COST VOLUME PROFIT MODEL, THE BREAK -EVEN POINT AND THE DECISION MAKING PROCESS IN THE HOSPITALITY INDUSTRY

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1 COST VOLUME PROFIT MODEL, THE BREAK -EVEN POINT AND THE DECISION MAKING PROCESS IN THE HOSPITALITY INDUSTRY Brcu Sor Uversty December 1st, 1918 Alba Iula Faculty of Sceces Scor e Carme Uversty of Oradea Faculty of Ecoomcs Maagemet accoutg ad cost calculato the hosptalty dustry s a pathless lad. The prezet artcle s a startg pot of a log scetfc approach o the doma of the hosptalty dustry ad o the maageral accoutg ths area. Our teto s to put the spot lght back o the thory problem of applyg Facal Accoutg ad specfcally ts mplemetato the hosptalty dustry. Oe am of ths artcle s to provde a pcture of CVP aalyss decso makg wth customzg the hosptalty dustry. To cope wth the crss perod, the competto ad to acheve the expected profts of the hosptalty dustry,maagers have the possblty to apply CVP aalyss, oe of the most smple ad useful aalytcal tools. Ths paper wll address the basc verso of the CVP model, exemplfyg the ma dcators of the partcular model for the hosptalty dustry that ca help gude decso-makg. Keywords: CVP model, Break-eve pot, hosptalty dustry JEL classfcato M41 Itroducto Hosptalty dustry s oe of the most dyamc sectors of cotemporary socety wth a creased role the globalzato process. Toursm s a ecoomc ad socal pheomeo characterstc of moder cvlzato, very rooted socety ad therefore strogly flueced by ts developmet. Addressg the large socal segmets ad respodg to ther eeds, toursm s by far a ecoomcal sector characterzed by a creasg dyamsm, mafested both atoally ad teratoally. Toursm rses to a vast huma ad materal potetal due to ts cotet ad complex character table, whch has mportat mplcatos for the developmet of atoal ecoomes ad socety. Toursm s a factor dvdual ad socal equlbrum, a source of fulfllmet for lesure tme, developed harmoy wth the huma evromet, atural ad cultural resources to be placed a cotext of sustaable developmet Takg cout of from the mportace of toursm, the developmet prospects of the sector but gve the curret cojucture ad atoal ecoomes affected by global ecoomc crss, mateace ad developmet of hosptalty dustry busess etty requres harmozato of resources ad market opportutes wth ther sklls, foudato strateges cost formato based o toursm products ad servces addtoal formato o accouts, but takg cout of the compay's capabltes ad balace wth the evrometal codtos. Lack of coheret maagemet strategy volves a weakess heret the maagemet system beefts of provdg costs. Awareess of beefts of provdg qualty servces related to the rght level of prces s ot a commo practce today Summary of processg of cogress BITS, Naples, jue 2000, over of Theoretcal ad Appled Ecoomcs. Suplmet ma 2009,Bucharest, pg

2 The toursm sector, regardless of market structure of terest covered by a ecoomc etty (recreato ad lesure toursm, spa toursm, busess travel, toursm crcumstace), key factors of success are: -Dfferetatg ther products from those of compettve terest a more attractve evromet afforded so, but ot least your ow offer compettve prce / qualty rato. I Romaa, because t appled the wrog polcy the hosptalty dustry o prce qualty rato, the effects of polces curretly exst through a customer oretato to market massve exteral terest; -Dversfcato ad complemetary tourst servces ad submsso of tegrated products the same package to esure all facltes durg the stay; -Flexblty ad adaptablty of supply to demad treds -Steady ad sustaed promovato of they're products o the market, hghlghtg the defg characterstcs that dstgush them from the competto. Theoretcal framework for the drect method ad CVP model Drect Costg method s based o the prcple of separatg varable costs from fxed costs accordg to behavour chage producto volume, ad s chargg oly varable costs o products whether they are drect or drect. Orgally, Drect - Costg `s cost s composed oly of the total costs that chage drectly wth output (actvty level) ad ot from drect costs as we could wrogly uderstad deducg from t s ame. Thus, the ame that best matches the Aglo-Saxo expresso s the "varable cost method" 564 or "varable costg". Frech Accoutat Geeral Pla 1982 also used the ame "proportoal cost method ad some authors detfy ths margal cost calculato method. 565 Costg provdes relevat formato for the maagemet team, ad s useful formulatg ecoomc etty's busess decsos for the ext perod. Ths method wll provde a bass for cost estmates to study the effects of plaed chages producto volume, resultg from chages ecoomc codtos or ope some maagemet actos such as prce chages, crease or decrease stocks or specal promotoal actvty. 566 So the method focuses o boostg sales that sze does ot allocate fxed costs o vetory (ufshed products, fshed products), but must be covered by the sales of the perod.. Also the emphass s o aalyss ad attrbuto of the fxed costs ad attrbutg the varable costs o the marg (gross).the maager has the oblgato to retur ad maxmze marg o varable costs over whch fxed costs wll be charged.the marg o varable costs (M / CV), also called gross proft or cotrbuto lmt s determed as the dfferece betwee gross turover ad varable costs assocated wth the etre producto sold. The marg of varable costs s alsow called the global marg ad t s the sum total margs o varable costs per product ut set (m / cv) multpled by the assocated producto sold. The ut marg ca be determed as the dfferece betwee the sellg prce ad the ut varable cost of product j. M/Cv= CA CV ; CA = Qv pv ad CV = Qp cv => R = Qv ( pv cv) CF Iformatoal value of the margs decso-makg s subject to the followg factors: - Dvdg the fxed costs ad varable compoets must be far ad cosstet; 563 Larsa Dragolea, Radu Mate Todora, Esurg the qualty of servces by makg costs effectve the maagemet of rural tourst boardg houseswork prezeted at the Iteratoal Scetfc Coferece "Challeges of a kowledge-based ecoomy cotmporae II-d Edto, ICMEA, Alba Iula, Sor Brcu, Theoretcal ad practcal maageral accoutg. Publsher: Edtura Ecoomc, Bucure t, 2006, p Dora Buduga, Iulaa Georgescu, Ioa Berhec, Leota Be au, Maagemet Accoutg, Publsher CECCAR, Bucharest 2007, p 358 (ctato after Lucey, T., Maagemet Accoutg, 3 rd Edto, D.P. Publcatos, Lodo, 1992). 566 Sor Brcu, ctato pag

3 - Ratoal use of uform margs (gross cotrbuto per ut) establshed as a bass for decsos the sales polcy, ths requres costat varable costs per ut of product; - For decsos regardg the selecto of the producto processes, the possblty of establsh varable cost (margal) referece costat ut cost of places s requred - Turover, varable costs ad the marg o varable costs, are three major dcators used by the Drect - Costg method, they behave proportoal wth the quattes sold. Assumg that the sale prce s remas costat throughout the perod wch tje aals s made, we could cosder that the busess marg ad varable costs behave proporto to the turover. 567 O the bass of the margs calculato we ca establsh wch of the products maufactured ad sold s able to cover the resume ad esures partcpato CF, ad whch product s usutable ad produces loss to the compay. Each product s judged by ts ablty to cover o-dstrbuted costs (fxed costs). The maagemet team of the etty ca decde to stop producto of goods whch have produced loss to the compay. The decso must be take to accout f the product ca help to esure the dssoluto of other products, or f there s a ew product whose maufacture ad dsposal has good prospects to crease proft 568. We beleve that the hosptalty dustry we ofte fd stuatos where a product codtos or cotrbutes to the dssoluto codto for others (demad for accommodato s codtoal upo the exstece caterg ut, or the exstece of bases for treatmet ad etertamet brg a sgfcat cotrbuto to the crease of outlets for lodgg). Ths way of approach allows cosderg whether to remove or develop oe or other product sales. But the ratoale for decso makg must aalyze several factors, ot just gross cotrbuto absolute sze. A powerful tool of aalyss based o Drect Costg s the Cost-volume-proft aalyss, oe of the most effectve tools that maagers of a ecoomc etty dspose of. Cost-Volume-Proft exames the behavor of total reveue, total costs ad results of operatos uder the fluece of chages producto volume, sellg prce, fxed costs or varables costs. Maagers routely use CVP aalyss to aswer questos such as: How wll the total costs ad reveues be affected f we sell 1000 uts more tha usualy? How wll the producto level be affected f you rase or lower the sales prces? All these questos have a commo topc: What would happe f...? 569 The CVP model proposed calculato ad aalyss of several dcators that wll provde decso facets for the maagemet team of specalzed ettes the hosptalty dustry, formato regardg the decsos of 'producto' of products or packages ad short term promoto. Cost calculato drect-costg system should be orgazed to provde data to eable decsos based o margal cost ad coverage cotrbutos 570 but also o other dcators (break-eve factor coverage, rage safety, etc.) The CVP model ad decso makg As we metoed before, the CVP model aalyzes the evoluto of total reveue, total costs ad operatg proft as are chages producto levels ( the geeral ecoomc actvty), the sellg prce, the ut varable cost ad / or fxed costs of a product. From practcal work we could fd that the eve the easest CVP aalyss s useful makg decsos regardg strategc plag ad offers, regardg the features of the toursm package products, prces ad tarffs offered. 567 Carme Mhaela Scorte, Iteral accoutg maagemet, Publsher: Edtura Uverst d Oradea, 2005, pag Brcu Sor, Maagemet asssted by cost calculato, Publsher: Rsoprt, Cluj Napoca, Charles T.Horgre s colectv,costurllor accoutg, a maagemet approach,publsher:arc,2006,pg Klaus Ebbeke, Ladslau Possler, Mha Rstea, Calculato ad cost maagemet, Publsher: Teora, Bucharest, 2000, pg

4 Competet ecoomstes say that order to mprove the performace of a ecoomcal etty geeral, ad to partcularse, we wll take the exemple of those from the hosptalty dustry, oe of the frst actos should be take to mprove orgazatoal culture. If you have a culture that s ot cocordace wth the cost maagemet ad cost structure, or f you do ot pay atteto to the cost structure, you ever get the results you wat 571. For the test result to be relevat we should take cout of a seres of costrats ad lmtato that have determed umerous crtcs from supporters of other deologes. These restrctos clude: kowg the exact cost behavor, relevat actvty wth the beach, all costs ca be separated to fxed ad varable costs, the aalyss does ot exceed the rage of actvty; varable costs that make the cost to grow proportoally wth the output producto fabrcated ad sold; put prces due ot chage durg the perod, so that approprate costs record the progressve developmet of foreg busess volume varato; producto processes should be defed, kow ad ot subjected to chages durg the perod of aalyst, the stuato of obtag more products t s requred to observed ad detfcate: terdepedeces betwee products, dffcultes product sales ad ther quatfcato as a lear depedecy. Ths type of aalyss comes from the ecoomc theory of costs, preseted Fgure 1, Graph o whch cost accoutg aalyss (Fg. 2) s a specal case of the graph show Fgure 1. Fg.1: Ecoomc reasog of the cost-volume-proft aalyss Fg. 2:Accoutg ratoamet of the cost-volume-proft aalyss OA: total costs exceed the reveues, the compay s workg loss, sce producto capacty s fully used (to produce fewer products tha s possble); AB: reveues exceed the costs (the proft), producto capacty s used at a ormal level BC: reveues exceed the costs (the loss). Producto capacty s overloaded, producg more equpmet tha they were desged to do, there are breakdows. Bascally, the ecoomc model shows that there are two equlbrum pots, B ad C. Istead, the accoutg model presets oly oe (pot E). Accoutg model s oly a short-term pcture of ecoomc model s based o the cocept of "relevat perod" ("relevat rage"), traslated lterature as a perod of valdty of the assumpto of learty. Maagers the hosptalty dustry cosder that the prce competto ths area has the largest share a fxed cost. The ssue wll be at what level of "producto" the hosptalty dustry wll the fxed costs be fully covered. The quatty of producto sold for wch the total reveues equal total costs s called break-eve, other words, t reflects the amout of producto sold so that the operatg proft s zero. The maagemet team of ay etty s terested the break-eve as t reflects the mmum quatty of producto that must be sold order to ot record losses. 571 Aderso T, Elloum F. Theory ad Practce of Ole Learg, Athabasca Uversty, 2004, p

5 To determe the break-eve (pot of equlbrum crtcal pot) the equato method s based o the formula s the result of whch operate uder: RBE = CA-CV-CF ad f CA = q p ; CV = q cv => RBE = q ( p cv) CF If the equlbrum gross operatg result s zero prevous equato becomes: q(p cv) = CF ad producto volume to acheve equlbrum pot s q=cf/(p-cv). But the hosptalty dustry as we sad, most of the costs are fxed, ad "producto" for housg uts correspods to the maxmum accommodato. Therefore we thk t would be approprate to calculate the pot of balace for each resposblty ceter or to calculate the pot of equlbrum theory reportg the fxed costs to the average gross cotrbuto. P = et CF / c bu cbu = ( Qv c ) / Qv = Cb bu totala / Qv = 1 I the gve codtos whch a ecoomc etty obtas ad sells more products (such as travel ad establshmets) the breakeve structure s relevat. To get ths structure t s ecessary to calculate the volume of each bearer share the total producto cost, a dex called specfc gravty. P = gs e ad gs = Q The margal cotrbuto method s a varat of the prevous method ad we beleve that the balace pot s the turover value for whch the fxed costs are equal to the total cotrbuto marg o varable costs (mv). The ut marg o varable costs expresses creased proft eared by sellg each addtoal ut of product. Thus, t wll help cover the loss curred by the etty utl t breaks eve, tme, each addtoal ut sold wll crease profts. Ths affrmato holds a truth as log as the etty does ot exceed the floor for whch the fxed costs were determed 572. Gve that the equlbrum outcome s 0 value we ca determed that the turover achevg breakeve turover called crtcal or break-eve moetary uts accordg to the formula: R C P et V / = 1 = 1 CA * = CF / ad R = MV / CA 100 C or R = Cb / CA 100 But the fxed costs are relatvely costat, so the gross operatg marg result wll chage accordg to the varable costs per ut of product (mv) ad by chagg the quatty sold. The marg o varable costs (gross cotrbuto per ut) s calculated as the dfferece betwee sellg prce ad ut varable cost ad wll cotrbute maly to cover fxed costs whch rema relatvely costat the rage establshed ad the cover up the proft or loss. The break-eve ca be used to determe the physcal volume of actvty so as to acheve a proft (P) ) 573. Calculato formulas: I physcal uts Pr P = ( CF + P) / CA ; I moetary uts CAP = ( CF + P) / Rc Wth the pot of balace or breakeve we ca calculate the turover requred to acheve a certa rate of proft (proft / sales). If the maagemet team of a ecoomc etty ams to acheve ad mata the eterprse to a certa rate of proft, he may fd that usg the break-eve volume of actvty that esures t. The calculato formula s: CA RP = CF /( Rc R P ) I the CVP aalyss other dcators such as: coverage factor, dyamc factor of safety, rage safety, dex samplg rate volatlty ad operatg leverage should be take cosderato as beeg of a sgfcat mportace. The coverage factor (Fa) shows how may percetes of the sales volume are eeded to cover the fxed costs ad obta proft. Ettes the hosptalty dustry eed to focus they`re C totala Q V = Nada Albu, C t l Albu, Performace Maagemet Tools, vol 1, Publsher: Edtura Ecoomc, Bucharest, 2003, pg Chra a Caraa, Mhaela Dumtraa, Accoutg ad Maagemet Cotrol, Publsher: IfoMega, Bucharest, 2004, pg

6 maufacturg ad sellg polcy wth the hghest coverage factor. Based o the coverage factor they ca alsow calculate the sellg prce ad the maager ca take quck decsos ad prcg polcy. Dyamc safety coeffcet (Ks) shows how the reveue may decrease relatve so that the etty ca reach the equlbrum pot. Ay decrease ths rato meas that the etty s abaut to eter to losses. The rage of safety (IS), also kow as dstace or safety road shows how much ca the etty afourd to decrease t`s sales so that the ut does ot eter the area of facal losses. Samplg dex (PI) defes the percetage of turover used to cover fxed costs, the compay reaches break-eve easer the lower ts value s. The purposes of ay actvty s to maxmze the results by submttg a mmum of effort. Extet of such actvty s the operatoal lever (Lo), whch expresses how the assumpto of fxed costs cotrbute to results. Ths dcator`s value grows as the relatoshp betwee fxed ad varable costs s hgher. Coclusos Gve the chagg ladscape, the hosptalty dustry s characterzed by a domat compettve logc, assumg a clear compettve advatage. There are several ways to create value, so there are may forms of compettve evromet that have ther ow rules. After detfyg the compettve logc, the ecoomcal etty ca adapt ts strategy a effectve mode, Maagemet accoutg helps maagers the hosptalty dustry to orgaze exstg ad future busesses so as to assess, motor ad maage the future of the busess ad everythg related to ts ecoomcal stablty. As t has bee already metoed, CVP model allows the calculato of dcators for facets of decso-makg, beeg usefull to the ettes of the hosptalty dustry,these dcators provde formato o producto decsos, sellg, short-term promoto. Each of these dacator s partcularly mportat, helpg short-term maagemet decso makg, therefore we propose to aalyze ther fluece ad utlty future scetfc research. Bblography 1. Albu Nada, Albu C t l, Performace Maagemet Tools, vol 1 s 2, Publsher: Edtura Ecoomc, Bucharest, Brcu Sor, Theoretcal ad practcal maageral accoutg. Publsher: Edtura Ecoomc, Bucharest, Brcu Sor, Maagemet asssted by cost calculato, Publsher: Rsoprt, Cluj Napoca, Buduga Dora, Georgescu Iulaa, Berhec Ioa, Be au Leota, Maagemet Accoutg, Publsher: CECCAR, Bucharest 2007, p Caraa Chra a, Mhaela Dumtraa, Accoutg ad Maagemet Cotrol, Publsher IfoMega, Bucharest, Dumtru M d la, Calu Daela Artemsa, Maagemet accoutg ad cost calculato, Publsher Cotaplus, Ploest, Ebbeke Klaus, Possler Ladslau, Rstea Mha, Calculato ad cost maagemet, Publsher Teora, Bucharest, Epura Mhal, B b t Valera, Grosu Cora, Accoutg ad Maagemet Cotrol, Publsher Ecoomc, Bucharest, Horgre Charles T, Datar Srkat M, Foster George, Cost accoutg a maageral approach, Publshe Arc, Horgre Charles T, Foster George, Datar Srkat M, Cost Accoutg, Publsher Pretce Hall

7 11. Kapla, Robert S. ad Brus, W. Accoutg ad Maagemet: A Feld Study Perspectve (Harvard Busess School Press, 1987) 12. Mocarz Elsa S., Nestor De Portocarrero, Nestor de J. Portocarrero, Nestor De Portocarrero, Accoutg for Hosptalty Idustry, Pretce Hall, New York, Scor e Carme, Iteral accoutg maagemet, Publsher: Edtura Uverst d Oradea, Tabara Ncula, Accoutg ad Maagemet Cotrol, Publsher: Tpo Moldova, Ias, Tabara Ncula, Horomea Eml, Mrcea Mrela Crsta, Iteratoal Accoutg, Publsher Tpo Moldova, Ias, Weetma Paule, Facal ad maagemet accoutg, Pretce Hall, New York,