Cost Drivers and Cost Control Measures for a Hotel Business

1. Cost drivers refers to the unit used to allocate the costs in a business. It
triggers the changes in the cost of an activity. Cost driver vary from each
company to company, depending on the nature of product or services
provided by the Company. A labor dominated company shall have labor hours
worked as the cost drivers, whereas the energy dominated company, shall
have electricity units consumed as the cost driver. The concept of cost driver
is most commonly used in Activity based costing, as in case of activity based
costing, the amount being spent by the company is allocated on the basis of
relevant cost driver for each of the expense, in order to ensure that the cost
is allocated correctly based on the cost driver.
For Sunshine Continental Hotel Pty. Ltd. the cost drivers would be
- labor hours of casual labor,
- number of permanent employees,
- electricity units consumed,
- Number of marketing activities undertaken by the company.
The cost drivers could vary between companies from one sector as well, for
example, in case of hotel, it could be due to size of hotel, whether the
property uses a brand name or works independently. The level of debt that
the company has.
In order to measure the performance of the cost control initiative of the
management, the above given cost drivers should be tracked as that would
give a clear idea on the amount of expense, company would incur.
In the current year, wages and other employee related costs together form
68% of total expenses of the company and 45% of the variance from the
budgeted numbers is driven by casual employee wages and superannuation
expense. Amount of casual wages paid by the company has increased from $
15,500 to $ 17,500, this amount is driven by the number of hours/days
worked by the casual workers.
The next highest amount of expense incurred by the company in the year is
electricity expense, which has number of electricity units consumed as the
cost driver. The company has spent $ 6,200 for electricity in the current year,
against the budgeted number of $ 5,800. Out of the total variance, 8% of the
variance is driven by the electricity expense of the company. Electricity unit
consumption is largely dependent on the number of room nights the hotel
was booked for and the number of guests served by the restaurant.
Marketing and promotional expense has been another area, which though, is
not significant in amount as such, but has shown a variance of $ 750, i.e.
more than 42% from the budgeted amount of $ 1,750.

The cost driver for each of the expense incurred by the company is as under,
each cost driver is directly responsible for the movement in the total cost for
each category of expense.
In order to regulate the cost for each of the item, the company should be
focusing on controlling the cost driver responsible for each nature of
expense. The focus area of the management of the company should be to
control the cost drivers which are significantly affecting the budgeted costs of
the company.
There could be numerous ways to control the cost drivers, which would also
differ from one cost driver to another, the management of the company,
Expenses Cost driver
Bank charges Number of transactions
Credit card commission Amount of Sales
Marketing & Promotional Number of marketing activities
Newspapers & magazines for
customers Number of room nights
Laundry/dry cleaning Number of clothes for laundry
Cleaning & cleaning products Number of room nights
Permanent employees wages Number of employees
Casual employee wages Number of employees and hours/days
worked
Superannuation Number of employees
Electricity/Gas Number of units consumed
Telephones Number of calls made
General Repair & maintenance Number of breakdowns
Water charges Number of units consumed

continuously tracks the cost driver that impacts the significant cost of the
business, in order to ensure that there are no cost overruns, from the budget
and the company is able to run the business profitably, as per the budget.
Analyzing the above mentioned facts about the movements in various costs
incurred by the entity, the major cost driver that has caused the variance in
the expenses against the budgeted expenses is labor hours, since the
increase in labor hours has caused an increase in the casual employee wages
incurred by the company and this has also resulted in an increase in the
superannuation expense of the company. These two variances combined
together, forms major part of the total variance in the actual expenses
incurred by the company vis-à-vis budgeted.
Q 2:
Cost control is one of the critical measure that a company can take, in order
to ensure that the company is able to run profitably, Profit is the difference
between the revenue earned by the company and cost incurred by the
company to earn that revenue.
Costs incurred by the company are driven by various factors, such as labor
hours, units consumed, machine hours, product returns from customers, etc.
depending on the nature of cost. In order to control the cost, management
needs to identify the cost driver that impacts a cost and thereafter, tracks
each important cost driver, in order to ensure that there are no significant
variances in the overall costs, which are driven by the cost drivers identified
by the management.
Cost drivers refers to the unit used to allocate the costs in a business. It
triggers the changes in the cost of an activity. Cost driver vary from each
company to company, depending on the nature of product or services
provided by the Company.
In case the company is planning to undertake a cost control measure, it
should be focusing on areas that have been causing the maximum variances,
some of those areas, based on above mentioned analysis can be as under:
i. Casual labor wages:

Total expense for casual labor wages is the multiple of number of man-
days the labor is engaged for and the rate per man day that labor is
entitled to. Man-days for labor can be computed by multiplying the
number of workers deployed by the number of days each worker has
been engaged for.
Casual labor wages accounts for one of the significant total cost
incurred by the company in running the hotel. The management would
be interested in controlling the amount paid for wages to casual labor
and it will be tracking the cost driver impacting the wages.
The company should optimize the number of workers that it would
engage in order to perform various functions at the hotel. This would
depend on effective management and allocation of activities amongst
worker.
ii. Permanent employee wages:
Permanent employee wages is a multiple of number of employees
engaged by the company and monthly salary paid to each employee.
Company should also manage the total number of employees recruited
by the company, based on the activities that the operations demand.
The cost driver for permanent employees salary is the number of
employees engaged by the company, in order to control the
permanent employees wages, the management should track and
control the number of permanent employees hired by the company.
iii. Marketing Expenses:
Marketing expenses of the company are a multiple of marketing events
undertaken by the company and cost per event. Management
undertakes marketing event, based on certain pre defined targets and
goals in terms of increase in sales, widening the reach to the
customers, etc. Management must track the amount spent on
marketing event vis-a-vis the budgeted amount and the actual sales
volume achieved, vis-à-vis the budgeted amount.
Company should re-evaluate the marketing activities that it undertakes
during the year, in terms of amount spent and also benefits derived
from those activities, as the company has a negative variance in the
marketing cost, i.e. actual marketing costs exceeded the budgeted