CHAPTER ONE

INTRODUCTION

 1.1    BACKGROUND STATEMENT

The hotel and catering industry is a substantial one in many countries it is the largest industry in the United States; the fourth largest in Great Britain. In France, Belgium and Eastern Europe, the industry occupies a large segment in the circle of business and economic activities. In Africa and other parts of the developing world, taking Nigeria for instance, the hotel industry which developed lately is fast growing into an enormous size and invariably, a standard hotel can almost be seen in every state of the federation. It consists of hundreds of hotels restaurants pubs and industrial canteens, all within the industrial and welfare sectors of the economy.

          Taken as a whole, the industry is an important employer of labour. In Nigeria, its total labour force during a season is approximately two hundred and fifty thousand (250,000). The turnover of hotel and catering establishments in this country is well over N5 billion. Thus, from humble beginnings in the relatively recent past, the industry has moved to a position of undisputed importance in the national economy.

Yet, there is no doubt that inspite of the prime economics position; the industry lags behind in business methods generally, and in accounting and control procedure in particular. While various firms in other industries may adopt efficient and remarkable cost control measures, the hotel industry operates in an environment of complete cost incurred in a hotel is fixed and uncontrollable. Thus, what may be applied to other industries as acceptable accounting and control procedures may need special modification and adaptation to the industry norms.

Every firm in any industry attempts in one way of the other to control its cost to suit standard set.

In the hotel industry, standards are set based on historical cost data. It lies on the hotel manager and cost controller to ensure that cost do not vary widely from the standards. However, cost control in a hotel industry is a herculean task.  This is because the greatest percentage of the hotel cost incurable in any given firm in the industry consists of fixed and semi-variable in components which are more or less uncontrollable.

BRIEF HISTORY (BACKGROUND STATEMENT)

ROESBOOM HOTEL LTD

The hotel is situated along Oron Road, opposite Mobile Airstrip, Eket. It was established in October, 2003 by Engineer Joseph Okpong Etukudo an Architect with vast experience in hotel management. It inception recorded thirty (30) staff including the manager, supervisor, account clerk, a driver, housekeepers, cooks, waiters, waitress, security officers etc.

As part of the tourism industry, it was registered with the ministry of trade, industry and tourism and company and Allied Matter in 2004. Between 2003 and 2011, the hotel had changed its management twice. This was due to incompetency and economy meltdown that was experienced by all sections of the economy.

It is worthy to note that due to the re-arrangement that took place, Roseboom is truly a resort centre. This researcher was taken round to different departments like –Restaurant, pool bar, store, cafe, accounting office, housekeeping laundry and the kitchen sections for the purpose of this project work.

DIAMOND PALACE HOTEL LTD

This hotel was founded in February, 2005, with a staff population of twenty (20) by Chief Kingsley Etop Mbre, an experienced businessman as Managing Director. It is situated along Akai Nyoho Street, off RCC Road, Eket. A registered hotel in 2005 with the Ministry of Trade, Industry and Tourism and Company and Allied Matter in compliance with the provisions of section 35 (6). The industry is proving its objective as well as its profitability due to the enforcement of cost control technique as expressed by the management skills.

In the course of this work, many areas in the hotel were exposed to the researcher to aids in his research work. It is a recreational home indeed.

1.5     RESEARCH PROBLEM 

The hotel industry has some special characteristics which are inherent in its operations and from which enumerate those problems which are peculiar to it. First, there is instability in sales resulting from fluctuations which occur daily, weekly and annually, secondly, most firms in the industry have a high proportion in fixed and semi-variable costs which are more or less uncontrollable. The fixed cost of the hotel include those cost

Which do not change irrespective of the level of sales? They include: salaries of administrative staff, supervisors, account clerks, rents, rates, insurance, etc.

The semi-variable costs are those which remain fixed for a certain level of sales and vary later as sales increases. They include: electricity costs which remain fixed when there are little or no sales to maintain food and beverages storage temperatures and increase as patronage increases for  rooms and restaurants sales. Other semi- variables cost involve labour cost which remain fixed for a normal level of patronage  but increases when casual staff are hired in times of unexpected patronage.

Moreover, the nature of the products of the industry is different from those of other industries. While products of a manufacturing firm can be stored and sold at an increased price during periods of inflation, a prepared hotel room which has not been sold is an irretrievable loss since cost are continuously incurred as long as its remain unsold. Similarly, food that is prepared has a limit of time to which it can be preserved. Many hotels in the catering industry are struggling to maintain earnings in a situation which costs are rising but levels of patronage are making tariff become more and more difficult to obtain. Proliferation of hotels which

have a high level of competition as well as governmental influence put serious constraints on price increases. To maintain earning in the face of these conditions, emphasis is placed on cost reductions and controls, waste eliminations and consequent increase in productivity.

It is in view of the above, that the following problems are stated:

(a)     Can cost be controlled effectively in the hotel and catering industry?

(b)     Does effective cost control increases the profitability of a firm in the industry as measured by the net profit margin?

1.3     OBJECTIVES OF THE STUDY

The objective of any cost control process is too measure and attain a high level of efficiency and make room for a constant review of methods employed in production. When cost standards are from historical cost data, it is necessary that actual costs incurred is monitored and controlled, and any variances arising from actual operations analyzed for effective planning, control and co-ordination.

The effect of control is to ensure that profit is not reduced by wide-and upward variations in actual costs. Consequently, when costs are controlled within standards, profitability tends to increase.

The objectives of the study therefore are:

(a)     To identify the various causes of variations between actual and standard costs as applied to the hotel industry.

(b)     To establish a relationship between costs and profits

(c)      To identify, weakness of effective cost control in the industry with the view to making adequate recommendations.

(d)     To determine the effect of cost control on the profitability of the hotel establishment.

(e)      To contribute to existing literature on the subject matter.

1.4     RESEARCH HYPOTHESIS

The cost of production in any given firm is invariably proportional to its profit. In other words, the higher the cost incurred, the lower the profit and vice-versa.

Consequently, effectiveness of cost control procedures aim at bringing cost low and with such standard as have been set prior to operations. The hotel industry operates at a very high proportion of fixed and semi-variable cost components which are more or less uncontrollable. How then can such cost are tailored with the pre-determined cost. What is the relationship of these costs to the profitability of a hotel. This study, for purposes of effective cost control and analysis test the following hypothesis.

(i)      Ho:    Effective cost control in the Hotel industry does not increase profitability as measured by the net profit margin.

          Hi:     Effective cost control in the Hotel industry increases profitability as measured by the net profit margin.

(ii)     Ho:    Profitability is not dependent of cost control.

          Hi:     Profitability is dependent of cost control.

1.5     SIGNIFICANCE OF THE STUDY

The significance of this study lies in its objective. It had long been the desires of various experts and enthusiasts of the catering industry to adopt an effective cost control procedures suitable to meet with the peculiarities of the industry. The findings of this research will be helpful to hotel proprietors as well as other investors and/ or potential investors and hotel (managers) in maintaining an effective cost control procedure. The findings of this study will also assist further research on the subject as a reference point. Finally, operators of other business in other sister industries will find the output of this project invaluable for possible adapting to their own practical situations.

1.6     SCOPE OF THE STUDY

The study covers the cost control systems of two standard hotels in the industry. The analysis, when made would involve a review of an existing system, identification of problems, critical analysis of the system, modification of the existing system through recommendations and comments. The study will not create a theoretical system nor advocate for a non-practical approach to problem solving.

The creation of a costing system is outside the scope of the study. However, the author will tap his academic experience when solving practical problems presented by the study.

1.7     LIMITATIONS OF THE STUDY

The scope and coverage of this study could have been wider if not for a few constraints, some which are outlined below:

TIME:

 This appears to be greatest constraint. While the research was battling with the project, other class assignments contested for their shares of the time. The dearth of time available had to apportion between academic work, family commitments and the series of appointments at Diamond Palace hotels and Roseboom Hotels. All this engagements made time a major constraint.

DEARTH OF LITERATURE:

There has been the inherent problem of literature in the hotel industry, especially in Nigeria. This is because it is a field where many people involved are trained professionals who have little or no time to put down their experience in black and white. Again there is this high cost of publishing.

Thus, the researcher had to source majority of his data from primary sources.

THE ENVIRONMENT:

The research project needs facts and figures as inputs. Unfortunately, most establishments’ approaches were skeptical in releasing information. This constraint slow down the pace scope of the study and forced the researcher to seek informal sources of data collection.

COST CONSTRAINTS:

The cost of data collection was the heaviest burden that pulled this research down. Costs here include transportation cost of shuffling between different hotels and catering homes apart from those of the case study for search of secondary data. Again the cost of stationary now is nothing but discourage to potential researchers.

However, it is worth to note that the above constraint did not invalidate the result of this study. I am glad that in the midst of these hitches, something worth presenting was done.

1.8     DEFINITION OF TERMS AND ACRONYMS

The following concepts are defined for the purpose of this study.

STANDARD COSTS:

Standard cost have been defined by Scott (1961) as the normal cost for both individual orders and for processes and the business as a whole for normal production efficiency at a normal or planned level of output.

          Batty (1975) defined standard costs as a pre-determined estimates costs based on normal historical data. Such cost may be regard as the true or real cost of the product concerned.

However, the concept of a normal standard cost is in many cases, purely theoretical, and in practice would be very difficult to apply. For purpose of this research, a standard cost is a type of predetermined cost, computed before production takes place.

ACTUAL COSTS

As the name implies, actual cost are those costs which are actually incurred from the production process. They differ from standard costs because they are not known until the production cycle is completed.

VARIANCE:

A variance is the difference between the standard or predetermined cost and the actual cost. Such differences arise from the fact that planned costs may be affected by certain production failures or their factors beyond the scope of this work. Variance should be analyzed for purposes of planning, co-ordination and control.

          Accounting for variances is not a major part of this study, it is worthy to note that variances are either absorbed as part of the hotel cost or production or written off as expenses in the profit and loss account

FIXED COSTS:

Fixed costs are those which do not vary with the level of output. They remain fixed in the short run and must be incurred whether the firm is in operation or not. At a unit level, however fixed cost can vary. Fixed costs are not controllable.

VARIABLE AND SEMI-VARIABLE COSTS:

Variable cost on the other hand change with t he level activity. They vary in direct proportion with the volume of output. At the unit level, they are fixed. Semi-variable cost are those element of costs which partly fixed and partly variable. At a certain level of output, they are fixed and vary later as output increases. In cost analysis, the variable elements must be

Separate from the fixed, variable costs are controllable and in this study we shall be concerned with them.

CONTROL:

Control is a managerial activity comparing actual output or performance (or cost in this case) with predetermined or planned situations; and analyzing any differences for purposes of managerial corrective actions and co-ordination. Cost for control purposes must be identifiable with people and therefore are accounted for by areas of responsibility, such as departments. Any costs, standing by itself, are not useful for control purposes. There must be an object and/ or basis for comparison.

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