The Holiday Hotel provides a recreation center for the use of its guests and employees. The center also sells memberships to people in the local community. The center has squash and racket ball court facilities, showering facilities, and a room with various types of exercise equipment. The courts occupy about 70% of the facility's floor space, the showering area 10%, the exercise room 15%. and the administrative offices 5%. In the long-run the hotel could convert unused facilities to additional lodging units. The center reports the following costs for the most recent year: 1. Assigned building depreciation and staff costs: $400,000. The depreciation charges amount to $250,000; the salaries of the manager and her staff amount to $150,000. Staff costs are independent of the level of activity in the recreation center. 2. Depreciation on the exercise equipment that are added as demand grows: $200,000. 3. Maintenance and electrical charges, which are thought to vary with the number of visitors to the center: $300,000. 4. Laundry costs: $300,000, comprising $50,000 of depreciation on the machines and $250,000 of supplies costs. 5. The cost of other supplies, which are consumed equally by all visitors to the center: $200,000. During the last year. there were 67,000 visits to the physical center. The capacity level of each of the showering. exercise, and court areas is estimated as 80,000, 40,000, and 25,000 visits per year respectively.

Required

(1) What is the cost per visit to the physical center?

(2) In the past, the costs of the physical center were charged to the various hotel departments, guest services, and outside business in the ratio 50%, 40%, and 10%. The idea of charging back to hotel departments is to recognize that the physical center is an employee-related cost. The idea of charging back to guest services is to provide information to support the calculation of cost per guest visit at the hotel. Costs were assigned to the unit relating to memberships with the expectation of covering out-of-pocket costs under the assumption that the facility was built for the use of the employees and guests. Some of the department controllers have complained about this practice and have argued that the charges to the departments should be based on use rather than on employee numbers. Moreover, some controllers have argued that it is unfair and unreasonable to charge all visitors the same. An audit of the centers use, which is thought to reflect average long-term use, suggests that about 25,000 visits were by employees and that 80% of them only showered; the rest used the exercise and court facilities almost equally and showered. About 15,000 visits were by hotel guests, virtually all of whom showered and used the exercise room. The remaining visits were from paid members, all of whom showered, and who used the exercise and court facilities almost equally. Based on this information, how should the costs of the physical center be assigned to the various groups?

Answer rating: 100% (QA)

Cost allocation Cost allocation is the assigning of a common cost to numerous cost obje... View the full answer