What are potential cost drivers for an ABC system at Virgin America?

After several years of losses, Virgin America recently announced that it anticipates a profit for 2013. Although the company is expecting a profit for 2013, it still is not out of the woods.  Critics have called for greater cost control at Virgin America.

The following table contains selected financial and other data for Virgin America for 2012.

Virgin America

Selected financial data

For Twelve Months Ended December 31, 2012

Partial income statement: (000s omitted)
Operating revenues  $                   1,332,837
Other expenses:
Aircraft fuel                           537,501
Aircraft rent                           221,275
Wages and salaries                           176,216
Aircraft maintenance                              74,459
Landing fees                           110,165
Sales and marketing                           107,136
Guest services                              50,448
Depreciation                              11,260
Other                              76,110
Total operating expenses  $                   1,364,570
Operating income/loss  $                       (31,733)
Selected data:
Available seat miles (millions)                              12,545
Departures                              56,362
Aircraft in service

                                     51

Guests (thousands)                                6,219
Load factor (% of seats filled)

79.0%

Fuel gallons consumed (thousands)

                          161,404

Financial data source here.

Questions

  1. For each of the expenses listed in the income statement, select a cost driver from the drivers listed under “Selected data.”  Provide rationale for your choice of each of the drivers.
  2. Are there any expenses you would group together into a single pool?  Why or why not?
  3. How could Virgin America use these cost pools and activity-based costing information internally?

Instructor Resources

These resources are provided to give the instructor flexibility for use of Accounting in the Headlines articles in the classroom. The blog posting itself can be assigned via a link to this site OR by distributing the student handout below. †Alternatively, the PowerPoint file below contains a bullet point overview of the article and the discussion questions. †The YouTube video link below is a narration of the blog post article (no discussion questions are included in the YouTube video; those can be assigned separately.)

Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial 3.0 Unported License.

About Dr. Wendy Tietz, CPA, CMA, CGMA

Dr. Wendy Tietz is a professor of accounting at Kent State University in Kent, Ohio, USA. She is also a textbook author with Pearson Prentice-Hall.

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