Short Term Rental Pty Ltd (STR) manages short-term rental accommodation properties on behalf of owners. Initially, it started managing small city apartments but has recently expanded to include holiday homes in coastal destinations. The expansion to include holiday homes is mainly a result of an increasing level of competition amongst similar service providers.

STR communicates with guests to ensure their needs are met and cleans the properties at the end of each stay. The costs of communicating with guests and cleaning are currently classified as indirect costs and allocated to each property using a single allocation base – i.e., the number of bookings. In other words, if STR serviced 10 bookings for a particular property (X) out of a total of 50 bookings over the same period, then 20% of its indirect costs (i.e., costs of communication and cleaning) would be allocated to property X.

STR's indirect costs have recently increased significantly, in line with rising guest expectations on the level of service they should receive from the property owners.

STR is considering if it should move away from using a single allocation base (number of bookings) to an Activity Based Costing (ABC) system to allocate its indirect cost to each property in its portfolio.

Which of the following statements about STR and indirect cost allocation system is/are likely to be true?

1. STR is more likely to adopt ABC as the level of competition in its industry increases
2. STR is more likely to adopt ABC following its expansion to include holiday homes in its property portfolio
3. STR is more likely to adopt ABC following the recent increase in the total indirect cost it incurs to service its clients’ property

A. Statement 1 only

B. Statement 2 only

C. Statement 3 only

D. Statements 1 and 2 only

E. Statements 1, 2 and 3

Which is the correct answer choice?

Answer rating: 100% (QA)

The correct answer is E Statements 1 2 and 3 STR is more likely to adopt ABC ... View the full answer