and Patiar, (2001, p111) interviewed
only 35 managers and indicated that general managers and department managers took equal
account of the management accounting system, but general managers were more content
with the accounting system and valued financial information more than department
managers. Pellinen (2003, p217) studied the pricing decisions in six tourism enterprises
(including a hotel) and suggested the enterprises observed all took their prices from the
leading company. Thus, the importance of cost accounting is limited with reference to
pricing decisions from the managerial viewpoint. Obviously, most of the studies have
focused on hotels. As Harris and Brown (1998, p161) pointed out, hotels, which typically
comprise food, beverage and lodging, can be used to illustrate that the context of the
hospitality product can provide a complete range of characteristics in a single arena.
Actually, the B&B industry also has all those characteristics. But this segment, specifically
nontraditional lodging (including B&B inns, country inns, small hotels, condominiums, and
vacation homes), has remained an enigma to industry analysts and researchers. Lanier et al.
(2000, p91) think this is in part because the analysts and researchers willfully overlook it in
favor of the traditional lodging industry, pleading lack of data (Statistics dealing with
properties of fewer than 20 rooms are usually estimated or based on small samples. Since
most country inns do not reach the 20-room threshold, statistics for these properties have not
been collected regularly, unlike other industry segments). This is so prevalent in studying
management accounting in the accommodation industry and that there is a huge lag for
researchers to make up for.
Summarizing the above, previous studies on accounting and product costing, pricing
of hotels propose that : (1) the knowledge in accounting is essential in hotel management, (2)
the connection between accounting information and marketing is important, and (3)
activity-based costing, cost-volume-profit analysis, yield management, and segment profit
analysis were among the most relevant management accounting methods, (4) the lack of
management accounting research in non-traditional lodging industry needs to be made up.
3. Activity-based costing
Cooper and Kaplan (1988) have developed what they believe is a better alternative to
the traditional cost calculation model. They argue that as products differ in the complex
process of manufacture, they consume activities in different proportions. The activity-based
costing method (ABC) promoted by Cooper and Kaplan provides a more accurate measure
of cost because it traces indirect costs more closely with regard to the different types of
activities consumed. Armed with knowledge of what activities are consumed by each
product and the resource cost of each activity, one can budget costs for a diversity of
products. However, the traditional accounting method usually assigns overhead costs of
products by using volume-related allocation bases such as labor hours, direct labor costs,
direct material costs, machine hours, etc. This will not critically distort the product costs as
the overheads are just a small portion of the production process. But in situation where there
is a large diversity of products, or where there is a high level of automation, as Brimson
(1991, p. 179) pointed out, the overheads’ distortion will be significant. In our case, for
example, high-volume products (hot spring use) may consume more direct labor hours than
low-volume products (meal serving), but do not necessarily consume more purchasing
activity costs.
The ABC model applied to the case of this hot spring country inn is depicted in figure
1. The ABC systems focus on the accurate cost assignment of overheads to products. In the
cost assignment view, the assignment of costs through ABC occurs in two stages: cost
objects (i.e., products or services) consume activities, activities consume resource costs. In
practice, this means that resource costs are assigned to various activity centers by using
resource drivers in the first stage. An activity center is composed of a group of related
activities, usually defined by function or process. The group of resource drivers is the factor
chosen to estimate the consumption of resources by the activities in the activity centers.
Every type of resource assigned to an activity center becomes a cost element in an activity
cost pool. And, in the second stage, each activity cost is distributed to cost objects by using
Figure 1
ABC Model in a Hot Spring Country Inn
Cost of Resources
Indirect Cost
First Stage
Resource Drivers
Activity Center
Cleaning
Customer
Reception
Cooking




Management Center

Second Stage
Activity Drivers
Cost Objects
Cost of Lodging
Cost Objects
Cost of Hot Spring
Cost of Meal
Use
Serving
a suitable activity driver to measure the consumption of activities by products or services
(Turney, 1992). Then, the total cost can be calculated by adding the various activities costs
to a specific product or service. And the total cost divided by the quantity of the product can
acquire the unit cost of product. In our case, the inn provides three products, lodging, hot
spring use and meal serving. We define five activity centers, namely the cleaning center, the
customer service center, the reception center, the cooking and foodservice center and the
management center. Each activity center is composed of related activities, clustered by their
function.
As Harris and Brown (1998, p161-162) indicated, a hotel operation can be used as an
example of hospitality products, in the same way the elements of a hot spring country inn of
the B&B industry also can be used to illustrate non traditional accommodation products. For
instance, the provision of rooms constitutes a nearly ‘pure service’ product incorporating a
large proportion of service elements. It can be defined as the rental of a certain amount of
space for a specified period of time and is thus an intangible good containing a high level of
service provision. The provision of hot spring use also represents a service product: it
includes hot spring rental and service activities. Furthermore, the meal serving provision,
comprised of purchasing, distribution and conversion of food into meals, again constitutes a
service product.
The main advantage of ABC lies in that it provides a more accurate and real cost
computation, especially in situations in which product diversity is important and in which
the indirect costs, not directly traceable to the products, represent an important proportion of
the total costs. In addition, ABC also allows a deeper level analysis of product costs by
explaining the relationship between products and activities. The improved accuracy of
perception of the cost structure of products and the continuous process improvements in the
various departments of an enterprise provide the substance of activity-based management
(i.e. using ABC to improve a business). Studies of the implementation of
ABC exist in
various fields, e.g. of universities (Cropper and Cook, 2000), a hotel (Noone and Griffin,
1999), library service (Ellis-Newman and Robinson, 1998), distribution logistics (Pirttilä
and Hautaniemi, 1995; Themido et al. 2000), (all of which belong to the service sector); of a
manufacturing company (Spedding and Sun, 1999), an assembly line (Gunasekaran and
Singh, 1999), (which belong to the manufacturing sector); of a wholesale fish market (Lee
and Kao, 2001), (agricultural sector); and of a radiotherapy unit (Lievens et al., 2003),
(medical sector). All of them agree that ABC is a useful accounting model and able to obtain
more accurate information about the cost structure as long as implementing managers
choose the right drivers and define activities well. However, it is generally accepted that
there is no universally appropriate accounting system suitable to all organizations in all
circumstances (Emmanuel et al., 1990). But as Harris and Brown (1998, p162) point out,
management accounting needs to be carried out in the context of the hospitality product in
order to supply the necessary information for decision-makers if researchers expect to make
a significant contribution to the industry.
4. A Case Study of a Hot Spring Country Inn
The Professional Association of Innkeepers International defines that a country inn is
a business offering overnight lodging and meals where the owner is actively involved in
daily operations, often living on site. The hot spring country inn in our study is located on
the Yang-Ming-Shan in the north of Taipei where it faces a very competitive hot spring tour
market environment. It includes 6 twin rooms, 9 quad rooms, a hot spring pool for men
(7109.2 square feet), another hot spring pool for women (3554.6 square feet) and 9 private
hot springs bathrooms, covering a total area of 1 acre and 31076.45 square feet. This inn
hires 25 full time employees and 13 part time employees, and the owner who also lives there
Table 1
Monthly Costs of Resources
Resource
life time
Replacement value
－
Capital costs
－
Cost per month
Rent-a-land
30
Owner’s lands
30
150,000,000
13,324,092
1,110,341
Buildings
30
16,050,000
1,425,672
118,806
Personnel
Number
Total Costs
700,000
Cost per month
Full time staffs
23
9,060,000
755,000
Part-time staffs
13
2,448,000
204,000
Managers
2
1,320,000
110,000
is the general manager. Meanwhile, the inn faces very serious seasonal customer
fluctuations. The average volume of customers for hot spring use can come to a maximum
of 58,048 persons monthly in the winter season and a reaches minimum of 18,311 persons in
the summer season. In addition, this hot spring country inn bears a heavy space and land
costs due to the high cost of buildings and land in Taipei. The monthly costs of rent, lands,
buildings and labor are showed in table 1.
This inn doesn’t use any activity-based costing method in its accounting system
except for the traditional one. Since activity-based costing can be very complex and time
consuming, and even less in tourism industry, it is not widely applied in the manufacturing
industries in Taiwan (Chen, 2001, p. 52). It is recognized that partial activity-based costing
can be used to enhance rather than totally replace the accounting system when the company
finds it too difficult to implement full-scale ABC-based accounting. Some companies also
complain that the cost of ABC’s administrative and technical complexity, and of
continuously generating activity data, exceeds any benefits subsequently derived from it, so
that they reject proposals to implement ABC to their companies. Nevertheless, many firms
still find they have success in cost reduction, product pricing, customer profitability analysis
and output decisions when they adopt ABC (Chenhall and Langfield-Smith, 1998; Clarke et
al., 1999; Innes and Sinclair, 2000; Cotton et al., 2003).
Our traditional accounting cost information was gathered from 1 November, 2003 to
30 December, 2003. The figures for customers’ volume were acquired from the mean of the
number of customers in these two months. In order to obtain a more accurate picture of
Table 2
Activities Analysis and Assigning Activity to Product Using Activity Drivers
(1)
Resource
(2)
(3)
Labor Material
Activity
& Utility
l
Cleaning
99,572
Changing
1,455
607
Washing
32,225
22,196
Clear up
91,475
(4)
Total
Cost
(5)
(6)
(7)
Quantities of Drivers
Lodging Spring
20,155 119,727
Total
(8)
5,454
Dining quantity activity driver
Lodging Hot-Spring
3,749
410.2
6810.6
17.58/hr
2,062
960
0
0
960
2.15/hr
54,421
830
1,832
188.6
2,851
19.09/hr
21,623 113,098
0
0
10,710
Ordering
54,451
Carrying
75,220
Re-supply
4,320
Cooking
297,968
Purchasing
73,886
Check in
263,806
1,994
2,754
2,437
7,730
56,445
77,974
6,757
58,945 356,913
605
74,491
90,647 354,453
450
0
0
20
0
18.5
0
11,203
0 103,754
436
0
24
232.47 1,891.6
/out
Admini-
0
0
4
2,010
198
10,710 10.56/number
450 17.17/number
11,203 5.04/number
103,754 0.75/number
460
2,010
14.69/hr
177.57/hr
240.5
309.73/hr
692.5 2,816.64
125.84/hr
7
779.2
102
1,091.2
34.51/space
6,336
1,440 56,750
33,240
91,430
0.07/person
27,156
1,440 56,750
33,240
91,430 0.297/person
36,608
1,049
37,657
Marketing
6,160
176
Accounting
26,400
756
210
strative
Renting
700,000
Depreciation
1,229,147
251.96 1,385.8
0
251.96 1,385.8
461.94
461.94
2,099.7 333.38/space
2,099.7 585.39/space
0
Total
1,069,000 226,220
(11)
Product cost
2,651.4
2,276
(10)
Unit cost per
sheets
Check on
(9)
3,224,367*
Total activity cost
65,904
7,212
(10.57%)
(3.67%)
(0.32%)
2,062
0
0
(0.47%)
(0%)
(0%)
15,849
34,972
3,600
(3.59%)
(1.95%)
(0.16%)
0
0
113,098
(0%)
(0%)
(5.06%)
7,730
0
0
(1.75%)
(0%)
(0%)
0
0
56,445
(0%)
(0%)
(2.52%)
0
0
77,974
(0%)
(0%)
(3.49%)
294
6,404
59
(0.07%)
(0.35%)
(0.00%)
0
0
356,913
(0%)
(0%)
(15.96%)
5,730
7,434
61,327
(1.30%)
(0.41%)
(2.74%)
29,255
238,051
87,147
(6.64%)
(13.26%)
(3.90%)
7,247
26,890
3,520
(1.64%)
(1.50%)
(0.16%)
100
3,933
2,303
(0.02%)
(0.22%)
(0.10%)
428
16,855
9,873
(0.10%)
(0.94%)
(0.44%)
83,999
461,999
154,002
(19.05%)
(25.73%)
(6.89%)
147,495
811,236
270,416
(33.45%)
(45.18%)
(12.09%)
346,800
(78.65%)
Direct material cost
61,137
(13.87%)
* All activities in column (3) added
Outsource laundry
Dining
46,611
1,673,678 1,203,889
(93.21%)
(53.83%)
116,843 1,032,498
(6.51%)
(46.17%)
33,000
(7.48%)
Hot-spring water
5,049
(0.28%)
Total product cost
440,937
1,795,570 2,236,387
Total customers
1,440
56,750
33,240
Unit product cost
306.21
31.64
67.28
allocated resource costs, working sampling (Tsai, 1996) is used to estimate the percentage of
time spent on each of various activities for each staff member and manager. In this way an
adjusted percentage of personnel time spent on each activity can be obtained. In the first
stage, resources in this country inn are assigned to all activities in five activities centers by
resource drivers.
In the second stage, all activities costs in the five activities centers are assigned to the
three country inn’s products. Table 2 shows activities analysis and the assignment of
activities to products by activity drivers. Labor, material and utility costs traced to activities
are shown in columns (1)-(3) of table 2. Columns (4)-(11) present detail about how activities
are allotted to each product by drivers. For example, the driver of the cleaning activity is the
true cleaning time which is total 6810.6 hours. Using the driver to trace the cleaning activity
to the three products separately, and assigning 2651.4 hours, 3749 hours and 410.2 hours
respectively, of cleaning time, the driver can allocate NT$ 46,611 to lodging, NT$65,904 to
hot spring use, and NT$7,212 to dining. Finally, adding all the allocation activities costs in
each product we can get the total activity costs. The total product cost is the combination of
the total activities costs, direct material costs, and outsource costs (laundry, hot spring water)
in each product. Unit product cost is defined as the total product cost divided by the total
number of customers. The unit product costs of lodging, hot spring use and dining are NT$
306.21, NT$31.64 and NT$ 67.28 per customer respectively in the busy winter seasons. The
lodging, hot spring use and dining products of this country inn represent three market
segments. After applying ABC to the country inn case, the unit costs of each of the country
inn’s products in three market segments are clear. The cost information acquired from ABC
in this case is extremely useful to the inn’s owners (managers) for marketing, decision
making and cost-volume-profit analysis.
5. Comparing ABC with traditional accounting
Table 3 shows a comparison between ABC and the traditional accounting method.
The traditional accounting system here uses direct labor hours to allocate overheads to the
three inn products. Cost for a high-volume product should not necessarily be traced based
on a correspondingly high level of labor hours, since, in reality, such a product may not
consume a proportionally high amount of overhead. As shown in table 3, the unit cost of the
three products derived from the traditional accounting method are NT$155.4 for lodging,
NT$15.85 for hot spring use, and NT$100.76 for dining, per customer. If we compare the
results between ABC and traditional accounting, the unit cost of lodging and of hot spring
use are underestimated, but the unit cost of dining is overestimated under the traditional
accounting method. This is because the traditional accounting method distorts the overheads
Table 3
Comparing ABC with Traditional Accounting
N.T. Dollars
Product
Cost
Lodging
Hot-Spring
Dining
Overhead
99,640
597,842
1,693,885
(Assigning by direct labor hours)
(240hr)
(1440hr)
(4080hr)
Direct Labor
30,000
180,000
623,000
Direct Materials
61,137
116,843
1,032,498
Outside laundry
33,000
Traditional accounting allocation:
Hot-spring water
Total cost on traditional accounting basis
5,049
223,777
899,734
3,349,383
Mean number of customers
1,440
56,750
33,240
Unit cost per customer
155.4
15.85
100.76
306.21
31.64
67.28
Unit cost per customer in ABC
cost allocation in the three products, while the ABC system avoids this distortion by valuing
the activity and driver assigning processes.
6. Conclusion
After deriving the cost of each product by providing accurate and relevant
information, we find that real estate costs consume the greatest proportion of the hot spring
use and of lodging costs (over 50%). This is the result of the high cost of real estate in
Taipei. In this case, through ABC implementation we can obtain clear and reliable
information about the proportions of activities costs in every single product. Managers also
can use the information derived from implementing ABC for decisions on pricing, product
mix (Tsai, 1994), product design, profitability analysis, and so on. Our comparison of ABC
with the traditional costing method shows that ABC method is practical and appropriate for
application to the hot spring country inn and yields more accurate information for cost
management and pricing decisions.
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