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The Project On Activity Based Costing

Cost Accounting

Submitted To: Dr.Bibhu Sahoo

Submitted By: Bhanu Pratap Singh 20110105 Harshit Pathak 20110106

Batch 2011-2013 PGDM- 1st Year


The completion of our project depends upon the co-operation, coordination and combined efforts of several resources of knowledge, inspiration & energy. I Always knew that in an organization, the work atmosphere yields enormously on an individuals productivity and quality of work. The competence and expertise of people around us at Was a factor that motivated us to strive and achieve nothing short of perfection. We owe a great many thanks to all those, without whom this project wouldnt have been as much a learning experience and as successful. To those, who helped and supported us during the course of this project. My deepest sense of gratitude for for constant guidance, professional help and support during the course of the project, for .guiding us and helping us at all times during the project. He was the key inspirer for us and without his guidance this project would have been a distant reality. We thank my colleagues and friends for providing constant encouragement and help. We are indebted to them for their timely help & the enthusiasm they expressed in helping us bring this project to the fruitful end.

Activity Based Costing

Activity Based Costing (ABC system) is a costing methodology where costs are allocated to products and services based on the number of transactions or events involved in the process of providing the product or service. The concept of Activity Based Costing was developed in the manufacturing sector and given a broader audience by Robin Cooper and Robert Kaplan. Cooper and Kaplan, proponents of the Balance Scorecard, published a number of articles in Harvard Business Review beginning in 1988. Cooper and Kaplan presented Activity Based Costing as an approach to solve the problems of traditional cost management systems. Traditional cost accounting was limited in its ability to accurately determine the costs of production and related services. As such, managers made decisions based on inaccurate data. Activity based costing by contrast identifies cause and effect relationships in order to objectively assign costs. Once activity costs are identified, the cost of each activity is attributed to each product to the extent that the product uses the activity. Activity based costing enables managers in this way to identify and correct areas of high overhead costs per unit. Activity based costing can provide detailed cost information to support annual budgets, and determine customer profitability. It also enables management to see how performance can be maximized and growth strategies realized. For example, a customer may appear to be profitable based on income. However, in applying activity based costing, where costs are associated with the services that the customer demands, it may be discovered that the profitable customer is driving the largest expenses. In identifying cost drivers, it is important to ensure that the activities are measurable and relevant. You must be able to determine that the activity has a direct or indirect relationship to the cost of doing business and you must be able to allocate to each customer the portion attributable to the activities consumed.

Activity Based Costing

Introduction & Background of the Case The purpose of this descriptive case study is not to elaborate on the complicated details of EVM, but to elaborate on the fundamentals of activity based costing (ABC) in the context of project management. The opportunity is to develop an integrated management system utilizing ABC concepts to plan, measure, and control costs that allow managers to focus on process performance and to make informed decisions along the product/service/project life cycle. It is assumed that the reader is familiar with common project management terms. However, Figure 01: Wideman Comparative Glossary in the appendix contains a web link to Wideman Comparative Glossary of Common Project Management Terms v3.1 for those readers unfamiliar with project management terminology. 1.1 Discussion & Analysis of Critical Issues

Organizations are faced with many challenges during this time of economic recession. The most common organizational reactions are to button down the hatches, secure the turf, and start chopping staff positions. Dysfunctional organizations tend to always look in the rearview mirror and employ managers that make snap decisions without sufficient data, which often result in organizational demise. Forward looking organizations that seek out opportunities during a time of economic recession tend to focus on process improvement initiatives such as, business-process analysis; activity based costing, life cycle compression metrics, among other things. This case study assumes the forward looking perspective. The next section introduces activity based costing, which is followed by a brief discussion of concepts and methods found during the research of several other independent case studies. Then an introduction and description of some basic project management processes. Finally, continued by a simplicity case and finally the conclusion.


Activity Based Costing (ABC) Introduction

ABC was developed as a continuous improvement initiative of the accounting information system. Original, ABC was used as a product costing methodology, but is now being used as a cost management tool in many different functions of business (Awasthi, 1994, p 8). A couple of differences between ABC and traditional cost systems are 1) costs are traced to cost objects by identifying cost drivers and 2) costs are traced on the basis of the structural or hierarchical level at which costs are incurred. Therefore, ABC provides more accurate cost estimates of the product or service and the corresponding activities than traditional costing (Kee, 1995, p 49).


Activity Based Costing (ABC) Discussion

It is important to note that in traditional costing the assumption is that products consume resources. ABC contrasts traditional costing by assuming that products consume activities and activities consume resources. Once the product or service activities are identified, costs are allocated to the product or service according to the amount incurred by those activities. This method of allocating costs provides a benefit for making decisions regarding different types of profitability and project accounting (Awasthi, 1994, pp 9-10). There are two sets of costs related to the accuracy of ABC cost information, 1) cost of measurement and 2) cost of decision error. As the accuracy of measurement goes down the cost of decision error goes up. Detail is an important factor in the success of a ABC system, but the detail must be value add. It is important to control changes brought on by environmental factors (competition, volatility, profit margins, etc) while still allowing for diversity throughout the life cycle of the product or service (Awasthi, 1994, p 11). So how can one ensure accuracy in measurements for better decision making? The key is to identify and analyze the most optimal cost drivers that trace the costs of the activities back to the product or service. 2.3 Activity Based Costing (ABC) Activity Identification & Analysis

Cost drivers are linked to business process mapping and activity analysis in order to obtain rigid data for measurement analysis. Figure 02 depicts a two stage process that traces expenses through activities to cost objects.

Figure 02: Basic ABC Flow The first stage traces expenses from the department or organizational level budget to activities that are assigned to resources (labor, space, materials, and suppliers). For example, a labor resource is allocated to an activity at 100% over a duration of time equating to a unit of work converted to an activity cost. In the second stage, activity costs are traced through the activity cost drivers to the cost objects, i.e. products and/or services. This stage is concerned with explaining the causes of work and what things cost. Managers that focus on process drivers and cost drivers have a more detailed understanding of activity costs and associated activity dependencies. Therefore, managers can make better decisions on areas in need for process improvement instead of shooting from the hip (Brandt, Levine & Gourdoux, 1999, pp 22-25). ABC provides a hierarchical structure of detail. The challenge for managers is to ensure an optimal amount of detail that achieves balance and accuracy. Next we discuss cost driver optimization. 2.4 Activity Based Costing (ABC) Cost Driver Optimization

Managers chose cost drivers for planning and control purposes. Choosing too many cost drivers and the system is bogged down creating extra costs and inefficiency problems. Managers must strive to strike a balance between accuracy benefits and costs of data management. Babad & Balachandran indicate in their article, Cost Driver Optimization in Activity-Based Costing, that an optimal number of cost drivers generally discriminates and captures most of the incurred costs, and identify a priority order that specifies which

low-priority and relatively insignificant activities will be combined to save costs without sacrificing much accuracy (Babad & Balachandran, 1993, p 565). At this point the concepts of ABC have been introduced and discussed as a process object for organizations to utilize. The next section expands on the project management context as it relates to ABC.


Project Management and ABC Introduction & Background

The project manager is responsible for the scope, schedule, and budget (triple constraints) at the project level. A project is characterized as a progressively elaborated temporary endeavor undertaken to create a unique product, service, or result (PMBOK, 2004, p 5). Projects generally exist as a sub-set of the organization.


Project Management and ABC Project Life Cycle

Project managers or organizations parcel projects into phases for better management control. Phases are typical identified within a life cycle. The phases of the project life cycle are depicted in Figure 03: Project Life cycle. The project life cycle is not intended to represent the project management process. The project life cycle typically defines 1) what technical work to do in each phase; 2) when the deliverables are to be generated in each phase; 3) who is involved in each phase; 4) how to control and approve each phase (PMBOK, 2004, p 20).

Figure 03: Project Life cycle (PMBOK, 2004, p 68) 3.2 Project Management and ABC Work Breakdown Structure (WBS)

In this process, project deliverables and objectives are subdivided into smaller more manageable components. A WBS is a deliverable-oriented hierarchical decomposition of the work. This is the activity analysis concept mentioned previously in section 2.3 Activity Based Costing (ABC) Activity Identification & Analysis. Work is planned to the lowest-level WBS component called a work package. Work packages can be scheduled, monitored, and controlled. Figure 04: WBS Example 01 in a generic representation of a WBS. Notice the phases and deliverables located throughout the WBS. Also notice the work packages at lowest-levels of the WBS. Figure 05: WBS Example 02 is a software development representation of a WBS. The activity costs are traced to the first level and are also the phases of the project. The deliverables are at level two, where as the resource and activity drivers are at the lowestlevel. As mentioned before, the lowest level is a work packages and can be scheduled, monitored, and controlled.

Figure 04: WBS Example 01 (PMBOK, 2004, p 114)

Figure 05: WBS Example 02 (PMBOK, 2004, p 116) 3.3 (RAM) To define the cost objects a PM will use a RAM. Max Wideman defines the RAM as an important tool that correlates the work required by a Contract Project Management and ABC Responsibility Assignment Matrix

Work Breakdown Structure (CWBS) element to the functional organization responsible for accomplishing the assigned tasks. The responsibility assignment matrix is created by intersecting the CWBS with theprogram Organizational Breakdown Structure (OBS). This intersection identifies the cost account (Wideman, 2002). Figure 06: RAM Example 01 and Figure 07: RAM Example 02 are great examples of how cost objects are realized as cost accounts. All the activity estimates, risks, and incurred costs related to the cost account are summarized at these management control points. This gives the PM tremendous insight to the health of his/her project.

Figure 06: RAM Example 01 (Valuation Opinions, Inc., 2008)

Figure 07: RAM Example 02 (Performance Management Associates, Inc., 2008) 3.4 Project Management and ABC Resource Loaded Network (RLN)

A RLN is an integration of schedule and cost and is represented as a network of time phased resource loaded activities sequentially ordered across the phases of the project life cycle. A resource loaded activity is also called a work package. The longest path through the sequential network of activities is known as the critical path. The PM uses what is known as the critical path method to focus on those activities along this path to ensure the project delivers on time and within budget. A PM can exercise a critical path analyses, what-if drills, and PERT analyses to monitor time and cost impacts. Figure 08: Critical Path represents a network of activities with the critical path indicated in bold red.

Figure 08: Critical Path (Construction-planning-and-control.com, 2008) 3.5 Project Management and ABC Descriptive Case

Project staff utilize ABC concepts throughout the project life cycle and may not even know it. One of the first jobs for the project manager (PM) and team to conduct is a delineation of the deliverables and objectives defined in the statement of work (SOW) using ABC concepts. A simple example of this is when a project sponsor initiates the transfer of scope (deliverables and objectives) to be performed within a stated timeline and within a specific budget to the PM via the project charter. Before establishing the activity costs, the scope must be decomposed into a work breakdown structure (WBS). The PM aligns the WBS with the organizational breakdown structure (OBS) to determine control accounts and assign control account managers (CAM). CAMs develop the scope description in the WBS dictionary, which is comprised of inputs, outputs, assumptions, constraints, risks, deliverable milestones dates, among other things. The resources are assigned to activities and time phased within a resource loaded network (RLN) or more commonly known as the schedule. It is the basis of estimate (BOE) artifact that explains the rationale behind the costs related to the time-phasing of activities and substantiates the activity cost estimates. All of the appropriate technical, schedule, and cost artifacts are captured into one project management plan (PMP).The technical baseline, schedule baseline, and the cost baseline are integrated into a performance measurement baseline (PMB), which establishes the foundation for performance tracking and estimate to complete forecasting. 4.0 Conclusions & Recommendations

ABC is absolutely applicable in the context of project management. Organizational managers and project managers alike need a method to manage vast amounts of activities. Tracing cost to the product/service/project element gives managers an advantage to make informed decision for process improvement. ABC is one method of many and project management is the discipline of tactical processes to implement business strategy. Organizations that focus on opportunities and process improvement initiatives may just come out on top as winners in this most uncertain time of economic despair.

Case Studies On Activity Base Costing

1. Introduction
Researchers in management accounting have traditionally been, above all, interested in the accounting systems of large manufacturing companies. Most accounting researchers interested in service production have conducted their research in non-profit seeking, public-sector organizations (Pellinen 2003, p. 217). Outside the non-profit sector, the number of studies on the management accounting practices of service organizations (profit seeking) have remained very limited (Brignall et al., 1991; Sharma, 2002). More unfortunately, non-traditional lodging, (i.e. the B&B industry), is totally lacking in management accounting research, in contrast with the traditional lodging industry, which is quite wellresearched.

The aim of this paper is to illustrate how activity-based costing (ABC) can be applied to a hot spring country inn in order to obtain information on activities and products for decision making purposes. ABC is a cost-accounting method that allocates resource costs to products using a two stage procedure on the basis of activity consumption by drivers. Its a method which can overcome many of the limitations of traditional cost systems which can distort product cost because they allocate the overhead costs to products mainly by direct labor hours (or volumerelated measures). This is particularly prone to result in distortions in cases where there is a large overhead ratio or a high degree of product diversity.

The country inn style of non-traditional lodging, especially suitable for ABC application, has various products such as lodging, hot spring use and dining which belong to different market segments. The indirect costs of this inn constitute an important proportion of the total costs (53.46%). In such a typical situation, the valuing of products of this inn may be distorted by a traditional accounting system. This article portrays an attempt to apply the ABC model to a hot spring country inn where the managers normally use a traditional accounting method to acquire product cost information. Our case study is presented in the hope of contributing to management accounting research in the non-traditional accommodations area.

In addition to the introduction, there are four main sections in this paper. The subsequent section reviews previous research in management accounting for the lodging industry. The third section presents the ABC model. The fourth section illustrates the implementation of ABC in a specific case. The fifth section compares results of the ABC method and the traditional method. Some conclusions are presented in section six.

2. Literature review
Poorani and Smith (1995, p. 58, 63) observe: The hotel and the B&B industry have very different financial aspects arising from contrasting ownership motives. In the hotel industry the emphasis is on maximizing profitability whereas the B&B industry has been traditionally characterized by innkeepers who embarked on inn-keeping as a second career to satisfy lifestyle goals. But the current economic environment has blurred that distinction. Hoteliers are trying to be more sensitive to customers needs and create an environment for personalized service. Meanwhile, many entrepreneurs are entering the B&B segment with strictly financial motives. Their investigations attribute financial characteristics to the B&B industry and find that innkeepers in USA with midsize

and larger operations not only were highly successful in reaching their career goals but also achieved their economic objectives as measured by return on investment and equity. However, notwithstanding the importance of financial aspects, the studies in cost structure of the B&B industry anywhere in the world were rare. One reason is the inns private-ownership arrangements; others are the fragmented industry structure and the lack of systematic cost and revenue data.

Unlike the situation in the B&B industry, there have been a large number of studies in the hotel industry. In the management accounting side of the tourism industry, research has been conducted both in tourism management research and in accounting research. Studies have been carried out in passenger transportation (Dent, 1991; Rouse et al., 2002), restaurants (Ahrens and Chapman, 2002), and hotels (Downie, 1997; Edgar, 1998; Noone and Griffin, 1999; Mia and Patiar, 2001; Pellinen, 2003). Downie (1997, p310) emphases the importance of considering how accounting information can be analyzed to support marketing decisions more effectively. Noone and Griffin (1999, p111-128) designed a customer profitability analysis (CPA) integrating activity-based costing (ABC) and customer segments in order to find profit yield in a hotel. Mia and Patiar, (2001, p111) interviewed only 35 managers and indicated that general managers and department managers took equal account of the management accounting system, but general managers were more content with the accounting system and valued financial information more than department managers. Pellinen (2003, p217) studied the pricing decisions in six tourism enterprises (including a hotel) and suggested the enterprises observed all took their prices from the leading company. Thus, the importance of cost accounting is limited with reference to pricing decisions from the managerial viewpoint. Obviously, most of the studies have focused on hotels. As Harris and Brown (1998, p161) pointed out, hotels, which typically comprise food, beverage and lodging, can be used to illustrate that the context of the hospitality product can provide a complete range of characteristics in a single arena. Actually, the B&B industry also has all those characteristics. But this segment, specifically nontraditional lodging (including

B&B inns, country inns, small hotels, condominiums, and vacation homes), has remained an enigma to industry analysts and researchers. Lanier et al. (2000, p91) think this is in part because the analysts and researchers willfully overlook it in favor of the traditional lodging industry, pleading lack of data (Statistics dealing with properties of fewer than 20 rooms are usually estimated or based on small samples. Since most country inns do not reach the 20-room threshold, statistics for these properties have not been collected regularly, unlike other industry segments). This is so prevalent in studying management accounting in the accommodation industry and that there is a huge lag for researchers to make up for.

Summarizing the above, previous studies on accounting and product costing, pricing of hotels propose that : (1) the knowledge in accounting is essential in hotel management, (2) the connection between accounting information and marketing is important, and (3) activity-based costing, cost-volume-profit analysis, yield management, and segment profit analysis were among the most relevant management accounting methods, (4) the lack of management accounting research in non-traditional lodging industry needs to be made up.

3. Activity-based costing
Cooper and Kaplan (1988) have developed what they believe is a better alternative to the traditional cost calculation model. They argue that as products differ in the complex process of manufacture, they consume activities in different proportions. The activity-based costing method (ABC) promoted by Cooper and Kaplan provides a more accurate measure of cost because it traces indirect costs more closely with regard to the different types of activities consumed. Armed with knowledge of what activities are consumed by each product and the resource cost of each activity, one can budget costs for a diversity of products.

However, the traditional accounting method usually assigns overhead costs of products by using volume-related allocation bases such as labor hours, direct labor costs, direct material costs, machine hours, etc. This will not critically distort the product costs as the overheads are just a small portion of the production process. But in situation where there is a large diversity of products, or where there is a high level of automation, as Brimson (1991, p. 179) pointed out, the overheads distortion will be significant. In our case, for example, high-volume products (hot spring use) may consume more direct labor hours than low-volume products (meal serving), but do not necessarily consume more purchasing activity costs.

The ABC model applied to the case of this hot spring country inn is depicted in figure 1. The ABC systems focus on the accurate cost assignment of overheads to products. In the cost assignment view, the assignment of costs through ABC occurs in two stages: cost objects (i.e., products or services) consume activities, activities consume resource costs. In practice, this means that resource costs are assigned to various activity centers by using resource drivers in the first stage. An activity center is composed of a group of related activities, usually defined by function or process. The group of resource drivers is the factor chosen to estimate the consumption of resources by the activities in the activity centers. Every type of resource assigned to an activity center becomes a cost element in an activity cost pool. And, in the second stage, each activity cost is distributed to cost objects by using

Figure 1 ABC Model in a Hot Spring Country Inn Cost of Resources Indirect Cost
First Stage Resource Drivers

Activity Center
Cleaning Customer Reception Cooking Management Center

Second Stage Activity Drivers

Cost Objects Cost of Lodging

Cost Objects Cost of Hot Spring Use Cost of Meal Serving

a suitable activity driver to measure the consumption of activities by products or services (Turney, 1992). Then, the total cost can be calculated by adding the various activities costs to a specific product or service. And the total cost divided by the quantity of the product can acquire the unit cost of product. In our case, the inn provides three products, lodging, hot spring use and meal serving. We define five activity centers, namely the cleaning center, the customer service center, the reception center, the cooking and foodservice center and the management center. Each activity center is composed of related activities, clustered by their function.

As Harris and Brown (1998, p161-162) indicated, a hotel operation can be used as an example of hospitality products, in the same way the elements of a hot spring country inn of the B&B industry also can be used to illustrate non traditional accommodation products. For instance, the provision of rooms constitutes a nearly pure service product incorporating a large proportion of service elements. It can be defined as the rental of a certain amount of space for a specified period of time and is thus an intangible good containing a high level of service provision. The provision of hot spring use also represents a service product: it includes hot spring rental and service activities. Furthermore, the meal serving provision, comprised of purchasing, distribution and conversion of food into meals, again constitutes a service product.

The main advantage of ABC lies in that it provides a more accurate and real cost computation, especially in situations in which product diversity is important and in which the indirect costs, not directly traceable to the products, represent an important proportion of the total costs. In addition, ABC also allows a deeper level analysis of product costs by explaining the relationship between products and activities. The improved accuracy of perception of the cost structure of products and the continuous process improvements in the various departments of an enterprise provide the substance of activity-based management (i.e. using ABC to improve a business). Studies of the implementation of ABC exist in various fields, e.g. of universities (Cropper and Cook, 2000), a hotel (Noone and Griffin, 1999), library service (Ellis-Newman and Robinson, 1998), distribution logistics (Pirttil and Hautaniemi, 1995; Themido et al. 2000), (all of which belong to the service sector); of a manufacturing company (Spedding and Sun, 1999), an assembly line (Gunasekaran and Singh, 1999), (which belong to the manufacturing sector); of a wholesale fish market (Lee and Kao, 2001), (agricultural sector); and of a radiotherapy unit (Lievens et al., 2003), (medical sector). All of them agree that ABC is a useful accounting model and able to obtain more accurate information about the cost structure as long as implementing managers choose the right drivers and define activities well. However, it is generally accepted that there is no universally appropriate accounting system suitable to all organizations

in all circumstances (Emmanuel et al., 1990). But as Harris and Brown (1998, p162) point out, management accounting needs to be carried out in the context of the hospitality product in order to supply the necessary information for decision-makers if researchers expect to make a significant contribution to the industry.

4. A Case Study of a Hot Spring Country Inn

The Professional Association of Innkeepers International defines that a country inn is a business offering overnight lodging and meals where the owner is actively involved in daily operations, often living on site. The hot spring country inn in our study is located on the Yang-Ming-Shan in the north of Taipei where it faces a very competitive hot spring tour market environment. It includes 6 twin rooms, 9 quad rooms, a hot spring pool for men (7109.2 square feet), another hot spring pool for women (3554.6 square feet) and 9 private hot springs bathrooms, covering a total area of 1 acre and 31076.45 square feet. This inn hires 25 full time employees and 13 part time employees, and the owner who also lives there Table 1 Monthly Costs of Resources


life time

Replacement value

Capital costs

Cost per month



700 ,000 1,11





lands Buildings 30 16,050,000 1,425,672

0,341 118 ,806

Personnel er

Numb Costs


Cost per month

Full time staffs Part-time staffs Managers









is the general manager. Meanwhile, the inn faces very serious seasonal customer fluctuations. The average volume of customers for hot spring use can come to a maximum of 58,048 persons monthly in the winter season and a reaches minimum of 18,311 persons in the summer season. In addition, this hot spring country inn bears a heavy space and land costs due to the high cost of buildings and land in Taipei. The monthly costs of rent, lands, buildings and labor are showed in table 1.

This inn doesnt use any activity-based costing method in its accounting system except for the traditional one. Since activity-based costing can be very complex and time consuming, and even less in tourism industry, it is not widely applied in the manufacturing industries in Taiwan (Chen, 2001, p. 52). It is recognized that partial activity-based costing can be used to enhance rather than totally replace the accounting system when the company finds it too difficult to

implement full-scale ABC-based accounting. Some companies also complain that the cost of ABCs administrative and technical complexity, and of continuously generating activity data, exceeds any benefits subsequently derived from it, so that they reject proposals to implement ABC to their companies. Nevertheless, many firms still find they have success in cost reduction, product pricing, customer profitability analysis and output decisions when they adopt ABC (Chenhall and Langfield-Smith, 1998; Clarke et al., 1999; Innes and Sinclair, 2000; Cotton et al., 2003).

Our traditional accounting cost information was gathered from 1 November, 2003 to 30 December, 2003. The figures for customers volume were acquired from the mean of the number of customers in these two months. In order to obtain a more accurate picture of Table 2 Activities Analysis and Assigning Activity to Product Using Activity Drivers
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11)

Resourc Activity e Cleanin g Changin sheets g Washin g Clear up

Tot Quantities of Tot Unit cost Labor Mate Product cost & riall al Cos LodginDrivers Dining quantit activity Lodging Sprin Hot- Dining al per 99,57 Utility t 119,7 2,651. 3,749 410.2 6810.6 17.58/hr 46,611 65,904 7,212 20,15 g g y driver Spring (10.57% (3.67%) (0.32%) 2 5 27 4 1,455 607 2,062 960 0 0 960 2.15/hr 2,062 0 0 ) (0.47%) (0%) (0%) 32,22 22,19 54,42 830 1,832 188.6 2,851 19.09/hr 15,849 34,972 3,600 (3.59%) (1.95%) (0.16%) 5 6 1 91,47 21,62 113,0 0 0 10,710 10,710 10.56/nu 0 0 113,098 (0%) (0%) (5.06%) 5 3 98 mber Check 5,454 2,276 7,730 450 0 0 450 17.17/nu 7,730 0 0 (0%) (0%) on mber (1.75%) Orderin 54,45 1,994 56,44 0 0 11,203 11,203 5.04/num 0 0 56,445 (0%) (0%) (2.52%) g 1 5 ber Carrying 75,22 2,754 77,97 0 0 103,75 103,75 0.75/num 0 0 77,974 (0%) (0%) (3.49%) 0 4 4 4 ber Re4,320 2,437 6,757 20 436 4 460 14.69/hr 294 6,404 59 (0.07%) (0.35%) (0.00%) supply Cooking 297,9 58,94 356,9 0 0 2,010 2,010 177.57/hr 0 0 356,913 68 5 13

(0%) (0%) (15.96% 73,88 605 74,49 18.5 24 198 240.5 309.73/hr 5,730 7,434 61,327 ) (1.30%) (0.41%) (2.74%) 6 1 263,8 90,64 354,4 232.4 1,891 692.5 2,816. 125.84/hr 29,255 238,051 87,147 (6.64%) (13.26% (3.90%) 06 7 53 7 .67 64 36,60 1,049 37,65 210 779.2 102 1,091. 34.51/spa 7,247 26,890 3,520 ) (1.64%) (1.50%) (0.16%) 8 7 2 ce 6,160 176 6,336 1,440 56,75 33,240 91,430 0.07/pers 100 3,933 2,303 (0.02%) (0.22%) (0.10%) 0 on 26,40 756 27,15 1,440 56,75 33,240 91,430 0.297/per 428 16,855 9,873 (0.10%) (0.94%) (0.44%) 0 6 0 son 700,0 251.9 1,385 461.94 2,099. 333.38/sp 83,999 461,999 154,002 00 6 .80 7 ace (19.05% (25.73% (6.89%) 1,229, 251.9 1,385 461.94 2,099. 585.39/sp 147,495 811,236 270,416 Depreciation ) ) (33.45% (45.18% (12.09% 147 6 .80 7 ace 1,069, 226,2 3,224,36 Total activity Total 346,800 1,673,6 1,203,8 ) ) ) (78.65% (93.21% (53.83% 7* 000 20 cost 78 89 * All activities in column Direct material 61,137 116,843 1,032,4 ) ) ) (13.87% (6.51%) (46.17% cost 98 (3) added Outsource 33,000 ) ) (7.48%) laundry Hot-spring 5,049 (0.28%) water Total product 440,937 1,795,5 2,236,3 Total 1,440 56,750 33,240 cost 70 87 Unit product 306.21 31.64 67.28 customers allocated resource costs, working sampling cost 1996) is used to estimate the (Tsai, percentage of time spent on each of various activities for each staff member and manager. In this way an adjusted percentage of personnel time spent on each activity can be obtained. In the first stage, resources in this country inn are assigned to all activities in five activities centers by resource drivers. Purchas ing Check in /out Administrative Marketi ng Account ing Renting

In the second stage, all activities costs in the five activities centers are assigned to the three country inns products. Table 2 shows activities analysis and the assignment of activities to products by activity drivers. Labor, material and utility costs traced to activities are shown in columns (1)-(3) of table 2. Columns (4)-(11) present detail about how activities are allotted to each product by drivers. For example, the driver of the cleaning activity is the true cleaning time which is total 6810.6 hours. Using the driver to trace the cleaning activity to the

three products separately, and assigning 2651.4 hours, 3749 hours and 410.2 hours respectively, of cleaning time, the driver can allocate NT$ 46,611 to lodging, NT$65,904 to hot spring use, and NT$7,212 to dining. Finally, adding all the allocation activities costs in each product we can get the total activity costs. The total product cost is the combination of the total activities costs, direct material costs, and outsource costs (laundry, hot spring water) in each product. Unit product cost is defined as the total product cost divided by the total number of customers. The unit product costs of lodging, hot spring use and dining are NT$ 306.21, NT$31.64 and NT$ 67.28 per customer respectively in the busy winter seasons. The lodging, hot spring use and dining products of this country inn represent three market segments. After applying ABC to the country inn case, the unit costs of each of the country inns products in three market segments are clear. The cost information acquired from ABC in this case is extremely useful to the inns owners (managers) for marketing, decision making and cost-volumeprofit analysis.

5. Comparing ABC with traditional accounting

Table 3 shows a comparison between ABC and the traditional accounting method. The traditional accounting system here uses direct labor hours to allocate overheads to the three inn products. Cost for a high-volume product should not necessarily be traced based on a correspondingly high level of labor hours, since, in reality, such a product may not consume a proportionally high amount of overhead. As shown in table 3, the unit cost of the three products derived from the traditional accounting method are NT$155.4 for lodging, NT$15.85 for hot spring use, and NT$100.76 for dining, per customer. If we compare the results between ABC and traditional accounting, the unit cost of lodging and of hot spring use are underestimated, but the unit cost of dining is

overestimated under the traditional accounting method. This is because the traditional accounting method distorts the overheads Table 3 Comparing ABC with Traditional Accounting N.T. Dollars Product Cost Traditional accounting allocation: Overhead (Assigning by direct labor hours) Direct Labor Direct Materials Outside laundry Hot-spring water Total cost on traditional accounting basis Mean number of customers Unit cost per customer Unit cost per customer in ABC 223,777 99,640 (240hr) 30,000 61,137 33,000 5,049 899,734 3,349,383 597,842 (1440hr) 180,000 116,843 1,693,885 (4080hr) 623,000 1,032,498 Lodging Hot-Spring Dining

1,440 155.4 306.21

56,750 15.85 31.64

33,240 100.76 67.28

cost allocation in the three products, while the ABC system avoids this distortion by valuing the activity and driver assigning processes.

6. Conclusion
After deriving the cost of each product by providing accurate and relevant information, we find that real estate costs consume the greatest proportion of the hot spring use and of lodging costs (over 50%). This is the result of the high cost of real estate in Taipei. In this case, through ABC implementation we can obtain clear and reliable information about the proportions of activities costs in every single product. Managers also can use the information derived from implementing ABC for decisions on pricing, product mix (Tsai, 1994), product design, profitability analysis, and so on. Our comparison of ABC with the traditional costing method shows that ABC method is practical and appropriate for application to the hot spring country inn and yields more accurate information for cost management and pricing decisions.