Quiz 4NamesRead chapter 5 and answer questions 1 – 7 (10 poin.docx

Quiz 4
Names:
Read 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 25.1. If 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?
A. The bartender steals the extra liquor
B. The drinks are given away in hopes the guests will be
generous with tips
C. The drinks are sold and the money deposited by the bartender
D. The drinks are sold and the revenue kept by the bartender
2. Which of these controls would be recommended to prevent
bar personnel from bring in their own bottles?
1. Par stock
2. Daily inventory
3. Use of lined shot glasses
4. Bottle tags or stickers
5. Use of a perpetual inventory
A. 1, 3, 4
B. 1, 4
C. 2, 4, 5
D. 1, 2
3. If a bartender were overpouring:
A. There would not be a variance between the standard and
actual revenue
B. The actual usage would be more than the standard
C. The inventory would show a difference in the par stock
D. The standard cost would be higher than the actual
4. If a bartender was underpouring and not registering the extra
drinks (but keeping the extra revenue), which of the following
would be true?
A. There would be a variance between the actual and the

standard revenue.
B. The actual usage would be higher than the standard usage.
C. There would be no variances in any of the analysis methods
we studied
D. The actual percentage would be higher than it should be
E. The actual dollar cost would be less than the standard dollar
cost
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?
a) The revenue for the premium brand would be low
b) None of these
c) The usage of the premium brand would be excessive
d) The usage of the well brand would be excessive
e) The revenue for the well brand would be low
6. If a bartender brought in his/her own bottle, there is a
potential of which of these?
a.
The portion sizes can vary
b.
Additional drinks
c.
Standard portion size larger than the actual
d.
Actual revenue less than the standard
7. With a no host bar, the major danger is:

a. Bartenders not pouring standard portions
b. Bartenders padding the catering bill and moving the bottles to
the bar
c. Bartenders stealing liquor
d. Bartender stealing cash.
8. (30 points)
Please read the attached article (Activity-Based Costing:
A More Accurate Way to Estimate the Costs for a Restaurant
Menu, Raab
Shoemaker and Mayer) and describe the advantages of using
Activity-Based Costing (ABC) methods in a restaurant.
Activity-Based Costing:
A More Accurate Way to Estimate
the Costs for a Restaurant Menu
Carola Raab
Stowe Shoemaker
Karl J. Mayer
ABSTRACT. Activity-Based Costing (ABC) has been
successfully ap-
plied in the manufacturing industry for the last two decades. In
this study,
a workable ABC model for restaurants was created and tested in

a restau-
rant operation in a western urban area of the United States. The
study iden-
tified that the actual cost of the dinner entrees was higher than
the
restaurant’s prices, when analyzed using ABC methods. The
results
revealed that ABC appears to be a very feasible method for
establishing
accurate menu costs in restaurants. doi:10.1300/J149v08n03_01
[Article
copies available for a fee from The Haworth Document Delivery
Service:
1-800-HAWORTH. E-mail address: <[email protected]>
Website:
<http://www.HaworthPress.com> © 2007 by The Haworth Press,
Inc. All rights
reserved.]
KEYWORDS. Restaurants, profitability, activity-based costing,
cost
accounting, menu pricing
Carola Raab, PhD, and Karl J. Mayer, PhD, both are Assistant
Professors, Tourism
and Convention Department, William F. Harrah College of
Hotel Administration,
University of Nevada, Nevada.
Stowe Shoemaker, PhD, is Associate Dean of Research, Conrad
N. Hilton College,
University of Houston, Texas.
Address correspondence to: Carola Raab, Tourism and
Convention Department,
William F. Harrah College of Hotel Administration, University

of Nevada, 4505 Maryland
Parkway, Las Vegas, NV 89154 (E-mail: [email protected]).
International Journal of Hospitality & Tourism Administration,
Vol. 8(3) 2007
Available online at http://ijhta.haworthpress.com
© 2007 by The Haworth Press, Inc. All rights reserved.
doi:10.1300/J149v08n03_01 1
mailto:[email protected]
http://www.HaworthPress.com
http://ijhta.haworthpress.com
INTRODUCTION
A major challenge for the restaurant industry in the twenty-first
cen-
tury will be the ability of restaurant managers to find a balance
between
appropriate product pricing and serving customers’ diverse
needs. One
theoretical approach that has provided manufacturing firms with
a better
comprehension of costs and increased profitability stems from
Activity-
Based Costing (ABC) theory (Cooper, 1989; Cooper & Kaplan,
1992).
ABC has major advantages over other costing methods by
showing the
ability to trace overhead costs, which allows for more accurate
unit cost-
ing (Turney, 1991; Cooper & Kaplan, 1992). Furthermore, ABC

infers
that activities are the antecedents of cost and that cost objects
create the
demand for activities (Turney, 1991). Cooper and Kaplan (1988)
pointed
out the general conditions that make companies good candidates
for the
application of ABC systems, such as a diversity of resource
consumption,
or the fact that product and resource consumption are not
correlated with
traditional cost allocation methods. Rotch (1990) stated that
these condi-
tions apply to service companies as well.
Even though ABC has been applied in such diverse service
firms as
health care and financial institutions, ABC applications in the
hotel or
restaurant industry are almost non-existent (Keller, 1994). The
restau-
rant industry generally establishes menu prices by using
contribution
margin analyses. However, Kaplan and Cooper (1988)
demonstrated
that the domain of traditional contribution margin analysis
could be
greatly enhanced by the use of ABC. In addition, Kunst and
Lemmik
(1995) pointed out the difficulties of tracing costs to activities
and
activities to products and customers in restaurants.
Raab and Mayer (2003) interviewed controllers of a sample of
the top
100 United States (U.S.) restaurant firms. Their study found

that restau-
rant managers are increasingly aware of the need to trace some
of their
overhead costs, such as salaries and wages, to individual menu
item
prices. Although approximately one-half of the respondents
attempted
to measure processes and their costs, only one restaurant
company was
able to gain knowledge of their labor costs by calculating
activity-based
labor costs (Raab & Mayer, 2003). The results of their study
indicate the
potential use of ABC in the restaurant industry.
However, few recent studies have discussed the application of
ABC
in the restaurant business. Thus, this study examines whether it
is feasi-
ble and desirable to extend ABC philosophies to the restaurant
industry.
The next section of this study examines the major challenges
faced by
restaurant managers and the traditional methods the industry
typically
2 International Journal of Hospitality & Tourism Administration
applies in order to manage costs and to create profits. In
addition, it
discusses why the traditional methods applied by the restaurant
industry
often do not maximize profits. Furthermore, it examines the
oppor-

tunities to maximize profits in the restaurant industry through
the
application of ABC methods.
RESTAURANT INDUSTRY BACKGROUND
Challenges in the Restaurant Industry
Traditionally, the restaurant industry, with small profit margins
and
high failure rates, is considered to be a risky business (NRA,
2001; Bell,
2002). A study conducted by American Express (2003) claimed
that
9 out of 10 new restaurant openings go bankrupt during their
first year
in business. Parsa (2003) challenged the American Express
study re-
sults and concludes that restaurant bankruptcies occurred at a
somewhat
lower rate of 60 percent.
Nevertheless, most of the published research on restaurant
failures
has concluded that the failure rates of new restaurants is
relatively high
and that independently owned restaurants are especially prone
to fail in
their first year of operation (Hume, 2002). The adverse
economic condi-
tions that followed the terrorist attacks of September 11, 2001
negatively
affected the U.S. restaurant industry, which was borne out in
unusually
high numbers of restaurant bankruptcy filings during 2002
(Hume,

2002). A study on business failures, including those in the
restaurant
sector, identified two common problems that cause businesses
to fail:
Ineffective financial control and poor marketing strategies
(Wilke,
Josiam, Upchurch & Willems, 1996). As a result, the restaurant
industry
is faced with a number of specific challenges. For example,
restaurants
are very labor-intensive with labor costs often representing a
large
share of total operating costs (Chan & Au, 1998; Quain,
Sansbury &
LeBrutto, 1999). The control of labor costs is difficult, because
service
provision is a major part of the product in the restaurant
industry. While
restaurant patrons expect quality of food and beverage items,
many
of them visit restaurants for the service experience itself.
Therefore,
controlling labor costs without decreasing the level of service is
a daunt-
ing task, which creates the basic challenge of finding a balance
between
serving customers’ desires and achieving acceptable
profitability levels.
Although restaurant managers generally are able to monitor
their cus-
tomer’s needs, most of them lack specific knowledge of whether
they
Raab, Shoemaker, and Mayer 3

will maximize overall profits by meeting their needs, in part
because
restaurant managers often do not know the true profitability of
their var-
ious menu items (Raab & Mayer, 2003).
Some restaurant studies suggest approaches that incorporate
labor
costs into menu item pricing (DeFranco & Noriego, 2000).
However, in
reality, menu prices are rarely analyzed; at best, either a
contribution
margin or menu engineering approach is applied to gain insights
about
proper menu pricing (Raab & Mayer, 2003). Further, menu
engineering
is based on a contribution margin analysis and cannot reveal the
true
profitability of a menu item if menu prices are set without a
thorough
knowledge of all operating costs. Clearly, these issues present
signifi-
cant continuing challenges for the restaurant industry.
Maximizing Restaurant Profits Through ABC
The application of ABC methods allows a manager to trace
undistrib-
uted operating expenses to individual menu items, which could
be bene-
ficial for several reasons. First, in the restaurant industry very
little
attention is ordinarily paid to undistributed operating expenses
when
product prices are established. Restaurant product prices are

usually
calculated strictly as a function of cost of goods sold, along
with a cer-
tain mark-up percentage (Bell, 2002). Usually, individual menu
item
prices only indirectly reflect any undistributed operating costs,
such
as labor, utilities, or fixed costs. In recent years, these expenses
have
increasingly captured a larger percentage of the total cost
structure
of a restaurant. In highly competitive market conditions, proper
pricing
measures become extremely important as profit margins are
dimin-
ished. Thus, restaurant operators may simply no longer be able
to afford
to price based on simply marking up their variable product
costs.
A more efficient and process-oriented restaurant organization
could
achieve increased labor productivity, thereby decreasing total
labor
costs, both directly and indirectly.
Second, an ABC analysis examines all major production
activities
and allows for the identification and reduction of activities that
cost
more than they add in value. These activities then can be either
elimi-
nated, outsourced, or conducted more efficiently by the
employees.
This type of analysis will assist not only in reducing
organizational
waste, but also in eliminating service delays for guests. In any

service
endeavor, all employees should be made responsible for the
entire
process of achieving customer satisfaction and loyalty
(Zeithaml &
Bitner, 2003).
Third, once ABC are calculated, the accounting and marketing
func-
tions can cooperatively apply Activity-Based Pricing (ABP)
methods
by considering the relationships between ABC and menu prices
de-
termined at the point where total profits are maximized as well
as
value is created for customers (Daly, 2002). For example,
research by
Cardinaels, Roodhooft and Warlop (2004) found that using ABC
analy-
sis to help make pricing decisions could have significant
positive
impacts for multiple market segments under highly competitive
condi-
tions, which is typically the case for most hospitality markets.
Thus, it
seems quite apparent that ABC methods might be applied to the
restau-
rant industry with some tangible benefits.
The remainder of this paper will demonstrate how the basic
princi-
ples of ABC can be applied to the restaurant business. In doing

so, it
addresses two principal research questions: (1) Can an ABC
approach
trace restaurant overhead costs through activity centers to
individual
menu items; and, (2) can an ABC approach reveal the true cost
structure
of individual menu items?
In order to address these questions, an ABC model for the
restaurant
industry was needed, as one did not already exist. An ABC
model for
restaurants was developed by modifying Cooper’s (1989) ABC
model
for the manufacturing industry. Following Cooper’s (1989)
approach, a
qualitative case analysis technique, which incorporated both
observa-
tion and interview methods, was applied to this study. The
result of the
case analysis was an ABC model that was applicable to a full-
service
restaurant (Figure 1).
Next, a methodology for applying the model was created that
allowed
for the practical application of ABC in a restaurant setting
(Cooper,
1989; O’Guin, 1991; Keller, 1994; Garrison & Noreen, 1997;
Cokins,
2001; Daly, 2002). The model and its methodology were
prepared in
conjunction with the management of a full-service restaurant in
the
western United States to ensure that the approach was

fundamentally
sound. Dinner entrées were selected as the menu items to be
analyzed in
this study because management expressed concerns about the
profit-
ability of the restaurant’s dinner menu.
AN ABC APPROACH FOR RESTAURANTS
The first step of an ABC analysis is the identification of
activities and
activity centers. Activity centers are established across
departments and
accountability structures by combining homogenous processes.
For a
restaurant, it was appropriate to create two activity centers: The
Front-
of-the-House (FOH); and, the Back-of-the House (BOH).
Individual
activities in the restaurant were then identified so they could be
classi-
fied into either activity center. Major activities in the restaurant
industry
are myriad, and include purchasing, receiving, storing, food
prepara-
tion, cooking, cleaning, dining room set-up, customer seating,
taking
orders, ordering and serving food and beverages, table
maintenance, ca
shing out customers, and customer communication. However, all
ac-

tivities were ultimately coded as either FOH or BOH activities.
They
were then classified in an Activity Dictionary, as shown in
Tables 1 and 2,
so they could be easily communicated to all restaurant
employees and to
facilitate further analysis.
Garrison and Noreen (1997) suggest that all activities should be
detailed in a Process Value Analysis (PVA), which is a flow
chart that
reveals all activities conducted in an organization and labels
them as
value-added and non-value added. In the restaurant industry,
only activ-
ities that actually produce the product or provide service to the
customer
are value-added. For example, all customer communications
occurring in
Restaurant Activity-Based Cost Model
General Ledger
Personnel
First
Stage
Second
Stage
Unit-Level
Batch-Level

Product-Sustaining
Unit-Level
Batch-Level
Product-Sustaining
Facility-Sustaining
Food Cost
BOH Activitiy Center
Dinner Entrées
FOH Activitiy Center
Unit-Level
Batch-Level
Product-Sustaining
Direct Operating Facility-Sustaining
FIGURE 1. Activity-Based Model for Restaurants
the Front-of-the-House and the production of menu items in the
Back-
of-the House are value-added activities. Non-value added
activities
include receiving, storing, moving goods, and waiting for
processing.
Basically, most non-value added activities consume resources
without

adding value to the product. Therefore, in order to minimize
costs in a
restaurant, such activities should be carefully examined by
means of a
PVA approach.
The next phase of applying ABC to a restaurant involved the
exami-
nation of the general ledger and the assignment of overhead
costs
TABLE 2. Activity Dictionary (Front-of-the-House)
Main Activities Description
Communicating Taking orders, interaction with customers,
greeting customers, explain
menu, sell menu items, taking reservations, answering phones,
checking on guest satisfaction, seating people, communicating
between bussers, management and servers.
Cleaning Keeping menus in order, cleaning floors, maintaining
tables, and
cleaning ashtrays.
Set-up Folding napkins, polishing silver, dining room set up (set
tables, side
station), making coffee, processing checks, process orders,
(inputting
into the Point-of-Sales System), close tabs.
Serving customers Serve water, pick up orders, serve meals,
time orders, bringing
condiments to table, replacing cutlery, present check, collect

payment, and make change,
Administrating Supervision, forecasting, scheduling, and
training.
TABLE 1. Activity Dictionary (Back-of-the-House)
Main Activities Description
Cleaning Dish-washing, disinfecting, cleaning floors, washing
pots, refill soap hand
wash stations, cleaning walls, counters, hoods, staff bathrooms,
refrigera-
tors, storage, beverage machines, removing trash, and washing
hands.
Preparation Selecting, washing, cutting fruit and vegetables,
defrosting, pre-portioning,
sauces and soups, cutting meat, grinding meat, mixing
ingredients, and
line set-up.
Cooking Preparing hot meals, expediting, read orders and time
orders, dish out
soup, cook sides, fry meat and seafood, arrange items on plate
and
garnish, keep food warm, preparing salad, put together
ingredients,
preparing desserts, cut cake and dish ice cream, whip cream,
bake,
broil, blanch, stewing and, plate set-up.
Administrating Purchasing, budgeting, supervising, menu
research, create menus and
items, scheduling, training staff, receiving, storing, and
forecasting.

into homogeneous cost pools. According to the Uniform System
of
Accounts for Restaurants, overhead costs include the following
items:
(1) Salaries and Wages; (2) Employee Benefits; (3) Direct
Operating
Expenses; (4) Music and Entertainment; (5) Marketing; (6)
Utility Ser-
vice; (7) General and Administrative Expenses; and, (8) Repair
and
Maintenance Expenses (Schmidgall, 1997). Homogeneous cost
pools
are a collection of overhead costs for which cost variations can
be
explained by only one first stage cost driver and that share a
common
purpose in the operation of the facility. An example of a first
stage cost
driver is the number of hours worked by the employees. This
first stage
cost driver is applicable to all labor related overhead costs.
Working with restaurant management and following the model
guide-
lines (Figure 1), three separate cost pools were created–labor,
direct
operating supplies, and facility sustaining. The first two cost
pools con-
tained overhead costs that were directly traceable to individual
menu
items. On the other hand, the facility sustaining cost pool
contained all
other overhead costs for which no first stage cost driver could

be identi-
fied. Therefore, no cost driver rates were established for this
cost pool.
Next, the labor and direct operating supplies cost pools were
divided by
the number of cost driver units, which established a cost driver
rate for
each of them. These pool rates were later applied as an internal
costing
mechanism for the dinner entrées, to reflect the cost of
resources they
consumed at each activity level.
The next step of an ABC process divides each activity center
into a
second stage, and establishes “second stage” cost drivers by
dividing
the total costs of each activity center into activity cost driver
pools.
According to ABC theory, all activities have a hierarchy, and
cost drivers
enable the activities to be grouped into different levels, such as
unit-
based, batch-related, product-related, or facility sustaining
(Cooper,
1990; Turney, 1991; O’Guin, 1991; Garrison & Noreen, 1997).
Thus, there are four categories of second stage cost drivers
applicable
to the restaurant industry. The first is unit cost drivers, which
occur any-
time a unit is produced and are directly related to the number of
units
produced. The number of employee hours and units of utilities
used are
unit-based cost drivers applicable to the restaurant industry. The

second
category, batch cost drivers, incorporate everything that is
produced in
batches such as setting up the kitchen line or purchasing
inventory. The
third category, product level drivers, signify resources used by
product-
level activities that are performed to sustain products in the
company’s
product line. In a restaurant, some examples of product-level
activities
include establishing and maintaining specifications, recipe
testing, and
expediting food production. Finally, the facility sustaining cost
driver
category contains costs that sustain a company’s general
processes such
as accounting, marketing, property taxes, security and
landscaping.
According to ABC theory, each of the activity cost driver pools
has
its cost assigned to products using a second stage cost driver
that is unique
to each cost pool. A cost driver pool is distributed to products
based on
the number of cost driver units it consumes. The overhead cost
applied
to the product is calculated by multiplying the number of cost
driver
units with the cost pool rates established during the first stage

of an
ABC process. Finally, ABC costs that were calculated for each
entree
were condensed as bills of activity. A completed bill of activity
becomes
a powerful tool for analysis and subsequent action by restaurant
man-
agement. An example of a completed bill of activity that
resulted from
this study for a dinner entrée (Pasta Marinara) is presented in
Table 3.
Since the restaurant involved in this study operated at a loss, all
over-
head costs were a major source of concern by management.
However,
similar to most restaurant operations, labor and related costs
repre-
sented by far the greatest source of concern to management.
Therefore,
the main objective for the study became the ability to trace
labor and
related costs to each entrée. In addition, management also
wanted to
trace all direct operating supplies to individual dinner menu
items.
Thus, three cost pools were established along these lines: (1) A
“Person-
nel” cost pool, which included all salaries, overtime pay, and
wages for
temporary help, all employer taxes, worker compensation
expenses,
employer insurance, and employee meal accounts; (2) a “Direct
Operat-
ing Supplies” cost pool, incorporating the uniform and laundry
account

as well as the disposable supplies account; and (3) a “Facility
Sustaining”
cost pool, including the utility, repair and maintenance,
accounting,
general and administrative expenses, insurance, security,
landscaping,
telephone, marketing, travel and entertainment, and equipment
depre-
ciation accounts.
Next, the three cost pools were assigned to the two activity
centers
(FOH and BOH) and cost pool rates were calculated. Table 4
displays
the results of this process for the first two cost pools, including
their as-
sociated cost pool rates. Table 4 does not display the facility
sustaining
cost pool because according to the ABC literature, cost pool
rates can
only be calculated from cost pools that can be traced to
individual menu
items (O’Guin, 1991; Garrison & Noreen, 1997). Instead, an
allocation
value was established for the facility sustaining cost pool based
on the
number of dinner entrees that were sold during the month of
November
2003. This approach for these costs is consistent with ABC
theory in
manufacturing, which ultimately allocates a portion of the total

over-
head costs that cannot be traced to individual items. All figures
shown
in Table 4 were obtained from the restaurant’s general ledger
for
November 2003, which was provided by restaurant management.
Both
activity centers were then divided into cost driver pools and
levels of
activities were established.
10 International Journal of Hospitality & Tourism
Administration
TABLE 3. Completed Bill of Activity for Pasta Marinara Entrée
Activities Resources
Used
Cost Pool Rates
($/Minute)
Total Cost $
Unit-Level Activities–FOH
Communicating 1.20 minutes 0.39 0.47
Setting-up 1.00 minutes 0.39 0.39
Serving customers 1.00 minutes 0.39 0.39
Processing checks 1.45 minutes 0.39 0.56
Total 4.65 minutes 1.81
Unit Level Activities–BOH
Preparation 2.0 minutes 0.17 0.34
Cooking 2.0 minutes 0.17 0.34
Cleaning 1.0 minutes 0.17 0.17

Total unit-level activities 9.65 minutes 2.66
Batch-Level Activities–FOH
Setting-up 3.20 minutes 0.39 1.25
Administrating 3.83 minutes 0.39 1.49
Batch-Level Activities–BOH
Preparation 6.13 minutes 0.17 1.04
Total batch-level activities 20.30 minuts 5.29
Product-Sustaining Activities
FOH–Administrating 2.55 minutes 0.39 0.99
BOH–Administrating 3.21 minutes 0.17 0.55
Total Product-Sustaining Activities 5.76 1.54
Facility-sustaining activities 1 unit 5.29
Direct operating costs 4.97 percent 0.26 1.29
Food costs 1 unit 2.00
Total cost 18.07
Observation and interview methods were employed to identify
sec-
ond stage cost drivers and activity hierarchies, which divided
the two
activity centers into unit-level, batch-level, product-related, and
facility
sustaining cost pools. Basic second stage cost drivers for unit-
level ac-

tivities were identified as time spent on activities conducted
each time a
customer is served and an entrée is produced. General cost
drivers for
batch-level activities were the number of batches required, such
as
number of set-ups per day, or the number of times purchasing
and re-
ceiving is needed during the month. Major product-sustaining
cost driv-
ers were identified as the number of new menu items created
each
month and the number of new employees hired per month. The
results
of the ABC process became a completed bill of activity for each
menu
entrée (Table 3), which allowed restaurant management to truly
under-
stand the cost structure of its menu for the first time.
DISCUSSION
The ABC approach described in this study revealed that the
dinner
menu, which contained fourteen individual entrées, was the
major
contributor to the restaurant’s negative operating profit. This
result
reflects the restaurant’s relatively high overhead costs, and
particularly
its high labor costs. In this case, the entrées’ actual costs were
higher
than the restaurant’s menu prices, if analyzed using ABC
methods.
Therefore, every time a dinner entrée was sold, with the
exception of

TABLE 4. Cost Pool Rates
Activity Centers Personnel Direct Operating Supplies
FOH $23.60/hour
($11,545/489 hours)
$0.26/entrée
($218.24/828 units consumed)
FOH cost pool rate
calculations
Total labor cost/hours worked Total direct operating costs/units
used
BOH $10.22/hour
($4686.75/458.50 hours)
$0.26/entrée
($509.23/1932 units consumed)
BOH cost pool rate
calculations
Total labor cost/hours worked Total direct operating
costs/units used
Note: All figures shown in the table were obtained from
restaurant management for the month of November
2003; for example, the hours used came from the restaurant’s
payroll records, and the units consumed rep-
resent actual supplies that were used during the month.

three entrees that could be classified as very profitable, the
restaurant
suffered an operating loss.
In addition, the analysis of the general ledger cost pools
provided
some compelling insights. First, the separation of overhead
costs into
homogenous cost pools and their assignment to the FOH and
BOH ac-
tivity centers revealed where major costs occurred with far more
preci-
sion. For example, for the dinner shift observed in this study,
the FOH
incurred 61 percent of the overhead costs; of that figure, the
FOH “Per-
sonnel” cost pool represented over half (53 percent) of all
overhead
costs. The detailed analysis of labor costs and hours necessary
to estab-
lish the “Personnel” cost pool and a cost pool rate identified
that the
hourly wages paid at the restaurant involved in this study are
much
higher than restaurants traditionally pay for their labor.
In addition, the analysis showed that the BOH incurred overtime
hours
for 53 percent of all hours worked. The use of part-time
employees and
more sophisticated demand forecasting methods are some likely
solutions
that could result in the reduction of overtime hours for this

establishment.
Another opportunity for management to reduce FOH labor costs
arises
from the use of PVA to reduce and eliminate any non-value
added activi-
ties. For example, in the restaurant involved in this study,
approximately
one-half of all the existing activities in the BOH and FOH are
consuming
resources without directly assisting in producing products or
providing
service to the customer. This seems much too great a
commitment to
non-value added activities. Therefore, management should
review all
non-value added activities and use this information to improve
the estab-
lishment’s processes. Some of the non-value added activities
that were
identified should be eliminated, such as personal conversations
and ex-
tensive personal phone calls. Other non-value added activities
could be
candidates for outsourcing. For example, non-value added food
prepara-
tion activities in the BOH could be reduced if pre-cut and pre-
washed
produce is purchased and meat and fish product are purchased
already
portioned. Finally, it may be advisable to outsource some of the
cleaning
activities such as the cleaning of hoods, walls and restrooms.
Even
though these actions may be considered common sense for a
restaurant

manager, the significance these insights might not have been
identified if
the restaurant had not been subjected to an ABC analysis.
These insights are consistent with the thrust of ABC
applications in
the business literature, which suggest that if products consume
diverse
amounts of resources, the ABC method will reveal dramatically
different
product costs in comparison to product cost methods that are
based solely
on contribution margins (Cooper, 1989). Indeed, this study
revealed that
Administration
overhead costs were consumed at a diverse resource
consumption rate
by each entrée.
IMPLICATIONS AND LIMITATIONS
This study demonstrated that ABC methods can be successfully
applied to a restaurant. The ABC model that was developed in
this study
can be applied to virtually any full-service restaurant, but the
results of
such a study would likely be different from this one, depending
upon the
market characteristics and cost structure of that particular
restaurant.
Nevertheless, applying ABC methods can assist to restaurant

operators
in a number of ways. First, ABC can enhance restaurant
feasibility anal-
ysis by making menu planning more accurate relative to
individual item
profitability. Second, ABC methods can help a restaurant
identify
which menu items are truly profitable and which ones are not,
given the
restaurant’s customer profile. Third, ABC methods can assist in
evalu-
ating promotions, such as the decision to use a price discount on
a fea-
tured item to boost sales; ABC can help determine whether that
decision
will incur a profit or loss for the promotion.
Although it is only a single case study of a restaurant, the
findings indi-
cate that restaurant managers should make menu decisions using
more
complete cost information. It also suggests that applications of
menu
profitability analyses that go beyond the simple analysis of food
costs
may be very appropriate for a restaurant. Restaurant managers
can make
much more reliable decisions with complete cost information,
which
emphasizes the need to calculate ABC costs for each item on the
menu.
Furthermore, this study supports Cooper’s (1989) view that the
lack
of precise product overhead costs may totally distort total
product cost

and price, which was the case for this restaurant. Thus, it is
likely that a
restaurant manager’s menu management decisions will differ
dramati-
cally if he or she is confronted with differing results from a
contribution
margin or an ABC approach. Of course, many other factors
besides cost
also enter into menu pricing decisions, such as customer
perceptions of
value and quality, customer segmentation, and competition.
This study contains a number of limitations that should be
noted.
First, although the ABC model that was developed could be
applied to
other full-service restaurants, the specific findings of this study
cannot
be generalized to the restaurant industry as a whole, or to other
restaurant
types, without further research. Second, this study only
examined the
restaurant’s dinner entrees; the restaurant’s beverage service
and its
lunch menu were not included herein. Thus, no conclusions can
be
drawn about the restaurant’s situation on an overall basis since
a com-
plete ABC analysis of all food and beverage items was not done.
SUMMARY

This study was able to develop and apply a workable ABC
model for
a restaurant, which established a unique overhead cost value for
each
menu item. This process allowed for the calculation of bills of
activities
for all entrées, which included both the overhead costs and food
cost per
entrée. Therefore, this study was able not only to assign
accurate over-
head rates, but also to provide true product cost information for
the res-
taurant in the form of operating profit margins for each entrée.
It
suggests that ABC methods can be applied in the restaurant
industry,
and may allow for greatly improved financial analyses that
incorporate
more precise and complete cost information. Thus, the study
revealed
that the application of ABC methods to restaurants is not only
feasible,
but also highly informative.
Future research on this topic should include determining
whether ABC
methods can be applied to other restaurant types, such as buffet,
quick
service, or casual dining venues. In addition, the ABC analysis
should in-
corporate all meal periods in a restaurant, so that an overall
picture of the
operation can be determined. Further, the potential application
of ABC
methods to other hospitality sectors, such as hotels, spas, or

casinos,
should be investigated. Finally, it would also be beneficial to
conduct a
study that combines ABC with a price sensitivity analysis,
which would
incorporate both costing and pricing aspects of a hospitality
operation.
REFERENCES
American Express (2003). Unpublished study cited in the NBC
television show: The
Restaurant.
Bell, D. (2002). Food & Beverage Cost Control–Course Packet.
Las Vegas: University
of Nevada, Las Vegas, Department of Reprographic Services.
Cardinaels, E., Roodhooft, F. & Warlop, L. (2004). The Value
of Activity-Based Costing
in Competitive Pricing Decisions, Journal of Management
Accounting Research,
l6(1), 133-148.
Chan, W. & Au, N. (1998). Profit Measurement of Menu Items,
Cornell Hotel and
Restaurant Administration Quarterly, 39(2), 70-75.
Cokins, G. (2001). Activity-Based Cost Management: An
Executive Guide, NY: John
Wiley & Sons, Inc.
Administration

Cooper, R. (1989). The Rise of Activity-Based Costing–Part 4:
What Do Activity-
Based Cost Systems Look Like? Journal of Cost Management,
Spring, 38-49.
Cooper, R. (1990). Cost Classification in Unit Based and
Activity-Based Manufactur-
ing Costs Systems, Journal of Cost Management, 4(3), 4-14.
Cooper, R. & Kaplan, R. (1992). Activity-Based Systems:
Measuring the Costs of
Resource Usage, Accounting Horizons, 6(3), 1-11.
Daly, J. (2002). Pricing for Profitability: Activity-Based Pricing
for Competitive
Advantage, NY: John Wiley & Sons, Inc.
DeFranco, A. & Noriego, P. (2000). Cost Control in the
Hospitality Industry, Upper
Saddle River, New Jersey: Prentice Hall.
Garrison, R. & Noreen, E. (1997). Managerial Accounting, 8th
ed., NY: Irwin
McGraw-Hill.
Hume, S. (2002). Shape Shifting: In a Downbeat Economy, Top
400 Companies Focus
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Kaplan, R. & Cooper, R. (1988). Measure Costs Right: No
longer. Journal of Manage-
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Keller, B. (1994). Activity-Based Costing for the Hotel
Industry, [Monograph].
Cornell University.
Kunst, P. & Lemmik, J. (1995). Managing Service Quality.
London: Paul Chapman
Publishing Ltd.
National Restaurant Association (2001). Retrieved April 4, 2003
from www.restaurant.org
O’Guin, M. (1991). The Complete Guide to Activity-Based
Costing, NY: Prentice Hall.
Parsa, H. (2003). Retrieved September 15, 2004 from
http://www.researchnews.osu.
edu/archive/restfail.htm.
Quain, E., Sansbury, M. & LeBrutto, S. (1999). Revenue
Enhancement, Part 4, Cornell
Hotel and Restaurant Administration Quarterly, 40(3), 38-47.
Raab, C & Mayer, K.J. (2003). Exploring the use of activity
based costing in the restau-
rant industry, Int'l Journal of Hosp. & Tourism Admin, 4(2) 79-
96.
Rotch, W. (1990). Activity-Based Costing in Service Industries,
Journal of Cost Manage-
ment, Summer, 4-14.
Schmidgall, R. (1997). Hospitality Industry Managerial
Accounting, 4th ed., Lansing,
MI: Educational Institute American Hotel & Motel Association.
Turney, P. (1991). Common Cents. The ABC Performance
Breakthrough, Cost Tech-

nology, 13-17.
Wilke, E., Josiam, B., Upchurch, R. & Willems, J. (1996).
Restaurant Attrition: A Lon-
gitudinal Analysis of Restaurant Failures, International Journal
of Contemporary
Hospitality Management, 8(2), 17-20.
Zeithaml, V. & Bitner, M. (2003). Services Marketing:
Integrating Customer Focus
Accross the Firm, 3rd ed., New York: McGraw Hill.
RECEIVED: 10/08/05
REVISIONS RECEIVED: 12/29/05
ACCEPTED: 01/17/06
doi:10.1300/J149v08n03_01
http://www.restaurant.org
http://www.researchnews.osu

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