Hospitality Industry Managerial Accounting

1
Hospitality Industry Managerial Accounting

• HRT 374
• Chapter 6
• Don St. Hilaire

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Chapter 6 Basic Cost Concepts

• Explain the various meanings of the word cost.
• Purchase price - an exchange of assets.
• Loss - a dissipation of assets.
• Expense - a reduction of an asset to generate
  revenues.

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Chapter 6 Basic Cost Concepts

• Define fixed and variable costs.
• Fixed costs remain constant in the short run.
• Capacity.
• Discretionary.
• Variable costs change proportionately with sales
  activity.

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Chapter 6 Basic Cost Concepts

• Define step, mixed, step, and mixed costs.
• Step costs are constant within a range of
  activity but different among ranges of activity.
• Mixed costs contain fixed and variable elements.
• Total costs

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Ch. 6 Determination of Mixed Costs Elements

• This text considers three methods used to
  estimate the fixed and variable elements of of
  each mixed cost.
• High/Low Two-point Method.
• Scatter Diagram
• Regression Analysis

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Chapter 6 Basic Cost Concepts

• Describe the high/low two-point method of
  estimating the fixed and variable elements of a
  mixed cost.
• This method bases estimation on data from two
  extreme periods of sales activity. Change in cost
  between highest and lowest sales activity.
• Calculate the differences in total mixed costs
  and activity for the two periods.

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Ch. 6 High/low Two point Method cont.

• Divide the mixed cost difference by the activity
  difference to determine the variable cost per
  activity unit. ( for example, each room sold.)
• Multiply the variable cost per activity unit by
  the total activity unit for the period of the
  lowest (or highest) sales to arrive at the total
  variable cost for the period of lowest (or
  highest) activity.

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Ch. 6 High/low Two point Method cont.

• Subtract the total variable cost from the total
  mixed cost for the period of lowest activity to
  determine the fixed cost for that period.
• Check your answer by subtracting the total
  variable cost from the total mixed cost for the
  period of Highest activity to determine the fixed
  cost. Your answer should be the same as for the
  lowest period.

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Ch. 6 High/low Two point Method cont.

• Multiply the fixed costs per period by the number
  of periods in the time span to calculate the
  fixed costs for the entire time period.
• Subtract the total fixed costs from the total
  mixed costs to determine the total variable
  costs.
• See pages 254-256 of the text

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Ch. 6 Scatter Diagram Method

• Plot the Data from all periods on a graph.
• Independent variable on the horizontal axis.
• Dependent variable on the vertical axis.
• Draw a Straight line through estimated center of
  points.
• Extend the Line to the vertical axis. Where the
  line intersects vertical axis is the fixed costs
  amount.

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Ch. 6 Scatter Diagram Method cont.

• Multiply the fixed costs per period by the number
  of periods in the time span to calculate the
  fixed costs for the entire time period.
• Subtract the total fixed costs from the total
  mixed costs to determine the total variable
  costs.
• Variable costs per unit are determined by
  dividing total variable costs by total units
  sold.
• See page 257 of the text.

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Ch. 6 Regression Analysis Method

• Mathematical approach to fitting a straight line
  to data points perfectly use formulas to make
  calculations without plotting points or drawing
  lines.
• The difference in the distances of the data
  points from the line is minimized.

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Ch. 6 Regression Analysis Method cont.

• Formula for a straight line y a bx
• y stands for the dependent variable
• a stands for the fixed cost element
• b stands for the variable cost per activity
• x stands for the independent variable
• See pages 257 - 260 of the text
• You do not have to memorize the formula on page
  258 of the text.

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Ch. 6 Comparison of the three methods

• High/low is the simplest and least precise
• Regression analysis is the most complex and most
  precise
• Major determination of which method to use is
  based on cost-benefit considerations.

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Ch. 6 Fixed versus Variable Costs

• Explain how fixed and variable cost factors
  influence purchasing decisions based on
  cost-benefit considerations involved.
• Define indifference point and explain how it is
  calculated.
• Indifference point is the level at which the
  period cost is the same under either arrangement.

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Ch. 6 Indifference Point cont.

• Some costs can be fixed or variable.
• Level of sales where variable cost equals fixed
  cost.
• Revenue Fixed Lease Cost / Variable Cost
  percentage
• If annual revenue is expected to exceed
  indifference point, select fixed lease.
• If annual revenue is expected to be less than
  indifference point, select variable lease.

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Ch. 6 Define direct and indirect costs.

• Direct costs are readily identified with an
  object indirect costs are not.
• Importance of context. Whether a cost is direct
  or indirect depends on context of discussion.
• Overhead - indirect costs of the profit centers.
  Include all costs other than direct costs
  incurred by a profit center they are indirect
  costs when cost objectives are profit centers.

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Ch. 6 Define overhead costs and describe the cost
allocation process.

• Operating and capacity overhead costs.
• Allocation with SABA or MABA.

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Ch. 6 Define controllable, differential,
relevant, and sunk costs.

• Controllable - managers have authority.
• Differential - difference between alternatives.
• Relevant - must be considered, they are
  differential, future, and quantifiable.
• Sunk - irrelevant past costs.

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Ch. 6 Define opportunity, average, and
incremental costs.

• Opportunity - best foregone opportunity in a
  decision-making situation.
• Average - total production and service costs over
  quantity.
• Incremental - cost of producing one more unit.

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Ch. 6 Define standard costs

• Standard - forecasted used for control and
  evaluation. A forecast of what actual costs
  should be under projected conditions used for
  control purposes and evaluations of productivity.