Fixed Cost and Variable Cost In Hotels

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Fixed Costs Vs Variable Costs

Fixed costs and variable costs are two important concepts in the hospitality industry, particularly in hotels. Fixed costs refer to expenses that remain constant, regardless of the level of business activity.

Examples of fixed costs in hotels include rent, salaries, and insurance. On the other hand, variable costs are expenses that fluctuate with the level of business activity. Examples of variable costs in hotels include utilities, housekeeping supplies, and food and beverage costs.

What are the Fixed Costs and Variable Costs in Hotels?

It is important for hotel managers to understand the difference between fixed costs and variable costs, as this knowledge can help them make informed decisions about pricing and cost control. For example, if a hotel is experiencing low occupancy, managers may consider reducing variable costs such as housekeeping supplies and food and beverage costs to keep expenses in line with revenue. Alternatively, if a hotel is experiencing high occupancy, managers may focus on increasing revenue by adjusting pricing strategies.

The terms Variable costs and fixed costs in hotel operation are used to distinguish between those costs that have a direct relationship to Hotel occupancy and those that have no relation to occupancy and business.

Fixed Costs: Fixed costs are normally not affected by changes in occupancy or sales volume. They are said to have little direct relationship to the business volume because they do not change significantly when the number of sales increases or decreases.

The term fixed should never be taken to mean static or unchanging, but merely to indicate that any changes that may occur in such costs are related only indirectly or distantly to changes in volume.

Examples of Fixed Costs in Hotels:

  • Land, Building Taxes to government.
  •  Wages to employees.
  •  Hotel employee’s health premium.
  •  Outsourced services contracted for a fixed amount in a month eg:- security services.
  •  Yearly maintenance contract fees ( AMC ) for all equipment, machinery, and Hotel Management software.
  •  Fixed internet, and telephone plans.
  •  Advertising cost.
  •  Yearly external auditing cost.
  •  Payroll.
  •  Provision.
  •  In-house moves/satellite TV.
  •  Music entertainment.
  •  Reservation expenses.
  •  Subscription – Newspaper, magazine, etc.
  •  Human resources.
  •  Sales & marketing.
  •  Interest on loan.
  •  Other fixed charges etc.

Variable Costs: Variable costs are related to hotel occupancy and business volume. As business volume or occupancy increases, variable costs will increase; as hotel occupancy decreases, variable costs should decrease as well. 

Examples of Variable Costs in Hotels:

  • Food, beverages, housekeeping cleaning supplies.
  •  Flower arrangements.
  •  Guest room amenities.
  •  The guest room, restaurants, and banquets are linen.
  •  Banquet HVAC costs.
  •  Stationeries used at the Front desk and restaurants.
  •  Chemicals for laundry and water treatment plants.
  •  T/A commission.
  •  Flower & decorations.
  •  Guest supplies -amenities.
  •  Guest relations.
  •  Laundry operations.
  •  Laundry Uniform.
  •  Printing supplies.
  •  Entertainment.
  •  Telephone & Fax.
  •  Transportation.
  •  Other operating supplies.
  •  Administration & General.
  •  Human resources.
  •  Sales & Marketing.
  •  Management Fees etc.
By carefully managing both fixed costs and variable costs, hotel managers can ensure that their businesses operate efficiently and profitably. This requires a deep understanding of the business and the ability to make data-driven decisions based on key performance indicators. With the right approach, hotels can thrive in even the most challenging economic environments.
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