Activity-based costing in restaurants
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
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
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