Journal of Hospitality & Tourism Research

http://jht.sagepub.com/ Activity-Based Costing in the Hospitality Industry: Evidence From Greece

Odysseas Pavlatos and Ioannis Paggios Journal of Hospitality & Tourism Research 2009 33: 511 DOI: 10.1177/1096348009344221 The online version of this article can be found at: http://jht.sagepub.com/content/33/4/511

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ACTIVITY-BASED COSTING IN THE HOSPITALITY INDUSTRY: EVIDENCE FROM GREECE

Odysseas Pavlatos Athens University of Economics and Business Ioannis Paggios University of Piraeus
The purpose of this article is to provide some empirical evidence of the current general trends regarding the practical consideration, adoption, and use of activity-based costing (ABC) in the hospitality industry. To this end, a survey was conducted with 85 firms of the Greek hotel sector with the use of questionnaires. Results showed that the adoption rate of an ABC system could be considered rather satisfactory. For the hotels that have adopted ABC, the survey showed that they apply it throughout all the core areas of management accounting, especially in pricing decisions and customers profitability analysis. The nonusers reported that the main reason for rejecting it is the satisfaction of the existing cost accounting system and the high cost of an ABC implementation. KEYWORDS: cost accounting; management accounting; activity-based costing; hotels; Greece

Evidence about cost accounting and its use in tourism enterprises and especially in hotels is rather limited (Pellinen, 2003). However, there is an active interest in hospitality management and particularly in cost and management accounting practices of hotels and tourism enterprises (Harris & Brown, 1998). Potter and Schmidgall (1999) believe that little innovation has occurred in hospitality cost and management accounting practices, and there are many issues that deserve research attention. Activity-based costing (ABC) is considered to be one of the most important innovations in the field of cost and management accounting (Bjrnenak, 1997; Bjrnenak & Mitchell, 1999). ABC systems use a simple two-stage approach that is similar to the structure of traditional cost systems, such as job-order costing and process costing, but more general. Traditional costing systems use actual departments or cost centers for accumulating and redistributing costs. Instead of using cost centers for accumulating costs, ABC systems use activities; that is, rather than asking how to allocate a service department expense to a production department, the ABC system designer asks what activities are being performed by the service departments resources. The resource expenses
Journal of Hospitality & Tourism Research, Vol. 33, No. 4, November 2009, 511-527 DOI: 10.1177/1096348009344221 2009 International Council on Hotel, Restaurant and Institutional Education
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are assigned to activities based on how much of them are required or used to perform activities (Atkinson, Banker, Kaplan, & Young, 2001; Garrison & Noreen, 2000). Both traditional and ABC systems vary in their level of sophistication but, as a general rule, traditional systems tend to be simplistic, mainly because they are inexpensive to operate, make extensive use of arbitrary cost allocations, have a low level of accuracy, high cost of errors, and so on. On the contrary, ABC systems tend to be more sophisticated, because they are expensive to operate, make extensive use of cost and affect cost allocations, have a high level of accuracy, low cost of errors, and so on (Drury, 2000). Research on ABC adoption (Briedley, Cowton, & Drury, 2001; Groot, 1999) suggests that one of the major perceived benefits from implementing ABC is the more accurate cost information for product costing. Other reasons that justify ABC adoption are improved cost control, cost reduction, more accurate allocation of indirect costs, improved insight into cost causation, identification of activity costs, and improvement of operational efficiency. Apart from the above reasons, the decision to implement ABC is often driven by the need to improve customer profitability analysis, to gain more accurate cost information for pricing, or to prepare relevant budgets. Research also reveals that many companies proceed to the implementation of ABC because they want to modernize their cost accounting system in order to better depict costs or to improve their business processes. Taking the above into consideration, a research was conducted aiming at providing some empirical evidence of current general trends in the practical consideration, the level of adoption, and the use of ABC in the Greek hospitality industry. The findings of this study are compared with prior cost accounting knowledge, and earlier cost accounting practices in the lodging industry.
CURRENT RESEARCH IN COST AND MANAGEMENT ACCOUNTING IN HOTELS

Studies in cost and management accounting applied in the lodging industry have been conducted both in the fields of tourism management and accounting. They cover various aspects of tourism industry. Apparently, however, most of the studies have focused on hotels (Harris & Brown, 1998). The topics of the previews research cover the whole field of cost and management accounting. As far as hotels are concerned, there are studies on strategic management accounting (Collier & Gregory, 1995), the structure of cost accounting system (Brignall, 1997; Brignall, Fitzgerald, Silvestro, & Johnson, 1991), the general and relative importance of the knowledge in accounting techniques in hotel management (Damitio & Schmidgall, 1990), the use of cost accounting information (Downie, 1997; Mia & Patiar, 2001), the causes and consequences of implementing yield management (Edgar, 1997; Jarvis, Lindh, & Jones, 1998), the activity-based modeling of costumer profitability analysis (Noone & Griffin, 1997, 1999), the roles of and participation on controllers in hotel management (Burgess, 1996; Gipson 1998, 2002; Pickup, 1985; Subramaniam, McManus, & Mia, 2002), the
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links between managerial accounting and corporate management (Mongiello & Harris, 2006), the pricing practices and their relationship to cost accounting (Pellinen, 2003), the acceptance and usage of Uniform Systems of Accounts for the Lodging Industry (USALI; Kwansa & Schmidgall, 1999), and the budget system characteristics and practices (Brader Brown & Atkinson, 2001; Brothertone, 2004; Jones, 1998; Schmidgall, Borchgrevink, & Begnum, 1996; Schmidgall & Ninemeier, 1987; Sharma, 2002; Winata & Mia, 2005).
COST ACCOUNTING IN HOTELS

Cost accounting measures and reports financial and nonfinancial information related to the organizations acquisition or consumption of its resources. It provides information for both financial and management accounting (Horngren, Bhimani, Datar, & Foster, 1997). Cost accounting, as applicable in the hospitality service industries, is a set of concepts and techniques designed to facilitate the accumulation, analysis, and utilization of historical and projected per unit cost for use in management decision making (Fay, Rhoads, & Rosenblatt, 1976). Although managers in the hospitality service industries require cost accounting information just as manufacturing firm managers do, the nature of activities in hotels (fixed capacity, perish ability, demand patents, product range, real-time activities, production and conception, location and size, labour and capital intensity, and cost structure) makes cost accounting systems used in manufacturing firms inapplicable to the hospitality business (Jones & Lockwood, 1989; Kotas, 1997).
Uniform Systems and Departmental Accounting

The development of uniform accounting systems (and uniform costing systems) is by no means a recent trend. For many years a significant hospitality accounting development has been the publication of uniform accounting systems for the key sector of the industry, notably hotels, restaurants, and clubs in the United States, while their first appearance for hotels traces back to 1926. The USALI, now in 10th edition, has become the industry standard, particularly for the large hotel businesses and international and global chains in Europe and the United States (Harris & Brown, 1998). It relates effectively to the operating characteristics of hotels and it is based on departmental accounting principles, reflecting the fact that rooms, food and beverage, and other services are produced in departments rather than in production lines, as in the case of manufactured products (Coltman, 1998; Everett, 1989; Schmidgall, 1996; USALI, 1996, 2006). The data provided in the detailed USALI accounts are used by the management of the lodging firms. The income statement (Everett, 1989; USALI, 1996, 2006) consists of three major sections: (a) a section covering departments, that reports the revenues and the directly expenses of profit centres, (b) a section displaying undistributed operating expenses including administrative, general, marketing, property operation and maintenance, and utility expenses, and (c) a section that includes management fees, fixed charges, and income taxes.
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For the most lodging properties, undistributed operating expenses, combined with management fees, rent, property taxes, and insurance, comprise a considerable portion of total expenses for period. The process of allocating these overhead costs has been presented in detail by Coltman (1998), Schmidgall (1996), and even in the USALI (2006, 1996). Changes were made in 10th edition of USALI to keep pace with the evolving business environment (i.e., condo hotels, Internet wholesales, resort fees), as well as provide clarification to ambiguous guidance found in the ninth edition (i.e., allowances, attrition and cancellation fees, definition of available rooms). However, it still uses traditional cost accounting techniques to provide cost data. It does not report how ABC technique could be used in the hospitality environment.
Cost Structure and Business Orientation

Most hotels have a high proportion of fixed cost (Brignall, 1997; Brignall et al., 1991) with approximately three quarters of the total cost of a hotel being fixed and uncontrollable. The room department has a fixed cost (mainly department wages and salaries) of 15% to 20% in relation to its sales volume, and a considerable lower proportion of variable costs (laundry, dry cleaning, domestic supplies, etc). Hotel food and beverage operations entail relatively high fixed costs (mainly kitchen and restaurant wages) as well as high variable costs (food and beverage costs and energy). High fixed costs mean high gross profit margins and this, in turn, means that each addition to total revenue results in a substantial rise in net profit (Kotas, 1997). Kotas (1973, 1982), noted that cost structure is a key determinant of business orientation, highlighting that business with high fixed-cost structures (e.g., hotels), tend to be market-oriented, whereas those with low fixed-cost structures such as manufacturing undertakings tend to be cost-orientated. Thus, the presence of high fixed costs and the reliance on consumer demand normally makes it essential for the management to be revenue driven and focused on product differentiation to achieve a fair share of profit (Graham & Harris, 1999).
Traditional and ABC Costing Systems

Kaplan and Cooper (1998) suggest that service companies are ideal candidates for ABC even more than manufacturing companies. Their justification for this statement is that most of the costs in services organizations are fixed and direct. In contract, manufacturing can trace important components (such as direct materials and direct labor) of cost to individual products. Therefore, indirect costs are likely to be a much smaller proportion of total costs. Service organizations also supply most of their resources in advance, and fluctuations in the usage of activity resources by individual services and customers do not influence short-term spending to supply the resources. Such costs are treated by traditional costing systems as fixed and irrelevant for most decisions. This resulted in a situation where profitability analysis was not considered helpful for decision making. Cost increases could also be absorbed by increasing the prices
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of services to customers. Little attention was therefore given to developing cost systems that accurately measured the costs and profitability of individual services. Drury (2000) noted that many service organizations have therefore only recently implemented management accounting systems. They have had the advantage of not having to meet some of the constraints imposed on manufacturing organizations, such as having to meet financial accounting stock valuation requirements. Furthermore, services have been implementing new costing systems at the same time as the deficiencies of traditional systems were being widely published. Also, new insights were beginning to emerge on how cost systems could be viewed as resource consumption models, which could be used to make decisions on adjusting the spending on the supply of resources to much resource consumption. Berts and Kock (1995), state that ABC is suitable for market-oriented sectors such as the lodging industry. Fay et al. (1976) showed the possible use of traditional costing systems (job-order costing and process costing) in the hospitality services industry. Noone and Griffin (1997) propose that ABC is the most effective and accurate costing method for customer profitability analysis (CPA) in a hotel environment (identified categories of customers, such as high profit contributors, marginal profit contributors, and loss makers). They support using ABC as a basis that identifies the type of task rather than the productfor instance, sales activities rather than sales salaries, telephone costs, and so on. They also suggest that overhead cost should be identified and then allocated to the respective market segment. There are certain types of customers who consume far more costs than others, for example, the longer the stay, the lower the overhead costs per room night incurred (check-in and check-out costs, for instance). Dunn and Brooks (1990) and Noone and Griffin (1999) document the implementation of CPA using ABC. Noone and Griffin (1999) report analytically the steps are involved at the design of ABC systems in hotels. These are
identifying activities, assigning costs to cost pools, selecting appropriate cost drivers for assessing the cost of activities to cost objects, and assigning the cost of the activities to services and to customers.

They present the cost drivers and cost pools that could be used by hotels that want to apply ABC system. However, the use of ABC in the hotel industry is limited (Tai, 2000) with an informal survey by Graham (quoted in Tai, 2000) identifying no hotels in Europe to have adopted this approach. Tai interviewed a range of industry personnel to identify the reasons for this and found that, although there was considerable knowledge of the theory of ABC, there was a low understanding of how it might be used in hotels (Burgess & Bryant, 2001). In light of the above, the first research question of this study is therefore formulated (Research Question 1, see Research Methodology).
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Figure 1 An Illustration of Two-Stage Allocation Process for Activity-Based Costing (ABC) Systems in the Hospitality Industry Overhead cost accounts (for each individual category of expenses e.g., properties taxes, depreciation etc) First stage allocations (Resource cost drivers) Activity Cost Center 1 Second stage allocations (Activity cost centers) Direct Costs Cost objects (services and customers) Activity Cost Center 2 Activity Cost Center N

ABC Applications

Over the past decade, the development of ABC has involved its application to a variety of firms (Copper & Kaplan, 1992). Moreover, its use has extended from purely product costing to a variety range of cost management applications (Innes & Mitchell, 1995) and different types of decisions (Briedley et al., 2001). The potential uses of ABC information are
product and service pricing (Clarke, Hill, & Stevens, 1999; Friedman & Lyne, 1995; Innes & Mitchell, 1991, 1995; Innes, Mitchell, & Sinclair, 2000; Malmi, 1996), cost reductions (Bhimani & Pigott, 1992; Evans & Ashworth, 1996; Friedman & Lyne, 1999; Innes et al., 2000; Innes & Mitchell, 1995), budgeting (Bescos, Cauvin, Gosselin, &Yoshikawa, 2001; Brimson & Fraser, 1991; Groot, 1999; Kaplan, 1994; Tayles & Drury, 2001), new product or service design (Bubbio, Alberti, Poli, & Toscano, 1999; Innes et al., 2000; Innes & Mitchell, 1995), costumer profitability analysis (Friedman & Lyne, 1995; Innes et al., 2000; Innes & Mitchell, 1995; Tayles & Drury, 2001), performance measurement (Groot, 1999; Innes et al., 2000; Innes & Mitchell, 1995), cost modeling (Cooper, 1991; Innes et al., 2000; Innes & Mitchell, 1995), output decisions (Bhimani & Pigott, 1992; Innes et al., 2000; Innes & Mitchell, 1995; Malmi, 1996), and product or service-mix decisions (Bescos & Mendoza, 1995; Cagwin & Bouwman, 2002; Friedman & Lyne, 1995).
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Based the above discussion, the second (Research Question 2) and third research question (Research Question 3) of this study are therefore formulated, as well as the first research hypothesis for this study (Research Hypothesis 1, see Research Methodology).
Reasons for Not Applying ABC

Cost accounting literature (Bescos, Cauvin, Gosselin, & Yoshikawa, 2001; Innes et al., 2000; Innes & Mitchell, 1995) suggests that the most common reasons to reject ABC are
the satisfaction with the existing cost accounting system, the high cost of ABC implementation, the lack of management interest, the lack of adequate knowledge about ABC implementation, the lack of time to access ABC suitability to their company, and the lack of appropriateness to the respondents type of business.

Thus, another research question (Research Question 4, see Research Methodology) is formulated.
Characteristics of ABC Adopters and ABC Nonadopters

Cost accounting literature suggests that firms adopting ABC systems have some characteristics, which distinguish them from companies that are not adopting ABC systems (Anderson & Young, 1999; Bjrnenak, 1997; Groot, 1999; Malmi, 1996, 1999). Cooper (1991) has identified cost structure, competition, and product diversity as factors relevant to the introduction of ABC. Innes et al., (2000) and Brown, Booth, and Giacibble, (2001) found that size influences the decision to adopt or reject ABC. In light of the above, the second research hypothesis of this study is therefore formulated (Research Hypothesis 2, see Research Methodology).
RESEARCH METHODOLOGY

According to the review of this study, the following four research questions were raised:
Research Question 1: What is the adoption rate of ABC and what are the ABC systems characteristics (cost pools, cost drivers, etc.) in the hospitality sector? Research Question 2: What are the specific purposes for which ABC is being used in the lodging industry? Research Question 3: What are users perceptions of the importance and of the success of each particular application of ABC? What is the overall success of ABC in hotels? Research Question 4: What are the main reasons that hotels reject ABC?

These questions led to the formulation of two research hypothesis, which guided this research:
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Research Hypothesis 1: There is a statistical significant correlation between the overall success rating awarded to ABC and the success rating given to the various individual purposes for which ABC has been employed. Research Hypothesis 2: There are statistical significant differences between ABC adopters and ABC nonadopters in the hospitality industry.

The sample surveyed included the leading Greek hotel enterprises. The criteria used for the selection of the hotels were their sales revenues, as well as their net profit for the year 2005, selected from the ICAPs Directory 2003 (Gallups subsidiary in Greece). The research was conducted between March and June 2006 and was realized in two phases. In the first phase, a participation form was sent to the selected companies accompanied by a cover letter, which included a brief reference of the main goals of the study. Financial managers were asked to indicate the type(s) of cost accounting practice(s) used by their hotels, as well as to state correspondence information in order to address the survey questionnaire, in case they were interested. In the second phase of the research, the survey questionnaire was designed and sent to the sampled hotels. Before the finalization of the questionnaire, a pilot test took place. More specifically, interviews were conducted with four chief accountants who had a long experience in cost accounting practices to make sure that the questionnaires content was easy to understand. Through this testing they managed to account for omissions or vagueness in the expressions used to formulate the questions. The participation form was sent to 146 hotel companies and 98 firms responded positively in the first phase of the survey (65% response rate). For the companies that did not show interest in the research, the main reasons they cited were the lack of time and the fact that answering questionnaires was not one of their top priorities. Following, the questionnaire was sent to those hotels that completed the participation forms. A total of 85 completed questionnaires were finally received during the second phase of the survey. The response rate was 58%. The questionnaires were answered at a percentage of 96% by executives in the top hierarchy of the financial departments (financial managers and chief accountants) that have firm knowledge of the cost accounting information used within their companies. The financial, geographical, and company characteristics for the final sample of hotel enterprises are shown in Table 1.
FINDINGS ABC Adoption Rate

The survey revealed that only 23.5% of the hotels have implemented ABC whereas 74.5% of the sample (65 firms) reported not to. These nonadopters are further classified in two groups according to their perceptions regarding ABC; those that do not intend to implement ABC (ABC deniers), and those that intend to implement ABC in the future (ABC supporters). The majority of ABC nonadopters (86.1%) are ABC deniers, and only nine hotels (13.9%) are ABC supporters.
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Table 1 Sales, Category, Geographical Area, Number of Beds, Management Status, and Type of Hotels That Participated in the Survey N Categories 5 stars 4 stars 3 stars Geographical area Athens Crete Aegean Islands Ionian Islands Macedonia Other No. of beds <300 300-350 350-500 >200 Company management status Private company Member of national chain Member of multinational chain Type of hotel Resort City hotel Sales revenue for the year 2005 ( millon) Mean Standard deviation Minimum Maximum 30 48 7 17 24 22 12 6 4 6 4 20 55 43 27 15 34 51 9.85 12.25 3.3 99.5 Percentage 35.3 56.5 8.2 20 28.2 25.9 14.1 7.1 4.7 7.1 4.7 23.5 64.7 50.6 31.8 17.6 40 60

3.3 99.5

ABC Systems Characteristics

According to the gathered data, the activities monitored by the majority of the hotels that use ABC include housekeeping (100%), check-in/check-out (100%), reservation (75%), marketing (16%), general administration (80%), food production/service (80%), beverage production/service (45%), switchboard operation (25%), main courante (25%), and meeting room administration (20%). ABC systems in the lodging industry are not excessively detailed, as they do not include a big number of cost drivers (mean value = 6.55, SD = 1.605) and calculate the cost of a rather small number of activities (mean value = 3.95, SD = 1.432). Moreover, there is a statistically significant positive correlation between these two variables, that is, number of cost drivers and number of activities estimated at a 10% significant level (Kendalls b = 0.543, p = .003). That means that the more (fewer) activities an ABC system includes the more (fewer) drivers are used.
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Table 2 Activity-Based Costing (ABC) Applications Proportion of ABC Users Adopting This Application N Service pricing Customer profitability analysis Service-mix Performance evaluation Budgeting Cost reduction Cost modeling Output Service design Other applications Overall success 18 16 Percentage 90 80 Importance Rating Mean 4.65 4.65 SD 0.489 0.489 Success Rating Mean 4.35 4.40 SD 0.409 0.598

15 14 13 12 10 9 9 2

75 70 65 60 50 45 45 10

4.45 4.40 4.30 4.40 4.05 4.25 4.25 4.20

0.510 0.503 0.571 0.503 0.394 0.350 0.550 0.550

4.30 4.25 4.10 4.35 3.95 3.90 3.80 N/A 4.30

0.571 0.639 0.447 0.429 0.510 0.641 0.523 N/A 0.503

Note: N/A = not available. Both importance and success rating were derived from 5-point scales, where 5 = very important/successful and 1 = very unimportant/unsuccessful.

ABC Application

The 20 respondents currently using ABC in our survey were queried on the rationale of its application. All had multiple purposes for its use (mean value = 5.9, SD = 2.713), some of which extended beyond those reviewed above. The majority of hotels (55%) use ABC information for more than seven purposes. Table 2 contains a summary of the specific purposes for which ABC is being used. This is combined with the users assessments of the importance and of the success of each particular application of the company. The extent and the mix of applications vary considerably but in general, both the importance and the success of each specific application are highly rated by those with experience in ABC. The survey revealed that ABC is used for the customer profitability analysis (80%), for the service-mix (75%), for the performance evaluation (70%), for budgeting (60%), and for cost reduction. On the contrary, ABC information is used less for service design (45%), outsourcing decision (45%), and cost modeling (50%). Additionally, it is concluded that all the above applications were viewed by the managers, both in terms of importance and success. Service pricing, customer profitability analysis, service-mix decisions, performance evaluation, cost reduction, and budgeting are considered by ABC adopters to be more important and successful than service design decisions, output decisions, or cost modeling. In addition, the overall success of ABC was rated at 4.3 (on a 5-point
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Table 3 Overall and Specific Success Rating Association Linear by Linear Service pricing Cost reduction Budgeting Service design Customer profitability analysis Performance evaluation Cost modeling Output Service-mix 15.346 8.908 5.042 1.949 13.412 12.769 4.606 3.979 13.509 p Value .001 .003 .025 .163 .001 .001 .032 .046 .001 Rank 1 5 6 9 3 4 7 8 2

scale, where 5 = very successful and 1 = very unsuccessful), and the investment made in ABC has been beneficial to the operation of the firms. To explore the factors underlying these assessments, an examination was made of the association between the overall success rating awarded to ABC and the success rating given to the various individual purposes for which ABC has been employed. Table 3 contains the results. The test statistic focuses on the linear by linear aspect of the association and its use is broadly equivalent to, but more appropriate than, the correlation coefficient for ordinal data, which is the type of the data obtained from the Likert-type scales employed in these questions (Innes et al., 2000). The values of the test statistic indicate a high degree of association. The rank column indicates the relative strength of association for each individual purpose. Respondents associated overall success with service pricing, service-mix decisions, customer profitability analysis, performance evaluation, cost reduction, and budgeting and less with cost modeling and output decisions. The majority of the purposes were therefore seen as significant aspects of overall success except service design decisions.
Reasons for Rejecting ABC

According to the survey results, the most important reasons reported by the hotels that do no intend to implement ABC is the satisfaction with the existing cost accounting system (mean value = 4.41), the high cost of ABC implementation (mean value = 4.30), and the lack of top management interest (mean = 4). The majority of ABC deniers is persuaded for the ABC effectiveness and believes that ABC is appropriate for the hotel business (Table 4).
Characteristics of ABC Adopters and ABC Nonadopters

According to our data, there are statistically significant differences in cost structure as well as size, in term of sales revenue, between ABC adopters and ABC nonadopters. In contrast, the differences in capacity, in terms of number of beds, and in services diversity, were not statistically significant. Hotels that
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Table 4 Reasons for Not Considering Future Activity-Based Costing (ABC) Implementation Reasons for Not Applying ABC Satisfaction with the existing cost accounting system (N = 56) ABC implementation being associated with high costs (N = 56) Lack of management interest (N = 56) Lack of adequate knowledge for ABC implementation (N = 56) Lack of time to access ABC suitability to their company (N = 56) No persuaded about ABC effectiveness (N = 56) Lack of appropriateness to hotel environment (N = 56) Mean 4.41 4.30 3.55 3.39 3.05 2.21 2.15 SD 0.596 0.537 1.094 0.731 0.862 0.929 0.658 Minimum 3 3 1 2 2 1 2 Maximum 5 5 5 5 4 5 4

Note: The scale is 1 = totally disagree to 5 = totally agree.

use ABC have a higher percentage of indirect cost and higher sales than those that do not use ABC (Table 5). An important finding was that there are not statistically significant differences between hotels that apply ABC and hotels that do not, regarding their category (Pearson 2 = 3.950, p = .139), management status (Pearson 2 = 2.800, p = .247), and type (Pearson 2 = 1.09, p = .297).
CONCLUSIONS

The analysis of the survey data from 85 leading Greek hotel enterprises indicates that ABC diffusion in hospitality industry in Greece can be considered very satisfactory. In all, 20 (23.5%) out of 85 hotels that participated in the survey use ABC systems. This research reports higher adoption rates than the ones presented in previous studies in lodging industry (Tai, 2000). Our findings confirm the increasing ABC adoption rate in Greece in recent years (Cohen, Venieris, & Kaimenaki, 2005). The survey results, based on 20 hotels, demonstrate that the majority of the ABC systems in hospitality industry are not excessively detailed, as they include a small number of cost drivers and calculate the cost of a rather small number of activities, such as housekeeping, check-in/check-out, reservation, food production/service, marketing, and general administration. For the hotels using ABC, a wide variety of management accounting applications were apparent. On average six different applications were apparent and 55% (N = 11) of users make at least seven distinct uses of ABC. Thus, ABC has a practical impact, which covers the core of management accounting areas including service pricing, customer profitability analysis, service-mix decisions, performance evaluation, budgeting, and cost reduction with more than 60% use. Pricing decisions, customer profitabilityINST OF MGMNT on October 25, 2011 analysis, and service-mix decisions Downloaded from jht.sagepub.com at INDIAN

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Table 5 Differences Between Activity-Based Costing (ABC) Adopters and ABC Nonadopters Mean Rank ABC Nonadopters (N = 65) Sales revenue for the year 2005 40 ABC Adopters (N = 20) 52.75 MannWhitney U 455 Wilcoxon W 2600

p .043

Mean Value ABC Nonadopters (N = 65) Indirect cost to total (%) No. of beds No. of services variants 44.63 565.45 7.25 ABC Adopters (N = 20) 54.50 668.89 7.90 Mean Difference 9.77 103.44 6.38

t Value 5.907 1.219 0.65

p .001 .226 .525

applications of ABC have proved to be more popular among those who adopted it. This conclusion confirms the findings that appear in the literature that ABC can be effectively combined with the profitability analysis of the customer (Dunn & Brooks, 1990; Noone & Griffin, 1997, 1999). As might be expected, those adopting ABC considered that its application has been successful and important. Hotels consider that ABC can be successfully applied to service pricing, customer profitability analysis, service-mix decisions, cost reduction, and performance evaluation. An important finding of our research is that the perceptions of overall success of ABC are closely related to the success on specific applications, such as service pricing, customer profitability analysis, and service-mix decisions. This confirms previous research (Innes et al., 2000), with the difference that in this survey the perception for overall success of ABC was associated with service pricing, service-mix decisions, and customer profitability rather than cost reduction. This confirms the findings appearing in the literature that hotels are market oriented, and for this reason they focus on monitoring their revenues (Harris & Brown, 1998; Kotas, 1982, 1997). In other words, we conclude that hotels associate the use of ABC with their business orientation. The majority of ABC nonadopters in the Greek hospitality sector do not intend to implement ABC (ABC deniers), and only a few of them intend to implement it in the future (ABC supporters). The main reasons for not considering future ABC implementation are their satisfaction from the existing cost accounting system and the belief that ABC implementation means higher costs. We should note that ABC deniers disagree with the opinion that ABC is not appropriate for the hotel business, confirming the point INDIAN INSTby MGMNT on October 25,Cooper (1998) and made OF Kaplan and 2011 Downloaded from jht.sagepub.com at

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Berts and Kock, (1995) that ABC is ideal for service providers and marketoriented sectors. Furthermore, ABC adopters and nonadopters appear to be different in terms of cost structure and sales. On the contrary there does not seem to be any substantial differences as regards their category, number of beds, their type, management status, and the number of offered services. Several limitation of the research design followed in this study should be mentioned. First, as the sample selected was not random, the findings of this study should be interpreted as relating to the largest hotels, not to the general population of hotels enterprises. As size may be associated with the availability of resources to experiment with new accounting techniques, it is likely that the sample included a greater proportion of firms employing new management accounting practices than the total population of hotels. Second, this research was limited to the Greek hotel sector. The study contributed to the current knowledge in cost and management accounting practices in hospitality industry. It presents the current general trends in the practical consideration, adoption, and use of ABC in hospitality industry. In the future, the findings of this survey could be compared with cost accounting practices in the lodging industry in other countries. Also, the cost accounting systems of firms that use ABC could be studied in depth to examine the perceived benefits and problems from their implementation. Finally, the use of cost data (budgeting, decision making, and performance evaluation) by hotel enterprises could also be examined, to trace possible differences between firms that apply traditional and ABC systems.
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Submitted October 31, 2007 Final Revision Submitted February 18, 2008 Accepted Month 20, 2008 Refereed Anonymously
Odysseas Pavlatos, PhD (e-mail: opaulatos@gmail.com), is a Adjunct Lecturer in the Department of Accounting and Finance at Athens University, Athens, Greece. Ioannis Paggios (e-mail: pagso@unipi.gr) is a professor in Cost Accounting at the University of Piraeus, Piraeus, Greece.
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