Cost Management in hotel by dino leonandri

1. Cost
Management in
Hotel
By : Dino Leonandri

2. Costs represent the money measurements of the efforts that a company has to make
in order to achieve its objectives.
Consequently, costs play a very important role in management decision making.
The nature of costs and assumptions
At the most basic level, costs can be defined as the sacrifices made in order to
achieve a specific goal. Cost can have many meanings depending on the context in
which it is used.
In management accounting, cost is considered as an expense that is incurred in
order to increase revenues.
For most hospitality operations as much as 90% of all revenues are used to pay for
costs. For this reason, cost management is very important.
One way of controlling costs in order to improve net income is through cost
budgeting and analysis

3. Before proceeding with the types of costs, it is necessary to note that accountants
generally employ cost functions that are linear.
This is based on a certain number of assumptions which will be summarized below:
a. Fixed costs are assumed to remain constant over different levels of production
activity
b. Variable costs are assumed to vary with different levels of production activity but
are constant per unit of output
c. It is assumed that all costs can be separated into either fixed or variable
d. It is assumed that the levels of efficiency and productivity remain constant over all
production activity levels
e. It is assumed that costs behaviour can be explained by causing changes on any
one of the related independent variables.

4. Types of costs
1. Standard cost
Standard cost is the measure of how much a product or service should normally cost
based on a given volume or sales. These costs have to be established by each
organization based on past experiences because the many factors that influence
standard costs differ from organization to organization.
2. Fixed cost
Fixed costs are those expenses that do not change in relation to the volume of the
business within a specific period or production level. Examples of fixed costs include
management salaries and fire insurance expenses
3. Variable cost
Variable costs are those expenses that change proportionately to changes in the
volume of the business.

5. Types of costs
4. Semi-fixed and semi-variable costs
Some costs cannot be finely split into their fixed or variable components. These are expenses
that contain both fixed costs components and variable costs components. The fixed costs
component is the part that will need to be paid whatever the level of business activity.
The variable cost component is the part that will vary proportionately to the business activity.
Examples include utilities and maintenance costs.
Cost of electricity is a good example. It has both fixed and variable components. Electricity is
essential for the basic operation of the business for light and heat.
5. Direct cost
Direct costs are those costs that can be traced to a particular operating department and is the
responsibility of that department. In general most direct costs are variable costs. The cost of
linen and laundry within the rooms division is an example, as well as the salaries and wages of
the rooms division employees.
6. Indirect cost
Indirect costs are costs that are not directly identified and are not traceable to a particular
operating department. Such costs cannot be charged to any particular department.

6. Types of costs
7. Joint cost
Joint costs are those costs that are shared and are the responsibility of two or more
departments. These costs will have to be appropriately allocated to the responsible
departments. For example if an employee in the main kitchen is producing food for the
banqueting department, then this employee’s salary will have to be allocated appropriately to
the F & B and the banqueting departments.
8. Controllable and non-controllable costs
Controllable costs are those costs that the department heads can directly influence in the short
run. An example will be the F & B manager’s ability to determine the amount of money to be
spent on wines. On the other hand, this F & B manager will not be able in the short run to
influence the amounts paid for rents. Those costs that cannot be influenced are therefore called
non-controllable costs.
9. Discretionary cost
These are costs that managers can choose to avoid, mainly for budgetary reasons, in the short
run and are mainly of a fixed character. Such avoidance decisions are normally made by the
general manager. Examples of discretionary costs are advertising, maintenance and employee
training programmed.

7. Types of costs
10. Relevant and non-relevant costs
Relevant costs are costs that change depending on decisions that are made, as well as
affecting these decisions. For a cost to become relevant it should be in the future and it should
differ between the possible alternatives. An example would be the possibility of replacing an old
oven in the kitchen by a combi-steamer. The relevant costs will be the costs of a new combi-
steamer (minus any trade-offs of the old oven, the cost of training the employees to use the
new combisteamer as well as all maintenance related costs of the combi-steamer). In such a
situation the labour cost of the kitchen employees will not be affected and as such do not form
part of the decision making process. These employees’ labour costs will be considered as
nonrelevant costs in making the decision to acquire the combi-steamer.
11. Sunk cost
Sunk costs are costs that have been incurred and as such cannot be recovered. An example of
a sunk cost derived from the example in relevant cost above could be the following. Assume
that prior to making the decision to buy the new combi-steamer, management had requested
and paid for the services of a consultant to produce a report on the advantages of using a
combi-steamer instead of a conventional oven. The amount of money paid for the consultant’s
services will be considered a sunk cost and it should not make any difference to the decision to
acquire the new combi-steamer

8. Types of costs
12. Opportunity cost
Opportunity cost, also called the economic opportunity loss is a very important concept in
economics. It represents the value of the forgone next best alternative that results from a
decision.
Opportunity costs are not assessed only in monetary terms but equally in terms of anything of
value.
As an example, still in line with our combi-steamer, the opportunity cost of acquiring the combi-
steamer will be the monetary value attributed to acquiring the conventional oven.
Another example without monetary terms would be in the situation that during a particular
weekend, the hotel guests have the opportunity to either attend on the Saturday night a musical,
or experience a special sunset evening at the beach. To the guest who attends the musical, the
opportunity cost will be missing out on the experience of the special sunset evening at the
beach.

9. Thank you