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Menu engineering and activity-based costing: An improved method of menu

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DOI: 10.1108/IJCHM-09-2014-0438
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International Journal of Contemporary Hospitality Management
Menu engineering and activity-based costing: An improved method of menu
planning
Rossano Linassi Anete Alberton Sidnei Vieira Marinho
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Rossano Linassi Anete Alberton Sidnei Vieira Marinho , (2016),"Menu engineering and activity-based
costing", International Journal of Contemporary Hospitality Management, Vol. 28 Iss 7 pp. 1417 -
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Menu engineering and Menu

engineering
activity-based costing and activity-
based costing
An improved method of menu planning
Rossano Linassi 1417
Ensino, Instituto Federal catarinense – Campus Camboriú, Camboriú,
Brazil, and Received 8 September 2014
Revised 8 December 2014
Anete Alberton and Sidnei Vieira Marinho 20 March 2015
13 July 2015
PPGA, Universidade do Vale do Itajaí, Biguaçu, Brazil Accepted 25 July 2015
Abstract
Purpose – This paper aims to examine whether using menu engineering (ME) together with
activity-based costing (ABC) for menu analysis provides new insights into true menu profitability. The
traditional ME approach only uses food costs to determine the contribution margin (CM) of individual
menu items. This combined approach uses both food and traceable operating costs to estimate CMs
more accurately.
Design/methodology/approach – An improved ME model was developed and tested in an oriental
restaurant in Brazil. Direct observation of restaurant activities allowed most costs to be traced (not
simply allocated) to individual menu items.
Findings – The results revealed small differences in the rankings between the traditional approach
and ABC/ME, demonstrating that the integration of ABC with ME made it to possible to identify
increased food-costs and lower CMs for all groups of menu items. The results also show that ABC
methods are applicable to an oriental-style restaurant.
Research limitations/implications – Just one restaurant and only 80 per cent of the menu were
examined in this study. Future research should apply the model used here to other restaurant types
located in different geographical areas to validate the approach.
Practical implications – The results suggest that ME can be improved upon by first assessing
variable costs using ABC methods.
Originality/value – This paper combines two different analytic techniques (ME and ABC) into a new
approach that reveals the true picture of profit and loss for a menu from a restaurant in Brazil.
Keywords Restaurants, Activity based costs, Cost accounting, Menu engineering
Paper type Research paper
Introduction
Food and tourism are closely related, as people are unlikely to think about tourism
without considering what they are going to eat, whether planning short or long trips.
Irrespective of the destination, travelers cannot do without food, and the local cuisine is
a decisive factor for many visitors. Food does not only perform a biological function but
also is part of social and cultural acts. It is part of a place’s cultural heritage, provides International Journal of
Contemporary Hospitality
employment and is one of the better paid activities related to tourism (Corner, 2004). Management
The basic function of food at tourist destinations is to provide sustenance while Vol. 28 No. 7, 2016
pp. 1417-1440
simultaneously offering pleasure. It is very often the decisive factor in choosing or © Emerald Group Publishing Limited
0959-6119
rejecting a tourism destination because of the characteristics of the type of cuisine DOI 10.1108/IJCHM-09-2014-0438
IJCHM (Krause, 2007). The experiences people have when traveling provide leisure and culture,
28,7 make memories last and also activate feelings of “belonging” to an ethnic group, and this
is particularly true of cuisine (Corner, 2004). As Barreto (2010) claims, every client who
goes to a restaurant does so to satisfy their physical and emotional desires, and so it is
very important that the establishment offers good service and a good atmosphere and,
primarily, that it has a good menu offering culinary diversity, if the customers’ wishes
1418 and expectations are to be fulfilled.
The basic purpose of the menu is to sell the products offered by the restaurant, and
the menu is the restaurant’s greatest sales tool, the establishment’s business card. Its
primary role is to inform, and it should have an appropriate graphic design and layout,
meeting customers’ expectations both in terms of the food offered and also in terms of
format, color and organization (Barreto, 2010). Customers make a subconscious
evaluation of the menu and base their first impressions of the restaurant on this
assessment (Teichmann, 2009; Barreto, 2010).

As the most important sales tool, the menu must not only be well formulated in terms
of good design, as mentioned above, but also be well planned in terms of costs and
pricing structure. According to Krause (2007), this is the food and beverage manager’s
greatest challenge. How to conduct the planning process successfully, starting from the
choice of dishes that will be offered and plans for their production, ensures the correct
operation of the processes to produce these items and, finally, manages to serve these
dishes in a manner appropriate to the customer profile, both in terms of the type of
service chosen and of the costs and the price to the customer. It is very important that
these issues be given due consideration, because there is a tendency to see the restaurant
business as an easy source of profitability, but it is good management that ensures that
these enterprises provide financial revenue and is a factor of competitive advantage,
attracting customers.
Costs, in turn, can be allocated in a variety of ways, according to variability of
expenditure (fixed and variable costs) and simplicity of tracing (direct and indirect
costs) using a range of methods: simple division, standard costs, cost centers, production
effort units and activity-based costing (ABC), for example (Bornia, 2010; Bernardi, 2010).
However, what is often observed is that the majority of restaurant businesses ignore the
principles of formal cost allocation and base their decisions merely on the competition,
or on an analysis of the costs of materials, ignoring other essential factors in the
breakdown of total costs, such as labor, electricity and water bills, administrative costs,
etc. (Maricato, 2010). According to Fonseca (2014), many people enter the industry
motivated by a love of cooking, but they forget that cooking at home is different from
how it must be done professionally. Furthermore, as Maricato (2010) observed, during
periods of crisis, many entrepreneurs are attracted to the bars and restaurants sector
because it does not demand academic qualifications, but the result is a lack of financial
success, leading to bankruptcy.
In response to this gap, manifest in companies that ignore formal principles of cost
allocation and cases of failure in the restaurant sector, this study proposes an integration
of menu engineering (ME) with the ABC method as a tool to support cost allocation that
takes into consideration, in addition to raw materials which are considered by all studies
of ME, the cost of direct and indirect labor, energy, wastage and other factors. The ABC
method is not a tool that can only be mastered by industrial companies, but one that can
also be usefully used by firms in the service industries (Cogan, 2003).
Using ME, once each item on the menu has been classified, a more critical analysis of Menu
the dishes can be performed, making decisions about which items will be retained or engineering
removed, put on promotion or even increased in price. By combining ME with ABC,
which is a management tool that takes into consideration concepts such as costs that do
and activity-
not add value, non-financial performance measures and accounting by activities, it based costing
becomes possible to make a more complete analysis of the menu. ABC is not only
concerned with calculating costs but also with what should be done with the information 1419
that is generated. Aligned with the modern business logic, founded on cutting costs and
improving processes, the basic idea is to compute the costs of a company’s different
activities and understand the way they function, identifying bases that can represent the
relationships between products and activities, called cost drivers (Bornia, 1995).
What can be observed with relation to the restaurant sector is a paucity of references
offering a technical and scientific foundation to support cost analysis and the resultant
planning and management of menus. According to Raab (2003), Raab and Mayer (2007),
Raab et al. (2008) and Vaughn et al. (2010), this is a subject of great relevance to the issue
of analysis and correct allocation of the costs involved in restaurant food production and
is one that has so far received little attention from either the academic or professional
communities, who tend to adopt empirical methods of allocating production costs that,
in general, are restricted to raw material costs. In an attempt to address this gap, this
article presents ME combined with the ABC method, which is a current and emerging
subject in both the professional and academic spheres. Its contemporary relevance lies
in the fact that very little has been published with relation to ABC and ME in restaurant
services, and the need of companies in the restaurant business for a more efficient
costing system and lack of research conducted on these subjects in Brazil is evident.
This article will review the scant bibliography that does exists on ME and ABC/ME,
arriving at a partial replication of the model proposed by Raab (2003), adapting the
model, which was originally conceived for the USA and China, to the Brazilian setting
by following the recommendations of Raab (2003) as an essential part to ABC-ME model
validation. The article relevance is based on three main aspects, the characteristics of the
markets, the type of the restaurant and the scope of this study. As to the characteristics
of the markets, the Brazilian market is very different from the others, because of its
economics and financial peculiarities, taxes and fees, and has the figure of small
business called “simples” (simple in English) created by the Brazilian Government. It is
a simplified tax system, with a single tax, that does not occur in the other
aforementioned countries. Brazil has consistently high employment costs for employees
at all salary levels, with employers having to regularly pay out over 50 per cent of an
employee’s salary in extra costs (Hornan, 2013). Brazil stands as a worldwide leader in
taxes, paying around 57.56 per cent of salaries’ gross value (20 per cent to National
Social Security (Pension) Institute, 8 per cent to fundo de garantia por tempo de serviço
[guarantee fund for length of service (FGTS)] – employee’s dismissal fund, 2.5 per cent
to education wage, 2 per cent to risk of industrial accident, 3.9 per cent to other industrial
associations and 21.76 per cent other indirect employees’ benefits. The global average
value is about 22.52 per cent, in the USA, it is only 8.84 per cent. Keeping a restaurant
open in Brazil has been the great challenge for food service entrepreneurs, especially
with dwindling profits, even with the simplified tax (ANR – Associação nacional de
restaurantes, 2013). The empirical study was conducted at an oriental restaurant in
Itajaí, SC, Brazil, that has a varied sales mix (à la carte, buffet all you can eat and
IJCHM delivery) and the capacity to serve 80 people. The oriental restaurant was chosen
28,7 because it is a different type from the one used by Raab (2003) and Raab et al. (2005). This
restaurant contains more items on the menu and inventory. This type of restaurant is
rising in Brazil, with a growth of 700 per cent over the past 10 years
(ABRASEL-Associação Brasileira de Bares e Restaurantes, 2012). This study unlike
Raab (2003), Raab et al. (2005, 2006), Raab and Mayer (2007) and Raab et al. (2007)
1420 applies the ABC/ME model for almost all menu items and all the selling arrangements of
the restaurant. With 135 dishes in total, making it a more complete application of the
proposed model, as suggested by these authors, which is one of the main deficiencies
identified in the preceding articles.
The intention is to make a contribution to introducing ME to restaurant managers in
the hope that they will adopt it to improve the profitability and manageability of their
businesses. From the socioeconomic perspective, this study makes a contribution by
providing a means through which restaurant managers in Brazil can acquire a better
understanding of the need to calculate costs precisely and could, who knows, put an end
to practices such as intuitive pricing, incomplete costing methods and methods based on
raw materials alone or on the competition, without correct measurement of costs, by
demonstrating a complete assessment of all costs involved in production of dishes,
including labor costs and administrative costs. Nevertheless, it enhances the study of
ME that has been little explored and still needs further studies, thus updating the
theoretical framework, which made little progress since 2010.
In the current business setting, characterized by global markets and competitors,
rapid technological innovations and emphasis on customer service, information
becomes the most important resource because it allows organizations to compete and to
meet the ever-more demanding expectations of the market. In this scenario, accounting
information, and costs data in particular, is indispensable to the decision-making
process, to process improvement and, consequently, to firm competitiveness. It is,
therefore, unsurprising that there is a growing interest in the ABC methodology, as it
offers a means for acquiring accurate cost data through identification, analysis and
control of the costs of the activities conducted by an organization. ABC also serves as the
primary source of data for implementation of activity-based management (Ramlow,
2001).
ME has an important role to play in refining the management of restaurant
businesses, and combining management of menus with costing methods, primarily
ABC, can provide an important tool for achieving sustainable development of
companies in the industry by compiling reports containing a detailed breakdown of the
costs of each item on the menu.
Menu engineering
ME is a management tool for assessing and increasing the potential profitability of
menus. Atkinson and Jones (1994, p. 37), in turn, define ME as “a range of techniques and
procedures that enable more effective decision-making, both with respect to marketing
and operating the menu”. The aim in combining the methods of ME and ABC is,
therefore, to further develop techniques created by Kasavana and Smith in 1982,
constructing a model that relates the costs incurred by the restaurant directly to each
item analyzed, thereby allocating these costs more correctly, providing more reliable
results and enabling a more critical analysis of dishes or groups of dishes.
So, at the end of the day, what are menu analysis (MA) and ME? What, if any, are the Menu
differences between them and how can they help to increase restaurant profitability? In engineering
fact, both MA and ME refer to the same technique of evaluating menus to increase their
potential profitability. The term MA was first used by Miller (1980) to designate all
and activity-
analyses conducted with the objective of increasing the potential profitability of menus. based costing
According to Pavesic (1983) and Taylor (2005), Miller attempted to identify menu items
that were both popular and low in food cost. He introduced a four-quadrant matrix for 1421
analyzing menus. Quadrants were segmented based on the product mix and food cost of
the menu item. The average food cost axis is defined as the line of division between high
and low quadrants. Originally, Miller did not define how the division line between high
and low volume was calculated. Menu items were categorized in quadrants named
winners (the most desirable), Marginals II, Marginals III and losers (less desirable
region).
Even though Miller was the first to describe MA, the term ME became popular and
synonym of MA after used for the first time in an article by Kasavana and Smith in 1982.
From the perspective of Kasavana (2008), ME is an expression that he and Donald Smith
created together in 1982, with a focus on the dynamic relationships between selling price and
the menu mix (MM), that can be used by management to measure the profitability of a menu
in relation to its future profitability. According to Kasavana, these analyses should be
repeated every 30 days to illustrate changes that take place as the months pass. Only four
pieces of information are needed to conduct the analysis: the name of each dish to be
analyzed, the cost of each recipe, the selling price and the number of units sold during the
period. It is then possible to calculate the MM and the contribution margin (CM) of each
group of dishes analyzed (e.g. starters and main courses or desserts), which can then be
compared with each other, within each group being analyzed.
The published literature on ME describes and discusses the different models that
exist and presents some of their applications in restaurants. These studies can be
classified into three phases, the phase during which the first models were created, the
phase during which labor time was included in models and the phase during which more
complex analytical models were constructed. Miller (1980) was a pioneer of the first
phase, creating an analytical technique based on matrices. Soon after, in 1982, Kasavana
and Smith proposed an adapted version of Miller’s model, using the CM rather than
percentage cost for calculations. They were also responsible for popularizing the term
ME to define all different types of MA and provided the inspiration and foundation for
construction of several later models. Pavesic (1983) adapted the model to include CM
weightings that were evaluated in terms of how high or how low a contribution each
item made. More recently, during a second phase, some authors added time expended to
their models. For example, Hayes and Huffman (1985), Bayou and Bennet (1992),
Atkinson and Jones (1994) and LeButo et al. (1995 and 1997) studied ME taking costs
related to labor into consideration in their analyses and proposed new models. In the
third phase, other authors applied complex analytical models such as multi-dimensional
analysis, data-envelopment analysis (DEA), Delphi and ABC/ME, for example, Cohen
et al. in 1998 (apud Cohen et al., 2006), Horton (2001), Taylor (2005), Raab (2003) and Raab
et al. (2010).
In addition to the three theoretical phases, there is also work describing applications
of ME, such as studies published by Hayes and Huffman (1995), Morrison (1996), LeButo
et al. (1997), Chan and Au (1998), Mifli (2000), Jones and Mifli (2000), Raab (2003), Raab
IJCHM and Mayer (2003), Raab et al. (2005, 2006), Cohen et al. (2006), Raab and Mayer (2007),
28,7 Raab et al. (2007), Taylor and Brown (2007), Taylor et al. (2008), Raab et al. (2008, 2010),
Vaughn et al. (2010), Chou and Fang (2013) and Fang and Hsu (2014). They compare
different proposed ME models to assess which methods are best for analysis of menus
and to identify the main differences that are observed when different models are applied
to the same menu. The majority of studies of applications of ME are based on
1422 hypothetical examples created by their authors to illustrate and compare different
models.
Here, in Brazil, as recently as 2008, the subject had only been covered in a small
number of textbooks, including one by Fonseca, first published in 1999 and then revised
and republished, another by Freund (2007) and a third by Knight (2005), but, although
these texts mention the existence of ME methods, they do not enter into the details of
their application, and the only authors cited by name with relation to ME are Kasavana
and Smith. With relation to menus in Brazil, there is also a dissertation written by Pelaez
(2008) approaching the subject from the perspective of the Jones and Mifli’s (2000) model
with the objective of evaluating the process of menu creation and development in an
oriental restaurant, and, more recently, Linassi (2009) submitted a dissertation in which
he describes an application of the ABC/ME, which was also conducted at an oriental
restaurant.
Raab (2003) worked with ME combined with ABC analysis, and she states that
measurement of the cost of the work expended on preparation of each menu item is more
precise and effective than previous methods. Raab returned to the subject of ABC/ME in
a series of articles written in partnership with other authors (Raab et al., 2005, 2006; Raab
and Mayer, 2007; Raab et al., 2008, 2010; Vaughn et al., 2010) that focused on application
of the method in different restaurant categories to validate the model. In Brazil, in search
of the annals of conventions and journals for articles on the subject of ABC did not return
any references published up to 2008 related to the hospitality industry, much less
specifically related to the restaurant sector.
ME is an aid for determining the four Rs, that is, which menu items should be
retained, repriced, replated or removed. These conclusions are arrived at by analysis of
the MM and the CM, distributed across four quadrants of a matrix representing the
categories “star”, “plow horse”, “puzzle” and “dog”, each of which has its own
characteristics and an action to be taken for each item assigned to it (Kasavana, 2008).
Kasavana (2008) justifies the decision not to include labor costs in the calculations
because they are based on the profitability of the menu derived from the cost of
ingredients and because many items are produced simultaneously in a single kitchen,
making it extremely complicated to track the cost of labor for each item. From his
perspective, labor is a semi-fixed cost, because it must still be paid for even if nothing is
produced, and he considers that methods that use labor costs in calculations are less
precise than the ME methods developed by Kasavana and Smith in 1982.
Raab (2003) has taken a contrary position to Kasavana, proposing a new approach
that not only uses the techniques developed by Kasavana and Smith but also includes all
costs, except taxes, by integrating ABC. Raab (2003), Raab and Mayer (2003), Raab et al.
(2005, 2006, 2007), Raab and Mayer (2007), Raab et al. (2008, 2010) and Vaughn et al.
(2010) adapted techniques used in the industry and in a small number of service
companies in the USA for use in restaurants, making the application a little more
complex but still easily understood by management. ABC is founded on the assumption
that resources are consumed by activities rather than by products, which highlights its Menu
affinity with ME, making the ABC/ME model a more complete tool than application of engineering
the traditional ME model, especially so in the current scenario in which costs and cost
analysis are essential to maximize not just profit, but wealth, adding value and
and activity-
increasing competitiveness. based costing
Activity-based costing and its application to restaurants 1423

According Kaplan and Cooper (1998), ABC an organization’s resources are consumed by
its activities and not by the products it produces. From this perspective, activities
consume resources and products consume activities. The authors explains that this is a
costing method that attempts to make a demonstrable reduction in the distortions
caused by arbitrary breakdown of indirect costs, which is generally done on the basis of
production volumes or labor capacity. The fundamental difference lies in the way that
indirect cost data are treated. As Bornia (2010) puts it, the basic idea is to take the costs
of all of the company’s different activities and understand that behavior to identify
bases that represent the relationships between products and activities, thereby making
cost calculations more accurate.
Nakagawa (2001) points out that ABC is conceptually very simple, as it is a
methodology developed to facilitate strategic analysis of costs related with those
activities that most consume company resources. The object of ABC cost analysis is,
therefore, the quantities, causal relationships, efficiency and efficacy of resource
consumption.
ABC starts from the assumption that a company’s activities should be subject to
documentation, analysis and control, as it is activities that consume resources, whereas
it is the reason for incurring costs (products or services) that consume activities,
including those that take place outside of the production environment, thereby making
it possible to measure and evaluate all costs incurred to satisfy the requirements of
customers in their demand for products and services. In other words, adoption of this
method makes it possible to link the indirect costs of manufacture to products and
services with a greater degree of precision (Kaplan and Cooper, 1998).
Cooper and Kaplan (1988) also say that an activity-based system can paint a picture
of product costs radically different from data generated by traditional systems. These
differences arise because of the approach of more sophisticated systems contributing to
the factory overhead, corporate overhead and other organizational resources, first
for the activities and then to the products that create demand for these indirect
resources. The process of tracing costs, first from resources to activities and then from
activities to specific products, cannot be done with surgical precision.
But measuring and managing the operating expenses of most organizational
resources as fixed in the short run does not give much insight as to why the resources
were acquired, what the resources are currently being used for and the level of
resources that will likely be required in the future. Although the cost of supplying the
resources may be fixed in the short run, the quantity of these resources used in each
period fluctuates based on activities performed for the outputs produced. Activity-based
systems measure the cost of using these resources, even though the cost of supplying
them will not vary, in the short run, with usage. The ABC resource usage cost
information can be used by managers to monitor and predict the changes in demands for
activities as a function of changes in output volume and mix, process changes and
IJCHM improvements, introduction of new technology and changes in product and process
28,7 design (Cooper and Kaplan, 1992).
According Horngren et al. (2011) activity-based accounting systems can turn many
indirect manufacturing overhead costs into direct costs – costs identified specifically
with given cost objectives. The appropriate selection of activities and costs allows
managers to trace many manufacturing overhead costs to cost objectives just as
1424 specifically as they have traced direct material and direct labor costs. Because
activity-based accounting systems classify more costs as direct as traditional systems,
managers have a higher confidence in the costs of products and services reported by
activity-based systems.
Raab (2003), Raab and Mayer (2003) and Kotaskis et al. (2010) point out that the
restaurant industry has specific peculiarities, such as the fast pace of the restaurant
business and the short lifecycle of products, which demand that managers ensure that
information is generated as quickly and efficiently as possible.

The majority of studies have found that in practice, fixed costs are not allocated to
products or to consumers but are allocated arbitrarily with no consideration for the
requirements of each product, leading to inefficient pricing. Traditionally, only variable
costs have been used to calculate CMs. In contrast, ABC attempts to allocate fixed costs
in a more correct manner, leading to more exact pricing and to increased profit for the
restaurant (Raab, 2003; Kotaskis et al. 2010).
The method also contributes to reducing cost by identifying whether activities do or
do not add value, thereby generating information to support process improvement,
elimination of certain activities and productivity increases, in addition to having an
impact on redesign of menu dishes, indicating which items could be changed for similar
items of equal quality but lower cost. Raab also believes that the processes and
information generated by the adoption of ABC can have an influence on the quality of
the workforce and can make a contribution to management taking faster and better
decisions, as they will know exactly which activities and costs are involved in each
product, helping them to focus on driving sales of those items that are most profitable to
the restaurant (Raab, 2003).
In practice, ABC is equally applicable to front-of-the-house (FOH) as to
back-of-the-house (BOH), in the same way as it is applicable in industry, because
employees generally conduct repetitive and specialized tasks. It should not be difficult to
measure the activities involved in producing a product if all points can be allocated
either to food production or to service (Raab, 2003; Kotaskis et al. 2010). The analysis
should also take into account different subsets of customers, classifying them by shift
(lunch or dinner) and age (adolescents vs seniors) and as regular customers or one-off
visitors. These factors differentiate restaurants from other service industries, because
they are both tangible and intangible, and restaurants must fulfill the needs of diverse
customers immediately, which imposes limitations on application of the ABC method
but does not mean it is inappropriate for this sector.
Methodology and the application of activity-based costing/menu

engineering
This article applies a partial replica of the model proposed by Raab (2003) to a case study
of an oriental restaurant in the city of Itajaí, SC, Brazil, using ABC/ME to analyze the 135
items on the menu, classified into 13 categories.
Figure 1 illustrates the structure of the ABC/ME model adopted for this study based Menu
on Raab’s (2003) study. The model comprises two parts, as follows: engineering
(1) a three-stage pre-design process; and and activity-
(2) the ABC/ME model comprising creation of the ABC model (a 16-step process, based costing
adapted from the 2003 Raab model and shown in Figure 2), ME with ABC
integrated, assessment of the ABC model and the final ABC/ME system.
1425
The stages that comprise the pre-design phase of the ABC component are: meetings with
the manager, chef and owner to establish the restaurant’s characteristics and define the
manner in which the subsequent stages would be conducted, in addition to obtaining
management buy-in to the project; data collection from the accounting department, the
restaurant’s bills, costs of raw materials and number of dishes sold; creation of a bill of
costs for each dish, detailing the quantity and the costs of each raw material used (each
oriental salad has seven different raw materials with a total cost of R$1.31 belonging to
a starter group); and ranking of all 135 items by the manager within each of the 13
different groups of items (starters, temaki, hossomaki, uramaki, norimaki, hot rolls,
niguiri, gunkan, sashimi, combination dishes, sushi combination dishes, hot dishes and
lunch). These data were then used to conduct ME on all groups, creating a second
ranking of all items (oriental salad was ranked in fifth position by management and in
Pre-design
ABC/ME Model
1
ABC Pre-design
Creation of ABC model for

restaurants
1st meeting with manager
(how the method works)
Stage 1 16 steps Supported by

(Definition of objectives to be Figure 2 and 3
(Creation of model)
achieved)
General manager ABC/ME

commits to project
Stage 2
(Data collection; Evaluation of ABC/ME model
ranking of dishes)
Stage 3
(Project planning;
ABC/ME SYSTEM
spreadsheet for item analysis)
Figure 1.
Pre-design and
creation process of
1 ABC/ME model for
restaurants (based on
Source: Linassi (2009) Raab model)
IJCHM General ledger
28,7
Personnel Utilities Direct Business
operating costs sustaining
CAC 1st Stage
1426 BOH activity center FOH activity center
Unit-level Unit-level
Batch-level Batch-level
Product-sustaining Product-sustaining
Utility activities Utility activities
CAC 2nd Stage
Dishes analyzed
Unit-level
Batch-level
Product-sust.
Utility activities
Facility-sustaining
Figure 2. Food-cost
ABC restaurant
model Source: Adapted from Raab (2003)
first by the ME model), this time using the 1982 Kasavana and Smith method, which is
one of the most popular and widely adopted ME methods.
The model proposed by Raab (2003) was used to support the ABC/ME model or, more
specifically, to support creation of the ABC model (a 16-step process). The model is
illustrated in Figures 2 and 3, showing the two stages followed to create an ABC/ME
model for the restaurant. The first stage includes the establishment of cost pools (CPs)
and cost pool rates (CPRs), and, in the second stage, overhead cost is applied to each
individual menu item by tracing and some allocation.
Through identification of the costs and evaluation of the menu according to the
principles of ME, it was possible to undertake a first evaluation of the menu and begin
the process of integrating ABC, before reevaluating the menu in a more complete
manner, taking into account additional costs including labor, utility bills (such as gas
and electricity) and all other administrative, financial and sales costs by dividing
activities into the CPs, personnel, utilities, direct materials costs and business
sustainability, and CPRs in the first stage of the model. Then, each of the cost drivers has
its cost assigned to products using a second-stage cost driver unique to each CP.
The first step in the process of creating an ABC model for the oriental restaurant was
to identify its activities, define activity centers and combine them into uniform
processes. For the purposes of this article, activity centers are divided into FOH and
BOH, as in the Raab model (2003), because, usually, restaurants have the same
configuration (food production and dining room). Step 2 is to conduct a process of
product value analysis in which all activities needed to produce a product are listed and
Manager Ranking Menu
Pré-design stage
(Figure 1)
engineering
ME Ranking and activity-
based costing
ABC/ME model
1427
FOH/BOH
activities Activities guide ABC/ME
3 Rankings Comparisons
Process of product CAC 2nd menu
(Table 4)
value analysis 2 nd stage engineering
VA and NVA (Figure 2) analysis
Define Costs for each ABC/ME

Activities centers activity center Dish classification
FOH/BOH (Table 3)
Cost pools Unit cost for each

Mensal costs of CP X the number
each activity of units utilized
CAC ABC bill of costs

1st stage +cost raw material Figure 3.
(Figure 2) ABC/ME Ranking Research summary
(Table 1)
each is labeled as “adds value” (activities that produce the product or provide a service
to the customer) or “does not add value” (activities that consume resources without
adding value to the product). The activity centers in Step 3 are defined by combining
main activities for BOH and FOH. All costs are then divided between the departments.
In Step 4, the fixed costs are separated into CPs, each of which is a group of general
costs for each variation in costs that can be explained by a cost driver, in accordance
with the literature, which recommends that similar costs should be combined. Basically,
the overall totals recorded are rearranged into CPs. In Step 5, the main costs for each
activity center are grouped into four CPs:
(1) personnel (salaries, benefits and other labor costs);
(2) utilities (electricity and gas);
(3) direct material costs; and
(4) business sustainability (repairs and maintenance, depreciation, general and
administrative costs, rents, taxes, accounting costs, etc).
Step 6 of the two-stage model is to attribute the fixed costs to activity centers. The costs
will be allocated using costs drivers of the first stage that can produce two inputs, the
general cost accumulation center (CAC) and the rate of accumulation. The resources of
the general CAC can be measured directly. For restaurants, personnel costs (labor) can
be attributed to BOH and FOH departments, determining how these resources will
IJCHM assigned to each department. To BOH, for food production costs, we use a monthly cost
28,7 in Brazilian currency (R$) and total worked hours/month. The CP will determine R$/
hour, being equal to a total of R$/hour worked. This CPR will be applied in the second
stage of the process costs to determine how many of the personnel costs (labor) will be
used for each product individually. This same process will be applied to the FOH. Other
CPs were made in the same way.
1428 Step 7 in construction of the ABC system is to establish the second-stage cost drivers
by dividing the total cost of each activity center into cost drivers pools. There are five
categories of cost drivers that are applicable to restaurants:
(1) unit-level cost drivers – incurred every time a unit is produced and directly
related to the number of units produced;
(2) batch-level cost drivers;
(3) product-level drivers – resources used to sustain products in the company’s

product line;
(4) facilities-sustaining activities – including the general costs of maintaining the
company’s processes, such as accounting, marketing, taxes, rents and security;
and
(5) utility activities (gas and electricity consumption).
The product sustainability activities are common to all the dishes and were cleared by
the percentage of time spent in the administration of the FOH by the manager,
established in 50 per cent, and, in the BOH, the percentage of time used by the chef in the
administration and supervision of the sector and the administration by the manager,
that devotes 50 per cent of his time to the BOH. For the activities of utilities and support,
the use of one unit per dish directly from the cost pool rate (CPR) was established.
In Step 8, the costs of each CP driver are attributed to the products using one cost
driver from the second stage for each CP. The CP, in turn, is distributed across the
products on the basis of the number of cost drivers that each product consumes. The
fixed costs allocated to the products are calculated by multiplying the number of cost
driver units by the CP rate defined in the first stage. Step 9 is conducting observations
and interviews and administering questionnaires in the restaurant, used to measure the
units of resources consumed by a given product. In Step 10, the costs are traced by
multiplying the unit cost for each CP by the number of units utilized for each item
analyzed. Other resources that must be taken into consideration when calculating the
cost of products are unit-based cost drivers, which are the number of units of energy and
units of hours of labor used to prepare a given item. Labor times are acquired by
observation and/or by interviewing employees.
Step 11 is to condense the ABC costs calculated for each product into an ABC cost bill
listing the costs and activities for each product in each activity center. The activities
guide will be as follows:
• labor cost per base unit;
• batch level (preparation);
• product level (stocking and costs of each recipe); and
• utility activities, which were summed, provide a total cost per item, based entirely
on BOH, in the personnel CP.
The same process can be used to define all costs for the other CPs, with the exception of Menu
business-facility-sustaining costs, which, as in other methods, are allocated by engineering
arbitrarily dividing the total cost by the total number of units sold. These CP costs are
then divided by 60 to provide a cost per minute, defined as the CPR. Step 12 is to add the
and activity-
raw materials costs that have already been calculated for the ME analysis in the cost based costing
sheets, arriving at the total cost for each item analyzed. For the oriental salad (Table I)
the resources used are measured in minutes and then multiplied by the value of each 1429
CPR, making the total cost for each level. At the unit level, the total used was 14.66 min
costing R$ 1.00; the batch level uses 5.29 min costing R$ 0.38; product sustaining uses
7.51 min costing R$ 0.56; and total of utility activities is R$ 0.73, totaling R$ 5.41 added
to the cost of raw material of R$ 1.31, amounting to the total cost of R$ 9.39 for this recipe.
Step 13 is to conduct a second ME analysis, using the principles of ABC costing and the
costs recorded on the ABC costs bills, arriving at a fresh analysis of each dish. These new
spreadsheets are then used, in Step 14, to reclassify the items according to the same criteria
used in traditional ME, allocating them to the categories of star, plow horse, puzzle and dog.
According to the 1982 Kasavana and Smith criteria, the oriental salad was classified as a
star. Step 15 is to produce an ABC/ME ranking of the items analyzed according to a
combination of their profitability and popularity, as had been done previously during the
pre-design phase (the oriental salad was classified in first position by ABC/ME model).
Finally, in Step 16 of creation of the ABC model, the results of the ABC/ME ranking are
compared with the rankings arrived at using the principles of traditional ME and according
to the restaurant manager’s perception, arriving at ABC/ME integration.
Table I illustrates how the model calculates costs using ABC and the way in which
labor times are recorded for the dish oriental salad, as illustrated in Figures 1 and 2,
following the 16 steps of the ABC model. The same method was applied to all 135 dishes
analyzed to compile lists of ABC costs. The use of the bill of costs just as the one used by
Raab (2003) because the restaurant has researched activities and organization similar to
those used by the author.
Table I shows how the costs were divided and how these costs were driven by each
activity. The activities were separated into groups and for each CP (BOH and FOH), and
the resources utilized were tracked through a process of discussions with the manager
and measurements of time and process conducted in the restaurant itself. These
resources are then multiplied by the CPR, thereby arriving at the total cost of each
activity. The table also includes the costs of ingredients taken from the costs and
specifications bills and, finally, the total ABC cost for each dish analyzed, according to
the 16 steps of the ABC model.
Following the steps of the ABC/ME model, once the ABC/ME stage has been
completed (started in Steps 13, 14, 15 and 16), it becomes possible to conduct an
assessment of the ABC/ME model that has been constructed to ensure that the
implementation of the model is successful, re-evaluation of the entire process of
construction, identification of potential benefits and opportunities generated by the
implementation of the ABC/ME system, management of the restaurant in a more
profitable manner and addition of value for the customers.
Research results
Table II presents a summary of the results of the traditional ME analysis, and Table III
lists the results of the ABC/ME analysis. Comparison of these two tables enables an
IJCHM Recipe: oriental salad
28,7 Cost pool
Resources rate Total cost
Activities used Unit (R$/min) (R$)
Unit-level activities
1430 FOH
Communicating 4.16 min 0.06 0.25
Setting up 1.00 min 0.06 0.06
Serving customers 4.00 min 0.06 0.24
Processing checks 2.50 min 0.06 0.15
Total 11.66 min 0.70
BOH
Preparation 2.00 min 0.10 0.20

Cooking 0.00 min 0.10 0.00
Cleaning 1.00 min 0.10 0.10
Total 3.00 min 0.30
Total unit-level activities 14.66 min 1.00
Batch-level activities
FOH
Setting up 1.64 min 0.06 0.10
Administrating 1.00 min 0.06 0.06
Total 3.69 min 0.22
BOH
Preparation 1.00 min 0.10 0.10
Total 1.60 min 0.16
Total batch-level activities 5.29 min 0.38
Product-sustaining activities
FOH
Administration 4.77 min 0.06 0.29
BOH
Administration 2.74 min 0.10 0.27
Total product-sustaining activities 7.51 min 0.56
Utility activities
FOH 1 unit 0.40
BOH 1 unit 0.33
Total utility activities 0.73
Facility-sustaining activities 1 unit 5.41
Direct operating costs
Food costs 1 unit 1.31
Table I. Total cost 9.39
Example ABC bill of
costs Source: Research data from this study
N IP ACM FC Star Plow Puzzle Dog
Menu
Group items (%) (R$) (%) (%) horse (%) (%) (%) engineering
and activity-
Starters 14 5.00 3.15 42.93 21.43 21.43 35.71 21.43
Temaki 6 11.67 11.45 22.16 16.67 16.67 16.67 50.00 based costing
Hossomaki 7 10.00 8.52 14.33 28.57 42.86 28.57 00.00
Uramaki 6 11.67 11.38 19.80 33.33 33.33 16.67 16.67
Norimaki 5 11.67 9.53 32.70 20.00 20.00 60.00 00.00
1431
Hot roll 3 23.33 11.47 28.67 00.00 33.33 33.33 33.33
Niguiri 7 10.00 3.23 37.68 28.57 28.57 00.00 42.86
Gunkan 4 17.50 6.59 17.65 00.00 25.00 00.00 75.00
Sashimi 6 11.67 9.97 40.69 16.67 33.33 16.67 33.33
Combination dishes 15 4.67 21.04 44.38 00.00 13.33 86.67 00.00
Sushi combination dishes 13 5.38 28.53 23.18 30.77 7.69 61.54 00.00
Hot dishes 23 3.04 18.18 29.77 21.74 17.39 30.43 30.43
Lunch 26 2.69 6.18 46.45 19.23 23.08 34.62 23.08
Notes: IP⫽ index of popularity; ACM⫽ average cost margin; FC⫽ food costs (considered total food Table II.
cost for analysis) Main ME analysis
Source: Research data from this study results
Var Plow Var

N IP ACM ACM* Star horse Puzzle Dog TFC TFC*
Group items (%) (R$) (R$) (%) (%) (%) (%) (%) (%)
Starters 14 5.00 5.09 8.24 21.43 21.43 35.71 21.43 192.11 149.18
Temaki 6 11.67 3.57 7.88 16.67 16.67 16.67 50.00 75.72 53.56
Hossomaki 7 10.00 0.59 7.93 28.57 42.86 28.57 0.00 94.11 79.78
Uramaki 6 11.67 3.36 8.02 33.33 33.33 16.67 16.67 76.31 56.51
Norimaki 5 11.67 1.55 7.98 20.00 20.00 40.00 20.00 89.05 56.35
Hot roll 3 23.33 3.23 8.24 0.00 33.33 33.33 33.33 79.88 51.21
Niguiri 7 10.00 4.61 7.84 28.57 28.57 0.00 42.86 188.85 151.17
Gunkan 4 17.50 1.33 5.26 0.00 25.00 0.00 75.00 116.59 98.94
Sashimi 6 11.67 1.87 8.10 16.67 33.33 16.67 33.33 88.88 48.19
Combination dishes 15 4.67 10.61 10.43 0.00 13.33 86.67 0.00 71.97 27.59
Sushi combination dishes 13 5.38 19.95 8.58 30.77 7.69 61.54 0.00 46.29 23.11
Hot dishes 23 3.04 9.38 8.80 21.74 17.39 26.09 34.78 63.77 34.00
Lunch 26 2.69 2.37 8.55 19.23 23.08 30.77 26.92 120.53 74.08
Notes: IP⫽ index of popularity; ACM⫽ average cost margin; TFC⫽ total food costs; VarACM⫽ Table III.
variation in average cost margin; VarTFC⫽ variation in total food costs; * variation in ACM (R$) and ABC/ME results and
FC (%) between ME and ABC/ME are calculated with respect to the ME results; there was no difference variation between
in IP between the methods ME and ABC/ME
Source: research data from this study results
analysis of the variations revealed between the results of application of the ME

methodology and of application of the ME methodology integrated with ABC (ABC/ME)
for each of the 13 groups of dishes analyzed. Mean percentage index of popularity did
not change because the sales data analyzed were from the same period in both cases. The
IJCHM tables also show the percentages of each group of items that were classified as star, plow
28,7 horse, puzzle and dog, and Table III shows the variations between the ME and ABC/ME
results for average cost margin (ACM) in Brazilian Reais (R$) and total food costs (FC) in
percentages (in relation to the rates shown in Table II) for each group.
There were no significant differences between the results of classification of items
according to ME and ABC/ME models (Tables II and III), because their mean popularity
1432 remained unaltered, which resulted in items remaining in the same category. The low
values for the FOH and BOH cost centers on the ABC costs bill is of note, as despite the
size of the differences in resource utilization, the totals for ABC and ABC/ME are similar
because costs accumulate in a near-proportional manner in some cases. This
phenomenon is possible because of the size of the restaurant under analysis (considered
a small-scale establishment), as its activities are performed by a small number of people,
thereby reducing costs.

However, the increase in total food costs according to the ABC/ME method for all
items analyzed is striking. This is because, as described above in the section on the steps
taken to construct the ABC model, it allocates the costs to the groups, thereby
highlighting those groups that make a negative contribution to the restaurant’s
profitability or that consume excessive resources. Armed with this information, the
restaurant manager can more easily identify the root of the problem, taking actions to
improve the group’s performance, cutting back activities that do not add value, running
promotions on specific items or even removing them from the menu if they are not
viable, that is, if they do not add value to other items in the group. Seen from this
perspective, ABC/ME can be a very useful tool of management control to be used for
identification of problems and losses generated by menu items or groups of items and
one that is more effective than ME alone because it represents all the costs involved in
each dish and not just raw material costs.
As can be observed in Table III, none of the 13 groups analyzed using ME and
ABC/ME exhibited any changes in the star category, and just three groups (norimaki,
hot dishes and lunch) exhibited variation in the dog category, with one extra item added
to the category in each group. No items in the hot rolls, gunkan or combination dishes
groups were classified as stars, whereas the hossomaki, combination dishes and sushi
combination dishes groups had no items classified as dogs, and the same was true fro
the norimaki group when analyzed with ME but not when analyzed with ABC/ME.
Similar findings were reported by Raab (2003), who also only observed minor variations
between item classifications conducted using the two methods.
The majority of groups analyzed exhibited a drop in ACM of around R$8, which is
considered a high figure, as in some cases, it impacts on the profitability of the item or
even takes its CM into negative figures (the CM comparison used the total costs of raw
material for ME and the total of the bill of cost for ABC/ME). The gunkan group
exhibited the least variation (⫺R$ 5.26), and the combination dishes group varied most
(⫺R$ 10.43) possibly because it is also the group containing the most expensive dishes.
The menu item groups can be split into three categories on the basis of change in food
costs:
(1) those that suffered the smallest variations in costs percentages, in the range of
25-50 per cent, containing sushi combination dishes (which exhibited the
smallest increase of all), combination dishes, hot dishes and sashimi;
(2) a category of items in the range of 50-80 per cent variation, containing hot rolls, Menu
temaki, norimaki, uramaki and lunch; and engineering
(3) a category of items that suffered variations greater than 95 per cent, with gunkan and activity-
(98.94 per cent), starters (149.18 per cent) and, the item with the greatest based costing
variation, niguiri (151.17 per cent).
The results presented above were used to construct rankings for each group analyzed, 1433
as a form of comparing the classifications of different dishes within the same groups. An
example is shown in Table IV, listing the rankings for the group hot dishes. These items
are listed in the order that they were ranked in by the restaurant manager and are then
compared with the ME and ABC/ME rankings, as was done by Raab (2003) and Raab
et al. (2010). The manager ranked the items on the basis of his impression of their
profitability; and items were ranked according to their CMs and their popularity for the
ME and ABC/ME classifications.

In common with the results shown in the Table IV example, for all 13 groups, there is
a clear difference in the sequence of items in the rankings defined by the manager and
according to the ME and ABC/ME methods and particularly so with relation to the
differences between the manager’s impressions and both the ME and ABC/ME
rankings, showing that the manager does not know the profit of each dish. Analysis of
Manager ME ABC/ME
Group Item Rank Category Rank Category Rank
Hot Beef Yakissoba 1 Plow 8 Plow 6

dishes Chicken Katsu 2 Star 3 Star 3
Fillet steak Teppanyaki 3 Star 1 Star 2
Salmon Teppanyaki 4 Plow 9 Plow 7
Chicken Teppanyaki 5 Plow 10 Plow 8
Bluefish Teppanyaki 6 Dog 18 Dog 19
Shrimp Teppanyaki 7 Puzzle 7 Puzzle 11
Shrimp and mushroom Tempurá 8 Dog 13 Dog 17
Full robata 9 Puzzle 6 Puzzle 10
Vegetable Tempurá 9 Dog 20 Dog 21
Chicken Robata 10 Puzzle 17 Dog 18
Beef Robata 11 Puzzle 7 Puzzle 12
Seafood Yakissoba 12 Star 4 Star 4
Sukiyaki 13 Puzzle 14 Puzzle 13
Shrimp Robata 14 Puzzle 15 Puzzle 14
Beef Teishoku 15 Dog 22 Dog 23
Chicken Teishoku 16 Dog 21 Dog 22
Fish Teishoku 17 Dog 12 Dog 16
Katsu gyu 18 Star 5 Star 5
Katsu ton 19 Puzzle 16 Puzzle 15
Vegetarian Yakissoba 20 Plow 11 Plow 9
Vegetarian Teppanyaki 21 Dog 19 Dog 20
Chicken Yakissoba 22 Star 2 Star 1
Table IV.
Note: * results for all 135 dishes can be found in Linassi (2009) Example rankings by
Source: research data from this study three methods*
IJCHM the ME and ABC/ME rankings reveals a great deal of similarity, which is a result of the
28,7 fact that in both cases, the analysis is based on the ME methodology proposed by
Kasavana and Smith in 1982, classifying items by popularity and in terms of the MM of
dishes.
Rankings for two of the menu item groups analyzed merit further attention, because
they exhibited the greatest variations between the results of the three different methods
1434 and they are also the groups containing the largest numbers of items. In the hot dishes
group (Table IV), the item classified in last place by the manager (chicken yakissoba) is
in first and second places according to the ABC/ME and ME methods, respectively, and
the majority of dishes are classified into positions that are very different to their
positions in the manager’s opinion, demonstrating that in Brazil even with a degree in
administration or gastronomy, the restaurant managers are unaware of the costs and
made their prices intuitively, damaging the profitability of the business. Raab (2003)
also observed these types of changes in item classifications in the rankings she
constructed.
The ranking of the lunch group also exhibited large variations between the three
classifications with only the ninth and last items out of 26 remaining unchanged. Once
more the manager’s opinion differs greatly from the other two rankings, this may be an
indication of negative profitability that has been detected by the ABC/ME model.
Even with these small variations in rankings, it is clear that the result of using the
combination of ABC with ME is that the data shown in Tables II and III and,
consequently, the ranking data in Table IV, are more trustworthy.
After conducting data collection and applying both ME and ABC/ME, certain
characteristics peculiar to each of the methods became clear. ME is effective for
itemizing all material costs and classifying menu items on this basis, and ABC/ME is
also effective for itemizing all material costs but is more effective overall because it
offers increased traceability and allocation of costs. Taking the results of comparison of
the methods and the rankings together and notwithstanding the fact that the item
classifications and rankings did not change greatly, it is still clear that integration of
ABC offers advantages in terms of arriving at a more accurate inventory of costs,
demonstrated by the differences in the results for ACM and, particularly, for food costs.
It is, therefore, evident that although the ABC/ME method is more complex and
demands greater expenditure of time on additional data collection and research, it also
offers a more exact representation of costs and provides clearer indications for
managers of which items or groups of items should be subjected to more careful
analyses.
Discussion and conclusions

The ME and ABC/ME methods are most likely to produce differing results for food costs
and mean CM, which are higher and lower, respectively, when the ABC/ME method is
applied. The ME analyses only take raw materials costs into consideration, whereas the
ABC/ME method allocates all expenditure to item costs. In the case study of application
of the ABC/ME method in an oriental restaurant described in this article, the result of
this was that many items were allocated a negative CM according to the ABC/ME
method, effectively highlighting priority areas on which management should
concentrate their efforts.
This paper has practical and scientific contribution, and the study serves as a Menu
confirmation of previous studies related to ABC/ME, as suggested by Raab (2003), Raab engineering
et al. (2006), Raab and Mayer (2007) and Raab et al. (2007), who point out that when
implemented well, notwithstanding more time is required at the beginning, the ABC/ME
and activity-
is a more complete and effective tool of cost management for restaurants than ME alone. based costing
Thus, this article contains new and significant information regarding the
implementation of ABC in the restaurant industry in Brazil, improving the model 1435
proposed by Raab (2003), and makes it applicable to Brazilian reality, which has legal
and management peculiarities different from other countries.
Kasavana (2008) claimed that inclusion of labor costs and other costs makes ME less
precise, but what is actually observed is that the costs allocated to each dish are more
plausible, as in addition to raw materials, the menu items also incorporate other costs
such as the costs of production, labor, electricity and gas and other administrative costs,
reaffirming the effectiveness of the ABC/ME model. Broken down in this manner, and in
contrast with the Kasavana and Smith method, costs can be viewed by each dish or
group of dishes, and losses per item or group can be easily identified, making it possible
to act more quickly and precisely, directly at the root of the problem. Integration of ABC
made it possible to identify the following costs in the make-up of the prices of menu
items: raw material costs, personnel costs, facility-sustaining costs and utility costs.
This study has advanced the discussion of ME by updating the theoretical references
about ME that it is yet little explored, that since 2011 does not produce new papers or
new approaches, includes a review of the entire restaurant as suggested in earlier
studies as a major deficiency in the applications of the ABC/ME and contributes to the
construction of a more solid theoretical foundation by confirming that the model
proposed is valid for application in restaurants.
The current study also revealed that most menu items had negative operating profits
after ABC was applied. The use of ABC increases the accuracy of the effective cost of
each menu item, especially in intensive labor production systems. Restaurant managers
cannot make reliable decisions without complete cost information, which emphasizes
the need to calculate ABC costs for each menu item on the menu, permit a more
profitable decision. The ABC/ME is a tool that can be of great use for managerial control
and can be used to identify both the most important problems and potential losses
generated by menu items or groups of items and also the items with the greatest
potential to generate revenues. The efficacy of integrating the methods of ME with those
of ABC has been confirmed, and the result is a good management tool for identification
of costs and their allocation directly to business activities, thereby making it possible to
visualize them with greater clarity.
With regard to the degree to which the two methods used in combination complement
each other, the additional utility that ABC brings to ME is unquestionable, as costing
more precisely takes into consideration the entire restaurant’s cost structure, although
facility-sustaining costs were distributed equally across all dishes. A suggestion for
further refinement in future studies is, therefore, that the facility-sustaining costs should
also be broken down by item. In the case of the restaurant analyzed here, there were
many points in common between the results of application of ME and of ABC/ME, and,
to a certain extent, analysis did not identify major variations in the rankings produced
by the two methods. Notwithstanding, there is no denying the differences in the costs
calculated according to each method and the importance in management terms of the
IJCHM additional elements offered by ABC, particularly those related to more correct
28,7 identification of expenditure and to indication of actions needed to achieve better overall
performance, by analyzing each item or group of items separately. The most striking
findings after comparison of the results of the ME and ABC/ME analyses were that the
ABC costs can be larger than the price, compared to traditional ME results, as stated by
Raab and Mayer (2007), who armed with this knowledge said that managers can take the
1436 necessary steps to alter their operation and reconfigure their menu to improve their
facility’s bottom line profitability, instead of merely guessing (based solely on food
costs) that the changes they make will actually lead to improved profitability.
It is believed that because of the peculiarities of the Brazilian market, the application
of the ABC/ME model brings new approaches and uses of this tool. Just to typify when
a Brazilian employer pays an annual salary of US$30,000.00 (considering the salary
gross value), there are additional US$17,200.00 to be paid on labor contributions and
charges; this includes all employees’s mandatory costs such as health insurance and
allowance provisions. In other countries, the average applied extra US$6.7m is less than
half of what is paid in Brazil. It is believed that this cost added when to all other company
costs makes a difference on the results analysis. In contrast with the manufacturing
industry, the restaurant industry offers a chance of improvement at all levels of
activities, because manual labor represents a crucial part of the restaurant production
and services process.
The evidence that it is an efficient tool for managing restaurants in Brazil is not
proven yet. So, this study advances in the professionalization of the discussion of the
Brazilian restaurant market and updates the literature on ME. The use of an oriental
restaurant with numerous ingredients, 135 dishes, several work shifts and selling
arrangements points that the model if applied to other “traditional” restaurants with few
dishes and less number of ingredients is confirmed in this application in a Brazilian
restaurant, allowing the use of this tool with minor modifications, which reduces the
application time and costs, being a feasible way to small business in Brazil and trying to
fill the gap between theory and practice. Comparing this paper to the previous studies,
this one is closer to the generalization of the ABC/ME model for restaurants, extending
the traditional ABC theories.
Even though the owners of the restaurant analyzed here have higher education
degrees in management, accounting and tourism and understand the importance of
correctly calculating costs, they were not using any specific pricing and costing
methods, basically setting their prices based on competition and the market and
conducting general costing on the basis of income statements, which demonstrates how
far they have to go in terms of management in this specific industry – the restaurant
business. From an academic point of view, the gap is clear, it lies in the scant literature,
whether Brazilian or international, related to application of these tools, particularly to
ABC/ME; in the contradictory and imprecise information on application of ME models;
and in the lack of empirical studies focused on commercial restaurants. Also, it is
necessary to go no further than Raab (2003), Raab and Mayer (2003), Raab et al. (2007)
and Vaughn et al. (2010) to compile this list of shortcomings.
Limitations and future research

This study suffers from certain limitations that merit mention. The study did not
analyze the entire restaurant menu, as beverages, desserts and promotions (sunday
lunch and salmon special) were excluded from the analysis. It means that it was not Menu
possible to evaluate the entire establishment, providing only a partial view of the engineering
restaurant, notwithstanding the fact that, in contrast to Raab (2003) who only analyzed
a single category (main courses), more than 80 per cent of the menu was analyzed, which
and activity-
confirms the stability of the ABC/ME system. based costing
Still with regard to the menu, as this is an oriental restaurant that serves sushi, there
were a significant number of small groups of menu items, some of which exhibited 1437
negative performance as individual dishes. However, many of the dishes that did not sell
well on their own were part of combination dishes that were selling, and, as a result, it
did not lead to wastage of raw materials. Another suggestion for future work is,
therefore, that when analyzing sushi restaurants, these types of dishes should also be
analyzed in conjunction, and the results of the two approaches should be compared.
The ABC/ME analysis illustrated how restaurant size and number of employees
influence the results of ABC, as the results for the cost centers, in particular, personnel,
tend to be low in small restaurants, with the result that many different dishes have equal
values, compromising the analysis. Still with relation to the CPRs, it did not prove
possible to break down the facility-sustaining costs by activity because they were not
specific to any one activity. As this account was responsible for almost 38 per cent of the
total for the cost centers, it is possible that this limitation has also had an effect on the
results, although it by no means invalidates the application, because all dishes were
given a fixed rate for this cost center.
These limitations possibly have implications for the small differences observed
between rankings according to ME and ABC/ME, as the ABC costs were similar or equal
for all dishes. Despite this, the ABC method provided a more faithful representation of
the costs linked with each dish or group analyzed and, therefore, serves as an aid for
restaurant management.
Another point that should be mentioned is that it was not possible to calculate the
wastage inherent in the process, which is treated as negligible for the purposes of study,
and the quantities of ingredients recorded on the costs and specifications bills were not
audited against what was actually being consumed when the dishes were prepared in
the restaurant, which could have revealed wastage or overestimation of the quantity of
ingredients used or even losses due to dishes rejected by customers that have to be
prepared again.
With regard to the ME methods used, the decision to only use the Kasavana and
Smith method was based on its widespread popularity, the fact that it has been cited in
work describing the development of a good part of the other methods and because it does
not take into account any of the restaurant’s costs other than raw materials. An
alternative option would have been to follow the example of Raab (2003), who also
analyzed methods that only used CM, and Pavesic (1983), who used the profit factor.
The limitations of this paper show that the size of the restaurant used for applying
the ABC/ME model is a small business, and the analysis of ABC/ME shows that the size
of the restaurant and the number of employees eventually influenced the company’s
results, although we did not calculate the wastes of the process or rework. The
suggestion for future research is to compare this model to other ME models and evaluate
the efficiency of the ABC/ME model over the time, based on the strategic focus and price
sensitivity. Future researches should apply the used model to other restaurant types
located in different geographical areas to validate the approach.
IJCHM Other suggestions for future research are as follows: application of the ABC/ME
28,7 method to an entire menu, thus arriving at a more complete analysis; reapplication of the
ABC/ME model tested here to the same oriental restaurant to assess its effectiveness
over time; application of the method to other types of restaurants with a view to analyze
the main differences and test its applicability to different restaurants, that is, test
whether restaurant type influences the results and determine what types of adaptations
1438 are needed to correctly apply the ABC/ME model.
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Corresponding author
Rossano Linassi can be contacted at: rlinassi@yahoo.com.br
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Menu engineering and activity-based costing: An improved method of menu

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Menu engineering and Menu

assessment (Teichmann, 2009; Barreto, 2010).

Activity-based costing and its application to restaurants 1423

information is generated as quickly and efficiently as possible.

Methodology and the application of activity-based costing/menu

Creation of ABC model for

Stage 1 16 steps Supported by

General manager ABC/ME

1426 BOH activity center FOH activity center

CAC 2nd Stage

VA and NVA (Figure 2) analysis

Define Costs for each ABC/ME

Cost pools Unit cost for each

CAC ABC bill of costs

(3) product-level drivers – resources used to sustain products in the company’s

Preparation 2.00 min 0.10 0.20

Var Plow Var

analysis of the variations revealed between the results of application of the ME

thereby reducing costs.

ME and ABC/ME classifications.

Hot Beef Yakissoba 1 Plow 8 Plow 6

Discussion and conclusions

Limitations and future research

Administration, Vol. 6 No. 3, pp. 11-26.

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