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Customer profitability analysis


with time-driven activity-based
costing: a case study in a hotel
Ilhan Dalci
Eastern Mediterranean University, Famagusta, Turkey

Veyis Tanis
Business Administration, Cukurova University, Adana, Turkey, and

Levent Kosan

Customer
profitability
analysis
609
Received 15 April 2009
Revised 1 September 2009,
22 October 2009,
1 December 2009
Accepted 13 December 2009

Silifke Vocational Business School, Mersin University, Mersin, Turkey


Abstract
Purpose The purpose of this paper is to show the implementation of customer profitability
analysis (CPA) using time-driven activity-based costing (TDABC), in a Turkish hotel.
Design/methodology/approach A case study was conducted in a four-star hotel with 100-room
capacity in the Cukurova region of Turkey. Interviews, direct observations, and documentation
collection were used to collect the data.
Findings The results showed that some of the customer segments which were found unprofitable
under the conventional ABC method were determined profitable using TDABC. The case study also
revealed the cost of idle resources devoted for front office, housekeeping, food preparation, and
marketing activities.
Research limitations/implications Only a single hotel operating in Turkey is examined in this
paper. Further research should focus on implementing CPA using TDABC in other hotels in Turkey
and abroad.
Practical implications Based on the results of the study, the hotel management is better able to
understand profitability of different customer segments and implement appropriate strategies.
Moreover, the time equations of TDABC are considered to provide hotel management with an
opportunity to better balance the capacities supplied in departments.
Originality/value There is limited research relating to profitability analysis in service companies
in general and in the hotel industry in particular. Therefore, this paper is unique in the sense that it
analyzes the use of TDABC systems for CPA within a real case hotel.
Keywords Activity based costs, Profit, Customers, Hotels, Turkey
Paper type Case study

1. Introduction
Customer cost information is essential for managerial decision making. Therefore,
understanding true costs of serving specific customers is important in any organization.
Companies that understand which customers are more profitable and which ones are
not, are armed with valuable information needed to make successful managerial
decisions to improve overall organizational profitability (Raaij et al., 2003). Cotton (2005)
and Cooper and Kaplan (1991), also suggest that understanding how current customer
relationships differ in profitability enables managers to make better managerial

International Journal of
Contemporary Hospitality
Management
Vol. 22 No. 5, 2010
pp. 609-637
q Emerald Group Publishing Limited
0959-6119
DOI 10.1108/09596111011053774

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decisions. However, obtaining accurate information about customer profitability


necessitates the use of an appropriate costing system.
Customer profitability analysis (CPA) entails allocation of revenues and costs to
specific customers in a way that the profitability of individual customers can be
calculated. Owing to the increased size and organizational complexity of service firms,
Kaplan and Narayanan (2001) state that understanding CPA is especially important for
service companies. Indeed, for service companies, CPA is more important than
production companies because the cost of providing a service is generally determined
by customer behavior. According to Zeithaml and Bitner (1996), the cost of finding and
gaining a new customer in service companies is five times greater than the cost of
retaining current customers. Therefore, successful implementation of CPA in order to
retain profitable relationships with current customers is essential for service
companies. Moreover, Cotton (2005) asserts that the effective use of CPA enables
service companies to increase customer satisfaction and boost profitability.
According to Cooper (1988), the use of activity-based costing (ABC) enhances the
traditional contribution margin approach and the quality of CPA. The ABC system
was promoted by Cooper and Kaplan in the mid-1980s, as an alternative costing
system to the traditional one, based on their experiences with some production
companies in the USA (Gunasekaran and Sarhadi, 1998). Subsequent studies dealt with
the deficiencies of traditional costing systems in automated production environments
(Innes, 1999; Baird et al., 2004). The activity-based approach to overhead costs is an
extension of the traditional volume-based costing that treats manufacturing overhead
as a complex set of costs with multiple cost-drivers (Drake et al., 2001). Rotch (1990)
points out that the conditions necessary for manufacturing firms to successfully
implement ABC are necessary for service companies as well.
The ABC approach assumes that products or customers generate activities, and the
activities consume resources (Cooper, 1988). ABC is based on a two-stage allocation
process. First of all, the costs of resources are allocated to the activities using first-stage
cost drivers, and then the costs of activities are apportioned to cost objects by means of
volume and non-volume related drivers (Cooper, 1990). That is, the activity costs are
allocated to the cost objects based on the relevant cost drivers (i.e. number of machine
hours, number of setups, number of design specifications, and number of customer
visits). The cost drivers are linkage between activities and cost objects (Cooper, 1988,
1990; Cooper and Kaplan, 1992). The rise of ABC has led to the understanding that not
every customer consumes the same level of activities and resources. Moreover,
resources that particular activities consume are measured in terms of cost driver units.
This is due to the fact that, while traditional cost systems rely on arbitrary cost
allocations of overhead costs, ABC classifies cost pools according to the activities (unit,
batch, product, and facility levels) performed within the organization (Kaplan and
Cooper, 1988). Understanding the hierarchical levels of the costs of ABC enables
managers to better understand cost causation, and hence make better decisions. Thus,
with ABC, managers are better equipped to understand which customers are profitable
and which ones are not (Kaplan and Cooper, 1998). Additionally, according to Cooper
and Kaplan (1992), the use of ABC by organizations has led to increased profitability.
Despite the fact that the ABC system can be a sufficient costing method, it has some
drawbacks. First, due to complexity of the activities performed within organizations,
ABC may take too much time to be implemented (Kaplan and Anderson, 2004). Second,

when activities, that contain more than one subtask with different cost drivers, are
intensified, ignoring that complexity may result in the misallocation of the costs. Third,
since the ABC system needs to be updated regularly, it becomes too costly to
re-interview and re-survey people engaged in the activities (Kaplan and Anderson,
2004). The downsides of traditional ABC system alerted Kaplan and Anderson to
introduce a new costing method called time-driven ABC (TDABC) system to address
the above-mentioned limitations. However, using TDABC in order to bring solutions to
the problems of conventional costing systems does not mean that ABC should be
completely abandoned. Proponents of TDABC argue that it removes time-consuming
and costly interviews and surveys which have been a major barrier to the
implementation of a traditional ABC system, as well as it allows cost driver rates to be
calculated based on the practical capacity of the resources supplied (Kaplan and
Anderson, 2007b).
Under a traditional ABC system, the costs of activity-cost pools, are apportioned
amongst cost objects using activity drivers (Kaplan and Cooper, 1998). On the other
hand, under a TDABC system, these costs are allocated to the cost objects on the basis of
time units consumed by the activities (Kaplan and Anderson, 2004). The TDABC
approach requires identifying resources needed to perform the activities, as it is done
under a traditional approach. It also requires time needed to perform the activities and
the practical rather than the theoretical capacity of the resources supplied. Theoretical
capacity equals the theoretically available working minutes, whereas practical capacity
is expressed as the amount of time that employees can work without idle time (Kaplan
and Anderson, 2007a). The practical capacity of the resources excludes the time that
employees spend on activities (such as having a rest and taking a break) which are
unrelated to actual work performance. Two important aspects of a TDABC system are:
estimating the practical capacity of the resources supplied and the cost of these
resources. Dividing the total cost of resources supplied by the practical capacity yields
the cost per time unit. Then, the time needed for performing the activities is multiplied by
the cost per time unit in order to assign the costs to products or customers. With the help
of the time equations of TDABC, the time needed to perform an activity can be estimated
without any need to continually re-interview people. These time equations can include
multiple time drivers if an activity is driven by more than one driver. Obviously, the
TDABC approach, with its time equations, makes it possible to know how many minutes
that staff members spend on activities in a particular time period. Therefore, the time
equations of TDABC can provide larger transparency than a traditional ABC system.
With TDABC, it is also possible to pinpoint which customers consume the largest
amount of time and resources (Kaplan and Anderson, 2004).
Research conducted on the analysis of costing systems, in the service industry in
general and the tourism industry in particular, is very limited. There has also been
little innovation regarding cost accounting practices in the hospitality industry (Potter
and Schmidgall, 1999). Fay et al. (1976) demonstrated the use of conventional costing
systems in the hospitality industry. Nordling and Wheeler (1992) implemented CPA in
the Hilton Hotel in Las Vegas. However, analysis of the activities in allocating the
overhead costs was not completed in that study. Although the use of ABC in the
application of CPA in the hospitality industry has attracted little interest, there has
been detailed research about costing practices in tourism enterprises after 1999. In a
case study conducted in a hotel by Noone and Griffin (1999), activities were determined

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at macro and micro level and the cost of these activities were assigned to specific
customers using ABC. Raab and Mayer (2003), surveyed restaurant controllers in the
USA and they found that the use of ABC was almost non-existent in the restaurants.
They also discovered that the use of ABC could be appropriate for the restaurants due
to the characteristics inherent in the restaurant industry. Raab et al. (2005) tested a
model for ABC in a buffet style restaurant in Hong Kong. Raab and Mayer (2007)
analyzed how menu engineering (ME) can be integrated with ABC to determine
whether or not the integration of ME with ABC can boost the profitability of a dinner
buffet in a restaurant in Hong Kong. Ultimately, Raab et al. (2009) applied
activity-based pricing in a restaurant setting. The findings of that study show that
ABC could be used by restaurant managers to better analyze the cost structure of their
restaurants.
Nevertheless, there are many issues, relating to cost and management accounting
practices in the hospitality industry, that deserve research attention (Pellinen, 2003;
Dittman et al., 2008). Several researchers as mentioned above have advocated the use of
ABC in the hospitality industry. However, the costs of activities have not been
analyzed using TDABC in the hospitality industry even though this method has been
applied in other industries. Pernot et al. (2007) used a case study in a university to show
how to use a TDABC system for inter-library services. They argue that TDABC can
improve the cost management of all library services because it enables library
managers to take appropriate actions to reduce the time needed for specific requests of
library customers. Everaert et al. (2008) described a case in a distribution company and
showed that ignoring the complexity of activities containing more than one subtask
with different time drivers, resulted in a misallocation of 54 percent of the costs when
the traditional ABC system rather than a TDABC approach was used. In a recent
study, Demeere et al. (2009) showed how to implement a TDABC model for five
outpatient clinic departments through a case study. They uncovered that the use of a
TDABC system provided the healthcare managers and physicians with valuable
information which assisted them in operational improvements, making profitability
analysis for departments, and deciding on future investments.
The general aim of this paper is to show the implementation of CPA with TDABC in
a hotel operating in the Cukurova region in Turkey. The case hotel is located in the city
of Mersin. The city of Mersin is important for the regions economy because trade
among Turkey, the Middle East, and Europe takes place through the Mersin Port.
Therefore, most of the businesspeople conducting business through the Mersin Port
prefer to stay in the hotels which are located in the city. Thus, hotels have significant
impact on the economic development of the Cukurova region. In that respect,
implementing CPA successfully for accurate and effective managerial decision making
is important for the managers of the hotels located in this region.
2. The case study and research design
This study adopted both convenience and purposive sampling techniques to select the
research sample (Altinay and Paraskevas, 2008). One of the co-authors of this study
previously worked for the hotel to have experience during his summer holidays. Thus,
he knew the managers and asked for permission to conduct a research of this kind.
He met the hotels managers for a preliminary discussion and he realized that the
case hotel was measuring customer profitability by using a traditional ABC system.

Then, he explained to the managers the benefits of conducting this case study in their
hotel. The managers of the hotel accepted to give permission for the research with a
condition that, due to confidentiality reasons, the hotels name should not be disclosed
in the paper. This request was taken into account and the researchers commenced the
study in the hotel and concluded it within one year.
The physical and environmental information about the hotel is as follows: it is a
four-star hotel operating with 100 rooms in the Cukurova region in Turkey. The hotel
operates at an annual occupancy rate of 60 percent. In addition to a banqueting hall,
steam bath, meeting room, bar, and business centre facilities, various other services
which are suitable for four-star hotel standards are also offered in the hotel. The case
hotel employs 53 personnel (one general manager, one assistant general manager, four
front office clerks, seven housekeepers, 30 restaurant staff, two marketing personnel,
three bartenders, two accounting personnel, and two human resource managers).
Our study in the case hotel started in September 2006 and ended in September 2007.
The data presented in this case study represent real figures gathered throughout the
one-year period. All the data presented in this study are expressed in US$. The cost
data were compiled during a three-month (September, October, and November) period
in 2006. In order to compile consistent data regarding the time spent on the activities,
needed for deriving the time equations used in the TDABC model, we observed the
actions of the personnel while they were performing the tasks several times during
the year of 2007. Additionally, we conducted follow-up interviews during the last three
months of the study in 2007 in order to verify and validate the accuracy of the data. By
comparing the results we obtained at different times, we computed the average times
for each of the activities. Moreover, documentation was collected from financial reports
in order to gain a rich description of the hotels costing system and to understand how
managers implement CPA. All of the above-mentioned case study applications were
conducted with the following theoretical background and literature.
A qualitative research strategy was used as the most appropriate method for a case
study of this kind because case studies are often associated with qualitative research
design even though they can be conducted with both qualitative and quantitative
research methods (Yin, 1994). According to Ryan et al. (2007), Lee (1999) and Yin (1994),
case studies provide the researchers with an opportunity to understand the nature of
accounting systems which are currently used in practice. Moreover, case studies could
be used to explore the application of new procedures. As suggested by Yin (1994), case
studies investigate a contemporary phenomenon in its real-life context and more than
one case can be conducted at a time. Since the main purpose of our study was to
understand the costing system currently applied and to evaluate the applicability of
TDABC in a hotel setting, the case study method was deemed to be the most appropriate
method to gain in-depth understanding of the hotel. In the study, a descriptive case study
was first used in order to explicate the accounting system currently used in the case
hotel. Then, we used an experimental case study method in order to evaluate the
applicability of the new costing system (TDABC) in the hotel.
We used qualitative research methods for gathering data regarding the costing
method currently used by the hotels accountants, activities performed in the hotel, unit
times needed for performing the activities, and detailed costs of these activities.
Semi-structured interviews that lasted between 45 minutes and one hour with the
personnel of the hotel (i.e. general manager, general assistant manager, cost accountant,

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receptionists, housekeepers, marketing personnel, and waiters), direct observations, and


documentation collection were used as data-collection methods. Semi-structured
interviews were chosen because they enable the researchers to understand the issues in
depth (Bryman and Bell, 2007). The interviews were conducted based on a detailed
interview schedule that was agreed upon with assistant general manager of the hotel.
The interviewees were asked closed-ended as well as open-ended questions on issues
relating to main activities performed in the hotel, the tasks performed by each staff
member, type of costs incurred, and the customers of the hotel. The purpose of those
interviews was to clarify how staff members performed their tasks and how much
time (in terms of minutes) they spend on performing these tasks. Direct observations
were also used to examine the activities while the staff members physically perform the
tasks. As suggested by Tharenou et al. (2007), observations are important tools for
understanding the procedures. In that respect, we conducted observations in order to
ensure that the data gathered through interviews accurately reflected the real time
experiences of the employees. After each visit to the relevant department, we wrote up
notes in order to analyze the nature of the activities. We also documented the tasks
performed by the staff members. All the interviews were recorded on tape, and the data
obtained through these interviews were filed. We transcribed all tapes and notes and
read the transcripts several times in order to make thorough activity analysis. The cost
data were obtained from the cost reports documented by the accounting department. We
used the cost reports to get an insight into the costing system currently employed by the
hotels cost accountants (Tables I and II).
We also utilized job descriptions in reviewing the tasks. In addition, we analyzed the
annual reports of the hotel in order to analyze revenues generated from accommodation
and other revenue generating areas, especially food and beverage spending. We
developed time equations using the data concerning the tasks and unit times needed to
perform these tasks. Based on the time equations that we formulated and the cost data
provided by the accounting department, we allocated the costs to customer segments
using TDABC. Ultimately, we computed profitability figures for the customer
segments using TDABC and compared TDABC results to the ones found under the
conventional ABC, as presented in Tables V and VI.
Customer segments of the case hotel
The implementation process for CPA started with scrutinizing the current customer
segments (groups) of the case hotel. The customers of the hotel were determined as
follows:
.
Group 1. This group includes managers of local and foreign companies. The
greatest share (48 percent) in the sales mix belonged to this group of customers.
These customers generally utilized accommodation and food and beverage
services.
.
Group 2. This customer group constitutes customers brought to the hotel by the
travel agents operating both in internal and external markets. That group had
the second highest sales mix percentage (19 percent). The customers clustered in
this group utilized accommodation and food and beverage services.
.
Group 3. These customers represent people holding managerial positions in
government-owned institutions. This customer group used accommodation and
food and beverage services and had a 10 percent share in the total sales mix.

Human resources

Stationary
Telephone
Marketing
Energy, building
depreciation and insurance

156,660
265,281
177,106
403,213
282,076

Depreciation
Personnel
Entertainment
Food and beverage
Cleaning and laundry

4,360 square
meters
83,000 Estimated
percentage of
time

221,235

Direct
Direct
Direct
Actual usage
Laundry and
cleaning hours
23,040 hours
3,840 Actual usage
9,415 Direct
54,977 Direct
Area

Total
costs ($) Cost driver

Cost centers

$50.742/
square
meter

$12.2428/
hour

Cost pool
rate

233.5
square
meters
$11,620
14%

$11,850

$2,031
$6,590

$9,260
$34,404

Front
office

$42,330
51%

1,660 square
meters

$84,231

13,776 hours

$168,656

$28,500
$68,945

$9,960
12%

$2,825
$54,977

$16,400
$26,288
$178,466
$44,504

$114,747
$33,511

$37,400
$22,505
$177,106
$110,000
$35,405

828.3
square
meters
$3,320
4%
672 square 966.2
meters
square
meters
$10,790
$4,980
13%
6%

(continued)

$42,031

$49,027

$34,096

2,737 hours 3,635 hours 2,892 hours


$446
$886
$477

$26,700
$22,848

$38,400
$90,291

Food
Beverage
Housekeeping Marketing preparation preparation Banqueting

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Table I.
Costs allocated to
customer groups under
traditional ABC
(allocation of costs to
activity-cost pools)

Table I.

Total ($)

Repair and maintenance

General (administrating and


accounting and finance)

Purchasing

Storing

2,092,135

120 square
meters
165,603 Orders
662 orders
80,000 Estimated
percentage
oftime
110,120 Maintenance
time
76,800 minutes

79,609 Space occupied

Total
costs ($) Cost driver

$1.4339/
minute

$250/order

663.41/
square
meter

Cost pool
rate

2,000
1,395
minutes
124,450

23,735
minutes
579,208
19,632
minutes
125,105

$12,000
15%
34,033

79 square
meters
$88,103
352 orders
$12,000
15%

$52,410

8,230
minutes
381,349

11,800

20 square
meters
$18,000
72 orders
$16,000
20%

$13,268

20,321
minutes
413,782

29,137

10 square
meters
$37,000
148 orders
$13,600
17%

$6,634

3,487
minutes
468,241

5,000

11 square
meters
$12,500
50 orders
$15,200
19%

$7,297

Food
Beverage
Housekeeping Marketing preparation preparation Banqueting

$28,150

$10,000
40 orders
$11,200
14%

Front
office

616

Cost centers

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Beverage preparation
Banqueting
Total ($)

Food preparation

Marketing

Housekeeping

Front office

Activities
Total cost ($)
No. of arrivals
Cost driver rate ($)
Total cost ($)
No. of nights
Cost driver rate ($)
Total cost ($)
No. of customer visits
Cost driver rate ($)
Total cost ($)
No. of covers
Cost driver rate ($)
Total cost ($)
Total cost ($)

125,105
17,993
6.9529
579,208
31,390
18.45225
124,450
2,482
50.140
381,349
67,652
5.63692
413,782
468,241

Total

5,214
104
58,364
10,354

93,863
1,872
156,278
27,724

189,980

84,934
4,603

278,020
15,067

563,780

41,468
5,964

Group 2

35,619
5,123

Group 1

149,568

32,412
5,750

15,042
300

90,414
4,900

8,730
1,256

Group 3

115,219

40,969
7,268

48,058
2,767

26,192
3,767

Group 4

170,941

90,236
16,008

802
16

68,990
3,739

10,913
1,570

Group 5

468,241
469,444

1,203
24

Group 6

11,566

3,090
548

501
10

5,792
314

2,183
314

Group 7

421,607

413,782

7,825
150

Group 8

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Table II.
Costs allocated to
customer groups under
traditional ABC
(allocation of costs of
activity-cost pools to
customer groups)

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Group 4. These customers are walk-in customers coming to the hotel without
making reservations. This customer group used accommodation and food and
beverage services and had a 12 percent share in the total sales mix.
Group 5. Professional sport clubs coming to the city of Mersin to play football
matches constitute this group. Customers in this group stayed in the hotel for one
or two days and had a 10 percent share in the total sales mix.
Group 6. This customer group comprises people who organize parties and
wedding ceremonies in the hotel. Customers in group 6 received catering and
entertainment services and did not stay overnight in the hotel.
Group 7. These customers come to the hotel to participate in wedding ceremonies
and parties and stay in the hotel for just one night. This group had a 1 percent
share in the total sales mix.
Group 8. Customers who come to the hotel only for bar and entertainment
services are clustered in this group. These customers do not stay overnight in the
hotel.

Activities performed in the case hotel


In the case hotel, we identified six general activities. Each of these activities comprises
several subtasks (sub-activities). These activities and the related subtasks are:
marketing (making calls to customers in order to arrange visits, giving information via
e-mail or fax, making customer visits, advertising, and making promotional campaigns),
front office (reservation and information, check-in and check-out, meeting and
welcoming customers, settling customers in the rooms, opening customers accounts,
controlling customers spending, accompanying customers when they are leaving, and
closing customers accounts), housekeeping (cleaning the rooms, making beds,
vacuuming, and replenishing linens), food preparation and service (taking orders,
preparing the kitchen for breakfast, lunch, and dinner, cooking, preparing and serving
breakfast, lunch, and dinner, cleaning the kitchen and the restaurant), beverage
preparation and service (preparing the bar for beverage service, servicing the beverages,
carrying out entertainment activities, and cleaning), and banqueting (making
preparations for catering events such as wedding ceremonies, parties, and meetings).
Allocation of costs to the customer groups under traditional ABC
In the case hotel, costs were initially totaled in cost centers along with their dollar value
(Table I). These cost centers were: personnel, stationary, telephone, marketing
(advertising, promotion, billboard, and customer visit costs), accounting and finance,
human resource, administrating, energy (electricity and heating costs), storing (rent,
air conditioning, and insurance costs), cleaning and laundry, purchasing, repair and
maintenance (material and personnel costs), entertainment, food and beverage (cost
of foods and beverage used for restaurant, bar, and catering events), and depreciation.
Then, the costs which were directly associated with particular activities were imputed
to relevant activity-cost pools. The direct costs that the accountants of the hotel
identified were: depreciation costs of equipment, furniture, and fixtures that are used in
particular departments, personnel costs, and telephone costs. On the other hand, the
costs not directly related to the activities were allocated to the activity-cost pools by
means of relevant cost drivers. The activity cost-pools were: front office, housekeeping,
marketing, food preparation, beverage preparation, and banqueting.

According to traditional ABC literature (Cooper, 1990; Kaplan and Cooper, 1998),
facility-sustaining costs (i.e. accounting, finance, human resource, training, and
administrating costs) should be attributed to the activity centers rather than be traced to
individual customers. Since facility-sustaining costs cannot be determined as specific
costs for particular customers in the case hotel, these costs were first apportioned to the
activity-cost pools. Then, from the activity-cost pools they were allocated to the customer
groups. This approach is also consistent with the ABC literature. Since it is difficult
to determine appropriate cost drivers and relevant consumption rates for the costs
of these types, they were apportioned to the activity-cost pools according to some
relevant pattern of usage. For allocating the costs of general support activities such as
administrating, accounting and finance, and human resource, the estimated percentage
of total personnel time spent for different departments was used as an allocation base.
Information about the time that the personnel, who are engaged in the general support
activities, spent for different departments were not documented in the case hotel.
Therefore, allocation of these costs was based on staff estimates of the time they spent on
each department.
For storing the goods, a 120-square meter warehouse was rented next to the hotel
building. The costs (rent, air conditioning, and insurance costs) gathered in the storing
cost center were allocated to the activity-cost pools based on the amount of floor
space occupied in the warehouse, which was measured in terms of square footage.
On the other hand, the costs of the purchasing cost center were allocated using the
number of purchase orders as an allocation base. The costs gathered in the repair
and maintenance cost center were allocated based on the actual maintenance time
spent. Information about the maintenance time was documented by the accounting
department.
The stationery and food and beverage costs were allocated according to actual usage
of stationary materials and food and beverage goods. The actual usage of these
resources was documented and maintained by the accounting department. The laundry
and cleaning costs (i.e. costs of personnel, depreciation cost of laundry machine, and cost
of cleaning materials) were apportioned among activities according to number of
cleaning hours spent. As can be seen in Table I, a major part of the cleaning costs were
allocated to the housekeeping activity because the laundry personnel take the most
time to wash and clean the linens of the rooms.
On the other hand, depreciation and insurance costs relating to the hotel building
were combined with energy costs in the same cost center (because these costs were
allocated using the same cost driver) and they were allocated to the activities based on
the amount of floor space that each department (restaurant, front office, banqueting
hall, rooms, bars, and disco) occupies. The entertainment costs were directly imputed to
the beverage preparation activity. Likewise, the costs (advertising, promotion,
personnel, and customer visit costs) which were gathered in the marketing cost center
were directly assigned to the marketing activity (Table I).
In allocating the indirect costs to the activities, cost pool rates were used (some
numbers in Table I were rounded to the nearest dollars therefore the numbers represent
approximate figures). For example, the total amount of purchasing costs was divided
by 662 orders (which is the total number of orders made during the study period) in order
to calculate a cost pool rate of $250 ($165,603/662 orders) per order. Then the rate of $250
was multiplied by the total number of orders made for each activity or department

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in order to allocate the purchasing costs to the activities. For example, the cost pool rate
of $250 was multiplied by 72 (total number of orders made for the purchase of the goods
to be used in the restaurant) in order to compute $18,000 (Table I).
After the costs were allocated to the activity-cost pools, the amounts were summed
up and the total amount of costs for each cost pool was calculated. For example, after
the amounts in the fifth column in Table I were summed up, the total amount of costs
for the front office cost pool was computed as $125,105. Once the total costs of the
activity-cost pools were computed, the costs of each activity-cost pool were allocated to
the customers via second-stage activity cost drivers which were unique to each
activity-cost pool (Table II). The activity cost drivers used by the accounting personnel
in order to allocate the cost of front office, housekeeping, marketing, and food
preparation activity-cost pools were: the number of arrivals, number of nights spent by
customers, number of customer visits, and number of covers, respectively.
The costs allocated to the customer groups were calculated using the activity driver
rates which were computed by dividing the total amount of costs gathered in each
activity-cost pool by the quantity of the relevant activity cost driver. The activity
driver rate computed for each activity-cost pool was multiplied by the quantity of
related activity cost driver that each customer group consumes. For example, the total
cost ($125,105) of the front office activity-cost pool was divided by the total number
of arrivals (17,993) in order to calculate the activity driver rate of $6.9529 per arrival.
Then, the rate of $6.9529 was multiplied by the number of arrivals (quantity of cost
driver) related to a particular customer group in order to compute the amount of front
office costs that should be assigned to that group. For example, the activity driver rate
of $6.9529 was multiplied by 5,123 (total number of arrivals made by customers
clustered in group 1) in order to compute $35,619, which was the amount allocated to
the customer group 1. The rate per activity driver ($6.9529) was used as a single rate
for the front office cost pool because it was assumed that each cost driver activity
(arrival) consumes the same amount of resources. In fact, this approach is consistent
with the traditional ABC literature (Cooper and Kaplan, 1992).
One of the customer groups of the case hotel is the bar customers who come to the
hotel in order to utilize solely the bar services. As a result of the interviews, it was
realized that the bar of the case hotel operates to serve the bar customers rather than
the customers staying in the hotel. It was also realized that customers who stay in the
hotel receive food and beverage services in the restaurant rather than in the bar.
Therefore, the accountants of the hotel assigned the total cost of the beverage
preparation activity-cost pool ($413,782) only to the customer group 8. Likewise,
the total cost of the banqueting activity-cost pool ($468,241) was assigned to the
customer group 6 and customer group 7.
Allocation of costs under TDABC
The calculations made under the conventional ABC system were based on an
assumption that the resources of the hotel were utilized at full capacity. Moreover,
tracing the costs of activities such as food and beverage preparation, making customer
visits, and front office may become a challenging task for the hotel management.
This is due to the fact that, the way each customer consumes these activities differs
from one another. For instance, some customers take more of the personnels time to
decide what to eat and drink when they come to the restaurant of the hotel, while some

of them decide quite quickly. Some customers consume all of the available services in
the restaurant, whereas some of them do not. Likewise, some of the customers need
more advice about the services of the hotel at the front office, while some of them leave
the front office quickly. Moreover, when making visits to particular customers, the
marketing personnel need to travel and stay longer. Furthermore, the marketing staff
members spend more time giving information to some customers before making
customer visits. However, some customers do not consume that much effort and
resources. Thus, diversity in the use of resources by customers is likely to make it
difficult for the hotel management to analyze the costs using a traditional ABC system
because ABC uses single cost driver rate for each activity. This is because, the use of a
single cost driver does not adequately reflect resource demands associated with the
activities performed in the hotel. In that respect, the TDABC, with its time equations, is
considered to better reflect the resource demands of the activities in the case hotel.
The time unit (in terms of minutes) used for the calculations made under TDABC
were average times. These averages were calculated by taking the average of the times
we obtained through interviews and observations. The staff members in the case hotel
work six days a week and daily working hours vary between seven and 12 hours
depending on the department in which the personnel work. For example, the
receptionists who are employed at front office work eight hours and 15 minutes a day,
whereas the administrative personnel such as the accountant and human resource
managers work 12 hours per day. However, the above-mentioned working hours
represent theoretical capacity of the personnel, while we based our TDABC calculations
on the practical capacity.
In implementing the TDABC approach, we did not assign the costs of accounting,
finance, human resource, purchasing and administrating departments directly to the
customer groups because these costs cannot be determined as specific costs for
particular customers in the case hotel. Instead, we considered the ABC cost pools (in
which the costs of support activities were already included) as activity costs for
making calculations under TDABC.
Under the TDABC approach, as it was done under the traditional ABC approach, we
assigned the total cost of the beverage preparation activity-cost pool ($413,782) only
to customer group 8. Likewise, the total cost of the banqueting activity-cost pool is
related solely to customer group 6 and customer group 7. Therefore, we assigned
the cost of the banqueting activity ($468,241) only to customer groups 6 and 7.
Allocation of the costs of front office activities under TDABC
The front office activity-cost pool consists of direct and indirect costs such as
depreciation, personnel, energy, stationery, telephone, repair and maintenance, and
purchasing. In addition, it includes the costs which are allocated from human resource,
accounting and finance, and administrating cost centers. The costs gathered in the front
office cost pool were allocated to the customer segments based on the practical capacity
of the receptionists. This approach is also consistent with the TDABC literature (Kaplan
and Anderson, 2004). Subtasks related to the main front office activity are: taking
reservations, giving information to a customer, welcoming the customer, settling the
customer in the room, opening the customers account, monitoring the room in order
to control customers spending, closing the customers account, and accompanying the
customer as he\she leaves the hotel. Indeed, the length of time spent on the front office

Customer
profitability
analysis
621

IJCHM
22,5

622

activities varies depending on the type of customer coming to the hotel. For instance,
walk-in-customers (group 4) come to the hotel without making reservations, while
customers in group 1, who come to the hotel more frequently than the others, need four
minutes to make a reservation and 2.5 minutes to get information. On the other hand,
it takes totally nine minutes for the personnel to make a reservation (six minutes) and
give information (three minutes) for a customer in group 3. When bar customers
come to the hotel, they only ask where the bar is. Therefore, it takes only 30 seconds for
the personnel to give information to these customers.
The total time needed for the main front office activity is obtained by summing up
the times spent on the related subtasks. For example, for a customer clustered in
group 1, the reservation activity starts with taking reservations (four minutes) and
giving necessary information to the customer (2.5 minutes). After the customer arrives
at the hotel, the receptionist welcomes the customer (1.5 minutes), settles the customer
in the room (two minutes), and opens the customers account (1.5 minutes). At the end
of the customers stay, the personnel controls the customers spending and closes
his/her account (four minutes) and accompanies the customer as he/she leaves the hotel
(two minutes). In this case, the total length of time, spent at the front office for a
customer in group 1, is 17.5 minutes.
Table III reveals the unit times of consumption of the front office activities by
each customer group. For instance, for the customers clustered in group 2, the
receptionists spent 107,352 (5,964 18 minutes) minutes in a year. As Table III shows,
the total time actually needed for performing the front office activities during the
study period was 326,600 minutes. Table III also demonstrates the allocation of the
front office costs using TDABC.
Through the inclusion of the data presented in Table III (total unit time column of
Table III), we developed the following time equation for estimating the time needed for
performing the front office activities:
Total time min for front office activities
17:5*#customresif customer group 1 18*#customersif customer group 2
22*#customersif customer group 3 18*#customersif customer group 4
12*#customersif customer group 5 17*#customersif customer group 6
0:5*#customersif customer group 7 2:5*#customersif customer group 8
The case hotel employs four receptionists to do the front-office work and normal
working hours (theoretical capacity) for each person is around eight hours and
15 minutes per day. Each receptionist works six days a week and 26 days in a month.
In this case, normal working hours for one receptionist corresponds to 12,870
8:25 hour 60 minutes 26 days minutes per month and 154,440 minutes per
year. Thus, the theoretical capacity for four receptionists is 617,760 minutes per year.
However, each receptionist spends around 75 minutes for breaks, arrival and
departure, and resting every day. Therefore, each receptionist actually works only
seven hours (which is practical capacity of one receptionist) per day. In this respect,
each receptionist practically supplies about 10,920 minutes per month or 131,040
minutes per year. Therefore, the practical capacity of 4 receptionists is about 524,160
minutes per year. Hence, the practical capacity corresponds to around 85 percent
(524,160/617,760 minutes) of the theoretical capacity.

Group
Group
Group
Group
Group
Group
Group
Group
Total

1
2
3
4
5
6
7
8

4
5
6
0
1
4
0
2
22

2.5
3
3
4
4
3
0.5
0.5
20.5

1.5
2
2
3
0.5
1
0
0
10

2
2.5
2.5
2
1
2
0
0
12

1.5
1.5
1.5
1
1.5
1
0
0
8

4
2
4
4
2
3
0
0
19

2
2
3
4
2
3
0
0
16

17.5
18
22
18
12
17
0.5
2.5
107.5

5,123
5,964
1,256
3,767
1,504
314
11,940
1,920
31,788

89,653
107,352
27,632
67,806
18,049
5,338
5,970
4,800
326,600

0.23868
0.23868
0.23868
0.23868
0.23868
0.23868
0.23868
0.23868

21,397
25,623
6,593
16,184
4,308
1,274
1,425
1,146
77,950

Unit time
(minute)
Unit time
(minute) Unit time spent on
Unit time
Unit Time spent on (minute) controlling
spent on customers (minute) spent
settling
(minute)
Unit time
Unit time
Total
on
spending
spent on customer opening
(minute)
(minute)
unit
accompanying
and
spent on welcoming in the customers
spent on
time
Activity Total
Rate Allocated
customer
account closing the
room
Customer reservation information customer
cost
(check-out) (minute) quantity minutes ($/min)
account
(check-in) (check-in) (check-in)
activity
activity
groups

Customer
profitability
analysis
623

Table III.
Costs of front office
activities allocated under
TDABC

IJCHM
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624

The cost per minute of capacity supplied is calculated by dividing the cost of capacity
supplied by the practical capacity of resources (Kaplan and Anderson, 2004). Thus, we
calculated the cost per minute of supplying capacity for the front office activities as
$0.23868 [$125,105 (Table I)/524,160 minutes]. Then, the rate of $0.2368 per minute
was multiplied by the total time (in terms of minutes), needed for each customer group,
in order to allocate the costs of the front office cost pool to the customer segments.
As revealed by the calculations, around 62 percent [326,600 minutes
(Table III)/524,160 minutes] of the practical capacity of the resources supplied for
the front office activities had actually been used for productive work during the
study period. Hence, only 62 minutes ($77,950/$125,105) of the total cost of $125,105
was assigned to the customer groups using TDABC. In this case, the total cost of
unused resources supplied to perform the front office activities was computed as
$47,155 ($125,105 2 $77,950).
Allocation of the costs of housekeeping activities under TDABC
The housekeeping activity-cost pool includes depreciation, personnel, energy,
cleaning and laundry, repair and maintenance, storing, and purchasing costs. The
housekeeping cost pool also comprises the costs allocated from accounting and
finance, administrating, and human resource cost centers. The total cost of the
housekeeping activity-cost pool was allocated to the customer segments based on the
practical capacity of the housekeepers. The housekeeping activities are classified as
activities that take place before a customer comes to the hotel and activities after
check-out. These activities constitute several subtasks as follows: cleaning and
vacuuming the rooms, making beds, and replenishing linens. The length of time spent
on the housekeeping activities is almost the same for all customer segments except
for the customers clustered in group 5. The customers in group 5 (football players)
come to the hotel after training and football matches and they leave their rooms dirtier
than the other customers. Therefore, it takes more time and effort for the housekeepers
to clean these rooms when compared to the rooms of other customers.
The total time for the main housekeeping activity is sum of the times spent on the
activities performed before check-in and after check-out. For example, before a
customer (group 1) checks in, the housekeeper controls (three minutes), as well as
cleans and vacuums the reserved room (seven minutes). After the customer settles in,
the housekeeper cleans and vacuums the reserved room during customers stay (four
minutes). After the customer leaves the hotel, the housekeeper cleans and vacuums the
room and replenishes the linens (16 minutes). In this case, the total length of time, spent
on the housekeeping activity for a customer in group 1, is 30 minutes. Table IV
portrays the average unit times of consumption of resources of the main
housekeeping activities by each of the customer groups. Table IV also shows the
amount of costs allocated under TDABC. Based on the figures presented in Table IV,
the total time needed for performing the housekeeping activities was calculated as
566,154 minutes.
The case hotel employs seven housekeepers and each housekeeper works 6.5 hours
per day (excluding time for breaks, meetings, arrival and departure, and resting hours).
In this case, each housekeeper supplies about 10,140 minutes per month and 121,680
minutes per year. Thus, the practical capacity of seven housekeepers is 851,760
minutes per year. We combined the unit time figures in Table IV (total unit time

Group
Group
Group
Group
Group
Group
Total

1
2
3
4
5
7

3
2
3
3
4
2
17

Unit time (minute)


spent on controlling
Customer the reserved room
(before check-in)
groups
7
6
7
7
11
6
44

4
4
4
4
4
4
24

Unit time (minute)


Unit time (minute) spent on cleaning the
rooms and
spent on cleaning
and vacuuming the replenishing linens
during customers
reserved room
stay
(before check-in)
16
16
16
18
31
16
113

Unit time (minute)


spent on cleaning
the rooms and
replenishing linens
after the customer
leaves the hotel
30
28
30
32
50
28
198

5,123
5,964
1,256
3,767
1,570
314
17,994

153,690
166,992
37,680
120,544
78,500
8,792
566,198

0.68
0.68
0.68
0.68
0.68
0.68

104,509
113,555
25,622
81,970
53,380
5,979
385,015

Total
unit time Activity Total
Rate Allocated
(minute) quantity minutes ($/min)
cost

Customer
profitability
analysis
625

Table IV.
Costs of housekeeping
activities allocated under
TDABC

IJCHM
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626

column) and derived the following time equation for the housekeeping activities
(customers clustered in groups 6 and 8 are not included in the equation because these
customers do not stay overnight in the hotel):
Total time min for housekeeping activities
30*#customersif customer group 1 28*#customersif customer group 2
30*#customersif customer group 3 32*#customersif customer group
50*#customersif customer group 5 28*#customersif customer group

4
7

As previously presented in Table I, the total cost of the housekeeping activities was
$579,208. Dividing this amount by the practical capacity of 851,760 minutes per year
resulted in a cost of $0.68 per minutes as the cost of one time unit of the housekeeping
activities. The rate of $0.68/minute was then multiplied by the total minutes, spent for
each customer group, in order to apportion the costs of the housekeeping activities to
the customers.
The use of TDABC reveals that the cost of unused resources, devoted for the
housekeeping activities, was $194,193 [$579,208 (again Table I) 2 $385,015]. This is
due to the fact that, only 66 percent (which was calculated by dividing 566,198 minutes
by the practical capacity of 851,760 minutes) of the practical capacity of the resources
supplied for the housekeeping activities had been actually utilized during the study
period.
Allocation of the costs of food preparation activities under TDABC
The food preparation activity-cost pool basically consists of depreciation, personnel,
energy, stationery, repair and maintenance, purchasing, storing, and food and
beverage costs. This cost pool also comprises the costs allocated from the human
resource, accounting and finance, and administrating cost centers. We allocated the
total cost of the food preparation activity-cost pool to the customer segments based
on the practical capacity of the personnel working in the restaurant. We identified three
common food preparation activities (preparing and serving breakfast, preparing and
serving lunch, and preparing and serving dinner), with each one comprising several
subtasks. These subtasks are: welcoming customers, taking orders, preparing and
cooking foods, serving the foods, waiting while the customers eat, and after-service
cleaning. In calculating the total time spent on the food preparation activities, the
unit time a customer spends on eating is also taken into account because the personnel
of the restaurant must wait until the customer finishes eating.
The unit and total times spent on the subtasks of the preparing and serving
breakfast activity is presented in Table VI. The total time needed for preparing and
serving breakfast activity is sum of the times spent on the subtasks. For example,
when a customer (group 1) comes to the restaurant, the staff members of the restaurant
welcome the customer and take the order (one minute), prepare and serve the food
(ten minutes), wait until the customer finishes eating (40 minutes), and deal with
after-service cleaning once the customer leaves the restaurant (one minute). In this case,
the total length of time, needed to offer breakfast for a customer in group 1, is
52 minutes (Table VI in order to see the total unit times needed to serve breakfast for
other customer groups).
Based on the data presented in Table VI (total unit time needed for breakfast
column of Table VI), we derived the time equation for breakfast as follows (customer

groups 6 and 8 are not included in the equation because these customers do not have
breakfast in the hotel):
Total time min for breakfast 52*#customersif customer group 1
50*#customersif customer group
52*#customersif customer group
52*#customersif customer group
37*#customersif customer group
38*#customersif customer group

2
3
4
5
7

As can be seen in Table VI, the time spent on performing the food preparation
activities varies for different customers. For instance, since a set menu is offered to the
customers in group 5, it takes up less time for the hotel personnel to perform the
subtasks for these customers when compared to others. Based on the data presented in
Table VI (total unit time needed for lunch column in Table VI), we developed the
following time equation to capture the estimate of the time necessary to implement the
preparing and serving lunch activity (Table VI in order to see the total unit times
needed to serve lunch to all customer groups):
Total time min for lunch 95*#customersif customer group 1
81*#customersif customer group
83*#customersif customer group
94*#customersif customer group
42*#customersif customer group

Customer
profitability
analysis

2
3
4
5

Customer groups 6-8 are not included in the above equation because these customers
do not have lunch in the case hotel. Similar to breakfast and lunch, the estimated time
for the preparing and serving dinner activity can be calculated using the following
time equation that we developed based on the data presented in Tables V and VI. In the
equation, customer groups 6-8 are not included because these customers do not have
dinner in the hotel (total unit time needed for dinner column of Table VI):
Total time min for dinner 145*#customersif customer group 1
106*#customersif customer group 2
108*#customersif customer group 3
129*#customersif customer group 4
57*#customersif customer group 5
Based on the figures presented in Table V, the total time needed for the food
preparation activities was calculated as 3,978,510 minutes. On the other hand, the case
hotel employs 30 employees in the restaurant and each employee works eight hours per
day (excluding meeting and resting hours). In this case, each employee supplies 12,480
minutes per month and 149,760 minutes per year. In that respect, the practical capacity
of 30 employees is about 4,492,800 minutes per year. On the other hand, the total amount
of indirect costs of the food preparation activities amounted to $298,434
[$381,349(Table I) 2 $82,915 (total direct food costs, see Table V)] during the study
period. Dividing this amount by the practical capacity of 4,492,800 minutes per year
produced $0.07 as the cost of one time unit of the food preparation activities. The rate of

627

Table V.
Cost of food preparation
activities allocated under
TDABC (allocation of
costs of food preparation
activities under TDABC)

Group
Group
Group
Group
Group
Group
Total

1
2
3
4
5
7

Customer
groups

1,253,616
477,150
261,144
333,008
197,432
152,000
2,674,350

419,485
80,878
59,616
74,304
331,512
965,795

338,365

1,741,786
561,916
335,368
434,384
753,056
152,000
3,978,510

0.07
0.07
0.07
0.07
0.07
0.07

Total minutes (sum of


Total minutes spent the total minutes spent
Rate
for dinner (see Table VI for breakfast, lunch,
and dinner)
($/min)
column u)

68,685
3,888
14,608
27,072
224,112

Total minutes spent


for lunch (see Table VI
column n)

121,923
39,333
23,477
30,405
52,715
10,640
278,493

Total
indirect
costs
allocated

628

Total minutes spent


for breakfast (see
Table VI column
g)

30,446
9,013
7,654
9,405
18,881
7,516
82,915

Total
direct
costs

152,369
48,346
31,131
39,810
71,596
18,156
361,408

Total
cost

IJCHM
22,5

Customer
groups
Group 1
Group 2
Group 3
Group 4
Group 5
Group 7
Total

Customer
groups
Group 1
Group 2
Group 3
Group 4
Group 5
Group 7
Total

Customer
groups
Group 1
Group 2
Group 3
Group 4
Group 5
Group 7
Total

10,120

(o) Quantity
(number of
customers having
dinner)
2,893
763
552
576
5,816

6,571

(h) Quantity
(number of
customers having
lunch)
723
48
176
288
5,336

(a) Quantity
(number of
customers having
breakfast)
24,108
9,543
5,022
6,404
5,336
4,000
54,412

30

175

125

330

10

545

210
10
395
Time spent on serving dinner
(r) Unit time
(p) Unit time (minute) (q) Unit time (minute)
(t) {p q r s}
(s) Unit time
(minute) spent
needed for welcoming needed for preparing
(minute) needed for total unit time needed
during having
customers and taking the order and serving
for dinner
after service cleaning
dinner
dinner
orders for dinner
7
45
90
3
145
5
39
60
2
106
7
39
60
2
108
8
44
75
2
129
3
8
45
1
57

30

965,795

(u) {o t} total
minutes needed
for dinner
419,485
80,878
59,616
74,304
331,512

338,365

Time spent on serving breakfast


(d) Unit time
(b) Unit time (minute) (c) Unit time (minute)
(f) {b c d e} (g) {a f} total
(e) Unit time
(minute) spent
needed for welcoming needed for preparing
(minute) needed for total unit time needed minutes needed
during having
customers and taking the order and serving
for breakfast
for breakfast
after-service cleaning
breakfast
breakfast
orders for breakfast
1
10
40
1
52
1,253,616
1
8
40
1
50
477,150
1
10
40
1
52
261,144
1
10
40
1
52
333,008
1
5
30
1
37
197,432
1
6
30
1
38
152,000
6
49
220
6
281
2,674,350
Time spent on serving lunch
(i) Unit time (minute) ( j) Unit time (minute)
(l) Unit time (minute) (m) {i j k l} (n) {h m} total
(k) Unit time
needed for welcoming needed for preparing
total unit time needed minutes needed
needed for after
(minute) spent
customers and taking the order and serving
or lunch
for lunch
service cleaning
during having lunch
lunch
orders for lunch
7
35
50
3
95
68,685
5
34
40
2
81
3,888
7
34
40
2
83
14,608
8
34
50
2
94
27,072
3
8
30
1
42
224,112

Customer
profitability
analysis
629

Table VI.
Cost of food preparation
activities allocated under
TDABC (time spent on
subtasks of the main food
preparation activities)

IJCHM
22,5

630

$0.07/minute was then multiplied by the total minutes, spent for each customer group, in
order to allocate the costs of the food preparation activities to the customers.
As can be found in Table V, the total amount of the food preparation costs, which
were assigned to all of the customer groups, was $361,408 (including the direct food
costs). This means that, only around 94 percent ($361,408/$381,349) of the total cost of
$381,349 was assigned to the customers using TDABC. In this case, the total cost of
unused resources, supplied for performing the food preparation activities, was
computed as $19,941 ($381,349 2 361,408). This is due to the fact that, only 3,978,510
minutes (Table V) of the practical capacity of 4,492,800 minutes had actually been used
for productive work during the study period.
Allocation of the costs of marketing activities under TDABC
The marketing activity-cost pool consists of depreciation, personnel, repair and
maintenance, advertising, promotion, customer visit, telephone, fax, e-mail, accounting
and finance, human resource, and administrating costs. Advertising costs include costs
of radio and television advertising, as well as the cost of billboards displayed in several
places throughout the city of Mersin. On the other hand, promotion costs include the
cost of gifts (pens, watches, and calendars) presented to the customers. Each gift set
costs around $7.6 per customer. These gifts, however, are not given to all of the
customers staying in the hotel. Since advertising and promotion costs are directly
related to particular customers, we directly assigned these costs to the relevant
customer segments. On the other hand, we allocated indirect marketing costs to the
customer segments based on the practical capacity of the marketing personnel.
The case hotel employs two marketing personnel to make customer visits and related
phone calls. Each person works seven hours per day and six days per week (excluding
meeting, vacation, and resting hours). Thus, each person supplies 10,920 minutes per
month and 131,040 minutes per year. In this case, the practical capacity of two employees
is 262,080 minutes per year. The total cost of customer visits and relevant fax,
telephone, and e-mail costs amounted to $60,112 cost of customer visits $50; 269
cost of fax; telephone; and e mail$9; 843 during the study period. Dividing this
amount by the practical capacity of 262,080 minutes per year resulted in a cost of
$0.23 per minute as the cost of one time unit. Then, the rate of $0.23/minute was multiplied
by the total minutes, that the marketing personnel spent visiting each customer group, in
order to apportion the costs of the marketing activities to the customer segments.
Table VII demonstrates the allocation of the costs of customer visits under TDABC.
The time spent to make customer visits and perform related subtasks changes
depending on the type of the customer. For example, before making a visit to a customer
in group 1, the marketing staff members phone the customer in order to arrange an
appointment (two minutes). After the appointment is arranged, the staff members give
information about the hotel to the customer via e-mail or fax (two minutes). Then, the
customer is visited (30 minutes). In this case, the total time needed for making a visit to a
customer in group 1 is 34 minutes. On the other hand, it is 52 minutes for a customer in
group 2.
Based on the figures presented in the total unit time column of Table VII,
we derived a time equation to estimate the total time needed for making customer visits
and performing related subtasks (customers in group 4 are not included in the equation
because they are walk-in customers):

Group
Group
Group
Group
Group
Group
and 7
Group
Total

1
2
3
4
5
6

2
3
3
0
2
3
2
15

4
2
17

Unit time
(minute) spent
on giving
information to
customer

2
4
2
0
3

Unit time
(minute) spent
Customer on arranging
appointment
groups

43
21
224

30
45
45
0
40

Unit time
(minute)
spent on
visiting
customer

50
25
256

34
52
50
0
45

Total
unit
time
(minute)

40
150
2,198

1,652
100
240
0
16

Total
number of
visits
(activity
quantity)

2,000
3,750
79,838

56,168
5,200
12,000
0
720
0.23
0.23

0.23
0.23
0.23
0.23
0.23

Total
Rate
minutes ($/min.)

460
863
18,363

12,918
1,196
2,760
0
166

Cost of
customer
visits
allocated to
customers

2,123
38,769
59,999

10,614
3,185
2,123
1,062
2,123

26,732
4,750
5,383
1,093
2,404
2,675
39,663
82,700

3,200
369
500
31
115
92
31
4,338

Advertising Promotion
costs
Total
costs
(direct)
cost
(direct)

Customer
profitability
analysis
631

Table VII.
Cost of marketing
activities allocated under
TDABC

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632

Total time min needed for making customer visits


34*#customersif customer group 1 52*#customersif customer group 2
50*#customersif customer group 3 45*#customersif customer group
50*#customersif customer groups 6 & 7
25*#customersif customer group 8

5

Table VII summarizes the dollar amount of the costs of advertising, promotion, and
customer visits which were assigned to each customer group using TDABC. Since
79,838 minutes of the practical capacity of 262,080 minutes had actually been used for
making customer visits, around 30 percent (79,838 of 262,080 minutes) of the
marketing resources had been used for productive work during the study period. In
this case, the total cost of unused resources devoted for the marketing activities was
computed as $41,750 ($124,450 2 $82,700).
3. Interpretation of the results
In this case study, we have developed a TDABC model for the case hotel in order to
implement CPA. Table VIII compares the profitability figures computed by means of
the traditional and TDABC systems. The figures in the total cost column in the
traditional ABC section of Table VIII are taken directly from the total column of
Table II. The figures calculated for customer groups 1, 2, 3, 4, and 5 in the total cost
column in the TDABC section of Table VIII are obtained by summing up the figures in
the total cost columns in Tables III-VII. The total cost figure for customer group 6
and customer group 7 is obtained by adding up the relevant figures in the total cost
columns in Tables III-VII and the total cost of banqueting activity-cost pool ($468,241).
On the other hand, the total cost figure for customer group 8 is found by adding up
the relevant figures in the total cost columns in Tables III and VII to the total cost of
beverage preparation activity-cost pool ($413,782).
In Table VIII, the revenue figures for customer groups 1, 2, 3, 4, and 5 are obtained by
summing up the restaurant and accommodation revenues. For example, the total amount
of revenue ($948,385) generated from customer group 1 is obtained by summing up
accommodation ($807,602) and restaurant revenues ($140,783). The total amount of the
restaurant revenue ($140,783) is calculated by totaling breakfast, lunch, and dinner
revenues. Since the banqueting activities are organized for only customer group 6

Customer
groups

Table VIII.
Comparison of
profitability figures
calculated under
traditional and TDABC

Group
Group
Group
Group
Group
Group
and 7
Group
Total

1
2
3
4
5
6
8

Revenue

Costs

Traditional ABC
Relative
Profit
profitability

TDABC
Costs

Profit

Relative
profitability

948,385
216,433
146,887
315,117
160,087

563,780
189,980
149,598
115,219
170,941

384,605
26,453
2 2,711
199,898
2 10,854

0.32
0.03
2 0.02
0.15
2 0.01

305,007
192,274
68,729
139,057
131,688

643,378
24,159
78,158
176,060
28,399

0.42
0.02
0.05
0.12
0.02

942,892
576,000
3,305,801

481,010
421,607
2,092,135

461,882
154,393
1,213,666

0.40
0.13
1.00

497,750
454,591
1,789,096

445,142
121,409
1,516,705

0.29
0.07
1.00

and customer group 7, the total amount of the banqueting revenues ($942,892) is related
solely to these customer groups. The amount of the bar revenues generated from
customer group 8, on the other hand, amounts to $576,000.
As Table VIII reveals, customer group 3 and customer group 5 who are
determined unprofitable customer segments using a traditional ABC method are found
profitable using a TDABC method. For example, the use of a traditional ABC method
demonstrates that customer group 5 (sports clubs) shows $10,854 of loss. On the other
hand, the calculations made with the TDABC method reveal that customer group 5
generates $28,399 of net profit. Moreover, in Table VIII we can observe that, profitability
figures computed using a TDABC approach are higher for all the customer groups when
they are compared to the ones calculated using a traditional ABC system.
This case study also highlights the difference between the capacity supplied and the
capacity used in the case hotel. In this case study, we found that $303,039 ($2,092,1352
$1,789,096) cost of unused capacity exists in the case hotel. Of the total dollar amount of
the cost of unused capacity, $41,750 represents the cost of unused resources kept for the
marketing activities. Likewise, the cost of unused resources, which are related to the
activities in the restaurant, is $19,941. On the other hand, $194,193 and $47,155 represent
the costs of unused resources devoted for the housekeeping and front office
activities, respectively.
The TDABC analysis in the case hotel reveals that only 66 percent of the resources
supplied for the housekeeping activities (566,198 of 851,760 minutes), 62 percent of the
resources supplied for the front office activities (326,600 of 524,160 minutes), 89 percent
(3,978,510 of 4,492,800 minutes) of the resources supplied for the food preparation
activities, and 30 percent (79,838 of 262,080 minutes) of the resources supplied for the
marketing activities had been actually utilized during the period of the study.
4. Conclusions and managerial implications
What does this all mean for the hospitality industry? First, there is support for the
TDABC model which incorporates activities, cost of resources supplied for the
activities, practical capacity of the resources devoted for performing the activities, and
the unit times spent on these activities. In that respect, the study produced valuable
information which will support various managerial decision makings. First, these
findings will allow the managers of the hotel to tailor the cost system strategies more
effectively. Each of the activities and unit times are adaptable for a TDABC model,
allowing the managers of the hotel to determine where they need to improve their
productivity and see how these improvements will affect the external value and overall
profitability of the organization. It seems that ABC is a necessary, efficient, but not
sufficient measurement tool for profitability analysis. More importantly, it ignores the
importance of the cost of unused resources assigned to different customer segments.
Moreover, the managers of the hotel should remember that tracing the cost of some
activities to customers using a traditional ABC approach may not be feasible due to the
diversity in the use of resources by various customers. If the managers of the hotel
want to install and implement a TDABC method for CPA in the subsequent periods in
order to overcome the limitations of a traditional ABC system, all they need is obtain
estimates for the costs of the activities that are performed in the hotel, as well as
average times needed to perform these activities. The estimates of the times, which are
needed for performing the activities, can be obtained via the time equations we

Customer
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analysis
633

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22,5

634

developed in this case study. In that respect, based on the practical capacity of the
resources supplied, the costs of the activities, and the time estimates for the activities,
the hotel management will be able to execute CPA via a TDABC model.
In implementing a TDABC model, the cost of activities should be divided by the
practical capacity of the resources, which is expressed as the amount of time that
employees (i.e. receptionists and housekeepers) can work, in order to compute the cost
per time unit for each activity. Costs then can be assigned to customers by multiplying
the cost per time unit by the time needed to perform the activity for each customer. The
time equations will also provide the management with a chance to update the TDABC
system quickly without any need for repetitive interviews. In this regard, not only will
the use of a TDABC system provide the managers with an insight into more accurate
CPA information, it will also make the unused capacity visible.
Second, there is a clear evidence indicating that the front office, housekeeping, food
preparation, and marketing departments have idle capacity. It is a well-known fact that
the hospitality industry is labor intensive and that personnel have a major impact on
the profitability of the hotel. In this case, the managers of the hotel should concentrate
on uncovering appropriate strategies for maximizing capacity utilization. For instance,
one starategy they can utilize might be to provide the personnel with necessary
training and motivation to follow and answer the needs and expectations of the
customers in order to attract more customers and to eliminate the idle capacities in the
future. Depending on the expected chages in the customer mix in the subsequent
periods, the use of a TDABC system with its time equations will provide managers
with an opportunity to estimate the capacity requirements of different departments.
Thus, the time equations of TDABC will assist the managers in understanding
whether it will be necessary to switch the personnel from one department to the next, in
order to balance capacities among departments. Obviously, with a TDABC approach,
the managers of the hotel will be better equipped to understand whether capacity is
enough to face forthcoming demands. This will allow better manpower planning,
which will in turn foster effective utilization of human resources. With better
manpower planning, the managers will be in a better position to recruit the right type
of employees who can be a good match with the needs of the hotel, as well as they will
be able to estimate training needs of the personnel more effectively. This will in turn
enable appropriate training programs to be implemented accordingly. Arranging
appropriate training programs will assure that the training budget is used efficiently.
At the same time, better manpower planning may also allow the hotel management to
be in a better position to provide long-term contracts to the employees, hence reduce
personnel turnover. This in turn can lead to increased job satisfaction and
organizational commitment among employees. Furthermore, the use of time equations
will provide the hotel management with an opportunity to see the time demands of the
activities. This will aid the managers in identfying which activities consume much
time, taking necessary actions in order to reduce the amount of time required by these
activities, and ultimately reducing the costs of serving customers.
Third, the managers, using customer profitability information gained through
TDABC, will be in a better position to determine which strategy (such as focus,
differentiation, and cost leadership) is useful for maximizing the overall profitability of the
hotel. With the help of the results of this case study analysis, the managers of the hotel can
now better distinguish profitable customers from unprofitable ones. Obviously, this will

result in better-informed managerial decisions. In that respect, the hotel management


should tailor appropriate programs for managing customer relationships. For instance,
the managers of the hotel should implement different promotional programs or campaigns
in order to attract more profitable customers during different seasons. The hotel can
attract low-profit customer groups during low seasons and may provide services to high
income groups at peak times. Additionally, by using a customer relationship marketing
system, the hotel personnel can keep track of customers demands and what action has
been taken on these demands by other hotels. The calculations made under the
conventional ABC system reveal that some customer groups (customer groups 3 and 5) are
unprofitable. This is due to the fact that, these customers are burdened with the cost of
unused capacity. In this case, based on the ABC analysis, the managers of the hotel may be
tempted to consider raising prices or cutting costs by changing service concepts in order to
turn unprofitable customers into profitable ones. However, raising prices and changing
service concepts, which may in turn result in changes in the customers quality perceptions
of the hotel, and possibly lead to a loss of customers to competitors. On the other hand,
contrary to the traditional ABC, the TDABC cost analysis shows that prices set for
these customer groups truly cover the costs of serving them, despite the fact that these
customers are low-profit contributors. Based on this finding, the managers of the hotel
should be alerted to revisit the managerial strategies concerning these customers and
tailor new strategies accordingly. According to TDABC CPA outcomes, customer groups
1, 6, and 7 are high profit contributors for the case hotel. Thus, the hotel management
should develop necessary marketing strategies in order to increase guest loyalty from
these customer groups. This will subsequently enable the hotel to subsidize low profit
contributors (i.e. customer groups 2, 3, and 5) with profits generated from the high-profit
contributors. Additionally, having obtained the results of the TDABC analysis, the hotel
management will better determine the customer mix which will generate the highest
returns in the future.
The findings of this study have been generated from a case study in a single
four-star hotel in Turkey. Although the results of this study cannot be generalized to
the hotel industry as a whole, it may shed light to the insights of cost practices in hotels
from a TDABC model perspective. For further research, this study can be replicated in
other hotels both in Turkey and abroad and also at different star-ratings to see if the
results would be generalizable. It would be very interesting for managers of other
hotels to identify profitable and unprofitable customers and their own idle capacity
using a TDABC approach. Furthermore, the TDABC method should be tested in other
organizations (i.e. restaurants) in the hospitality industry in order to provide a better
understanding of the application of TDABC in the tourism sector.
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Corresponding author
Ilhan Dalci can be contacted at: ilhan.dalci@emu.edu.tr

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