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A Report on Time-Driven Activity
Based Costing for Palms Beach & Spa Hotel

 

 

Subject:
Managerial Accounting

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Course
Code: HI5017 S1

Student
Name: Ronit Manandhar

Student
ID : EMV21849

Word
Count: 2079

Date:
25/01/2018

 

 

 

 

 

 

 

 

 

Table
of Contents
 
A Report on
Time-Driven Activity Based Costing for Palms Beach & Spa Hotel 3
Introduction. 3
Enterprise’s
Background Information. 3
TDABC
(Time-Driven Activity Based Costing) 5
Differences
between TDABC and ABC Models. 7
Need for
Implementing TDABC Model in Palms Beach & Spa. 8
Conclusion. 9
References. 10
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

A Report on Time-Driven Activity Based Costing for Palms
Beach & Spa Hotel

Introduction

Most
companies have implemented the system of the Activity-based costing for
measuring the profitability of the customer and product cost every month. For
these firms to stimulate improvement of the process, customer relationship
action, and pricing of the product, they are forced to acquire many facilities
to be used to submit monthly surveys, and many employees to help in collecting
and processing the data as well as preparing reports for the management, this
processes takes more time (Bruggeman, and Everaert, 2007).

             Our client, the Palms Beach & Spa Hotel
Enterprise, have been encountering the same implementation challenges with its
model of Activity-Based Costing. The system takes long time to calculate the
costs for its orders, activities and services. Due to the costs of data
processing and surveys of time consuming of Activity Based Costing system, the
firm enterprise has ceased updating its system, this have left the enterprise
with inaccurate and out-of-date estimates of services, process and customer
costs.

             This report presents a new approach that can
help this enterprise to improve its cost operations and speed up its cost activities
and processes. It presents information on the Time-Driven Activity Based
Costing, which is abbreviated as TDABC, its features, comparison with the
traditional systems of costing and the reasons as to why this approach is
suitable to our client the Palms Beach & Spa Hotel Enterprise.

 

Enterprise’s Background Information

The hotel enterprise of
Palms Beach and Spa is a business that offers services of fitness and recreational,
accommodation to guests and food. It is one of the largest recognized hotel
enterprises in Turkey. It has about six buildings and tend to offers its services
to about seven thousands guests in a day. This hotel enterprise is located in
Kuwait, Turkey between the mid beaches and the south beach; hence the hotel
enterprise is free from noise. The enterprise guests tend to enjoy easy space,
free breakfast, and free internet services, as well as beaches that are
exceptional, free parking and airport shuttles.
Also, the inviting hammock exists at the hotel enterprise, this enterprise has
a clean ground as well as clean gardens of the soaring palm trees, and
accommodation rooms (The Palms Beach Hotel and Spa. 2017).

            The
hotel enterprise have a GYM, Spa and five pools of outdoor as well as the
onsite sender for diving the private beaches, an on-site Centre for diving, and
kids’ club. The major priority of this enterprise is on the environmental
wellness and awareness and offers excellent services to its guests. The Palms
Beach and Spa Hotel enterprise has a website that enables it to reach potential
customers visiting the region across the world. These customers are able to
view the services offered by the enterprise and the prices charged through the
site at their comfort. It also possess an online booking system that enables
the esteemed customers to book for accommodation and other services offered by
the hotel through online. The online booking services together with the website
have increased the efficiency of the enterprise operations and its general
productivity (The Palms Beach Hotel and Spa. 2017).

      
      The Palms Beach & Spa Hotel markets its
products and services via its website and through social media. Through the
website they also receive feedbacks and reviews of the customers on the
services together with the products offered by the enterprise. In addition, the
enterprise also offers services to its guests, this includes swimming pools,
salons, gym, and restaurants and provides junior care services. The enterprise
has standardized its operational systems across all departments and centralized
the management.  The Palms Beach &
Spa Hotel enterprise aims at being among the most customer oriented hotel
enterprises across the world, and to achieve this, it has initiated an online
booking system and offers its services at affordable prices. It also plans to
monitor, control and manage its information systems and processes by ensuring
the proper information security measures are put in place so as to avoid
attacks by risks and to protect the availability, integrity and confidentiality
of its private information (The Palms Beach Hotel and Spa. 2017).

 

TDABC (Time-Driven Activity Based Costing)

The TDABC approach uses
time to drive costs of resources directly to the objects like customers,
services, products, orders, and transactions. Instead of allocating the costs
of resources to activities before driving those costs to the objects of the
cost, it uses time as a primary deliver of cost. It specifies each process or
department’s capacity and then allocates the cost of the capacity of resource
groups over the cost object basing on the time needed for activity to be
performed. If the demand declines in these departments, the approach has
ability of estimating the quality of the released resources (Kaplan 2006). It
captures different features of an activity through equations of time where an
activity’s consumed time is a function of distinct features. The equation then
assigns the activity’s cost and the time to the cost object based on the each
object’s characteristics. The two parameters of this approach are the required
time to carry out an activity and the used resources’ unit time. This approach
has six stages that are;

1.     
Specifying the groups of resources and
the required time for which these resource groups are used.

2.     
Define specific costs of every resource
group

3.     
Estimation of each group’s practical
capacity

4.     
Calculation of the cost per unit time.

5.     
Determination of the time units needed
for every activity

·        
Calculating costs per transaction

The approach of
Time-Driven Activity Based Costing simplify the process of costing by removing
the requirement of surveying and interviewing employees for resource costs
allocation to the activities before driving them down to the objects’ cost; the
objects can be clients, products and orders. This method allocates the costs or
the resource directly to the objects of the cost through the use of an elegant
framework that only requires two sets of estimates. It starts by calculating
the cost of supplying the capacity of the resource. In the next step, it uses
the cost rate of capacity to drive resource costs of departments to the objects
of cost through estimation of the demand for the capacity of the resource which
is required by each object of cost (Bruggeman, and Everaert, 2007).

This approach doesn’t
need the orders of the customers to be similar; it allows the estimation of
time to vary basing on the particular demands by specific orders. It simulates
the processes that are used to carry out work in the entire enterprise. The
model is also able to capture complexity and far more variations without
establishing a demand that is exploding for estimates of data, processing and
storage capabilities. With the model of TDABC, enterprises are able to embrace
complexity instead of being forced to use inaccurate, simplified models of ABC
of its complex operations (Bruggeman and Hoozee, 2010).
Features
of Time-Driven ABC Approach

Many challenges that
are posed by the ABC model are eliminated by the Time-Based ABC approach
(Bruggeman and Hoozee, 2010). The approach has the following features;

·        
It is fast and easy to implement.

·        
It integrates with the available data
from the Customer relationship Management system as well as the ERP systems.
Hence making the systems less people intensive and more dynamic.

·        
The maintenance and updating of this
model is fast and inexpensive

·        
It has ability to scale to wide models
of an enterprise

·        
It is easy to incorporate this approach
with particular features for specific customers, suppliers, processes and
orders.

·        
It has ability to forecast the future
demands of the resource based on the predicted complexity and quantities of the
order.

·        
Building an accurate model is faster and
easy

·        
It can be used monthly for capturing the
economics of recent transactions

·        
It provides visibility to utilization of
the capacity and efficiencies of the processes.

·        
It is scalable easily to the wide models
of an enterprise via technologies of scalable database and application software
of the enterprise.

Differences between TDABC and ABC Models

              ABC Model

 TGABC Approach

Its operational control and
improvement focuses on the financial measures.

Its improvement and financial control
focuses on the non-financial measures.

It takes place at product level

It takes place at process and product
levels

Its financial reporting is not
accepted by GAAP

Its financial reporting is not
accepted by GAAP

Step 1 involves identification of
different activities of overhead

Step 1 involves identification of
various resource groups, like departments

Step 2 Assigning the overhead to the
activities by the use of drivers of a resource

Step 2 involves estimating the total
cost of every resource group

Step 3 involves identification of the driver
of every activity

Step 3 Estimating the practical
capacity of each resource group

Step 4 Determining the rate of
activity driver through the division of the total cost of activity withthe activity
driver’s practical volume

Step 4 Calculating the cost per unit
of everygroup of the resource through the division of the resource group’s total
cost with practical capacity

Step 5 Multiplying the activity driver
rate by the activity driver consumption to trace costs to orders, customers
and products.

Step 5 Determining the estimation of
time for every event in line with the activity’s time equation and event’s
features

 

Step 6 Multiplying each resource
group’s unit cost with time estimate of the event.

 

Need for Implementing TDABC Model in Palms Beach & Spa

Since the client
company; the Palms Beach & Spa Hotel enterprise is experiencing some
difficulties in its costing processes, together with the need for the
enterprise to advance its systems, I recommend that the enterprise implements
Time-Drive Activity Based Costing model so as to enhance its operations and to
have a competitive advantage in the hotel industry (Kaplan, 2006).

This new approach it
will provide the enterprise with the practical option for establishing the
utilization of the capacity, profitability and cost of its guests, services,
products and orders.

The approach of Time-Drive Activity
Based Costing is going to help the enterprise to improve its systems of
managing costs. It will provide managers with accurate profitability and cost
information to help him in effective decision making process. With this system
they will also be able to set priorities for the improvement of processes,
rationalizing the product mix and variety, managing customer relationships, and
pricing orders of the customer (Carlos, Azadeh, and Miguel, 2017).

      
     The model is also going to
enable the enterprise to overcome of the problems that they are currently
facing in their process of costing. The system’s capabilities and accuracy will
be able to be managed by only few employees. It will provide visibility to the
efficiencies of the process as well as utilization of the capacity. The
enterprise will now be able to budget for the capacity of resources basing on
the predicted complexity and quantities of the orders. To help users with specifying
the main cause of the problems, this model provides granular information
(Kaplan, 2006).

Conclusion
         This report has examined various
features of the Time-Driven Activity Based Costing. It has also highlighted how
this model is applied in the organizations as well as the difference between
this model and the traditional methods of costing. The report has also stated
some of the benefits that the Palms Beach & Spa Hotel enterprise can
achieve through implementation of this new approach. In consideration of the
challenges facing the Palms Beach & Spa Hotel enterprise, as our client we
have to recommend for the implementation of the Time-Driven ABC approach. This
approach is going to enhance the efficiency of the costing processes as well as
other operations of this enterprise. It is also going to help the enterprise to
reduce its operational costs.

 

References

Bruggeman W., and Everaert P., (2007). Time-driven
activity-based costing: exploring the Underlying model. Cost Manage 21(2):16–20

Bruggeman W., and Hoozee S., (2010). Identifying operational improvements during
the design process of a time-driven ABC system: the role of collective
worker participation and leadership style. Manage Account Res 21(3):185–198

Kaplan R., (2006). The competitive advantage of
management accounting. Manage Account Res
18:127–135

Carlos, R., Azadeh N and Miguel A., (2017). Activity Based Costing, Time-Driven Activity
Based Costing and Lean Accounting: Differences Among Three Accounting
Systems’ Approach to Manufacturing. Retrieved from: http://oa.upm.es/19409/

The Palms Beach Hotel and Spa. (2017). The Palms Beach and Spa Hotel Profile.
Available at: http://www.thepalms-kuwait.com/Default.aspx?pageId=0

 

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