ACTIVITY BASED COSTING

Activity based costing in small UK hospitality sector

Activity based costing in small UK hospitality sector

Introduction

Evidence about cost accounting and its use in tourism enterprises and especially in hotels is rather limited (Pellinen, 2003). However, there is an active interest in hospitality management and particularly in cost and management accounting practices of hotels and tourism enterprises (Harris & Brown, 2008). Potter and Schmidgall (2009) believe that little innovation has occurred in hospitality cost and management accounting practices, and there are many issues that deserve research attention.

Activitybased costing (ABC) is considered to be one of the most important innovations in the field of cost and management accounting (Bjomenak, 2012; Bjomenak & Mitchell, 2009). ABC systems use a simple twostage approach that is similar to the structure of traditional cost systems, such as joborder costing and process costing, but more general. Traditional costing systems use actual departments or cost centers for accumulating and redistributing costs. Instead of using cost centers for accumulating costs, ABC systems use activities; that is, rather than asking how to allocate a service department expense to a production department, the ABC system designer asks what activities are being performed by the service department's resources. The resource expensesare assigned to activities based on how much of them are required or used to perform activities (Atkinson, Banker, Kaplan, & Young, 2011; Garrison & Noreen, 2012). Both traditional and ABC systems vary in their level of sophistication but, as a general rule, traditional systems tend to be simplistic, mainly because they are inexpensive to operate, make extensive use of arbitrary cost allocations, have a low level of accuracy, high cost of errors, and so on. On the contrary, ABC systems tend to be more sophisticated, because they are expensive to operate, make extensive use of cost and affect cost allocations, have a high level of accuracy, low cost of errors, and so on (Drury, 2012).

Research on ABC adoption (Briedley, Cowton, & Drury, 2011; Groot, 2009) suggests that one of the major perceived benefits from implementing ABC is the more accurate cost information for product costing. Other reasons that justify ABC adoption are improved cost control, cost reduction, more accurate allocation of indirect costs, improved insight into cost causation, identification of activity costs, and improvement of operational efficiency. Apart from the above reasons, the decision to implement ABC is often driven by the need to improve customer profitability analysis, to gain more accurate cost information for pricing, or to prepare relevant budgets. Research also reveals that many companies proceed to the implementation of ABC because they want to modernize their cost accounting system in order to better depict costs or to improve their business processes.

Taking the above into consideration, a research was conducted aiming at providing some empirical evidence of current general trends in the practical consideration, the level of adoption, and the use of ABC in the UK hospitality industry. The findings of this study are compared with prior cost accounting knowledge, and earlier cost accounting practices ...