Activity-based costing in restaurants

Raab, Shoemaker and Mayer (2007) developed a workable ABC model for a restaurant operation in the USA that enabled previously undistributed indi- rect operating expenses to be traced to individual menu items. Menu prices were previously deter- mined on a cost-plus basis using variable cost as the cost base. In recent years, indirect operating expenses had become a larger percentage of the total cost structure of the restaurant.

The ABC study only examined the restaurant’s dinner entrée and beverage service and its lunch menu was not included in the study. The ABC analy- sis revealed that 11 out of the 14 dinner entrées were unprofitable and were thus a major contributor to the restaurant’s negative operating profit. These results reflect the restaurant’s relatively high over- head costs which were not taken into account when determining menu prices. The authors conclude that menu ABC profitability analyses that goes beyond the simple analysis of food costs can be applied in the restaurant industry and that a restau- rant manager’s menu management decisions will differ dramatically if he or she is confronted with the differing results arising from an ABC approach.

Reference: Raab, C., Shoemaker, S. and Mayer, K.J. (2007) Activity- based costing – A more accurate way to estimate costs for a restaurant menu, International Journal of Hospitality & Tourism Administration, 8(3), 1–15. Available at dx.doi.org/10.1300/J149v08n03_01

Questions:

1. The first step in designing an ABC system is to identify the major activities in an organization. What are the major activities in a restaurant?

2. What action should an organization take when the ABC analysis identifies loss-making activities?

3. What are the factors that might prevent the restaurant industry from using ABC?