Activity-based costing in restaurants

Topics: Costs, Cost accounting, Management accounting Pages: 16 (5354 words) Published: July 8, 2014
Activity-based costing in restaurants

1. Introduction
Interest in cost and management accounting practices in the restaurant industry is rising (Raab et al., 2009; Annaraud et al., 2008). Pavesic (1985) has initiated research in pricing and cost accounting for restaurants, introducing the concept of profit factor (PF) in menu engineering (ME). Prior studies, such as the one presented in Chan and Au (1998) investigate the implications of not incorporating overhead costs in menu-item profitability analyses in restaurants in Hong Kong. Since then, a number of researchers have examined the application of contemporary cost and management accounting techniques, and particularly activity-based costing (ABC) in a restaurant environment (Raab et al., 2004).

ABC is a cost accounting methodology that aims to allocate overhead costs effectively. ABC traces costs by using resource and activity cost drivers that reveal activities and objects consumption patterns on the basis of a cause and effect relationship. In an ABC, model cost drivers are used to establish a transitional mapping between resources, activities and cost objects. The identification and selection of appropriate and accurate cost drivers is one of the most difficult tasks in ABC models (Cobb et al., 1992). As this survey showed, most companies find it difficult to translate theory into action, mainly due to difficulties relating to data collection, identification of activities and lack of resources. The most common technique used for the identification of activities and the selection of cost drivers is by interviewing the heads of departments. Other methods include labour reporting systems, work order systems, employee surveys, observations, timekeeping systems and storyboards (Kaplan and Cooper, 1998). Velcu (2002) argued that some data, like cost driver information can be more easily obtained from a company’s information system, such as ERP systems. Although acompany may have implemented a variety of management information systems, obtaining sound information resulting from employee’s interviews, still remains a problem (Kostakis et al., 2011). This study aims at overcoming the problem of estimating cost drivers by introducing a methodology in ABC models in restaurants, a problem that commonly appears in practice. In particular, the study shows how by integrating three management techniques, one can accurately compute values for cost drivers, in cases where real data are not available or are difficult and time consuming to gather. These techniques include ABC, simulation and association rule mining (ARM) and are applied in the restaurant industry. The proposed method equally serves as a tool for improving cost estimation in menu-item profitability analysis.

2. Purpose and background
ABC in restaurants
ABC is one of the most important innovations in the field of cost and management accounting (Bjornenak and Mitchell, 1999; Bjornenak, 1997). ABC systems use a two-stage approach that is similar to the structure of traditional cost systems, such as job order costing and process costing. Traditional costing systems use actual departments or cost centres for accumulating and redistributing costs, while ABC systems use activities for this purpose. Thus, instead of asking how to allocate a service department expense to a production department, the ABC system designer requests a list of performed activities by the service department’s resources. The resource expenses are assigned on the one hand to the number of required activities and on the other hand on the former’s usage to perform these activities (Atkinson et al., 2001; Garrison and Noreen, 2000). The usefulness of ABC in the financial performance of firms has been explored in the literature. Cagwin and Bouwman (2002) use confirmatory factor analysis and structural equation modelling to investigate whether the use of ABC is associated with improved financial performance. Results show that:

[. . .] there is a...

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