Hospitality Industry Managerial Accounting HRT 374

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Hospitality Industry Managerial AccountingHRT 374

• Chapter 6
• Basic Cost Concepts

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Fixed costs

• Constant in the short run
• Does not vary with sales
• Usually in dollars
• 6 fixed costs
• Rent, interest, taxes, depreciation,
  amortization, insurance
• Discuss salaries

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Fixed costs (continued)

• As sales volume increases, fixed cost goes down
• Rent 2,000 Sales 100,000
• Fixed cost 2
• If sales go up to 200,000
• Fixed cost 1

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Variable costs

• Changes equally with sales
• Direct relationship with sales
• Usually in
• Examplescos, supplies, labor (discuss)

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Step costs

• Constant within range of activity (sales)
• Similar to mixed costs, except more constant
• Example supervisor can supervise up to 15
  housekeepers, then must hire additional supervisor

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Mixed costs

• Part fixed and part variable
• Constant within range of activity (sales)
• Similar to step costs, except that there are many
  steps in sales

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Costs in relation to sales volume

• Fixed
• Variable
• Step
• Mixed

Step
Fixed
Mixed
Variable
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Total costs

• Total costs Fixed Costs Variable Costs
• Or TC FC (vc per unit x unit sales)
• Example
• Sells 1,000 rooms
• FC 20,000 VC per unit 20
• TC 20,000 (1,000 x 20)
• TC 20,000 20,000
• TC 40,000

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Determination of mixed cost elements

• 3 methods
• Hi lo two point method
• Scatter diagram
• Regression Analysis

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Using the hi-lo method, estimate the monthly
FIXED R and M expense

• Month Expense Rooms sold
• Jan 6200 1860
• Feb 6100 1820
• Mar 7000 2170
• Apr 7500 2250
• May 8000 2480
• Jun 8500 2700
• July 7900 2790
• Aug 8600 2800
• Sep 7000 2100
• Oct 6000 1900
• Nov 6500 1800
• Dec 5900 1330

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High/ low method

• R M
  expense Rooms sold
• Highest month August 8,600
  2,800
• Lowest month December 5,900
  1,330
• Difference 2,700 1,470
• To find variable cost per room sold
• Mixed cost difference / Rooms sold difference
• 2,700 / 1,470 1.84 Gives you variable cost per
  room
• For every additional room sold, the hotel will
  incur
• R M variable costs of 1.84
• To find Decembers variable cost of R and M
• December Rooms sold x Variable cost
• 1,330 X 1.84 2,447
• To find Decembers fixed cost of R and M TC
  VC FC
• 5900 2447 3453

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Using hi-lo method, what is the fixed costs of
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Fixed vs. variable
Variable
Fixed
Indifference Point
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Direct and indirect

• Direct
• Related to department
• Department head responsible
• Readily identifiable
• Examples?

• Indirect
• Related to all operations
• Higher up responsible
• Not readily identifiable
• Examples?

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Overhead

• All costs other than direct
• Allocation
• Square footage
• Cubic footage
• Number of employees
• Revenue
• Operating income

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Controllable

• All costs are controllable at some executive
  level
• Department managers usually control short run
  costs
• Corporate executives usually control long run
  costs

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Differential costs

• Costs that differ between two alternatives
• Example?
• Switch from an outside bookkeeper to doing it
  yourself on a computer
• What would be the differential costs?

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Relevant

• Use only those costs that affect your decision
• Costs that do not change are not relevant
• Costs that have already been spent are not
  relevant
• Costs that cannot be quantified are not relevant

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Sunk

• Costs that have happened in the past
• Not relevant to the future

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Opportunity costs

• Revenue sacrificed by taking one alternative over
  another
• Page 291

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Average and incremental

• Average
• Total costs divided by total units

• Incremental
• Cost to produce one more unit
• Could be substantial if you are at the extensive
  range of production

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Standard

• Forecast of costs under certain conditions
• Used for budget purposes
• Compared to actual to determine and investigate
  variances

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In class problemUsing the high-low method, what
is the monthly fixed r m expense for the year?

• Month Total r m exp Paid Occ
• Jan 12,600 60
• April 13,800 70
• July 13,000 65
• Oct 14,000 68

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Homework (See above slide first)

• Problems
• 1, 2 (just part 1), 3, 6a, 9 (just part 1), 14

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Problem 1 Ch. 6

• Fixed
• Variable
• Step
• Mixed
• Variable

• Fixed
• Fixed
• Mixed
• Fixed
• Variable

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Problem 2

• 1. Monthly fixed repair and maintenance
• Determine the variable portion per 1 occupancy
• Month expense sales
• Hi April 13,800 70
• Low Jan 12,600 60
• Difference 1,200 10
• cost difference / sales difference 1200/10 120
  per 1 occ
• For each additional 1 of sales, it will add 120
  more of r and m cost
• Determine the variable portion for January (cost
  x sales)
• 120 x 60 7,200
• Determine the fixed portion by subtracting the
  variable portion from the total expense for
  January TC FC VC becomes FC TC - VC
• 12,600 7,200 5,400

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Problem 3

• 1. Payroll and related exp 20,000
• Other expenses 1,450
• 
  21,450
• 2. Undistributed op exp 44,770
• Fixed charges 17,450
• Income taxes 15,136
• Total overhead exp 77,356

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Problem 6

• A. Indifference point
• Variable cost x Revenue Fixed Lease Cost
• .05 x sales .02 12,000
• .05 - .02 x sales 12,000
• .03 x sales 12,000
• sales 12,000 / .03
• sales 400,000

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In class One more Problem 6 type

• Would you choose fixed lease or variable lease if
• Fixed lease 38,000 per year or
• variable lease 4 of sales
• Variable cost x sales fixed lease cost
• .04 x sales 38,000
• Sales 38,000 / .04
• Sales 950,000
• Sales higher than 950,000 choose fixed,
• lower than 950,000 choose variable

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Problem 9

• Part 1
• COS -- Variable
• Payroll costs -- Mixed
• Supplies -- Variable
• Utilities -- Mixed
• Other op costs -- Variable
• Bldg rent -- Fixed
• Depreciation -- Fixed

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Problem 14

• 1 no sunk costs
• 2 Irrelevant cost operator labor supplies
• 3 Comparison
• A
  B
• Cost 10,000
  12,000
• Salvage cost (1,000) (2,000)
• Utilities 3,000
  2,400
• Repairs 3,000
  2,700
• Total 15,000
  15,100
• 4 Recommend alternative A