Upon reviewing the Bentley Hotel’s income statements and expenses for FY 2005 and 2006, EMC discovered inconsistencies in the accounting methods employed to determine the causal factor for the allocation of overhead expenses to the hotel’s various activity segments.
The original allocations were made based on actual usage in the case of employee café (based on a 2002 study of use) and laundry services, and ranged to square footage and total revenue in the case of overhead pool costs. This mix-and-match method of spreading overhead costs produces misleading information regarding the financial performance of the various hotel segments.
EMC employed a more progressive; activity based costing (ABC) method to allocate overhead expenses in an effort to determine the underlying causes for the hotel’s poor performance. The ABC method of allocation helps more effectively determine the causal links between activities and costs. The following is a summary of the steps that were undertaken in performing the ABC analysis.
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Overhead pool A, pool B, and laundry expenses were all considered as one general overhead pool. The total overhead amounts used in the ABC calculation for 2005 and 2006 were $13,537,479 and $14,415,346 respectively (see accompanying spreadsheet tab titled “Revised Overhead Pool”). Note: employee café expenses could not be considered under the same overhead pool as these expenses were already allocated by being included in the payroll of the affected departments and therefore not traceable.
2. Actual recorded expenses for the various hotel segments (i.e. rooms, food and beverage, telephone, parking, guest services (other)) were used. The food and beverage segment was further subcategorized into banquets, Oak room, Carnival lounge, room service, and minibar. This allows for more focus on the performance of these individual sub-segments as they were the prime areas of concern expressed by the hotel