Cost Structure Of The Airlines Industry Harvard Case Solution & Analysis

Answer to question no 1:

The objectives of airlines cost accounting system

The objectives of airlines cost accounting system is the general concept of cost accounting systems. Integrating efficient cost accounting systems into the operations of the company provides the management with complete insight regarding the summarized expenses, analyzing expenses and reporting information about the business.

The management needs to know about the major costs that affect the business. For the purpose of analyzing cost efficiently and effectively, the management distributes the cost into fixed and variable costs. The management’ subjective is to decrease the fixed costs of the company so that they can make more profits even when their sales are low and vice versa.

Analyzing cost accounting system helps management to identify unnecessary costs and to eliminate such cost to make the entity more cost effective in their operations.After analyzing the cost accounting system, reports are made on the feasibility of the costs incurred; all the unnecessary costs, sunk costs, fixed costs and variable costs are identified. This assists the top management of the company in making cost effective strategies in order to enhance the overall profitability of the company.

In order to make effective recommendations on the cost accounting system, it is necessary that the management should assess the accounts critically to achieve the objectives of making cost accounting system. 

Answer to question no.2

Answer to question (2a)

After analyzing the costs given in the table and assuming that the costs in the accounts are mainly fixed or variable with respect to the number of flights flown- regardless of how many passengers are carried on the flights, it can be concluded that most of the staff will be on a fixed payroll to avoid hourly pays and frequent change of staff, so it is assumed that a fixed number of staff will be employed on payroll.All the general overheads and rentals will be categorized as fixed. Therefore, as per the calculation in the table, the percentage of fixed cost is 36.20%.

All other costs are related with the number of flights that the airline company makes which means that a major part of the costs is variable. The airline is trying to attract the passengers by offering more frequent flights.Therefore, as per the calculation in the table, the percentage of variable cost is 63.80%.

Uniform System of Accounts Required by the
Department of Transportation
Fixed cost Variable cost Assumption
Fuel and Oil 24.30%
Flying operations labor (flight crew---- pilots, co-pilots,   navigators, and flight engineers) 8.60% staff is on fixed payroll
Passenger service labor (flight attendants) 4.60% staff is on fixed payroll
Aircraft traffic and servicing labor (personnel servicing aircraft  and handling passengers at gates, baggage, and cargo) 8.90%
Promotions and sales labor (reservations and sales agents,  advertising and publicity) 9% staff is not on fixed payroll
Maintenance labor (maintenance of flight equipment and ground  property and equipment) 7%
Maintenance materials and overhead 2.10%
Ground property and equipment (landing fees, and rental  expenses and amortization for ground property and equipment) 12.50%
Flight equipment (rental expenses and amortization on aircraft  frames and engines) 8.40%
General overhead (administrative personnel, utilities, insurance, communications, etc.) 14.60%
Total 36.20% 63.80%
100.00%

Answer to question (2b)

When analyzing the costs given in the table and assuming that the costs in the accounts are mainly fixed or variable with respect to the number of passengers carried on a particular scheduled flight, on the basis of the calculations in the chart the percentage of fixed cost is 68.70%.  On a particular flight, most of the staff will not be on a fixed payroll because hourly or per flight pays would be much less than monthly payroll of the staff members.Cost Structure Of The Airlines Industry Case Solution

Air traffic and service & maintenance labor also can be fixed for a particular flight.However,in this case most of the costs are allocated to fixed cost because the airline is focusing on a particular flight and considering increasing the average number of passengers per flight.This will reduce the variable costs and increase the fixed cost and as aw hole, the profits can be increased by increasing the average number of passengers per flight.Therefore, as per the calculation in the table, the percentage of variable costs is 31.70%................................

This is just a sample partial case solution. Please place the order on the website to order your own originally done case solution.

Cost Structure Of The Airlines Industry Case Solution Other Similar Case Solutions like

Cost Structure Of The Airlines Industry

Share This