Shoreline Community College Activity Based Costing Project

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HMD 330 Cost Control
Activity Based Cost Project, Spring 2022
The application of Activity-Based Costing in a Casual Service Restaurant
The Barcelona restaurant is a franchise located in the southwestern USA. It is a casual service
restaurant and has about 80 seats.
The study will calculate Activity-Based Costs for major items from the restaurant menu as
selected by management. Students should incorporate the following steps:
ABC Stage One
1. Decompose the general ledger (use the provided income statements for October 2020 (Table
1) into major cost pools following the model below (Figure 1).
Figure 1
1
HMD 330 Cost Control
Table 1. General Ledger, Barcelona Restaurant, October 2020
Total Revenue
CGS – Food
$122,560.00
$32,450.00
CGS – Beverage
$1,280.00
Operating Supplies Experience
$2,500.00
FOH Salaries
$14,521.06
BOH Salaries
$20,671.94
Accounting Service Fees
$250.00
Transportation
$186.00
Security
$33.00
Bank charges
$49.00
Travel and Entertainment
$250.00
Marketing & Promotion
$600.00
Insurance
$280.00
License fees
$350.00
Overtime Payment
$650.00
Telephone
$143.00
Linen & Laundry
$375.00
Office Supplies
$200.00
Employee Benefits
$905.79
Employee Meals
$301.93
Administrative & General
$4,800.00
Employer Tax
$492.90
Employer Insurance
$603.86
Utilities
$1,680.00
Rent and Maintenance
$1,520.00
Depreciation
$1,260.00
2
HMD 330 Cost Control
Table 2. Selected Menu Item Data
Menu Item
#
Sold
(Mm)
210
Menu
Mix %
(Mm%)
5.45%
Item
Food
Cost
2.24
Item
Price
1
Chopped Salad
2
Chopped Salad w Chicken
200
5.19%
3.12
11.70
3
Chopped Salad w Tuna
58
1.51%
3.02
12.70
4
Arugula Pear Salad
100
2.60%
2.24
8.75
5
Arugula w Chicken
150
3.90%
3.06
11.50
6
Arugula w Tuna
80
2.08%
3.08
12.50
7
Cobb Salad
370
9.61%
2.59
10.75
8
Chicken Caesar Wrap
320
8.31%
3.18
9.95
9
BBQ Chicken Wrap
259
6.73%
3.18
9.95
10
Chicken Tender Wrap
160
4.16%
3.08
9.95
11
Cheeseburger
269
6.99%
2.25
7.95
12
Chicken Mushroom Burger
112
2.91%
2.69
9.95
13
Grilled Garden Burger
202
5.25%
2.07
8.95
14
Smoked Turkey & Avocado
320
8.31%
2.53
10.75
15
Club Sandwich
310
8.05%
3.36
11.50
16
Turkey Club
230
5.97%
3.58
10.95
17
Signature Pasta
125
3.25%
2.88
11.50
18
Angel Hair Bolognese
122
3.17%
2.35
10.95
19
Traditional Tomato Basil
153
3.97%
2.54
9.75
20
Rachel’s Mac & Cheese
100
2.60%
2.08
9.95
3,850
100.0%
Total
8.95
3
HMD 330 Cost Control
Table 3. Activity Resource Required Minutes
Activities
FOH
BOH
Required Minutes
Checking inventory
0.45
Receiving a guest order
0.32
Cleaning kitchen equipment after
cooking an entrée
0.36
Cleaning up kitchen after closing
0.42
Cooking an entrée
0.52
Dining Room Supervision
0.32
Folding napkins
0.15
0.45
0.28
Line Cook Training
Preparation an entrée
Processing Checks
0.12
Recipe Testing
0.32
0.22
Serving Customers
Setting-up a table for next guests
Setting-up tables before opening
Vacuuming floor
0.26
0.35
0.35
2.
Calculate Labor and Facility-Sustaining Costs pools.
3.
Establish cost pool rates and an allocation value using the following information:
a) The total # of items sold was 3850 during October 2020
b) The employees worked 1,200 hours in the FOH, and 1,150 hours in the BOH during
October, 2020.
4.
Conduct a Contribution Margin Menu Engineering (CM ME) Analysis (Table 5
template) by using the selected menu item data displayed in Table 2 Selected Menu Item
Data.
4
HMD 330 Cost Control
ABC Stage Two
5. Trace “Labor Costs” and “Facility-Sustaining Costs” from the activity cost pools (Table 1
General Ledger) and use the “Activity Resource Required Minutes” (Table 3) to
allocate the labor costs into three activity levels.
6. You are required to construct “Bill of Activity” (Table 4) for these 4 assigned menu
items, respectively. Based on your last name, you are required to analyze the 4 assigned
menu items as follows,
Your Last Name
A-M
Assigned Menu Items
Chopped Salad w/ Chicken; Arugula w Tuna;
Arugula Pear Salad; BBQ Chicken Wrap
N-Z
Cobb Salad; Chicken Mushroom Burger;
Angel Hair Bolognese; Cheeseburger
7. Calculate the ABC costs and conduct an ABC Menu Engineering Analysis (Table 6
template) by using the Table 6 template. (whole 20 menu items)
8. According to the ABC Menu Engineering Analysis, make Management
Recommendations on your 4 assigned items.
5
HMD 330 Cost Control
Table 4 Bill of Activity for ________ (Template)
Activity
Resource Required
(minutes)
Cost Pool Rate
($ / min)
Total Cost
Unit-Level Activities
FOH
FOH Activity Center Total
BOH
BOH Activity Center Total
Unit Level Activity Pool Total
Batch-Level Activities
FOH
FOH Activity Center Total
BOH
BOH Activity Center Total
Batch Level Activity Pool Total
Product-Sustaining Activities
FOH
FOH Activity Center Total
BOH
BOH Activity Center Total
Product Sustaining Activity Pool
Total
Cost per unit
Labor Activity Pool
Facility Sustaining Activity Pool
1 unit
1 unit
Food Cost
1 unit
Total Activity Based Cost
6
HMD 330 Cost Control
Table 5 CM Menu Engineering Analysis (Template)
MENU ITEM
1
Chopped Salad
2
Chopped Salad w
Chicken
3
Chopped Salad w
Tuna
4
Arugula Pear Salad
5
Arugula w Chicken
6
Arugula w Tuna
7
Cobb Salad
8
Chicken Caesar Wrap
9
BBQ Chicken Wrap
10
Chicken Tender Wrap
11
Cheeseburger
12
Chicken Mushroom
Burger
13
Grilled Garden Burger
14
Smoked Turkey &
Avocado
15
Club Sandwich
16
Turkey Club
17
Signature Pasta
18
Angel Hair Bolognese
19
Traditional Tomato
Basil
20
Rachel’s Mac &
Cheese
#
SOLD
(MM)
MENU
MIX %
(MM%)
ITEM
FOOD
COST
ITEM
PRICE
ITEM
CM
Total
Item
COSTS
Total Item
REVENUES
Total
Item
CM
MM
%
RANK
CM
RANK
MENU
ITEM
CLASS
Total
7
Profit
Factor
HMD 330 Cost Control
Table 6 Activity-Based Costing Menu Engineering Analysis (Template)
1
2
3
4
5
6
7
8
9
10
11
Menu Item
Chopped Salad
15
Club Sandwich
16
Turkey Club
Signature
Pasta
Angel Hair
Bolognese
Traditional
Tomato Basil
Rachel’s Mac
& Cheese
17
18
19
20
Item
Price
Total
Item
ABC
Costs
Total
Item
Rev
Total
Item Op
Profit
Popularity
Rank
Profitab
ility
Rank
Menu Item
Class.
Cobb Salad
Chicken
Caesar Wrap
BBQ Chicken
Wrap
Chicken
Tender Wrap
14
13
Menu
Mix %
Item
Op
Profit
Chopped Salad
w Chicken
Chopped Salad
w Tuna
Arugula Pear
Salad
Arugula w
Chicken
Arugula w
Tuna
Cheeseburger
Chicken
Mushroom
Burger
Grilled Garden
Burger
Smoked
Turkey &
Avocado
12
QTY
Sold
Item
ABC
Costs
Total
8
Profit
Factor
ABC
Cost
%
ABC Project
Student
William F. Harrah College of Hospitality, University of Nevada, Las Vegas
HMD 330
Professor Grace Yang
November 15, 2021
Contribution Margin Menu Engineering Analysis
MENU ITEM
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Chopped Salad
Chopped Salad w Chicken
Chopped Salad w Tuna
Arugula Pear Salad
Arugula w Chicken
Arugula w Tuna
Cobb Salad
Chicken Caesar Wrap
BBQ Chicken Wrap
Chicken Tender Wrap
Cheeseburger
Chicken Mushroom Burger
Grilled Garden Burger
Smoked Turkey & Avocado
Club Sandwich
Turkey Club
Signature Pasta
Angel Hair Bolognese
Traditional Tomato Basil
Rachel’s Mac & Cheese
Total
#
SOLD
(MM)
MENU
MIX %
(MM%)
ITEM
FOOD
COST
ITEM
PRICE
ITEM
CM
MENU
COSTS
MENU
REVENUES
MENU
CM
MM%
RANK
CM
RANK
MENU
ITEM
CLASS.
PF
210
200
58
100
150
80
570
320
259
160
269
112
202
520
310
230
125
122
153
100
4.94%
4.71%
1.36%
2.35%
3.53%
1.88%
13.41%
7.53%
6.09%
3.76%
6.33%
2.64%
4.75%
12.24%
7.29%
5.41%
2.94%
2.87%
3.60%
2.35%
2.24
3.12
3.12
2.24
3.12
3.12
2.69
3.18
3.18
3.08
1.75
2.69
2.07
2.93
3.36
3.58
2.99
2.85
2.54
2.47
8.95
11.70
12.70
8.75
11.50
12.50
10.75
9.95
9.95
9.95
7.95
9.95
8.95
10.75
11.50
10.95
11.50
10.95
9.75
9.95
6.71
8.58
9.58
6.51
8.38
9.38
8.06
6.77
6.77
6.87
6.20
7.26
6.88
7.82
8.14
7.37
8.51
8.10
7.21
7.48
470.40
624.00
180.96
224.00
468.00
249.60
1,533.30
1,017.60
823.62
492.80
470.75
301.28
418.14
1,523.60
1,041.60
823.40
373.75
347.70
388.62
247.00
1,879.50
2,340.00
736.60
875.00
1,725.00
1,000.00
6,127.50
3,184.00
2,577.05
1,592.00
2,138.55
1,114.40
1,807.90
5,590.00
3,565.00
2,518.50
1,437.50
1,335.90
1,491.75
995.00
1,409.10
1,716.00
555.64
651.00
1,257.00
750.40
4,594.20
2,166.40
1,753.43
1,099.20
1,667.80
813.12
1,389.76
4,066.40
2,523.40
1,695.10
1,063.75
988.20
1,103.13
748.00
H
H
L
L
H
L
H
H
H
H
H
L
H
H
H
H
L
L
H
L
L
H
H
L
H
H
H
L
L
L
L
L
L
H
H
L
H
H
L
L
Plough Horse
Star
Puzzle
Dog
Star
Puzzle
Star
Plough Horse
Plough Horse
Plough Horse
Plough Horse
Dog
Plough Horse
Star
Star
Plough Horse
Puzzle
Puzzle
Plough Horse
Dog
0.88
1.07
0.35
0.41
0.79
0.47
2.87
1.35
1.10
0.69
1.04
0.51
0.87
2.54
1.58
1.06
0.66
0.62
0.69
0.47
4,250
100.0%
$12,020.12
$44,031.15
$32,011.03
Average Menu Mix (%)
Average Contribution Margin ($)
MENU ITEM
1
2
3
4
Chopped Salad w Chicken
Arugula w Tuna
Chicken Mushroom Burger
Turkey Club
3.50%
$7.53
#
SOLD
(MM)
MENU
MIX %
(MM%)
ITEM
FOOD
COST
ITEM
PRICE
ITEM
CM
MENU
COSTS
MENU
REVENUES
MENU
CM
MM%
RANK
CM
RANK
MENU
ITEM
CLASS.
PF
200
80
112
230
4.71%
1.88%
2.64%
5.41%
3.12
3.12
2.69
3.58
11.70
12.50
9.95
10.95
8.58
9.38
7.26
7.37
624.00
249.60
301.28
823.40
2,340.00
1,000.00
1,114.40
2,518.50
1,716.00
750.40
813.12
1,695.10
H
L
L
H
H
H
L
L
Star
Puzzle
Dog
Plough Horse
1.07
0.47
0.51
1.06
Activity-Based Costing Summary
Labor Cost Pool
FOH Salaries
BOH Salaries
Overtime Payment
Employee Benefits
Employee Meals
Employer Tax
Employer Insurance
Total
$
$
$
$
$
$
$
$
Facility Sustaining Cost Pool
Operating Supplies Experience
$
Accounting Service Fees
$
Transportation
$
Security
$
Bank charges
$
Travel and Entertainment
$
Marketing & Promotion
$
Insurance
$
License fees
$
Telephone
$
Linen & Laundry
$
Office supplies
$
Administrative & General
$
Utilities
$
Rent and Maintenance
$
$
Depreciation
Total $
14,521.06
18,671.94
650.00
905.79
301.93
492.90
603.86
36,147.48
2,500.00
250.00
186.00
33.00
49.00
335.00
600.00
312.00
500.00
143.00
677.00
408.00
5,516.86
1,680.00
2,020.00
1,260.00
16,469.86
ABC Cost Pool Summary
Labor
Facility-Sustaining
$
15,813.57
$
20,333.91
$
36,147.48 $
16,469.86
FOH
BOH
Total
FOH Payroll Ratio
BOH Payroll Ratio
43.75%
56.25%
Total hours worked FOH
Total hours worked BOH
Total #of times sold
ABC Cost Pool Rates
Labor Cost per min.
FOH
$
BOH
$
1,000
1,100
4,250
0.26
0.31
Facility Sustaining Cost Pool Allocation
Facility Sustaining Cost Pool
per Menu Item
$
3.88
Bill of Activity for Chopped Salad w Chicken
Activity
Resource Required (minutes)
Unit-Level Activities
FOH
Receiving a guest order
Processing Checks
Serving Customers
Setting-up a table for next guests
0.3
0.15
0.22
0.26
FOH Activity Center Total
BOH
Cleaning kitchen equipment after cooking an entrée
Cooking an entrée
Preparation an entrée
BOH Activity Center Total
Unit Level Activity Pool Total
Batch-Level Activities
FOH
Folding napkins
Setting-up tables before opening
Vacuuming floor
FOH Activity Center Total
BOH
Checking inventory
Cleaning up kitchen after closing
BOH Activity Center Total
Batch Level Activity Pool Total
Product-Sustaining Activities
FOH
Dining Room Supervision
FOH Activity Center Total
BOH
Line Cook Training
Recipe Testing
BOH Activity Center Total
Product Sustaining Activity Pool Total
Labor Activity Pool
Facility Sustaining Activity Pool
Food Cost
Total Activity Based Cost
Cost Pool Rate ($ / min)
0.26
0.26
0.26
0.26
0.26
$
$
$
$
0.93
$
$
$
$
$
0.31
0.31
0.31
0.31
$
$
$
1.23
$
$
$
$
0.26
0.26
0.26
0.26
$
$
$
0.95
$
$
$
$
0.31
0.31
0.31
$
$
0.9
$
$
$
$
$
0.26
0.26
$
0.3
0.31
0.31
0.31
$
$
0.97
$
$
$
0.35
0.6
0.28
0.15
0.35
0.45
0.45
0.45
0.3
0.55
0.42
1 unit
1 unit
1 unit
Total Cost
0.0791
0.0395
0.0580
0.0685
$
0.25
$
$
0.38
0.62
$
0.25
$
$
0.28
0.53
0.1078
0.1849
0.0863
0.0395
0.0922
0.1186
0.1386
0.1386
0.08
$
0.08
0.1694
0.1294
$
$
0.30
0.38
Cost per unit
$
1.53
$
3.88
$
3.12
$
8.52
Bill of Activity for Arugula w Tuna
Activity
Resource Required (minutes)
Cost Pool Rate ($ / min)
Total Cost
Unit-Level Activities
FOH
Receiving a guest order
Processing Checks
Serving Customers
Setting-up a table for next guests
FOH Activity Center Total
0.3
0.15
0.22
0.26
Cleaning kitchen equipment after cooking an entrée
Cooking an entrée
Preparation an entrée
BOH Activity Center Total
Unit Level Activity Pool Total
Batch-Level Activities
FOH
Folding napkins
Setting-up tables before opening
Vacuuming floor
FOH Activity Center Total
BOH
Checking inventory
Cleaning up kitchen after closing
BOH Activity Center Total
Batch Level Activity Pool Total
Product-Sustaining Activities
FOH
Dining Room Supervision
FOH Activity Center Total
BOH
Line Cook Training
Recipe Testing
BOH Activity Center Total
Product Sustaining Activity Pool Total
0.35
0.6
0.28
0.26
0.26
0.26
0.26
0.26
$
$
$
$
0.93
$
$
$
$
$
0.31
0.31
0.31
0.31
$
$
$
1.23
$
$
$
$
0.26
0.26
0.26
0.26
$
$
$
0.95
$
$
$
$
0.31
0.31
0.31
$
$
0.9
$
$
$
$
$
0.26
0.26
$
0.3
0.31
0.31
0.31
$
$
0.97
$
$
$
0.0791
0.0395
0.0580
0.0685
$
0.25
$
$
0.38
0.62
$
0.25
$
$
0.28
0.53
BOH
Labor Activity Pool
Facility Sustaining Activity Pool
Food Cost
Total Activity Based Cost
0.15
0.35
0.45
0.45
0.45
0.3
0.55
0.42
1 unit
1 unit
1 unit
0.1078
0.1849
0.0863
0.0395
0.0922
0.1186
0.1386
0.1386
0.08
$
0.08
0.1694
0.1294
$
$
0.30
0.38
Cost per unit
$
1.53
$
3.88
$
3.12
$
8.84
Bill of Activity for Chicken Mushroom Burger
Activity
Resource Required (minutes)
Cost Pool Rate ($ / min)
Total Cost
0.26
0.26
0.26
0.26
0.26
$
$
$
$
0.93
$
$
$
$
$
0.31
0.31
0.31
0.31
$
$
$
1.23
$
$
$
$
0.35
0.45
0.95
$
$
$
$
0.26
0.26
0.26
0.26
$
$
$
0.45
0.9
$
$
$
0.31
0.31
0.31
$
$
$
$
0.26
0.26
$
$
$
$
0.31
0.31
0.31
$
$
Unit-Level Activities
FOH
Receiving a guest order
Processing Checks
Serving Customers
Setting-up a table for next guests
FOH Activity Center Total
0.3
0.15
0.22
0.26
Cleaning kitchen equipment after cooking an entrée
Cooking an entrée
Preparation an entrée
BOH Activity Center Total
Unit Level Activity Pool Total
Batch-Level Activities
FOH
Folding napkins
Setting-up tables before opening
Vacuuming floor
FOH Activity Center Total
BOH
Checking inventory
Cleaning up kitchen after closing
BOH Activity Center Total
Batch Level Activity Pool Total
Product-Sustaining Activities
FOH
Dining Room Supervision
FOH Activity Center Total
BOH
Line Cook Training
Recipe Testing
BOH Activity Center Total
Product Sustaining Activity Pool Total
0.35
0.6
0.28
0.0791
0.0395
0.0580
0.0685
$
0.25
$
$
0.38
0.62
$
0.25
$
$
0.28
0.53
BOH
Labor Activity Pool
Facility Sustaining Activity Pool
Food Cost
Total Activity Based Cost
0.15
0.45
0.3
0.3
0.55
0.42
0.97
1 unit
1 unit
1 unit
0.1078
0.1849
0.0863
0.0395
0.0922
0.1186
0.1386
0.1386
0.08
$
0.08
0.1694
0.1294
$
$
0.30
0.38
Cost per unit
$
1.53
$
3.88
$
2.69
$
8.09
Bill of Activity for Turkey Club
Activity
Unit-Level Activities
FOH
Resource Required (minutes)
Receiving a guest order
Processing Checks
Serving Customers
Setting-up a table for next guests
FOH Activity Center Total
0.3
0.15
0.22
0.26
Cleaning kitchen equipment after cooking an entrée
Cooking an entrée
Preparation an entrée
BOH Activity Center Total
Unit Level Activity Pool Total
Batch-Level Activities
FOH
Folding napkins
Setting-up tables before opening
Vacuuming floor
FOH Activity Center Total
BOH
Checking inventory
Cleaning up kitchen after closing
BOH Activity Center Total
Batch Level Activity Pool Total
Product-Sustaining Activities
FOH
Dining Room Supervision
FOH Activity Center Total
BOH
Line Cook Training
Recipe Testing
BOH Activity Center Total
Product Sustaining Activity Pool Total
0.35
0.6
0.28
Cost Pool Rate ($ / min)
Total Cost
0.26
0.26
0.26
0.26
0.26
$
$
$
$
0.93
$
$
$
$
$
0.31
0.31
0.31
0.31
$
$
$
1.23
$
$
$
$
0.26
0.26
0.26
0.26
$
$
$
0.95
$
$
$
$
0.31
0.31
0.31
$
$
0.9
$
$
$
$
$
0.26
0.26
$
0.3
0.31
0.31
0.31
$
$
0.97
$
$
$
0.0791
0.0395
0.0580
0.0685
$
0.25
$
$
0.38
0.62
$
0.25
$
$
0.28
0.53
BOH
Labor Activity Pool
Facility Sustaining Activity Pool
Food Cost
Total Activity Based Cost
0.15
0.35
0.45
0.45
0.45
0.3
0.55
0.42
1 unit
1 unit
1 unit
0.1078
0.1849
0.0863
0.0395
0.0922
0.1186
0.1386
0.1386
0.08
$
0.08
0.1694
0.1294
$
$
0.30
0.38
Cost per unit
$
1.53
$
3.88
$
3.58
$
8.98
ABC Menu Engineering Analysis
Menu Item
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Chopped Salad
Chopped Salad w Chicken
Chopped Salad w Tuna
Arugula Pear Salad
Arugula w Chicken
Arugula w Tuna
Cobb Salad
Chicken Caesar Wrap
BBQ Chicken Wrap
Chicken Tender Wrap
Cheeseburger
Chicken Mushroom Burger
Grilled Garden Burger
Smoked Turkey & Avocado
Club Sandwich
Turkey Club
Signature Pasta
Angel Hair Bolognese
Traditional Tomato Basil
Rachel’s Mac & Cheese
Total
QTY
Sold
Menu
Mix %
210
200
58
100
150
80
570
320
259
160
269
112
202
520
310
230
125
122
153
100
4,250
4.94%
4.71%
1.36%
2.35%
3.53%
1.88%
13.41%
7.53%
6.09%
3.76%
6.33%
2.64%
4.75%
12.24%
7.29%
5.41%
2.94%
2.87%
3.60%
2.35%
100.00%
Item ABC
Costs
$
7.64
$
8.52
$
8.52
$
7.64
$
8.52
$
8.52
$
8.09
$
8.58
$
8.58
$
8.48
$
7.15
$
8.09
$
7.47
$
8.33
$
8.76
$
8.98
$
8.39
$
8.25
$
7.94
$
7.87
$
Total ABC (%)
1
2
3
4
Chopped Salad w Chicken
Arugula w Tuna
Chicken Mushroom Burger
Turkey Club
8.95
11.70
12.70
8.75
11.50
12.50
10.75
9.95
9.95
9.95
7.95
9.95
8.95
10.75
11.50
10.95
11.50
10.95
9.75
9.95
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1.31
3.18
4.18
1.11
2.98
3.98
2.66
1.37
1.37
1.47
0.80
1.86
1.48
2.42
2.74
1.97
3.11
2.70
1.81
2.08
Total Item
Revenue
$
1,879.50
$
2,340.00
$
736.60
$
875.00
$
1,725.00
$
1,000.00
$
6,127.50
$
3,184.00
$
2,577.05
$
1,592.00
$
2,138.55
$
1,114.40
$
1,807.90
$
5,590.00
$
3,565.00
$
2,518.50
$
1,437.50
$
1,335.90
$
1,491.75
$
995.00
34,990.94
Total Item
Operating Profit
$
274.07
$
635.02
$
242.16
$
110.51
$
446.27
$
318.01
$
1,513.41
$
436.83
$
353.56
$
234.42
$
213.88
$
207.77
$
297.97
$
1,255.85
$
847.88
$
451.97
$
388.14
$
328.80
$
276.18
$
207.51
$44,031.15
$
MM
Rank
H
H
L
L
H
L
H
H
H
H
H
L
H
H
H
H
L
L
H
L
CM
Rank
L
H
H
L
H
H
H
L
L
L
L
L
L
H
H
L
H
H
L
L
Item
Class.
Horse
Star
Puzzle
Dog
Star
Puzzle
Star
Horse
Horse
Horse
Horse
Dog
Horse
Star
Star
Horse
Puzzle
Puzzle
Horse
Dog
Profit
Factor
0.61
1.40
0.54
0.24
0.99
0.70
3.35
0.97
0.78
0.52
0.47
0.46
0.66
2.78
1.88
1.00
0.86
0.73
0.61
0.46
ABC
Cost %
85.42%
72.86%
67.13%
87.37%
74.13%
68.20%
75.30%
86.28%
86.28%
85.28%
90.00%
81.36%
83.52%
77.53%
76.22%
82.05%
73.00%
75.39%
81.49%
79.14%
9,040.21
3.50%
Average Menu Item Operating Profit ($)
QTY
Sold
200
80
112
230
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Total Item ABC
Costs
$
1,605.43
$
1,704.98
$
494.44
$
764.49
$
1,278.73
$
681.99
$
4,614.09
$
2,747.17
$
2,223.49
$
1,357.58
$
1,924.67
$
906.63
$
1,509.93
$
4,334.147
$
2,717.12
$
2,066.527
$
1,049.36
$
1,007.10
$
1,215.57
$
787.49
Item CM
$
Average Menu Mix (%)
Menu Item
Item Price
1.81
82.53%
Menu
Mix %
4.71%
1.88%
2.64%
5.41%
Item ABC
Costs
$
$
$
$
8.52
8.52
8.09
8.98
Item Price
$
$
$
$
11.70
12.50
9.95
10.95
Item CM
$
$
$
$
3.18
3.98
1.86
1.97
Total Item ABC
Costs
$
$
$
$
1,704.98
681.99
906.63
2,066.527
Total Item
Revenue
$
$
$
$
2,340.00
1,000.00
1,114.40
2,518.50
Total Item
Operating Profit
$
$
$
$
635.02
318.01
207.77
451.97
MM
Rank
CM
Rank
Item
Class.
Profit
Factor
ABC
Cost %
H
L
L
H
H
H
L
L
Star
Puzzle
Dog
Horse
1.40
0.70
0.46
1.00
72.86%
68.20%
81.36%
82.05%
Management Recommendation
The recommendation is based on the results of two menu engineering analysis, which is Contribution margin menu engineering analysis and ABC menu
engineering analysis, and it is only for selected four items, which is Chopped salad with chicken, Arugula with tuna, Chicken mushroom burger and Turkey
club.
Chopped salad with chicken is above the average of contribution margin and menu mix on both analyses, and the menu item class is defined as a star. In
this case, the restaurant can test for price elasticity and measure the demand due to price fluctuations, so that they can increase the price if needed. In addition,
because this item’s popularity and profitability is above the average, the restaurant needs to focus on maintaining food quality to meet customers’ expectations.
Arugula with tuna’s profit factor is below 0.9 on both analyses and the menu item class is puzzle, which means the item is profitable but not popular. To
increase the sales, the restaurant can provide this salad to the customers with discounted price or increase the portion size. Also, the restaurant can promote this
salad as a combo menu with sandwiches, so that customers can try it more often and come back for this salad.
Chicken mushroom burger shows that item contribution margin and menu mix are below the average. This means that this item is neither popular nor
profitable, which is a dog on the menu engineering classification chart. The restaurant can try to increase the price of this item to change the class to puzzle, but
it requires another promotion to increase popularity, such as making combo menus or advertising on social media. If the restaurant doesn’t want to keep this
menu any more, they can simply eliminate this item from the menu.
Turkey club shows high menu mix percentage on the analyses; however, contribution margin is lower than average. Since this menu is sold a lot due to
high popularity, the restaurant can increase the price. The restaurant doesn’t need to worry about price change because customers will still buy this item despite
the increased price. The profit factor of turkey club is slightly higher than 0.9, which is defined as favorable item, but increasing price seems necessary
considering potential food price fluctuations.
October 2020
Total Revenue
CGS – Food
CGS – Beverage
Operating Supplies Experience
FOH Salaries
BOH Salaries
Accounting Service Fees
Transportation
Security
Bank charges
Travel and Entertainment
Marketing & Promotion
Insurance
License fees
Overtime Payment
Telephone
Linen & Laundry
Office Supplies
Employee Benefits
Employee Meals
Administrative & General
Employer Tax
Employer Insurance
Utilities
Rent and Maintenance
Depreciation
$122,560.00
$32,450.00
$1,280.00
$2,500.00
$14,521.06
$20,671.94
$250.00
$186.00
$33.00
$49.00
$250.00
$600.00
$280.00
$350.00
$650.00
$143.00
$375.00
$200.00
$905.79
$301.93
$4,800.00
$492.90
$603.86
$1,680.00
$1,520.00
$1,260.00
MENU ITEM
#
SOLD
(MM)
210
MENU
MIX %
(MM%)
5.45%
ITEM
FOOD
COST
2.24
ITEM
PRICE
1
Chopped Salad
2
Chopped Salad w Chicken
200
5.19%
3.12
11.70
3
Chopped Salad w Tuna
58
1.51%
3.02
12.70
4
Arugula Pear Salad
100
2.60%
2.24
8.75
5
Arugula w Chicken
150
3.90%
3.06
11.50
6
Arugula w Tuna
80
2.08%
3.08
12.50
7
Cobb Salad
370
9.61%
2.59
10.75
8
Chicken Caesar Wrap
320
8.31%
3.18
9.95
9
BBQ Chicken Wrap
259
6.73%
3.18
9.95
10 Chicken Tender Wrap
11 Cheeseburger
160
4.16%
3.08
9.95
269
6.99%
2.25
7.95
12 Chicken Mushroom Burger
13 Grilled Garden Burger
112
2.91%
2.69
9.95
202
5.25%
2.07
8.95
14 Smoked Turkey & Avocado
15 Club Sandwich
320
8.31%
2.53
10.75
310
8.05%
3.36
11.50
16 Turkey Club
17 Signature Pasta
230
5.97%
3.58
10.95
125
3.25%
2.88
11.50
18 Angel Hair Bolognese
19 Traditional Tomato Basil
122
3.17%
2.35
10.95
153
3.97%
2.54
9.75
20 Rachel’s Mac & Cheese
100
2.60%
2.08
9.95
3,850
100.0%
Average Menu Mix (%)
Average Menu Item Operating Profit ($)
Total ABC (%)
8.95
ITEM
CM
Total Item
COSTS
Total Item
REVENUES
Total Item
CM
MM
%
CAT.
CM
CAT.
MENU
ITEM
CLASS.
Profit
Factor
Activity Resource Required Minutes
Activities
FOH
BOH
Required
Minutes
Checking inventory
0.45
Receiving a guest order
0.32
Cleaning kitchen equipment
after cooking an entrée
0.36
Cleaning up kitchen after
closing
0.42
Cooking an entrée
Dining Room Supervision
Folding napkins
Line Cook Training
0.52
0.32
0.15
0.45
Preparation an entrée
0.28
Processing Checks
0.12
Recipe Testing
0.32
Serving Customers
0.22
Setting-up a table for next
guests
0.26
Setting-up tables before
opening
0.35
Vacuuming floor
0.35
Bill of Activity for
Activity
Unit-Level Activities
FOH
FOH Activity Center Total
BOH
BOH Activity Center Total
Unit Level Activity Pool
Total
Batch-Level Activities
FOH Activity Center Total
BOH
BOH Activity Center Total
Batch Level Activity Pool
Total
Resource Required
(minutes)
Cost Pool Rate
($ / min)
Total Cost
Product-Sustaining
Activities
FOH
FOH Activity Center Total
BOH
BOH Activity Center Total
Product Sustaining
Activity Pool Total
Cost per unit
Labor Activity Pool
1 unit
Facility Sustaining
Activity Pool
1 unit
Food Cost
1 unit
Total Activity Based Cost
Bill of Activity for
Activity
Unit-Level Activities
FOH
FOH Activity Center Total
BOH
BOH Activity Center Total
Unit Level Activity Pool
Total
Batch-Level Activities
FOH Activity Center Total
BOH
BOH Activity Center Total
Batch Level Activity Pool
Total
Resource Required
(minutes)
Cost Pool Rate
($ / min)
Total Cost
Product-Sustaining
Activities
FOH
FOH Activity Center Total
BOH
BOH Activity Center Total
Product Sustaining
Activity Pool Total
Cost per unit
Labor Activity Pool
1 unit
Facility Sustaining
Activity Pool
1 unit
Food Cost
1 unit
Total Activity Based Cost
Bill of Activity for
Activity
Unit-Level Activities
FOH
FOH Activity Center Total
BOH
BOH Activity Center Total
Unit Level Activity Pool
Total
Batch-Level Activities
FOH Activity Center Total
BOH
BOH Activity Center Total
Batch Level Activity Pool
Total
Resource Required
(minutes)
Cost Pool Rate
($ / min)
Total Cost
Product-Sustaining
Activities
FOH
FOH Activity Center Total
BOH
BOH Activity Center Total
Product Sustaining
Activity Pool Total
Cost per unit
Labor Activity Pool
1 unit
Facility Sustaining
Activity Pool
1 unit
Food Cost
1 unit
Total Activity Based Cost
Bill of Activity for
Activity
Unit-Level Activities
FOH
FOH Activity Center Total
BOH
BOH Activity Center Total
Unit Level Activity Pool
Total
Batch-Level Activities
FOH Activity Center Total
BOH
BOH Activity Center Total
Batch Level Activity Pool
Total
Resource Required
(minutes)
Cost Pool Rate
($ / min)
Total Cost
Product-Sustaining
Activities
FOH
FOH Activity Center Total
BOH
BOH Activity Center Total
Product Sustaining
Activity Pool Total
Cost per unit
Labor Activity Pool
1 unit
Facility Sustaining
Activity Pool
1 unit
Food Cost
1 unit
Total Activity Based Cost
ABC Menu Engineering Analysis
Menu Item
1
Chopped Salad
2
Chopped Salad w Chicken
3
Chopped Salad w Tuna
4
Arugula Pear Salad
5
Arugula w Chicken
6
Arugula w Tuna
7
Cobb Salad
8
Chicken Caesar Wrap
9
BBQ Chicken Wrap
10
Chicken Tender Wrap
11
Cheeseburger
12
Chicken Mushroom Burger
13
Grilled Garden Burger
14
Smoked Turkey & Avocado
15
Club Sandwich
16
Turkey Club
17
Signature Pasta
18
Angel Hair Bolognese
19
Traditional Tomato Basil
20
Rachel’s Mac & Cheese
Total
Average Menu Mix (%)
Average Menu Item Operating Profit ($)
Total ABC (%)
QTY
Sold
Menu Mix %
Food Cost
Item ABC
Costs
Item Operating Total Item
Item Price
Profit
ABC Costs
Total Item
Revenue
Total Item
Operating
Profit
Popularity
Rank
Profitability Menu Item
Rank
Class.
Profit
Factor
ABC Cost
%
MENU ENGINEERING USING
ACTIVITY-BASED COSTING:
AN EXPLORATORY STUDY
USING A PROFIT FACTOR
COMPARISON APPROACH
Carola Raab
Karl Mayer
University of Nevada, Las Vegas
Stowe Shoemaker
University of Houston
Traditional cost accounting systems have been replaced in the manufacturing sector by
activity-based costing (ABC) systems. Now in wide use by manufacturing firms, ABC has
made few inroads in the services and hospitality sector, including the restaurant industry.
Several recent studies have begun to reverse this trend by applying ABC to restaurants.
This study extends those works by creating an ABC menu engineering (ME) analysis, and
comparing the results with traditional ME results. Four hypotheses were constructed
that tested the relationships between the restaurant manager’s perceptions, traditional
ME methods, and ABC-based ME. The results suggest that ABC-based ME may be a
feasible alternative for examining menu profitability.
KEYWORDS: restaurants; activity-based costing; cost accounting; menu engineering;
profit factors
The worldwide restaurant industry faces major challenges today, one of
which is to find an appropriate balance between serving customers’ diverse
needs while pricing its menu items to achieve adequate profitability levels. The
service provision itself is a major part of the product in the restaurant industry.
Although restaurant patrons expect quality of food and beverage items, many of
them visit restaurants just for the service experience. Thus, controlling labor
costs in a restaurant without decreasing the level of service is a daunting task,
which creates the basic challenge of finding a balance between serving customers’ wants and achieving acceptable profitability levels. Although restaurant
managers generally are able to monitor their customer’s needs, most of them
lack specific knowledge of whether they will maximize overall profits by meeting customers’ needs, in part because restaurant managers often do not know the
true profitability of their various menu items (Raab & Mayer, 2003).
Journal of Hospitality & Tourism Research, Vol. 34, No. 2, May 2010, 204-224
DOI: 10.1177/1096348009349823
© 2010 International Council on Hotel, Restaurant and Institutional Education
204
Raab et al. / MENU ENGINEERING USING ACTIVITY-BASED COSTING   205
Manufacturing firms typically face the same dilemma. However, in manufacturing, a theoretical approach that has provided these firms with a better
comprehension of costs and increased profitability comes 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, rather than simply allocating them to finished products, which allows for
more accurate costing when pricing the products (Cooper & Kaplan, 1992;
Turney, 1991). Furthermore, ABC uses activities as the antecedents of cost, and
ABC theory states that cost objects create the demand for the activities (Turney,
1991). Cooper and Kaplan (1988) identified the usual conditions that make a
company a good candidate for the application of ABC methods, including a
diversity of resource consumption, and the fact that product and resource consumption are not highly correlated with traditional cost allocation methods.
Rotch (1990) found that these same conditions also apply to service companies,
making them good candidates for the adoption of ABC methods.
However, even though ABC has been applied in service firms, such as health
care and financial institutions, examples that demonstrate the use of ABC in the
hotel or restaurant industry have been scarce, even up to the mid-1990s (Keller,
1994). In 1995, Kunst and Lemmink pointed out the difficulties of tracing costs
to activities and activities to products and customers in restaurants, which is the
realm of ABC methods. Shortly thereafter, Noone and Griffin (1997) pointed
out the need for incorporating ABC methods into customer profitability analysis. This was followed by Noone and Griffin’s (1999) study, which conducted
an ABC-based customer profitability analysis in an Irish hotel property.
Although somewhat limited in scope, this prior research suggests that ABC
methods could be applied successfully in restaurant and hotel firms, and a number of restaurant studies have been published that have confirmed this supposition (e.g., Raab, 2003; Raab, Mayer, Ramdeen, & Ng, 2005). In addition, Raab
and Mayer (2003) interviewed a sample of controllers from the top 100 U.S.
restaurant firms. Their study found that restaurant 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 activitybased labor costs (Raab & Mayer, 2003). Thus, the results of these studies have
collectively demonstrated the potential use of ABC in the restaurant industry.
Therefore, the current study seeks to extend the trend of recent investigations
into the use of ABC philosophies in the restaurant industry. It adds to the existing literature on using ABC in restaurants by comparing the results of a traditional contribution margin (CM)-based menu engineering (ME) analysis with
those of an ABC/ME approach. In particular, it will build on the prior research
by comparing traditional ME in restaurants with ABC/ME. First, the study discusses why the traditional methods that have been applied by the restaurant
industry often do not maximize profits. It will then further examine why the
application of ABC methods may make sense for the restaurant industry, before
206   JOURNAL OF HOSPITALITY & TOURISM RESEARCH
turning to a discussion of ME usage in restaurants. In addition, it will develop
and test four hypotheses to reach a comparison of traditional ME (CM-based)
approach) with ABC/ME, and discusses the implications. Finally, this study
uses profit factor (PF) analysis (Pavesic, 1985) to develop the compariso