King's Own Institute: ACC202 Hospitality Cost Analysis Report

This report provides a comprehensive analysis of cost management within the hospitality industry, focusing on Cool Destination Limited's services. It examines the cost structures of accommodation, evening meals, and tour services using process costing, hybrid costing, and marginal costing methods. The report breaks down costs at each stage of service delivery, from reception to accommodation payment, and calculates profitability margins. It includes detailed cost sheets, profitability analyses, and explores pricing strategies, including upper and lower price points for meals. The analysis also offers insights into innovation and strategic considerations for cost reduction and improved financial performance within the hospitality sector. The report also considers the evening meal service, using hybrid costing system to determine the cost of each meal and also evaluates the estimated cost of tour service.

Title:
Analysis of cost in industry engaged
in hospitality service

Executive Summary:
Every entity who is involved in business of hospitality industry must analyze its costing as well as
financial ratio. It will help to determine several ratios. The person responsible for finance of
company must keep in mind the nature and source of revenue while determining the price of
product. It is necessary to analyze the following:
a) How company will reduce cost of products and service?
b) What type of pricing strategy needs to be adopted for different types of marketing
strategies?
In hospitality industry, Entity can earn income through different sources such as charging
fees in respect of accommodation service, food facility, entertainment facility and any
other type of facility such as tour, conference room for corporate clients.
It is also necessary for hospitality industry to consider marketing strategies so that they can
attract different customers.
The company should ensure cost of service is lower as compared to its competitors. This type
of technique will support company to fulfill their objectives.
2

Table of contents
Contents
Introduction: 4
1. Process Costing: 5
2. Statement showing calculation of profitability of accommodation services: 9
3. Definition of approaches under Hybrid costing system 11
4. The cost of kitchen service and restaurant service is estimated as follows:: 13
5. Estimated Cost of Tour Service: 15
6. Profitability Analysis of Tour Service: 17
7. Innovation in Hospitality Industry 18
8. Strategic Consideration: 19
Conclusion: 19
References: 21
3

Introduction:
The company is involved in the business of providing accommodation, food and tour service. In
this report, all of the products are analyzed from the viewpoint of cost reduction as well as cost
benefit analysis. Such services are categorized into three products, which is namely,
accommodation service, evening meal service and tour service. The cost of each product has
been analyzed separately. The cost of product has been analyzed from different types of
techniques. The type of costing are marginal costing, pricing strategy and break event point in
respect of unit as well value.
The company should confirm how to analyze its cost, profit and innovation in hospitality industry
to achieve its goals. Some suggestions have been provided to hospitality industry to control
cost as well as point which is required to be reviewed by management of organization.
4

Discussion
1. Process Costing:
Under process costing, system, there are several step through which product passes before
completion of final output. Each process can be classified and cost can be analyzed on each
step. Any cost incurred on first process shall be passed to another process. Accordingly, the
cost of final product or services step included all costs incurred from beginning to end. The
company’s cost could be analyzed on each process. Where cost of any process forecast future
loss, then company should stop activity in relation to further process.
The cost of accommodation process per person can be calculated as follows:
Accommodation service of cool destination limited has 3 processes namely reception process,
room maintenance process and collection of amount in respect of accommodation
simultaneously process-1, process-2 and process -3.
Process -1 Reception Process
Particulars Amount in $
Salaries to staff 50000
Depreciation and insurance in respect of
equipment 6000
Electricity Expense 3000
Telephone expense 4000
Lease Rent for Building 1200
Consumables 3000
Total cost 67200
5

As discussed above, process costing is such where cost of one process is transferred
from one to another process. Accordingly, cost of reception of $67,200 will be transferred
to another process namely cost of room maintenance.
Process-2 Room Maintenance Process:
Particulars Amount in $
Cost of reception transferred to room maintenance 67200
Salaries to staff 105000
depreciation and insurance in respect of equipment 155000
Electricity Expenses 5000
Linen Expense 4800
Lease Rent for Building 30000
Consumables 35000
Total cost of room maintenance process 402000
As already discussed, cost of process should be transferred to another process. Hence,
again cost of process-2 room maintenance process should be transferred to another
process-3 i, e collection of amount in respect of accommodation services.
6

Process-3 collection of amount in respect of accommodation services:
Particulars Amount in $
Transfer from room maintenance process( Process-2) 402000
Salaries to staff 60000
Depreciation and insurance in respect of equipment 4000
Electricity expenses 2500
Telephone Expenses 2000
Lease rent on Building 900
Consumables 2000
Total cost of accommodation services 473400
Hence, the Cost of accommodation process includes costs in respect of all the three process
discussed above. Hence, Total cost of accommodation services is equal to $ 473,400.
(a) Accordingly, while calculating cost person in respect of accommodation service,
the total cost of accommodation service is to be divided the no of person. The cost
per person of the accommodation process is as follows:
= $473400/2400 = $197.25 per person.
(b) While calculating cost per day in relation to room maintenance process is
calculated as total cost of room maintenance divided by no, of days in year.
The cost per day of the room maintenance =
= (402000-67200)/365
7

=$ 917.26 per day
(c) Collection of accommodation payment processes should be calculated as cost of
accommodation divided by no. of person which is as follows:
The cost per accommodation payment processed =
= (473400-402000)/2400 = $29.75
Note: In the given question, we are assuming that there is one payment should be
processed for each backpacker. Hence, Total numbers of accommodation process is
2400 as there are 2400 backpackers in the given questions.
(d) While calculating cost per person for accommodation on stay day of average five
day is calculated as total cost of accommodation process divided by multiplication
of no. of backpacker and average of 5 day stay. Total cost per person per day of
accommodation on average of five day stay by such person=
T = 473400/12000= $39.45 per day per person
Note: Hence, division should be done by 2400*5 = 12000.
2. Statement showing calculation of profitability of accommodation
services:
Such calculation of profitability is done in total as well as per person per day:
Computation of profitability of accommodation
process which is one of the product of cool
destination limited:
Particulars
Amounts
in $
8

Receipts from backpackers in respect
of accommodation services
480,000
(The revenues is calculated by
multiplying by rate of $ 40 per day for 5
days for 2400 backpacker. which is as
follows = (2400*5*40) = $480,000
Less: Cost in respect of
accommodation services ( Please
refer given below cost sheet for
accommodation service)
$
473,400
Profit margin in respect of
accommodation services
$
6,600
Profit per day per person (6600/12000)
$
0.55
(Total no. of person in a year =2400*5=
12000)
Cost sheet for accommodation service
Process-1
Reception
Process-2
Room
maintenance
Process-3
Collection of
accommodatio
n payments
Total
Cost
9

Particulars
Amount in
$ Amount in $ Amount in $
Salaries to staff 50000 105000 60000 215000
Depreciation and insurance in respect of
equipment 6000 155000 4000 165000
Electricity Expenses 3000 5000 2500 10500
Telephone Expenses 4000 0 2000 6000
Lease rent on Building 1200 30000 900 32100
Linen Expenses 0 4800 0 4800
Consumables 3000 35000 2000 40000
Total Cost 67200 334800 71400 473400
As shown in above table, Profit margin from accommodation service is equal to $ 6600. To
calculate profit per person per day such profit has been divided by the total number of
backpacker multiplied by no of average stay night. Hence, resulted profit per day per person is
equal to $0.55 in respect of accommodation services.
3. Definition of approaches under Hybrid costing system
One or more product can be produced using single product. Simultaneously in the given
question, several meals have prepared using the same kitchen and restaurant/ table
services. Such system is referred to as Hybrid costing system.
Due to the incurrence of expenses and used to produce several products, such cost in
relation to kitchen service and restaurant or table services should be equally allocated
among the various types of meals. Such cost should be allocated to meals on the basis
of their cost of ingredients. (Bragg, 2018).
10

The evening meal cost can be estimated as follows:
Kitchen
Service
Restaurant/
Table service
Total Cost
Particulars Amount in $ Amount in $
Salaries to staff 50000 30000 80000
Depreciation and
insurance in respect
of equipment 20000 25000 45000
Electricity Expenses 15000 4000 19000
Telephone
Expenses 1100 900 2000
Lease rent on
Building 1900 4100 6000
Total Cost 88000 64000 152000
Total Evening meals
purchased 8000
Evening meal cost
can be calculated as
follows in respect of
cost incurred in
relation to kitchen
and restaurant
service/ table
services. which is as
follows:
19
11

(152000/8000 = $
19 )
The cost can be allocated as follows on the basis of above calculation:
Types of Meal
Cost of
different
ingredients(
given in
question) Allocation Allocated
Cost of
meals
Roast 4.20 (19*4.20/16.68) 4.784172662 8.98
Spaghetti
Bolognese 3.30 (19*3.30/16.68) 3.758992806 7.06
Vegetarian 3.78 (19*3.78/16.68) 4.305755396 8.09
Fish Fillets 5.40 (19*5.40/16.68) 6.151079137 11.55
Hence, the cost of meals under hybrid costing approaches for r Roast, Spaghetti Bolognese,
Vegetarian and Fish fillets is $ 8.98, $ 7.06, and $ 8.09 respectively.
4. The cost of kitchen service and restaurant service is estimated as
follows:
In accordance with given case, Upper and lower price of meal is $15 and $5
respectively. To ensure that company will earn more profit only when it sold more
and more percentage of goods and services at high price of evening meals. As
percentage of meal sold at low price increase, profitability of company will go
down.
12