Custom essays on Principles of Accounting Allocation of Fixed Costs Module

In the contemporary business environment the allocation of fixed costs is very important because it helps to optimize the use of fixed costs and to plan the business development of organizations accurately. At the same time, the allocation of fixed costs depends on a variety of factors which may raise substantial barriers on allocation of fixed costs. In such a situation, companies need to develop effective strategies and approaches to allocation of fixed costs. In this respect, organizations need to allocate fixed costs accurately to be able to define how much financial resources are needed from the part of the organization to cover the existing expenses. In actuality, such companies as Kingston Hotels need to allocated fixed costs to maintain the existing facilities and buildings and maintain the facilities and infrastructure respectively to the company’s standards.
In this respect, it is possible to refer to the allocation of fixed costs in a hotel belonging to Kingston hotels. The hotel has forty suits, a restaurant, a parking slot, and a swimming pool. The company attempts to optimize the use of its costs focusing on the allocation of fixed costs spent on the maintenance of the building, facilities and infrastructure of the hotel. In this respect, it is primarily necessary to dwell upon the definition of fixed costs, the company spends on the maintenance of the hotel. First of all, the hotel has to maintain its suits. The maintenance of an average suit costs about $100 per month, whereas the four VIP suits costs the hotel $350 per months. The occupancy of the hotel rates from 60 to 75% per months, depending on the season and the current situation in the market. Therefore, the maintenance of suits costs the company $3,600 (36 suits * $100= $3,600) for standard suits and $1,400 (4 suits * $350 = $1,400) for VIP suits. At the same time, the maintenance of suits implies the employment of professionals who will maintain them. However, the costs of the labor force may vary and these costs are not necessarily fixed but rather depend on the individual contract of each employee with the Kingston Hotel.
Furthermore, the maintenance of facilities and infrastructure involves cleaning, including the cleaning of the pool located on the territory of the hotel and water disinfection. The costs spent on the cleaning of the hotel and pool are allocated and comprise $4,000 per month. The company can try to decrease the costs it spends on cleaning but, in such a case, the company will need to outsource cleaning services.
In addition, it is important to define fixed costs spent on the maintenance of security and safety of the building. Today, the hotel spends $2,500 on the maintenance of its security and safety systems. In such a way, the company can focus on the improvement of the security and safety system to save costs. For this purpose the company can develop the automation of its security and safety system. To put it more precisely, the company should introduce the system of video surveillance and automate the fire alarm system to minimize the potential risk to the property and health of clients and employees in case of fire.
Basically, the allocation of fixed costs needed about a week. In the course of the week the information on the current situation in the hotel was collected and analyzed. During the first and second day the information about the number of suits and the occupancy rate was calculated. To calculate the occupancy rate, annual reports of the hotel were used, where the information was collected and compared to assess the average attendance and occupancy of suits in the hotel. Hence, the average occupancy was defined. At the same time, annual reports provided the information on costs of maintenance of suits as well as cleaning services and security and safety maintenance of the hotel. The analysis of information concerning cleaning services and security and safety systems of the hotel took two more days. The next two days were spent on calculation of fixed costs of the company, whereas the last day was dedicated to the elaboration of recommendations to the company specifically.
Eventually, the following recommendations were developed. First, the company needs to optimize its suit maintenance costs focusing on the maintenance of the 75% of suits clean and ready to accept clients, whereas the rest 25% could be stored in reserve with limited spending on the maintenance because they are not used actively by clients. Furthermore, the company can implement the automation of security and safety that decreases costs on the maintenance of these systems. Finally, the cleaning services can be outsourced and the company will be able to save costs for it will not need to employ the personnel working in the field of cleaning services.
Thus, in conclusion, it is important to stress the prospects of optimization of costs due to the allocation of fixed costs and their reconsideration.