Question

How could activity-based costing be applied in that business of a restaurant

• What would be some of the indirect cost pools for your business?

• Would it make sense to implement ABC right away or would you stick to traditional

  costing? Why or why not?

  Be prepared to discuss your opinions in class.

Answer 1

Activity Based Costing can be applied in a business of restaurant. In Activity based costing cost are pooled into a cost pool based on the activities classification and activity driver is determined for each activity cost pool. Activity driver rate is computed for each activity cost pool based on total activities. Some of the activities that are done in restaurants are

· Handling of all inputs needed for meal preparation

· Cooking time for each recipe

· Number of customer orders

· Number of tables served

Indirect cost pool

· Maintenance facilities

· Order handling costs

· Customer servicing costs

· Shipment costs

· Quality costs

· Material handling costs

· Machine related costs

Implementation of ABC method can be done based on cost benefit analysis. If the benefits of implementation are higher than cost involved the ABC system should be implemented immediately. Also ABC system implementation needs time to study the various activities involved and classifying activities into value adding and non value adding activities. In case of multi product business ABC costing should be implemented sooner since it helps in accurate product costing and pricing. In case of single product business, firm can continue with traditional method of cost allocation since ABC method may not be beneficial immediately.