Accounting and cost systems in hotel companies

Accounting and cost systems in hotel companies

1. INTRODUCTION

1.1 Economic and financial generalities of the hotel company.

The hotel business is basically a commercial activity for the sale of accommodation and gastronomy services; it has general and special financial economic characteristics that differentiate it from other commercial and industrial activities. Some of the general characteristics of this sector are: great diversity and complexity, rigidity of the offer, conditioning to exogenous factors and elastic demand.

Among the special economic and financial characteristics, the following stand out:

The nature of the hotel product: The nature or characteristics of the product sold by any industry is of considerable importance to it for a number of reasons; a durable product can be stored for long periods of time and kept in large quantities to handle spikes in demand; During periods of price increases, there is the possibility of selling at an increased price a product that was produced a few months ago at a relatively low cost.

The hotel product is entirely different. In the lodging area, a room that has not been sold is an irrecoverable loss of income. In a similar way, in the gastronomy area, a part of the food that is not sold is perishable, both in the form of raw material, as well as processed.

The characteristics of its cycle of operations: In some industrial or commercial activities, the time that elapses from the purchase and receipt of raw materials for production or goods for sale to the moment of sale of the finished product is long, sometimes many months. Another of the basic characteristics of the hotel's financial economic activity is the shortness of its operations cycle, since operations are practically daily. Groceries received in the morning are often processed later that morning and sold the same day.

The instability or fluctuation of income: One of the most important characteristics of the hotel business is the variability of its cycle of operations, be it the annual cycle, the days of the week or the hours of the day, which causes a instability or fluctuation in income, with the consequent implications on the final result of the activity.

The primary or fundamental cause of the instability of income in hotels is constituted by the characteristics of their annual cycle of operations, which behaves seasonally according to weather conditions or economic and social events, (seasons of the year, fairs and international events of prestige, etc.) that are produced, both from the emitting tourist pole, as well as from the receiving pole, or from its geographical area of ​​location.

This operating structure, with cyclical ups and downs, gives rise to the so-called high seasons or maximum production level and to low seasons with little or no income level, which in many cases produces the need for the total or partial closure of the hotel facility during the low season.

The cost structure of a hotel: The cost of operating a hotel, that is, the cost of production or provision of its services can be defined: as the monetary expression of the resources of all kinds used in the process of customer service. guests and users of hotel services; includes expenses for groceries, beverages, materials of all kinds, fuels, energy and other work objects consumed in the process, as well as expenses for work remuneration, depreciation of equipment, buildings and other means, promotion and marketing, maintenance of facilities, taxes and other expenses that arise as a result of the activities carried out by the hotel entity.

The costs of a hotel can be direct or indirect. A direct cost is one that can be directly identified with a process, product, job, or service. Examples of direct costs include the cost of groceries consumed in a restaurant or the salary of a bartender in a bar.

An indirect cost is one that cannot be directly attributed to a production or service, such as the salary of the hotel manager or the depreciation of the building; Indirect costs can be distributed to the hotel's productions, services or points of sale according to a base or index that reflects the way in which those indirect elements are supposed to be used or applied in the productions or services to which they are distributed. But the distribution bases of indirect costs are generally arbitrary (arbitrary) or are based on theoretical bases or criteria issues, so that currently most entities reject the distribution of indirect costs and record them as such due to their nature.

In a general sense, most hotels have a high proportion of fixed costs and, analyzing it from the point of view of the hotel's productive departments, the highest percentage of fixed costs occurs in the accommodation area, many of the expenses in the area of Accommodation are of a fixed nature, the main ones being depreciation, operation and maintenance of the facilities. Variable expenses include laundry, guest items and other eventual expenses, these expenses constituting a relatively small percentage of lodging production. (The consumption of water and electricity has a fixed part and a variable part).

Regarding gastronomy operations, the percentage of fixed expenses is rather low in relation to the volume of income for this concept.

The effects of income instability and the combined effect of a high percentage of fixed costs, fluctuations in sales volumes, and excess or under-utilized capacity, produce an unstable condition in the activities that is not common in many other activities.

The higher the percentage of fixed costs, the more difficult it will be to maintain adequate productivity by manipulating or controlling variable costs. In such circumstances, in addition to paying adequate attention to cost control, there should be greater concern about increasing hotel revenues.

The major implication of a high fixed cost structure in a hotel is that the traditional generally cost-oriented approach to registration and control problems (control and consequent reduction) is only partially important. Cost analysis, cost control, cost statements, etc., (many of those costs of an uncontrollable nature), are not enough to attack the obstacles to hotel productivity. Instead of this, you should also look at the part of the income in the Income Statement and look for solutions to the increase in the total volume of sales, the structure of the sales, the departmental profit margins, the occupancy levels, the income. optional or pocket, pricing systems, etc.,since the weight of fixed costs can only be assimilated productively by increasing income.

2. Uniform Accounting System for Hotels. Costing methods.

2.1 Origins, objectives and basic conceptual aspects of the Uniform System of Accounts for Hotels

The hotel industry is characterized by the complexity and quantity of the processes that are carried out, to provide accommodation, gastronomy and other personal, commercial or recreational services offered in this activity.

The expenses of the hotel activity are classified by the nature or type of expense in question and by the area or organizational unit where they occur. The initial grouping by area or organizational unit where they are carried out in three large categories:

- The expenses that correspond to the operational departments and that represent the costs and direct expenses of the hotel's productive activities.

- The expenses that correspond to the non-operating departments are the organizational units or cost centers that do not receive income and represent the indirect expenses of the hotel's productive activities.

- Expenses corresponding to fixed charges of the business, such as rents, taxes, insurance, interest, depreciation, amortizations, etc.

The SUCH establishes the departmental cost method or by budget area, calculating for each department the cost of the merchandise sold, the direct salaries and the direct expenses of the department, obtaining the departmental result. Fixed charges are not included in the departmental cost.

The Departments or Cost Centers that the system considers, as a general list of possibilities, are the following:

Operational Departments:

• AccommodationGastronomyPhoneGarage and ParkingGuest laundryGolf CourseGolf Supplies ShopTennis CourtsTennis ShopGymPool, Cabins and BathroomsOthers

Functional Departments:

• Rentals and other incomeAdministrationPurchasing and WarehousesData ProcessingHuman Resources (Attention to personnel) TransportationMarketingRecreationEnergyOperation and Maintenance FacilitiesFixed Charges: RentalsNon-profit taxesInsurance PremiumsInterest ExpensesDepreciation Fixed Assets Amortization Pre-Opening Expenses, Intangibles and other benefits, Salary and salaries Taxes on utilities hotel

Regarding the costs and expenses of the non-operating departments, these are not distributed to the departments that have income, but a statement is presented for each one separating the expenses of salaries and personnel expenses from the other expenses of the department, obtaining a total of salary expenses and a total of other expenses, which together make up the total expenses of the non-operational department in question.

In addition to direct costs and expenses, and those of non-operational departments, SUCH recommends a statement with fixed expenses.

An additional possibility of the cost structure according to the SUCH is formed by obtaining the “Total Cost” in the operating departments by transferring to them the proportions assigned to them of the non-operating expenses and fixed charges, and which constitute indirect expenses of the departments operational.

Profits in operations of income-producing areas, such as accommodation, gastronomic services, shops, etc. they should be considered as profit (or loss) before undistributed indirect expenses. Only by adding a portion of the indirect expenses can the total costs and net results of each area be obtained. Although it should always be remembered that the distribution of indirect costs is based on generally arbitrary or estimated bases that can produce some distortions in the results. For these reasons, the allocation or distribution of indirect costs to operational departments should be an additional procedure to the established method and should only be used to: evaluate or establish new rates for service charges and serve as a basis for strategic planning.

The requirements of a distribution system are: an appropriate accounting system, as described in the SUCH, and adequate statistical information for the development of the allocation bases.

The basis for distributing indirect expenses to operational departments should logically be the amount of services provided by each department to the others, but if there is no exact measurement of these services, an estimate must be made. There are several methods to assign indirect expenses (Direct, Step and Formula), but the most widely used is the so-called “Direct” by means of which indirect expenses are charged to operational departments with some logical, although arbitrary basis (at the discretion of who defines it) such as% of total income, number of workers, area occupied by the department, etc.

The echelon method, with which the distribution is also made to overhead departments. With this procedure, a department is chosen for the first assignment, to which the expenses are prorated according to some logical basis. The other departments are distributed in a similar way.

The formula method, with which the distribution of each department is made, simultaneously to all the other departments, which are served by the department in question, whether they have income or not. With this method, the overhead departments are divided into two groups: those that supply each other in addition to the productive departments, and those that supply only the productive departments. Those supplying both overhead and production departments are distributed first, but the procedure is usually carried out by computers.

Although any of the accepted methods used on a regular basis will provide useful information, the formula method gives results that more closely reflect cross-department activities. All methods require the following steps:

- Collect the necessary data, including interdepartmental services and other information, to determine the basis for distribution.

- Reclassify, if necessary, for example, you can make monthly distributions. The order may need to be reversed to make the distribution of overhead more accurate.

- Distribute fixed expenses (rentals, insurance, depreciation taxes) directly to all departments.

- Spread overhead, including your share of overhead, using one of the recommended methods.

The main bases used in the SUCH to distribute indirect expenses are the following:

Telephone	Number of extensions
Tax on payroll and employee benefits.	Template. Detailed payroll record. Salaries and wages
Administration and General	Accrued expenses Template.
Computing	Accrued expenses Template.
Marketing	Ratio to sales
Animation and Recreation	Ratio to sales
Energy Expenses	Sub-meters Cubic meters of occupied surface.
Property Operation and Maintenance	Work orders Template. Square meter.
Human Resources	Template.
Transport	Template.
Rental	Percentage applicable to sources of income Square meters of occupied surface (fixed rent)
Real estate taxes.	Square meters of occupied surface
Insurance-Buildings and content	Square meters of occupied area Square meters plus investment in furniture and facilities.
Interests	Square meters of occupied area Square meters plus investment in furniture and facilities.
Amortizations-Buildings	Square meters of occupied surface.
Amortization- Furniture and facilities	History of the department's assets. Square meters of occupied area.

The methods of costing the hotel activity mentioned above are used by most of the major hotels in the international arena. However, it is recommended to expand the account classifier and the procedures to offer meaningful information to management, including operating cost per activity indices, such as: per tourist-days, per occupied room, per worker, etc. However, care should be taken to expand the information base only with information that is meaningful and can be used effectively by management. Over-reporting of immaterial or incomplete data weakens, rather than strengthens, the value of financial reporting.

3. Experiences in the application of traditional costing methods.

In companies that work with a single product, the calculation of costs is greatly simplified. The unit cost price is calculated by dividing the total cost for the period by the number of units produced.

On the other hand, in multi-product companies, the cost calculation is complicated, since many costs cannot be charged directly to each product, so you have to decide the system to use among the existing ones (partial and complete, basically).

3.1 Partial cost systems. The Direct Costing method.

In an area of ​​controversy, it is important to be careful in defining and choosing terminology. The term direct costing is, to some extent, wrong. The preferred terminology would be variable costing, which more accurately reflects the assumptions underlying direct costing. Direct costing is the method, under which only costs that tend to vary with production volume are charged to product costs. There are several variants of partial cost systems, but all of them are distinguished by assigning only part of the costs to the product. (See figure 2.1)

As we previously exposed, the costing method recommended by SUCH is direct costing, which is a partial cost system since it imputes a part of the costs to the products. When using the direct cost system to calculate the cost of a product or service, only those costs that can be directly assigned, with objective criteria, to the corresponding product or service are taken into account. With this system you can obtain the result account by products, very useful to analyze the contribution margin (sales minus direct costs) generated by each product. The rest of the costs, that is, the indirect costs, are taken directly to the profit and loss account. Therefore, indirect costs are considered period costs. (See figure 2.2).

COSTS	DIRECT COSTS	DIRECT COSTS EVOLUTION-NADO	VARIABLE COSTS	EVOLUTIONARY VARIABLE COSTS
Raw Materials	Yes	Yes	Yes	Yes
Workforce	The direct part	Direct part	The variable part	The variable part
Direct fixed	Yes	Yes	Not	Yes
Direct variables	Yes	Yes	Yes	Yes
Fixed indirect.	Not	Not	Not	Not
Indirect variables	Not	Yes	Yes	Yes

Figure 2.1 Costs charged to products in each variant of the partial cost systems.

Figure 2.2 Diagram of the operation of a direct cost system.

Example of calculating the direct cost of a product.

Next, the direct cost of a dish in a restaurant (Italian Lobster) is calculated. To perform this calculation, the quantity and price of each of the ingredients in the dish must be known.

RAW MATERIAL	PRICE ($ / kg.)	QUANTITY (Kgrs)	Costs of 10 servings.
Lobster dough	27,500	5,000	137.50
cheese	1,650	0.250	0.4125
Potatoes	0.450	1,000	0.450
Onions	0.250	0.800	0.200
Total cost	-	-	138.56
Number of servings	10	10	10
Unit cost per serving	-	-	13.86

According to Amat, the cost of the previous ration (raw materials) could also be added to the cost of the kitchen staff who have been directly involved in its preparation.

Setting the selling price of a product or service using direct costing.

We consider it appropriate to clarify that in addition to the cost price analysis, the sale price of a service is usually set on the basis of the market price analysis, that is, this price depends on the prices of the competition, the category of the hotel and the the marketing policy that is designed.

There are several methods to set the sale price of a product or service, one of the most used consists of the following steps:

- Calculation of the direct costs of the product or service as we previously analyzed.

- Set the percentage represented by the direct costs assigned to the product of the total costs of the hotel.

- Calculation of the total cost of the dish dividing the direct cost of the product or service by the amount by one that represents the direct costs over the total costs.

- Finally, the desired profit margin is added to the total cost using the following formula: PV = Total cost x (1 + desired margin).

The main limitation of the aforementioned method is that it is based on the assumption that the same percentage of margin must be applied for all the products and services of the same activity offered by the hotel, something that is not usual in practice. To solve the problem raised above, it is necessary to know for each activity and if necessary for each family or group of products and / or services the percentage that indirect costs represent of the total costs of the hotel, something very difficult to obtain in practice.

Advantages and Limitations of Partial Cost Systems.

Advantage:

- This costing method has come of age and is proving to be an extremely valuable tool in planning, control, and management decision making.

- The information obtained as a result of the application of this method facilitates the analysis of the breakeven point or Cost-volume-profit.

- They stand out for their simplicity, in relation to other cost systems, and consequently they are cheaper as information systems.

- Partial cost systems are useful in companies in which indirect costs (which are not assigned to products) are not very significant.

- They provide information to evaluate the products in courses and the finished products, information required by financial accounting in order to prepare the annual accounts.

- Eliminates the distortion that can produce in the result of the period the variation of the inventories of products in course and finished in the systems of complete costs.

- The use of the variable cost system allows to know how far the price of an order can be lowered without losing money.

- With the direct cost system you can obtain the income statement by products and / or services, very useful to analyze the contribution margin generated by each product and / or services.

- In the case of the variable cost system, very useful data are obtained for decision-making such as the elimination of products and the setting of minimum sales prices.

- It more easily highlights the origin of the variations that appear in the results.

- It highlights the close relationship between the structure of the cost obtained and the volume of production achieved.

- It is easier both in the registration and in the analysis, also the presentation of the results is clearer for the leader.

- The presentation of the results facilitates the application of cost control by area of ​​responsibility.

Limitations:

- The main disadvantage of direct costing is its lack of acceptance for external reports by the American Institute of Certified Public Accountants, the Internal Revenue Service, and the US Securities and Exchange Commission.

- The results may be inaccurate, because there are a large number of semi-variable costs that cannot be easily separated from fixed and variable.

- It can cause the absence of analysis of certain costs, essentially indirect ones, which in many companies are experiencing significant increases.

- It is not advisable to use it in companies with low profit margins.

3.2 Complete cost systems. The method of sections.

Absorption costing is the method under which all direct and indirect costs, including fixed manufacturing overhead, are charged to product costs.

As we previously exposed, an additional possibility of the cost structure according to the SUCH is formed by obtaining the “Total Cost” in the operating departments by transferring to them the proportions assigned to them of the non-operating expenses and fixed charges and that constitute indirect costs of operational departments. (see figure 2.3)

Figure 2.1 Distribution of costs to products in a complete cost system with sections.

There are several methods to apply the full cost system, but all of them are very similar in essence, the one most used in the hotel industry is the so-called Sections Method. To apply this method it is necessary to follow the following steps:

First: Divide the hotel into sections, cost centers or areas of responsibility, also taking into account the division into main sections and auxiliary sections. Every section is characterized by having a person in charge, specific objectives, human and material resources and assigned costs. In the event that there are costs that are not assignable to any section, they will be charged to a general expenses section.

Second: Assign all the costs that have been generated in the period to each section. If there are costs that are not assignable to any section, they will be charged to a general costs section. With this primary distribution it is possible to know the cost of each section or area of ​​responsibility, which is one of the objectives of analytical accounting. Each cost can be located according to different criteria or distribution keys.

Third: Allocate the expenses of the auxiliary sections to the main sections. To carry out this, we will follow the recommendations of the SUCH regarding the allocation methods and the distribution bases of indirect expenses.

Fourth: Next, in the sections that are possible, it is necessary to define the unit of services, or work unit of each section, which is the unit of measurement of its activity.

Fifth: Once the service units of each section have been defined, the total costs of each main section must be divided by the service units that have been provided in the period considered. In this way the cost of each service will be obtained.

Advantages and Limitations of Full Cost Systems.

Advantage:

- Although direct costing is now popular as a management accounting tool, absorbing costing remains the dominant basis for valuing output for external reporting purposes. Absorbing costing is the inventory valuation method that is recommended in generally accepted accounting principles.

- Complete cost systems provide a higher quality of information that affects indirect costs.

- It is very useful when applied in companies that carry out massive productions of similar units, for example textile, hotels, etc.

Disadvantages:

- Given the inflexible principle of having to apply everything to the product or service executed, truly arbitrary indirect cost distribution procedures are used, which does not provide any benefit.

- The total cost tends to present global figures, which makes economic analysis difficult.

- It is not possible to clearly establish individual responsibility for the greater or lesser efficiency in the results.

- The valuation of production requires the allocation or distribution of fixed costs to the product based on a normal level of production, for this reason when the production volume differs from the standard, an over or sub-allocation of fixed costs is produced causing errors in inventory valuation and in it I calculate the net profit.

- Full cost systems tend to be more expensive as information systems than partial cost systems.

As we stated in the previous chapter, the costing systems respond to the needs of the users regarding the information of the concrete and real processes of the production units, that is, there is necessarily a relationship

COSTING TECHNIQUE <> Organizational Context of Reference

Judgments about the validity of any costing technique, to be objective, must be the result of an analysis that has respected that "technical - context" relationship.

In other words, a conceptually correct technique designed for a “context A” will necessarily fail if it is used in a “context B”. However, the cause of its failure does not respond to the fact that it is a wrong technique, but rather that it is applied in the wrong context (for which it was not created).

This circumstance is aggravated by the fact that, for various reasons, the processes of change in production organizations motivated by the impact of globalization are not even. In this way, many companies maintain their "departmental structures" and their information schemes without causing any disturbance. Others, more exposed to changes, have proceeded to redesign both their processes and the information systems that serve as support for making their decisions.

4. Conclusions

- The hotel company has general characteristics (great diversity and complexity, rigidity of the offer, conditioning to exogenous factors and elastic demand) and economic-financial characteristics (nature of its product, short operating cycles, instability or fluctuation of income, structure of costs characterized by its high portion of fixed costs) that differentiate it from the rest of commercial and industrial activities.

- Considering the special characteristics of the hotel company, since 1926 it has had its own accounting system, the Uniform System of Accounts for the Lodging Industry, however this system does not departs from and is in fact consistent with Generally Accepted Accounting Standards and Principles.

- The analysis of the characteristics of this type of companies and of the environment in which they operate, support the need and possibility of applying activity-based costing in the hotel company.

- The SUCH recommends direct costing method, one of the variants of the partial cost systems, according to an Amat classification. The direct costing referred to by the SUCH differs from the traditional direct costing in that the latter imputes to the products only the variable costs, both direct and indirect, however the direct costing referred to by the SUCH takes into account only the direct costs be these variable or fixed.

- The SUCH recommends obtaining the Total Cost as an additional procedure after issuing the reports according to direct costing, although the system recommends several methods and the main distribution bases to assign indirect expenses to operational departments, this process does not It is no longer inaccurate because in practice it is based on generally arbitrary bases (at the discretion of the person who defines it) or estimates that can cause some distortions in the results.

- The practical application of these methods reveals the existence of advantages and limitations in each of them, our position in this regard is that both methods are necessary and feasible to apply without much effort, however we consider that the method used to calculate the total cost presents some inaccuracies, for which it should be replaced by a more exact one, which could well be the activity-based costing method, which allows a better allocation of indirect costs, in addition to allowing their reduction and control.

5. BIBLIOGRAPHY:

- AMAT ORIOL and SOLDEVILA GARCIA PILAR: «Accounting and Cost Management», Editora Gestión 2000, Spain, 1997.

- ARMENTEROS DIAZ MARTA: »Cost systems in Cuba, We must catch up, El Economista de Cuba Magazine, No. 9, ANEC, Cuba, 1999.

- GARBEY CHACON NORGE: »Theoretical framework for the implementation of activity-based costing (ABC) in the hotel company.» Paper presented at the I International Event on Tourism Economics, Santiago de Cuba, November 2000. (Published in the Book of Abstracts).

- GARBEY CHACON NORGE and SARMIENTO SANTANA JOSE: »Proposal of a methodology for the implementation of activity-based costing in Cuban hotels. Practical experiences achieved. » Paper presented at the II International Event Accounting and Finance in the Third Millennium, Havana, April 2001. (Published in the Book of Abstracts.)

- GARBEY CHACON NORGE: “Activity-Based Costing: A proposal for its application in Cuban Hospitality”, Thesis in Option to the academic title of Master in Tourism Management, Santiago de Cuba, 2001.

- HOTEL ASSOCIATION OF NEW YORK CITY, INC.: “Uniform System of Accounts for Hotels” USA, Sixth Revised Edition, 1971.

- HOTEL ASSOCIATION OF NEW YORK CITY, INC.: “Uniform System of Accounts for Hotels” USA, Eighth Revised Edition, 1986.

- KAPLA ROBERT S and COOPER ROBIN: “Cost y Efecto” Editora Gestión 2000, Spain, 1999.

- KAPLA ROBERT S and NORTON DAVID P: “Balanced Scorecard” Editora Gestión 2000, Spain, 1997.

- MFP: «General Accounting Standards for Business Activity. General Guidelines for the Planning and Determination of the Cost of Production », Cuba, 1997.

- MIJUS: "General Bases of Business Improvement", Official Gazette of the Republic of Cuba, September 14, 1998.

- PPC: "Economic Resolution V Congress of the Communist Party of Cuba", Political Editor, Havana, CUBA, 1998.

AUTHOR INFORMATION:

NORGE GARBEY CHACON E-mail: [email protected]

AGE: 36 YEARS

APPLIED STUDIES:

Degree in Economics, Year 1989.

Master in Tourism Management, Universidad de Oriente, Year 2001.

Diploma in Tourism Business Management, School of Hospitality and Tourism FORMATUR Santiago de Cuba, 2002.

PROFESSIONAL EXPERIENCE:

More than 14 years of work in the Business Economics activity, during the last 9 Years he has served as Economic-Financial Director of two Hotels belonging to the CUBANACAN S, A GROUP. in Santiago de Cuba.

Currently he also works as Adjunct Professor of FORMATUR.

TITLE: ACCOUNTING SYSTEMS AND COSTS IN HOTEL COMPANIES.

CATEGORY: ADMINISTRATION AND FINANCE / ACCOUNTING

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