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Paper 02: Travel Agency and Tour Operations, Itinerary

Preparation & Tour Package Design
Module 23: Costing A Tour Components And Consideration

THE DEVELOPMENT TEAM

Principal Investigator Prof. S. P. Bansal
Vice chancellor, Indira Gandhi University,
Meerpur, Rewari, Haryana
Co-Principal Investigator Dr. Prashant K. Gautam
Director, UIHMT ,Panjab University,
Chandigarh
Paper Coordinator Prof. Mohinder Chand
Chairman, Department of Tourism and Hotel
Management Kurukshetra University
,Kurukshetra Haryana
Content Writer Prof. Mohinder Chand
Chairman , Department of Tourism and Hotel
Management Kurukshetra University
,Kurukshetra Haryana
Content Reviewer Prof. Ravi Bhushan Kumar
Department of Tourism and Hotel
Management Kurukshetra University
,Kurukshetra Haryana
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ITEMS MODULE DESCRIPTION

Subject Name Tourism & Hospitality
Paper Name Travel Agency And Tour Operations , Itinerary Preparation & Tour Package Design
Module Title Costing A Tour : Components And Consideration
Module Id Module No-23
Pre- Requisites Basic Knowledge About Travel Agency And Tour Operations
Objectives To Study The Meaning And Concept Of Costing A Tour, Components And
Considerations
Keywords Cost, Components , Tour , Consideration Fixed Cost , Variable Cost

TABLE OF CONTENTS
1. Learning Outcomes
2. Introduction
a. 3. Costing A Tour : Components And Consideration
i. 3.1 Meaning And Concept Of Cost
b. 3.2 Tour Cost-Meaning
i. 3.3 Components Of Tour Cost
ii. 3.4 Considerations Of Tour Costing
iii. Summary

QUADRANT-I

1. LEARNING OUTCOMES
After completing this module students will be able to:
 Understand the manning and concept of tour cost
 Know the components of tour cost
 Understand the considerations of tour costing.
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2. INTRODUCTION

Tour operation industry has witnessed development of numerous products and services
over the last two decades. A “tour package” is a group of products and services presented as a
unit and sold for one fixed price. Tourism Products and services may include
accommodation, transportation, sightseeing, and meals. Some tour packages may even
include helicopter rides, theatre tickets, interpretive centre entrance passes, picnics,
community events and hands-on learning experiences. Moreover, tour operation business is
carried with the help of systematic planning and controlling of various down and upspring
resources. The tour package is designed or prepared to give more value to the tourist that will
yield more profit and image for the company. Generally, the price tag of the package tour is
determined on the basis of the positioning and branding in tourism market. Tour operators
use the methods of marginal pricing after investigating the market trends. The operational
costs and margin of profit is thoroughly examined by the tour operators to decide the price of
the package. Tour operators have the absolute freedom to zero in the price tag on the basis of
mark-up and buying power of the potential buyers. The cost of a tour is the prerequisite for
determination of right type of price and to compete in the tourism market place. Thus, an
understanding of tour cost, its components and consideration has become vital for the tourism
students. After completing this module student will be able to understand the manning and
concept of tour cost, know the components of tour cost and understand the considerations of
tour costing.

3. COSTING A TOUR: COMPONENTS AND CONSIDERATION

3.1 Meaning and Concept of Cost

The word cost originated from the Latin term "costus" and the Greek term "kostos" and is
defined as the amount that should be give or pay in Exchange for one thing. As layman the
term ‘cost’ means the amount of expenses may be actual or notional incurred on or
attributable to specified thing or activity. In the business term, the cost is what should be
reversed to make the product, which will then be moved to the price. As per Institute of cost
and work accounts (ICWA) India, Cost is ‘measurement in monetary terms of the amount of
resources used for the purpose of production of goods or rendering services. In other words,
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the cost is the economic effort that should be done to achieve an operational objective
(payment of wages, the purchase of materials, the manufacture of a product, obtaining funds
for the financing, etc.). The Committee on Cost Terminology of the American Accounting
Association defines cost as “the foregoing, in monetary terms, incurred or potentially to be
incurred in the achievement of the objective of management which may be manufacturing of
a product or rendering of a service.”

3.2 Tour Cost-meaning

A package tour which is also known as ‘Inclusive tour’ is an advertised Journey

including accommodation, transfers, sightseeing etc arranged and promoted by a
tour operator. The travellers pay “in full before the commencement of the tour. In
such arrangements the tourists purchases transport and accommodation etc. at an
inclusive price. The price of the individual element cannot be determined by the
customers. The tour package includes air fare to and fro, hotel accommodation,
transfer, sightseeing, meals and guides etc. Thus, after purchasing an inclusive tour
a tourist has nothing to pay except for laundry, alcohol/beverage, shopping and
other optional activities which are mentioned in list of tour package. In brief, a
package tour contains following elements: Accommodation, Transportation, and
Sightseeing/Excursions, Guides or escorts and other services like insurance,
currency etc. Thus, ‘inclusive tour is a total tourists product, consists of
transportation from and to generating area, accommod ation at destination and other
services during the tour. A package is made in well advance (sometimes more than
one year earlier) by tour operator because he has to negotiate with all service
suppliers and publish in a brochure. He makes a suitable program me for a target
market or class of people. He meets the retailers and fixes their commissions. He
may have his own handling agency or he can appoint other handling agency. The
tour may be escorted or unescorted. The package may be offered to a group foreig n
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inclusive tour or free independent tour or foreign inclusive tour or free independent
tour. Cost of tour operations involves following elements:

 Payments for services/ products included in the Package.

 Administrative cost,
 Promotional cost
 Other costs
Thus, costing includes the tariffs of hotels accommodation, transportation,
handling agency, cost of own firm house-staff-office maintenance and cost of
advertisements/publicity etc. The first step is to prepare the confidential tariff.

3.3 Components of Tour cost

The total cost of a tour package cannot serve the purpose of management for decision
making related with preparation of tour package, have acquire accommodation and to launch
a new package in the market. Management needs to know about each component of tour cost
for cost control and management purposes. Tour Cost consists of various expenses incurred
on production/making of a tour package such as tourism ingredients used to produce or
develop package i.e. tour ingredients like air fare to and fro, hotel accommodation,
transfer, sightseeing, meals and guides etc. All material which becomes an integral part
of finished tour package and which can be conveniently assigned to specific physical unit is
termed as “Direct Material”. It is also described as accommodation, transportation,
sightseeing and others, etc. The substance from which the product is made is known as
material. It may be direct material or indirect material. Labour is the main factor of
production. For conversion of tour ingredients into finished tour package, human resource is
needed, and such human resource is termed as labour cost. Labour cost is the main element of
cost in a product or service. Labour can be classified as direct or indirect. On the other hand
all cost incurred in the production of finished goods other than tour ingredients cost and
labour cost is termed as expenses. As managers determine the costs involved in getting their
product or service to their customers, they must understand components cost appropriately to
ensure that all of the associated costs of a product or service are included in the cost plan. The
classification process groups costs together depending on their relevance to a product,
service, or other event and the common characteristics that they possess. The main
components of total tour cost are:
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 Prime Cost: this cost consists of costs of direct materials, direct labours and direct
expenses. It is also known as basic, first or flat cost. It is sum of total direct material,
labour and expenses.
 Work Cost: this cost comprises prime cost and, in addition, works overheads that
include costs of indirect materials, indirect labours and indirect expenses incurred to
change the shape of tour package. It is also known as works cost, or production cost.
 Administrative Cost: the third category of cost is administrative cost. This cost is
the sum of office and administration overheads and work cost. This is also termed as
administration cost or the total cost of production.
 Promotional Cost: Today, promotional expenses have increased many folds due
rapid completion in the tourism market. This is the cost which is incurred to for
promotion of tour package also known as selling and distribution cost.
 Total Cost: If you are not clear about total cost, you will not be able to determine the
profit of a product. The total cost is the sum of Selling and distribution overheads and
cost of product. In other words when selling and distribution overheads are added to
the total cost of production you will get total cost or the cost of sales.

3.4 CONSIDERATIONS OF TOUR COSTING

The costing process requires considering a specific list of tourists requirements prior to
purchasing of tour package components/ ingredients. In tour operation costing specifications
drive the process, material (ingredients) and ultimately cost of other services. Tour operators
must evaluate the many important factors that directly influence a tour package’s total cost,
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which can be grouped under the general headings of material, labour, and overheads. For the
tour operator, the total amount of material in the costing hardly determines its price.
Understanding the additional variables and how they impact price is imperative in
successfully procuring the best costing at the best price. Unnecessary costs will be incurred if
specifications for a costing are more demanding than necessary. Insufficient demands will
lead to increased waste and costing that do not meet quality requirements. Followings are the
main considerations when determining cost of a tour package:

 Seasonality: Tourism industry is also known as seasonal industry naturally most

tourism products are affected by seasonality because of holiday patterns, structure and
behaviours. It has become imperative for the tour operators to consider the seasonal
aspects while developing a tour package and fixing its prices. Moreover, Seasonal
demand leads to low and peak season periods, which require demand management
pricing to cope with short-run capacity problems.
 Operating Costs: To run a successful business operation one must control or
minimise the operating costs. It has noticed that the higher the operating costs, the
more expensive the prices will need to be so that it covers all expenses.
 Product quality: Many tourists demand quality product/ tour package and they are
ready to higher to that product. Actually, the quality of the product determines the
cost- price value relationship. It is logical that that product that offers greater utility
and fills the consumer needs more effectively than a competitive product can
command a higher cost.

 Product distinctiveness: A tour operator must consider the product distinctiveness

while ascertaining cost of tour package. It has seen that a standard or staple product
with no distinctive features offers little or no opportunity for cost control. But, a novel
and different product may be able to command higher cost e.g. the Lost City as an
attractive novelty, combined with excellent services and product features.

 Competition: competition in the market has a direct impact on the determination of

cost. In most of the cases we fix the cost or price that is comparable to that of
competitors' costs. Thus, competitors must taken into consideration while determine
the cost of your product / service. To some extent the product’s cost /price determines
its position in the market.
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 Method of distribution: The mode of distribution mechanism is important

consideration while costing your product/ tour package. Thus, the cost of the product
must include adequate margins for tour operators, travel agents or the company's own
sales force.

 Nature of the market. The nature of market helpful to determine the number of
tourists as well as producers. The type and possible numbers must be considered
before costing/ pricing a product. If there is a limited number of a consumer, then the
cost must be high enough to compensate for a limited market. But, one must also
consider consumer ability and propensity to buy.

 Daily Costs To determine the fixed costs associated with operating business, such as
food, beverage, labour etc. and to determine the daily variable costs associated with
taking passengers on tour or letting out rooms, such as meals, third party activities,
linen and room cleaning
 Annual Business Costs (Fixed): Annual business costs is the calculation the total
costs associated with operating the business, these costs occur whether the tours
operating or not, it remains to be fixed such as costs that are fixed include insurance,
marketing, lease payments, bank fees, accounting fees and salaries.
 Average Capacity: The package tour business is based on factors such as visitation
to the region, competitor analysis and customer feedback. Thus, average capacity
must be considered while determining the total cost of a tour package.

 Cost of the product and service: the cost of the product and service occupied a
major chunk of price. The price must be higher than cost over the long run or the
business will not survive. Both cost and market conditions should serve as guides to
pricing.

• Cost of distribution: distribution cost is a major portion in the total cost of tour
package. Distribution costs must also be included in the pricing equation. They are
much more difficult to estimate than other costs. Therefore, keep this cost as
minimum as possible to operator in the tourism market.

• Margin of profit desired: the tour companies beforehand fixed that desired margin
of profit from a particular tour package. Thus, the profit margin build into the
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product's price must be higher than the returns realised on any conventional
investments in order to compensate for the risk involved in the enterprise.

• Special promotion prices: It is often a good strategy to offer introduction prices and
special one-time price offers to introduce the product to consumers. In these cases the
cost of product / tour package may be some low as compare to others. However, these
must be carefully planned so that they achieve the purpose and do not become a
regular price.

 Cash position: Cash flow is high because much of the payment of tourism products is
being made in advance of consumption. It must be considered before determination of
cost of tour package.

 Cost control: This is the main objective of costing in tour operation business. Cost
control is an important part of pricing policy. Many tourism establishments have high
fixed costs and price close to break-even positions. This could make them weak or
near to financial collapse.

 Political or Natural Disasters: Political or natural disasters are the main aspect in
ascertaining cost of a tour package. Generally, typhoons or volcanoes, or currency
movements or new aviation or tourist taxes influence the cost of package tours. These
factors create is a very high level of price elasticity in tourism markets. On the other
hand it may by another risk to loss of popularity of a destination /country where the
tour operator has contracted heavily.

 Demand: it has been seen that the demand of tour package is generated by both
existing and potential tourists. A professional tour operator must ensure that market
demands and their impact on rate are not very high. Moreover, a tour operator must
understand what should be added to the existing tour package to improve sales
without sacrificing profit.
 Currency fluctuation: Tourism is known an invisible export. Thus, currency
fluctuations have a main impact of tour package sales. Sometimes the governments
would prefer tourists to spend their money in their own country and take holidays
within host country rather than go abroad especially to promote domestic tourism. It
also wishes to encourage more overseas visitors to come to the India.
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 Commissions: Usually, a tourism product is sold through tour operators and/or travel
agencies who both have commissions. Tour operators usually ask for net prices and
charge a commission between 15-25%. In general, the more specialised the tourism
product is, the higher the margin. You have to take this into consideration when
determining your cost. The commissions of tour operators and travel agencies do not
vary much in major countries.
 Type of holiday: Cost is a more important factor with regard to mainstream holidays
(sun, sea, beach) than with tailor-made holidays or more specialised segmented
holidays where the contents (excursions, visits, seeing the locals) are more important
factors. In general, costs for tailor-made or specialised holidays are higher than for
mainstream holidays.

 Target markets: A tour operator must ensure or determine which markets he intends
to target – domestic (intrastate or interstate), international (western/eastern or both).
Tour operator must identify target markets in relation to product needs, price
sensitivity, length of stay and disposable income. Moreover, tourism implies mainly
nature-based tourism, cultural tourism, ethnic and tribal tourism, or village lifestyle
tourism. Sometimes the characteristics of target markets of package tourism might
differ from those of general tourism markets.
 High-end international tourists who are bored with the usual package tours
and seeking new and different destinations
 Expatriates living in metropolitan cities looking for holidays outside the
city
 High-end urban families (domestic tourists) seeking a short holiday trip to
villages to get away from the city life and to experience farmhouse
lifestyles in a village environment
 Low-income students and young urban population who want to
experience the rural life in a
 different environment during their free time
 Students and researchers visiting mountain areas for excursions, study,
and research on sociology, anthropology, culture, ethnic groups,
ecotourism, the environment, natural resources, birds and animals, and
flora and fauna
 International tourists seeking an additional short or long-haul package
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 Free independent travellers (FITs) for long-haul tours and trekking

 Contracting : A very important tool for inbound tour operators is to contract product
elements (for example hotels, excursions or transportation) in order to either achieve
exclusivities or to concentrate on certain products and create higher volumes with
better rates. Tour operators are advised to have clear targets and a strategy in the
contracting of hotels, excursions, transportation or other tourism services. They could
concentrate, for example, on certain hotels to create volume which could give them
cost advantages. Furthermore, they should try to create products which they offer
exclusively. This would give them a chance to obtain higher margins. As they
compete with companies with higher buying power, they need to be more innovative.

 Product development and innovation: Tour packages are developed to meet

changing tourist needs and expectations. The more aware consumers become about
the selective for holidays, the greater the demand for activity or adventure holidays.
Those seeking safety and reasonable cost can choose an all-inclusive holiday. There
are various areas for innovations in tour package such as ‘spa’ holiday, yoga and
medical treatments etc.

 Changing Tourist Needs and Expectations: Recently, the tourism market is

witnessed dramatic Changes and developments. These developments are enviable in
travel and tourism and the more products consumers demand the more pressure there
is on tourism professionals to make them available. The more products and
destinations on offer, the more consumers expect, and the quicker they tire of the old
and search for the new. Moreover, technological advances have changed the mindset
of the tourists and this has desired more experience of the tourism product(s).

4. SUMMARY

Today’s, tour operators are fortunate having the best bargain capability while
negotiating with the tourism suppliers to secure best services at the cheapest possible
cost. Several uncontrollable factors may create the risk of loss in tour operation business
in one hand and on the other hand they buy services in bulk in special discounted rate in
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the off season helps in managing cost for designing the package tour. We know that cost
for tour package elements determines the market price and quantity of sale and tour
operators mainly consider the costs incurred for preparation of tour package such as fixed
and variable costs. Thus, in this module an attempt has been made to describe the
meaning and concept of tour cost, the components of tour cost and discussed various
considerations of tour costing.
.