Question

What does an activity based costing system outline look like pretaining to a company funtion in a restaurant?

Answer 1

A major challenge for restaurant managers is to find a balance between appropriate product pricing and enhancing the value to customers. The restaurant industry usually establishes menu prices with a usage of contribution margin analysis, a process with which a desired food cost percentage is marked up to expectation that the difference between the menu item’s price and menu item’s food costs will cover all undistributed operating costs, taxes as well as profits. But the traditional contribution margin analysis cannot show the true profitability of a menu item when menu prices are set without incorporating all of a restaurant’s undistributed operating costs. It can be greatly enhanced by using Activity-Based Costing (ABC) which provides major advantages compared to other costing methods by tracing overhead costs to individual product units, thus revealing an accurate unit costing and pricing. It is also considered a superior approach for restaurants, because the similar basic conditions that made ABC appropriate for the manufacturing industry apply to restaurants. These conditions include a highly competitive environment, high overhead costs, and diversity of resource consumption for individual items. The usage of activity based pricing allows managers at restaurant to set price levels that cover all operating costs and profits, while still meeting customers' expectations of value. Thus ABC method helps them to understand both its operating cost structure and the price perceptions of it guests.