{"id":14595,"date":"2018-02-20T23:50:30","date_gmt":"2018-02-20T23:50:30","guid":{"rendered":"http:\/\/writemyessayfree.com\/hospitality-accountingactivity-based-costinga-more-accurate-way-to-estimate-the-costs-for-a-restaurant-menu-carola-raab-stowe-shoemaker-karl-j-mayer-2\/"},"modified":"2017-02-12T21:57:08","modified_gmt":"2017-02-12T21:57:08","slug":"hospitality-accountingactivity-based-costinga-more-accurate-way-to-estimate-the-costs-for-a-restaurant-menu-carola-raab-stowe-shoemaker-karl-j-mayer-2","status":"publish","type":"post","link":"https:\/\/www.benedictsol.com\/blogs\/hospitality-accountingactivity-based-costinga-more-accurate-way-to-estimate-the-costs-for-a-restaurant-menu-carola-raab-stowe-shoemaker-karl-j-mayer-2\/","title":{"rendered":"Hospitality Accounting\/Activity-Based Costing:A More Accurate Way to Estimate the Costs for a Restaurant Menu Carola Raab Stowe Shoemaker Karl J. Mayer"},"content":{"rendered":"

\nABSTRACT. Activity-Based Costing (ABC) has been successfully applied
\nin the manufacturing industry for the last two decades. In this study,
\na workable ABC model for restaurants was created and tested in a restaurant
\noperation in a western urban area of the United States. The study identified
\nthat the actual cost of the dinner entrees was higher than the
\nrestaurant?s prices, when analyzed using ABC methods. The results
\nrevealed that ABC appears to be a very feasible method for establishing
\naccurate menu costs in restaurants. doi:10.1300\/J149v08n03_01 [Article
\ncopies available for a fee from The Haworth Document Delivery Service:
\n1-800-HAWORTH. E-mail address: Website:
\n ? 2007 by The Haworth Press, Inc. All rights
\nreserved.]
\nKEYWORDS. Restaurants, profitability, activity-based costing, cost
\naccounting, menu pricing
\nCarola Raab, PhD, and Karl J. Mayer, PhD, both are Assistant Professors, Tourism
\nand Convention Department, William F. Harrah College of Hotel Administration,
\nUniversity of Nevada, Nevada.
\nStowe Shoemaker, PhD, is Associate Dean of Research, Conrad N. Hilton College,
\nUniversity of Houston, Texas.
\nAddress correspondence to: Carola Raab, Tourism and Convention Department,
\nWilliam F. Harrah College of Hotel Administration, University of Nevada, 4505 Maryland
\nParkway, Las Vegas, NV 89154 (E-mail: raab@unlv.nevada.edu).
\nInternational Journal of Hospitality & Tourism Administration, Vol. 8(3) 2007
\nAvailable online at http:\/\/ijhta.haworthpress.com
\n? 2007 by The Haworth Press, Inc. All rights reserved.
\ndoi:10.1300\/J149v08n03_01 1
\nINTRODUCTION
\nA major challenge for the restaurant industry in the twenty-first century
\nwill be the ability of restaurant managers to find a balance between
\nappropriate product pricing and serving customers? diverse needs. One
\ntheoretical approach that has provided manufacturing firms with a better
\ncomprehension of costs and increased profitability stems from ActivityBased
\nCosting (ABC) theory (Cooper, 1989; Cooper & Kaplan, 1992).
\nABC has major advantages over other costing methods by showing the
\nability to trace overhead costs, which allows for more accurate unit costing
\n(Turney, 1991; Cooper & Kaplan, 1992). Furthermore, ABC infers
\nthat activities are the antecedents of cost and that cost objects create the
\ndemand for activities (Turney, 1991). Cooper and Kaplan (1988) pointed
\nout the general conditions that make companies good candidates for the
\napplication of ABC systems, such as a diversity of resource consumption,
\nor the fact that product and resource consumption are not correlated with
\ntraditional cost allocation methods. Rotch (1990) stated that these conditions
\napply to service companies as well.
\nEven though ABC has been applied in such diverse service firms as
\nhealth care and financial institutions, ABC applications in the hotel or
\nrestaurant industry are almost non-existent (Keller, 1994). The restaurant
\nindustry generally establishes menu prices by using contribution
\nmargin analyses. However, Kaplan and Cooper (1988) demonstrated
\nthat the domain of traditional contribution margin analysis could be
\ngreatly enhanced by the use of ABC. In addition, Kunst and Lemmik
\n(1995) pointed out the difficulties of tracing costs to activities and
\nactivities to products and customers in restaurants.
\nRaab and Mayer (2003) interviewed controllers of a sample of the top
\n100 United States (U.S.) restaurant firms. Their study found that restaurant
\nmanagers are increasingly aware of the need to trace some of their
\noverhead costs, such as salaries and wages, to individual menu item
\nprices. Although approximately one-half of the respondents attempted
\nto measure processes and their costs, only one restaurant company was
\nable to gain knowledge of their labor costs by calculating activity-based
\nlabor costs (Raab & Mayer, 2003). The results of their study indicate the
\npotential use of ABC in the restaurant industry.
\nHowever, few recent studies have discussed the application of ABC
\nin the restaurant business. Thus, this study examines whether it is feasible
\nand desirable to extend ABC philosophies to the restaurant industry.
\nThe next section of this study examines the major challenges faced by
\nrestaurant managers and the traditional methods the industry typically
\n2 International Journal of Hospitality & Tourism Administration
\napplies in order to manage costs and to create profits. In addition, it
\ndiscusses why the traditional methods applied by the restaurant industry
\noften do not maximize profits. Furthermore, it examines the opportunities
\nto maximize profits in the restaurant industry through the
\napplication of ABC methods.
\nRESTAURANT INDUSTRY BACKGROUND
\nChallenges in the Restaurant Industry
\nTraditionally, the restaurant industry, with small profit margins and
\nhigh failure rates, is considered to be a risky business (NRA, 2001; Bell,
\n2002). A study conducted by American Express (2003) claimed that
\n9 out of 10 new restaurant openings go bankrupt during their first year
\nin business. Parsa (2003) challenged the American Express study results
\nand concludes that restaurant bankruptcies occurred at a somewhat
\nlower rate of 60 percent.
\nNevertheless, most of the published research on restaurant failures
\nhas concluded that the failure rates of new restaurants is relatively high
\nand that independently owned restaurants are especially prone to fail in
\ntheir first year of operation (Hume, 2002). The adverse economic conditions
\nthat followed the terrorist attacks of September 11, 2001 negatively
\naffected the U.S. restaurant industry, which was borne out in unusually
\nhigh numbers of restaurant bankruptcy filings during 2002 (Hume,
\n2002). A study on business failures, including those in the restaurant
\nsector, identified two common problems that cause businesses to fail:
\nIneffective financial control and poor marketing strategies (Wilke,
\nJosiam, Upchurch & Willems, 1996). As a result, the restaurant industry
\nis faced with a number of specific challenges. For example, restaurants
\nare very labor-intensive with labor costs often representing a large
\nshare of total operating costs (Chan & Au, 1998; Quain, Sansbury &
\nLeBrutto, 1999). The control of labor costs is difficult, because service
\nprovision is a major part of the product in the restaurant industry. While
\nrestaurant patrons expect quality of food and beverage items, many
\nof them visit restaurants for the service experience itself. Therefore,
\ncontrolling labor costs without decreasing the level of service is a daunting
\ntask, which creates the basic challenge of finding a balance between
\nserving customers? desires and achieving acceptable profitability levels.
\nAlthough restaurant managers generally are able to monitor their customer?s
\nneeds, most of them lack specific knowledge of whether they
\nRaab, Shoemaker, and Mayer 3
\nwill maximize overall profits by meeting their needs, in part because
\nrestaurant managers often do not know the true profitability of their various
\nmenu items (Raab & Mayer, 2003).
\nSome restaurant studies suggest approaches that incorporate labor
\ncosts into menu item pricing (DeFranco & Noriego, 2000). However, in
\nreality, menu prices are rarely analyzed; at best, either a contribution
\nmargin or menu engineering approach is applied to gain insights about
\nproper menu pricing (Raab & Mayer, 2003). Further, menu engineering
\nis based on a contribution margin analysis and cannot reveal the true
\nprofitability of a menu item if menu prices are set without a thorough
\nknowledge of all operating costs. Clearly, these issues present significant
\ncontinuing challenges for the restaurant industry.
\nMaximizing Restaurant Profits Through ABC
\nThe application of ABC methods allows a manager to trace undistributed
\noperating expenses to individual menu items, which could be beneficial
\nfor several reasons. First, in the restaurant industry very little
\nattention is ordinarily paid to undistributed operating expenses when
\nproduct prices are established. Restaurant product prices are usually
\ncalculated strictly as a function of cost of goods sold, along with a certain
\nmark-up percentage (Bell, 2002). Usually, individual menu item
\nprices only indirectly reflect any undistributed operating costs, such
\nas labor, utilities, or fixed costs. In recent years, these expenses have
\nincreasingly captured a larger percentage of the total cost structure
\nof a restaurant. In highly competitive market conditions, proper pricing
\nmeasures become extremely important as profit margins are diminished.
\nThus, restaurant operators may simply no longer be able to afford
\nto price based on simply marking up their variable product costs.
\nA more efficient and process-oriented restaurant organization could
\nachieve increased labor productivity, thereby decreasing total labor
\ncosts, both directly and indirectly.
\nSecond, an ABC analysis examines all major production activities
\nand allows for the identification and reduction of activities that cost
\nmore than they add in value. These activities then can be either eliminated,
\noutsourced, or conducted more efficiently by the employees.
\nThis type of analysis will assist not only in reducing organizational
\nwaste, but also in eliminating service delays for guests. In any service
\nendeavor, all employees should be made responsible for the entire
\nprocess of achieving customer satisfaction and loyalty (Zeithaml &
\nBitner, 2003).
\n4 International Journal of Hospitality & Tourism Administration
\nThird, once ABC are calculated, the accounting and marketing functions
\ncan cooperatively apply Activity-Based Pricing (ABP) methods
\nby considering the relationships between ABC and menu prices determined
\nat the point where total profits are maximized as well as
\nvalue is created for customers (Daly, 2002). For example, research by
\nCardinaels, Roodhooft and Warlop (2004) found that using ABC analysis
\nto help make pricing decisions could have significant positive
\nimpacts for multiple market segments under highly competitive conditions,
\nwhich is typically the case for most hospitality markets. Thus, it
\nseems quite apparent that ABC methods might be applied to the restaurant
\nindustry with some tangible benefits.
\nThe remainder of this paper will demonstrate how the basic principles
\nof ABC can be applied to the restaurant business. In doing so, it
\naddresses two principal research questions: (1) Can an ABC approach
\ntrace restaurant overhead costs through activity centers to individual
\nmenu items; and, (2) can an ABC approach reveal the true cost structure
\nof individual menu items?
\nIn order to address these questions, an ABC model for the restaurant
\nindustry was needed, as one did not already exist. An ABC model for
\nrestaurants was developed by modifying Cooper?s (1989) ABC model
\nfor the manufacturing industry. Following Cooper?s (1989) approach, a
\nqualitative case analysis technique, which incorporated both observation
\nand interview methods, was applied to this study. The result of the
\ncase analysis was an ABC model that was applicable to a full-service
\nrestaurant (Figure 1).
\nNext, a methodology for applying the model was created that allowed
\nfor the practical application of ABC in a restaurant setting (Cooper,
\n1989; O?Guin, 1991; Keller, 1994; Garrison & Noreen, 1997; Cokins,
\n2001; Daly, 2002). The model and its methodology were prepared in
\nconjunction with the management of a full-service restaurant in the
\nwestern United States to ensure that the approach was fundamentally
\nsound. Dinner entr?es were selected as the menu items to be analyzed in
\nthis study because management expressed concerns about the profitability
\nof the restaurant?s dinner menu.
\nAN ABC APPROACH FOR RESTAURANTS
\nThe first step of an ABC analysis is the identification of activities and
\nactivity centers. Activity centers are established across departments and
\naccountability structures by combining homogenous processes. For a
\nRaab, Shoemaker, and Mayer 5
\nrestaurant, it was appropriate to create two activity centers: The Frontof-the-House
\n(FOH); and, the Back-of-the House (BOH). Individual
\nactivities in the restaurant were then identified so they could be classified
\ninto either activity center. Major activities in the restaurant industry
\nare myriad, and include purchasing, receiving, storing, food preparation,
\ncooking, cleaning, dining room set-up, customer seating, taking
\norders, ordering and serving food and beverages, table maintenance, ca
\nshing out customers, and customer communication. However, all activities
\nwere ultimately coded as either FOH or BOH activities. They
\nwere then classified in an Activity Dictionary, as shown in Tables 1 and 2,
\nso they could be easily communicated to all restaurant employees and to
\nfacilitate further analysis.
\nGarrison and Noreen (1997) suggest that all activities should be
\ndetailed in a Process Value Analysis (PVA), which is a flow chart that
\nreveals all activities conducted in an organization and labels them as
\nvalue-added and non-value added. In the restaurant industry, only activities
\nthat actually produce the product or provide service to the customer
\nare value-added. For example, all customer communications occurring in
\n6 International Journal of Hospitality & Tourism Administration
\nRestaurant Activity-Based Cost Model
\nGeneral Ledger
\nPersonnel
\nFirst
\nStage
\nSecond
\nStage
\nUnit-Level
\nBatch-Level
\nProduct-Sustaining
\n Unit-Level
\n Batch-Level
\nProduct-Sustaining
\nFacility-Sustaining
\nFood Cost
\nBOH Activitiy Center
\nDinner Entr?es
\nFOH Activitiy Center
\nUnit-Level
\nBatch-Level
\nProduct-Sustaining
\nDirect Operating Facility-Sustaining
\nFIGURE 1. Activity-Based Model for Restaurants
\nthe Front-of-the-House and the production of menu items in the Backof-the
\nHouse are value-added activities. Non-value added activities
\ninclude receiving, storing, moving goods, and waiting for processing.
\nBasically, most non-value added activities consume resources without
\nadding value to the product. Therefore, in order to minimize costs in a
\nrestaurant, such activities should be carefully examined by means of a
\nPVA approach.
\nThe next phase of applying ABC to a restaurant involved the examination
\nof the general ledger and the assignment of overhead costs
\nRaab, Shoemaker, and Mayer 7
\nTABLE 2. Activity Dictionary (Front-of-the-House)
\nMain Activities Description
\nCommunicating Taking orders, interaction with customers, greeting customers, explain
\nmenu, sell menu items, taking reservations, answering phones,
\nchecking on guest satisfaction, seating people, communicating
\nbetween bussers, management and servers.
\nCleaning Keeping menus in order, cleaning floors, maintaining tables, and
\ncleaning ashtrays.
\nSet-up Folding napkins, polishing silver, dining room set up (set tables, side
\nstation), making coffee, processing checks, process orders, (inputting
\ninto the Point-of-Sales System), close tabs.
\nServing customers Serve water, pick up orders, serve meals, time orders, bringing
\ncondiments to table, replacing cutlery, present check, collect
\npayment, and make change,
\nAdministrating Supervision, forecasting, scheduling, and training.
\nTABLE 1. Activity Dictionary (Back-of-the-House)
\nMain Activities Description
\nCleaning Dish-washing, disinfecting, cleaning floors, washing pots, refill soap hand
\nwash stations, cleaning walls, counters, hoods, staff bathrooms, refrigerators,
\nstorage, beverage machines, removing trash, and washing hands.
\nPreparation Selecting, washing, cutting fruit and vegetables, defrosting, pre-portioning,
\nsauces and soups, cutting meat, grinding meat, mixing ingredients, and
\nline set-up.
\nCooking Preparing hot meals, expediting, read orders and time orders, dish out
\nsoup, cook sides, fry meat and seafood, arrange items on plate and
\ngarnish, keep food warm, preparing salad, put together ingredients,
\npreparing desserts, cut cake and dish ice cream, whip cream, bake,
\nbroil, blanch, stewing and, plate set-up.
\nAdministrating Purchasing, budgeting, supervising, menu research, create menus and
\nitems, scheduling, training staff, receiving, storing, and forecasting.
\ninto homogeneous cost pools. According to the Uniform System of
\nAccounts for Restaurants, overhead costs include the following items:
\n(1) Salaries and Wages; (2) Employee Benefits; (3) Direct Operating
\nExpenses; (4) Music and Entertainment; (5) Marketing; (6) Utility Service;
\n(7) General and Administrative Expenses; and, (8) Repair and
\nMaintenance Expenses (Schmidgall, 1997). Homogeneous cost pools
\nare a collection of overhead costs for which cost variations can be
\nexplained by only one first stage cost driver and that share a common
\npurpose in the operation of the facility. An example of a first stage cost
\ndriver is the number of hours worked by the employees. This first stage
\ncost driver is applicable to all labor related overhead costs.
\nWorking with restaurant management and following the model guidelines
\n(Figure 1), three separate cost pools were created?labor, direct
\noperating supplies, and facility sustaining. The first two cost pools contained
\noverhead costs that were directly traceable to individual menu
\nitems. On the other hand, the facility sustaining cost pool contained all
\nother overhead costs for which no first stage cost driver could be identified.
\nTherefore, no cost driver rates were established for this cost pool.
\nNext, the labor and direct operating supplies cost pools were divided by
\nthe number of cost driver units, which established a cost driver rate for
\neach of them. These pool rates were later applied as an internal costing
\nmechanism for the dinner entr?es, to reflect the cost of resources they
\nconsumed at each activity level.
\nThe next step of an ABC process divides each activity center into a
\nsecond stage, and establishes ?second stage? cost drivers by dividing
\nthe total costs of each activity center into activity cost driver pools.
\nAccording to ABC theory, all activities have a hierarchy, and cost drivers
\nenable the activities to be grouped into different levels, such as unitbased,
\nbatch-related, product-related, or facility sustaining (Cooper,
\n1990; Turney, 1991; O?Guin, 1991; Garrison & Noreen, 1997).
\nThus, there are four categories of second stage cost drivers applicable
\nto the restaurant industry. The first is unit cost drivers, which occur anytime
\na unit is produced and are directly related to the number of units
\nproduced. The number of employee hours and units of utilities used are
\nunit-based cost drivers applicable to the restaurant industry. The second
\ncategory, batch cost drivers, incorporate everything that is produced in
\nbatches such as setting up the kitchen line or purchasing inventory. The
\nthird category, product level drivers, signify resources used by productlevel
\nactivities that are performed to sustain products in the company?s
\nproduct line. In a restaurant, some examples of product-level activities
\ninclude establishing and maintaining specifications, recipe testing, and
\n8 International Journal of Hospitality & Tourism Administration
\nexpediting food production. Finally, the facility sustaining cost driver
\ncategory contains costs that sustain a company?s general processes such
\nas accounting, marketing, property taxes, security and landscaping.
\nAccording to ABC theory, each of the activity cost driver pools has
\nits cost assigned to products using a second stage cost driver that is unique
\nto each cost pool. A cost driver pool is distributed to products based on
\nthe number of cost driver units it consumes. The overhead cost applied
\nto the product is calculated by multiplying the number of cost driver
\nunits with the cost pool rates established during the first stage of an
\nABC process. Finally, ABC costs that were calculated for each entree
\nwere condensed as bills of activity. A completed bill of activity becomes
\na powerful tool for analysis and subsequent action by restaurant management.
\nAn example of a completed bill of activity that resulted from
\nthis study for a dinner entr?e (Pasta Marinara) is presented in Table 3.
\nSince the restaurant involved in this study operated at a loss, all overhead
\ncosts were a major source of concern by management. However,
\nsimilar to most restaurant operations, labor and related costs represented
\nby far the greatest source of concern to management. Therefore,
\nthe main objective for the study became the ability to trace labor and
\nrelated costs to each entr?e. In addition, management also wanted to
\ntrace all direct operating supplies to individual dinner menu items.
\nThus, three cost pools were established along these lines: (1) A ?Personnel?
\ncost pool, which included all salaries, overtime pay, and wages for
\ntemporary help, all employer taxes, worker compensation expenses,
\nemployer insurance, and employee meal accounts; (2) a ?Direct Operating
\nSupplies? cost pool, incorporating the uniform and laundry account
\nas well as the disposable supplies account; and (3) a ?Facility Sustaining?
\ncost pool, including the utility, repair and maintenance, accounting,
\ngeneral and administrative expenses, insurance, security, landscaping,
\ntelephone, marketing, travel and entertainment, and equipment depreciation
\naccounts.
\nNext, the three cost pools were assigned to the two activity centers
\n(FOH and BOH) and cost pool rates were calculated. Table 4 displays
\nthe results of this process for the first two cost pools, including their associated
\ncost pool rates. Table 4 does not display the facility sustaining
\ncost pool because according to the ABC literature, cost pool rates can
\nonly be calculated from cost pools that can be traced to individual menu
\nitems (O?Guin, 1991; Garrison & Noreen, 1997). Instead, an allocation
\nvalue was established for the facility sustaining cost pool based on the
\nnumber of dinner entrees that were sold during the month of November
\n2003. This approach for these costs is consistent with ABC theory in
\nRaab, Shoemaker, and Mayer 9
\nmanufacturing, which ultimately allocates a portion of the total overhead
\ncosts that cannot be traced to individual items. All figures shown
\nin Table 4 were obtained from the restaurant?s general ledger for
\nNovember 2003, which was provided by restaurant management. Both
\nactivity centers were then divided into cost driver pools and levels of
\nactivities were established.
\n10 International Journal of Hospitality & Tourism Administration
\nTABLE 3. Completed Bill of Activity for Pasta Marinara Entr?e
\nActivities Resources
\nUsed
\nCost Pool Rates
\n($\/Minute)
\nTotal Cost $
\nUnit-Level Activities?FOH
\nCommunicating 1.20 minutes 0.39 0.47
\nSetting-up 1.00 minutes 0.39 0.39
\nServing customers 1.00 minutes 0.39 0.39
\nProcessing checks 1.45 minutes 0.39 0.56
\nTotal 4.65 minutes 1.81
\nUnit Level Activities?BOH
\nPreparation 2.0 minutes 0.17 0.34
\nCooking 2.0 minutes 0.17 0.34
\nCleaning 1.0 minutes 0.17 0.17
\nTotal 5.0 minutes 0.85
\nTotal unit-level activities 9.65 minutes 2.66
\nBatch-Level Activities?FOH
\nSetting-up 3.20 minutes 0.39 1.25
\nCleaning 1.59 minutes 0.39 0.62
\nAdministrating 3.83 minutes 0.39 1.49
\nTotal 8.62 minutes 3.36
\nBatch-Level Activities?BOH
\nPreparation 6.13 minutes 0.17 1.04
\nCleaning 5.55 minutes 0.17 0.94
\nTotal 11.68 minutes 1.98
\nTotal batch-level activities 20.30 minuts 5.29
\nProduct-Sustaining Activities
\nFOH?Administrating 2.55 minutes 0.39 0.99
\nBOH?Administrating 3.21 minutes 0.17 0.55
\nTotal Product-Sustaining Activities 5.76 1.54
\nFacility-sustaining activities 1 unit 5.29
\nDirect operating costs 4.97 percent 0.26 1.29
\nFood costs 1 unit 2.00
\nTotal cost 18.07
\nObservation and interview methods were employed to identify second
\nstage cost drivers and activity hierarchies, which divided the two
\nactivity centers into unit-level, batch-level, product-related, and facility
\nsustaining cost pools. Basic second stage cost drivers for unit-level activities
\nwere identified as time spent on activities conducted each time a
\ncustomer is served and an entr?e is produced. General cost drivers for
\nbatch-level activities were the number of batches required, such as
\nnumber of set-ups per day, or the number of times purchasing and receiving
\nis needed during the month. Major product-sustaining cost drivers
\nwere identified as the number of new menu items created each
\nmonth and the number of new employees hired per month. The results
\nof the ABC process became a completed bill of activity for each menu
\nentr?e (Table 3), which allowed restaurant management to truly understand
\nthe cost structure of its menu for the first time.
\nDISCUSSION
\nThe ABC approach described in this study revealed that the dinner
\nmenu, which contained fourteen individual entr?es, was the major
\ncontributor to the restaurant?s negative operating profit. This result
\nreflects the restaurant?s relatively high overhead costs, and particularly
\nits high labor costs. In this case, the entr?es? actual costs were higher
\nthan the restaurant?s menu prices, if analyzed using ABC methods.
\nTherefore, every time a dinner entr?e was sold, with the exception of
\nRaab, Shoemaker, and Mayer 11
\nTABLE 4. Cost Pool Rates
\nActivity Centers Personnel Direct Operating Supplies
\nFOH $23.60\/hour
\n($11,545\/489 hours)
\n$0.26\/entr?e
\n($218.24\/828 units consumed)
\nFOH cost pool rate
\ncalculations
\nTotal labor cost\/hours worked Total direct operating costs\/units
\nused
\nBOH $10.22\/hour
\n($4686.75\/458.50 hours)
\n$0.26\/entr?e
\n($509.23\/1932 units consumed)
\nBOH cost pool rate
\ncalculations
\nTotal labor cost\/hours worked Total direct operating
\ncosts\/units used
\nNote: All figures shown in the table were obtained from restaurant management for the month of November
\n2003; for example, the hours used came from the restaurant?s payroll records, and the units consumed represent
\nactual supplies that were used during the month.
\nthree entrees that could be classified as very profitable, the restaurant
\nsuffered an operating loss.
\nIn addition, the analysis of the general ledger cost pools provided
\nsome compelling insights. First, the separation of overhead costs into
\nhomogenous cost pools and their assignment to the FOH and BOH activity
\ncenters revealed where major costs occurred with far more precision.
\nFor example, for the dinner shift observed in this study, the FOH
\nincurred 61 percent of the overhead costs; of that figure, the FOH ?Personnel?
\ncost pool represented over half (53 percent) of all overhead
\ncosts. The detailed analysis of labor costs and hours necessary to establish
\nthe ?Personnel? cost pool and a cost pool rate identified that the
\nhourly wages paid at the restaurant involved in this study are much
\nhigher than restaurants traditionally pay for their labor.
\nIn addition, the analysis showed that the BOH incurred overtime hours
\nfor 53 percent of all hours worked. The use of part-time employees and
\nmore sophisticated demand forecasting methods are some likely solutions
\nthat could result in the reduction of overtime hours for this establishment.
\nAnother opportunity for management to reduce FOH labor costs arises
\nfrom the use of PVA to reduce and eliminate any non-value added activities.
\nFor example, in the restaurant involved in this study, approximately
\none-half of all the existing activities in the BOH and FOH are consuming
\nresources without directly assisting in producing products or providing
\nservice to the customer. This seems much too great a commitment to
\nnon-value added activities. Therefore, management should review all
\nnon-value added activities and use this information to improve the establishment?s
\nprocesses. Some of the non-value added activities that were
\nidentified should be eliminated, such as personal conversations and extensive
\npersonal phone calls. Other non-value added activities could be
\ncandidates for outsourcing. For example, non-value added food preparation
\nactivities in the BOH could be reduced if pre-cut and pre-washed
\nproduce is purchased and meat and fish product are purchased already
\nportioned. Finally, it may be advisable to outsource some of the cleaning
\nactivities such as the cleaning of hoods, walls and restrooms. Even
\nthough these actions may be considered common sense for a restaurant
\nmanager, the significance these insights might not have been identified if
\nthe restaurant had not been subjected to an ABC analysis.
\nThese insights are consistent with the thrust of ABC applications in
\nthe business literature, which suggest that if products consume diverse
\namounts of resources, the ABC method will reveal dramatically different
\nproduct costs in comparison to product cost methods that are based solely
\non contribution margins (Cooper, 1989). Indeed, this study revealed that
\n12 International Journal of Hospitality & Tourism Administration
\noverhead costs were consumed at a diverse resource consumption rate
\nby each entr?e.
\nIMPLICATIONS AND LIMITATIONS
\nThis study demonstrated that ABC methods can be successfully
\napplied to a restaurant. The ABC model that was developed in this study
\ncan be applied to virtually any full-service restaurant, but the results of
\nsuch a study would likely be different from this one, depending upon the
\nmarket characteristics and cost structure of that particular restaurant.
\nNevertheless, applying ABC methods can assist to restaurant operators
\nin a number of ways. First, ABC can enhance restaurant feasibility analysis
\nby making menu planning more accurate relative to individual item
\nprofitability. Second, ABC methods can help a restaurant identify
\nwhich menu items are truly profitable and which ones are not, given the
\nrestaurant?s customer profile. Third, ABC methods can assist in evaluating
\npromotions, such as the decision to use a price discount on a featured
\nitem to boost sales; ABC can help determine whether that decision
\nwill incur a profit or loss for the promotion.
\nAlthough it is only a single case study of a restaurant, the findings indicate
\nthat restaurant managers should make menu decisions using more
\ncomplete cost information. It also suggests that applications of menu
\nprofitability analyses that go beyond the simple analysis of food costs
\nmay be very appropriate for a restaurant. Restaurant managers can make
\nmuch more reliable decisions with complete cost information, which
\nemphasizes the need to calculate ABC costs for each item on the menu.
\nFurthermore, this study supports Cooper?s (1989) view that the lack
\nof precise product overhead costs may totally distort total product cost
\nand price, which was the case for this restaurant. Thus, it is likely that a
\nrestaurant manager?s menu management decisions will differ dramatically
\nif he or she is confronted with differing results from a contribution
\nmargin or an ABC approach. Of course, many other factors besides cost
\nalso enter into menu pricing decisions, such as customer perceptions of
\nvalue and quality, customer segmentation, and competition.
\nThis study contains a number of limitations that should be noted.
\nFirst, although the ABC model that was developed could be applied to
\nother full-service restaurants, the specific findings of this study cannot
\nbe generalized to the restaurant industry as a whole, or to other restaurant
\ntypes, without further research. Second, this study only examined the
\nrestaurant?s dinner entrees; the restaurant?s beverage service and its
\nRaab, Shoemaker, and Mayer 13
\nlunch menu were not included herein. Thus, no conclusions can be
\ndrawn about the restaurant?s situation on an overall basis since a complete
\nABC analysis of all food and beverage items was not done.
\nSUMMARY
\nThis study was able to develop and apply a workable ABC model for
\na restaurant, which established a unique overhead cost value for each
\nmenu item. This process allowed for the calculation of bills of activities
\nfor all entr?es, which included both the overhead costs and food cost per
\nentr?e. Therefore, this study was able not only to assign accurate overhead
\nrates, but also to provide true product cost information for the restaurant
\nin the form of operating profit margins for each entr?e. It
\nsuggests that ABC methods can be applied in the restaurant industry,
\nand may allow for greatly improved financial analyses that incorporate
\nmore precise and complete cost information. Thus, the study revealed
\nthat the application of ABC methods to restaurants is not only feasible,
\nbut also highly informative.
\nFuture research on this topic should include determining whether ABC
\nmethods can be applied to other restaurant types, such as buffet, quick
\nservice, or casual dining venues. In addition, the ABC analysis should incorporate
\nall meal periods in a restaurant, so that an overall picture of the
\noperation can be determined. Further, the potential application of ABC
\nmethods to other hospitality sectors, such as hotels, spas, or casinos,
\nshould be investigated. Finally, it would also be beneficial to conduct a
\nstudy that combines ABC with a price sensitivity analysis, which would
\nincorporate both costing and pricing aspects of a hospitality operation.
\nREFERENCES
\nAmerican Express (2003). Unpublished study cited in the NBC television show: The
\nRestaurant.
\nBell, D. (2002). Food & Beverage Cost Control?Course Packet. Las Vegas: University
\nof Nevada, Las Vegas, Department of Reprographic Services.
\nCardinaels, E., Roodhooft, F. & Warlop, L. (2004). The Value of Activity-Based Costing
\nin Competitive Pricing Decisions, Journal of Management Accounting Research,
\nl6(1), 133-148.
\nChan, W. & Au, N. (1998). Profit Measurement of Menu Items, Cornell Hotel and
\nRestaurant Administration Quarterly, 39(2), 70-75.
\nCokins, G. (2001). Activity-Based Cost Management: An Executive Guide, NY: John
\nWiley & Sons, Inc.
\n14 International Journal of Hospitality & Tourism Administration
\nCooper, R. (1989). The Rise of Activity-Based Costing?Part 4: What Do ActivityBased
\nCost Systems Look Like? Journal of Cost Management, Spring, 38-49.
\nCooper, R. (1990). Cost Classification in Unit Based and Activity-Based Manufacturing
\nCosts Systems, Journal of Cost Management, 4(3), 4-14.
\nCooper, R. & Kaplan, R. (1992). Activity-Based Systems: Measuring the Costs of
\nResource Usage, Accounting Horizons, 6(3), 1-11.
\nDaly, J. (2002). Pricing for Profitability: Activity-Based Pricing for Competitive
\nAdvantage, NY: John Wiley & Sons, Inc.
\nDeFranco, A. & Noriego, P. (2000). Cost Control in the Hospitality Industry, Upper
\nSaddle River, New Jersey: Prentice Hall.
\nGarrison, R. & Noreen, E. (1997). Managerial Accounting, 8th ed., NY: Irwin
\nMcGraw-Hill.
\nHume, S. (2002). Shape Shifting: In a Downbeat Economy, Top 400 Companies Focus
\non Acquisitions, Buyouts and Bankruptcies, Restaurants and Institutions, 112(16),
\n42-100.
\nKaplan, R. & Cooper, R. (1988). Measure Costs Right: No longer. Journal of Management
\nAccounting Research (Fall), 2-15.
\nKeller, B. (1994). Activity-Based Costing for the Hotel Industry, [Monograph].
\nCornell University.
\nKunst, P. & Lemmik, J. (1995). Managing Service Quality. London: Paul Chapman
\nPublishing Ltd.
\nNational Restaurant Association (2001). Retrieved April 4, 2003 fromwww.restaurant.org
\nO?Guin, M. (1991). The Complete Guide to Activity-Based Costing, NY: Prentice Hall.
\nParsa, H. (2003). Retrieved September 15, 2004 from http:\/\/www.researchnews.osu.
\nedu\/archive\/restfail.htm.
\nQuain, E., Sansbury, M. & LeBrutto, S. (1999). Revenue Enhancement, Part 4, Cornell
\nHotel and Restaurant Administration Quarterly, 40(3), 38-47.
\nRaab, C & Mayer, K.J. (2003). Exploring the use of activity based costing in the restaurant
\nindustry, Int’l Journal of Hosp. & Tourism Admin, 4(2) 79-96.
\nRotch, W. (1990). Activity-Based Costing in Service Industries, Journal of Cost Management,
\nSummer, 4-14.
\nSchmidgall, R. (1997). Hospitality Industry Managerial Accounting, 4th ed., Lansing,
\nMI: Educational Institute American Hotel & Motel Association.
\nTurney, P. (1991). Common Cents. The ABC Performance Breakthrough, Cost Technology,
\n13-17.
\nWilke, E., Josiam, B., Upchurch, R. & Willems, J. (1996). Restaurant Attrition: A Longitudinal
\nAnalysis of Restaurant Failures, International Journal of Contemporary
\nHospitality Management, 8(2), 17-20.
\nZeithaml, V. & Bitner, M. (2003). Services Marketing: Integrating Customer Focus
\nAccross the Firm, 3rd ed., New York: McGraw Hill.
\nRECEIVED: 10\/08\/05
\nREVISIONS RECEIVED: 12\/29\/05
\nACCEPTED: 01\/17\/06
\ndoi:10.1300\/J149v08n03_01
\nRaab, Shoemaker, and Mayer 15<\/p>\n

Quiz 4
\nNames:
\nRead chapter 5 and answer questions 1 ? 7 (10 points each) and read the attached article to answer question 8 (30 points). Bring your answers to class on Tuesday October 25.<\/p>\n

1.\tIf a bartender can somehow accumulate extra liquor, and does not register the extra drinks, which of these activities could be spotted by the analytical methods we studied?
\nA.\tThe bartender steals the extra liquor
\nB.\tThe drinks are given away in hopes the guests will be generous with tips
\nC.\tThe drinks are sold and the money deposited by the bartender
\nD.\tThe drinks are sold and the revenue kept by the bartender<\/p>\n

\n2.\tWhich of these controls would be recommended to prevent bar personnel from bring in their own bottles?
\n1. Par stock
\n2. Daily inventory
\n3. Use of lined shot glasses
\n4. Bottle tags or stickers
\n5. Use of a perpetual inventory
\nA.\t1, 3, 4
\nB.\t1, 4
\nC.\t2, 4, 5
\nD.\t1, 2<\/p>\n

\n3.\tIf a bartender were overpouring:
\nA.\tThere would not be a variance between the standard and actual revenue
\nB.\tThe actual usage would be more than the standard
\nC.\tThe inventory would show a difference in the par stock
\nD.\tThe standard cost would be higher than the actual<\/p>\n

\n4.\tIf a bartender was underpouring and not registering the extra drinks (but keeping the extra revenue), which of the following would be true?
\nA.\tThere would be a variance between the actual and the standard revenue.
\nB.\tThe actual usage would be higher than the standard usage.
\nC.\tThere would be no variances in any of the analysis methods we studied
\nD.\tThe actual percentage would be higher than it should be
\nE.\tThe actual dollar cost would be less than the standard dollar cost<\/p>\n

5. If a bartender were substituting a well scotch for a premium scotch, charging the guest the premium price, and was ringing up the well price; what would your analysis show?
\na)\tThe revenue for the premium brand would be low
\nb)\tNone of these
\nc)\tThe usage of the premium brand would be excessive
\nd)\tThe usage of the well brand would be excessive
\ne)\tThe revenue for the well brand would be low<\/p>\n

\n6. If a bartender brought in his\/her own bottle, there is a potential of which of these?
\na. \tThe portion sizes can vary
\nb.\tAdditional drinks
\nc.\tStandard portion size larger than the actual
\nd.\tActual revenue less than the standard<\/p>\n

7.\tWith a no host bar, the major danger is:
\na.\tBartenders not pouring standard portions
\nb.\tBartenders padding the catering bill and moving the bottles to the bar
\nc.\tBartenders stealing liquor
\nd.\tBartender stealing cash.<\/p>\n

8. (30 points)
\nPlease read the attached article (Activity-Based Costing:
\nA More Accurate Way to Estimate the Costs for a Restaurant Menu, Raab
\nShoemaker and Mayer) and describe the advantages of using Activity-Based Costing (ABC) methods in a restaurant.<\/p>\n","protected":false},"excerpt":{"rendered":"

ABSTRACT. Activity-Based Costing (ABC) has been successfully applied in the manufacturing industry for the last two decades. In this study, a workable ABC model for restaurants was created and tested in a restaurant operation in a western urban area of Read More …<\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-14595","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts\/14595","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/comments?post=14595"}],"version-history":[{"count":0,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts\/14595\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/media?parent=14595"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/categories?post=14595"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/tags?post=14595"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}