Activity based costing essay example

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Activity based costing essay example

Get Full Essay Get access to this section to get all help you need with your essay and educational issues. Activity-based costing in restaurants Essay Sample 1.

Activity based costing essay example

Introduction Interest in cost and management accounting practices in the restaurant industry is Activity based costing essay example Raab et al. Pavesic has initiated research in pricing and cost accounting for restaurants, introducing the concept of profit factor PF in menu engineering ME.

Activity based costing essay example

Prior studies, such as the one presented in Chan and Au investigate the implications of not incorporating overhead costs in menu-item profitability analyses in restaurants in Hong Kong. Since then, a number of researchers have examined the application of contemporary cost and management accounting techniques, and particularly activity-based costing ABC in a restaurant environment Raab et al.

ABC is a cost accounting methodology that aims to allocate overhead costs effectively. ABC traces costs by using resource and activity cost drivers that reveal activities and objects consumption patterns on the basis of a cause and effect relationship.

In an ABC, model cost drivers are used to establish a transitional mapping between resources, activities and cost objects. The identification and selection of appropriate and accurate cost drivers is one of the most difficult tasks in ABC models Cobb et al.

As this survey showed, most companies find it difficult to translate theory into action, mainly due to difficulties relating to data collection, identification of activities and lack of resources. The most common technique used for the identification of activities and the selection of cost drivers is by interviewing the heads of departments.

Other methods include labour reporting systems, work order systems, employee surveys, observations, timekeeping systems and storyboards Kaplan and Cooper, In particular, the study shows how by integrating three management techniques, one can accurately compute values for cost drivers, in cases where real data are not available or are difficult and time consuming to gather.

The proposed method equally serves as a tool for improving cost estimation in menu-item profitability analysis.

Purpose and background ABC in restaurants ABC is one of the most important innovations in the field of cost and management accounting Bjornenak and Mitchell, ; Bjornenak, ABC systems use a two-stage approach that is similar to the structure of traditional cost systems, such as job order costing and process costing.

Traditional costing systems use actual departments or cost centres for accumulating and redistributing costs, while ABC systems use activities for this purpose.

The usefulness of ABC in the financial performance of firms has been explored in the literature. Cagwin and Bouwman use confirmatory factor analysis and structural equation modelling to investigate whether the use of ABC is associated with improved financial performance.

Studies have shown the possible use and potential benefits of ABC in the hotel industry Kostakis et al. New techniques assisting large-scale ABC implementation have also been developed in recent years Kaplan and Anderson, The restaurant industry is facing great challenges today, mainly due to the highly competitive environment and the diverse needs of the customers.

Restaurants have to achieve a balance between serving these needs, and pricing their menu items to achieve adequate profitability levels Raab et al. Traditional costing systemsand simplistic pricing approaches were very popular within the restaurant industry.

Overhead cost and operating expenses were usually excluded and prices were a function of food cost, as well as customer demand, historical prices and other factors. This method has the evident disadvantage of leading to misleading information about individual menu items.

Research has revealed the significance of labour and energy costs in restaurants Chan and Au, This study also revealed that restaurants are labour intensive with labour cost representing a great share of total operating cost.

This study also reveals that although some restaurant managers trace a portion of undistributed operating costs to their menus, the restaurant industry in general does not allocate overhead costs to menu items. Studies in cost and management accounting in the restaurant industry demonstrate the potential benefits of the use of ABC in their operations.

ABC was able to gain insights about the operating profit margins of individual menu items.Activity-based costing in restaurants Essay Sample.

1. Introduction Interest in cost and management accounting practices in the restaurant industry is rising (Raab et al., ; Annaraud et al., ).

Lifting the Veil: The best ever investigative history of of what's really going on behind the scenes in our world with over links to reliable sources to back up the stunning picture that is painted. Knowledge is power. Activity Based Costing Essay. Activity based costing (ABC) is a relative new way to allocate costs to specific processes and services - Activity Based Costing Essay introduction.

This system assures that the costs are accurately distributed to the products or services that generated them. Turnitin provides instructors with the tools to prevent plagiarism, engage students in the writing process, and provide personalized feedback.

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Activity Based Costing systems can be used to estimate the cost a product and also as a tool for management to monitor and control what is happening in the business by analysing the activity costs, the root causes of activities, the value of to the customer and measures of performance.

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