Evaluation Of Activity Based Costings Success Accounting Essay


1. Introduction

Traditional costing has been replaced in recent years in the hospitality sector by Activity Based Costing (ABC) systems. In spite of this trend, ABC systems have made few inroads in the services and hospitality sector, particularly in restaurant industry. In this study, an Activity-Based Cost model for restaurants was created and tested in a restaurant operation in a major city of the Western United States. Further, an ABC menu engineering analysis was created for the purpose of testing the feasibility of the ABC approach. The detail literature about traditional cost accounting and ABC analysis has been given in this chapter.

2. Traditional Cost Accounting

The end of the 19th century was marked by a rising interest in cost accounting. The reasons for an intensifying focus on costing resulted naturally from the increasing scale and complexity of businesses and their administration together with an increasing difficulty in setting prices (Davidson and Weil, 1978). Salomons (1968) pointed out that the impact of the industrial revolution created a need for more systematic methods of cost determination. A system was developed for the manufacturing industry that classified costs by objects of expenditure, by project, and by responsibility centers (Salomons, 1968). Classification of costs by object of expenditure includes designated charges such as direct labor, raw materials and manufacturing overhead, with subdivisions of these categories. Direct labor is defined as the category that can identify certain labor costs with a specific job. Often, management has to decide whether payroll taxes and other fringe benefits should be considered with direct labor (Davidson and Weil, 1978). Direct materials or raw materials are defined in the manufacturing industry as costs that can be associated with particular jobs. Manufacturing overhead is comprised of all costs that are not classified as direct labor or direct materials.

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Costs in the manufacturing industry are classified by projects and/or responsibility centers. Project costing involves an accumulation of costs for each job on a particular project, which enables management to prepare financial statements without physical inventories and to assist in preventing cost overruns. When costs are categorized by responsibility centers (departments), control is the primary objective. The secondary objective is the facilitation of reasonable allocation of charges to specific jobs (Davidson and Weil, 1978). Higgins (1952) indicated that costs classified by responsibility centers make a system that concentrates mainly on reporting controllable costs to managers.

Traditionally, the understanding of the different types of costs is necessary in order to manage costs well. The different types of costs are defined as shown in Table 3 (Garrison & Noreen, 1997).

Table 3: Manufacturing Costs

Type of Cost

Description of Cost

Direct Costs ( direct labor and direct materials)

All costs that can be physically traced to a product

Manufacturing overhead

Indirect labor, indirect materials, insurance, utility, suppliers, depreciations, property taxes.

Non-manufacturing costs (marketing and administrative costs)

All costs associated with general management of the company and necessary to secure customer orders.

Source: Garrison & Noreen, (1997)

Traditionally, the traceability of a cost to its objective determines the nature of a cost (Lewis, 1995). For example, a direct cost is considered to be the responsibility of a particular department or manager and is directly influenced by the fluctuations of sales revenues. This cost is also considered controllable and is referred to as a separable cost, as opposed to a joint cost. In the manufacturing industry, direct labor and direct materials represent the only direct costs. Examples of direct costs for the hospitality industry include food and beverage, wages, and operating supplies. Direct costs are generally the responsibility of the department head.

By contrast, indirect costs are not easily distributed to a particular department and are, therefore, generally viewed as not controllable by department heads. For example, in the manufacturing industry, materials that are too insignificant to be traced to a certain object are considered to be indirect materials, and any labor costs that cannot be traced to a certain product are termed indirect labor. Examples of indirect costs for the hospitality industry include expenses such as management fees, fixed charges, and income taxes.

Another cost category is overhead costs. In the manufacturing industry, all costs that are not either direct labor or direct materials are considered to be manufacturing overhead. Generally, only the costs linked to operating the factory are considered to be overhead, which excludes costs from marketing and administration. In order to include overhead costs with direct costs, they must be assigned to products and services. This allocation is accomplished by determining allocation bases that are measurable, such as direct labor hours or machine hours (Garrison and Noreen, 1997). However, companies adapt different types of cost systems. Cooper (1990) summarizes a five-year study that looked at fifty cost systems in thirty-one manufacturing companies. All cost systems applied a two-stage procedure for allocating overhead costs. The first stage assigns indirect costs and support department costs to production cost centers. The second stage assigns all costs accumulated at production cost centers to products. While the first stage used allocation bases, such as direct labor, floor space, and head counts, the second stage most commonly used direct labor hours and direct labor costs.

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In the hotel industry, overhead costs include all costs that are not direct costs (Coltmann, 1994; Schmidgall, 1997). Direct costs include expenses such as the cost of sales and payroll and. related expenses, as well as all expenses derived from daily operations such as linen, china, and glassware. These expenses can be tracked directly to profit centers. While direct costs are distributed to profit centers in the hotel industry, overhead costs most often remain undistributed (Geller and Schmidgall, 1997; Coltmann, 1994). Emmet Steed, a former senior controller for Marriott Corporation, explained that in the lodging industry, overhead costs are only occasionally distributed in order to determine the feasibility of a proposed additional profit center (personal communication, 2002). However, research suggests that hospitality overhead costs should be allocated to profit centers (Schmidgall, 1997). Schmidgall (1997) recommends several allocation methods to be used in the hospitality industry. Two of the methods will be discussed as an illustration of overhead allocation approaches for the hospitality industry. The most simplistic method suggested for the hospitality industry, the single allocation base approach (SABA), is displayed in Table 4.

Table 4: The application of SABA in a lodging operation (SchmidRall, 1997)



Overhead Cost

Overhead Cost


Food &





































Note. * A&G=Administrative and General **POM=Property Operation and Maintenance

3. Activity Based Costing (ABC)

To illustrate the concept of ABC, we might imagine the following scenario: Four friends dine at a restaurant. One friend orders soup and the others order steak dinners. When the waiter brings the bill, the friends who eat the steak dinners suggest splitting the bill. How is the friend who only ate soup supposed to feel about such an arrangement? The same feeling is true when accountants take overhead costs and arbitrarily allocate them to departments, or to product and service lines (Cokins, 2001).

Kaplan and Cooper (1988) demonstrated that the domain of traditional contribution margin analysis and cost variability could be greatly enhanced by the use of ABC. Kaplan (1990, pg. 21) elaborates that traditional cost approaches view a fixed cost as "an endowment that companies are born with." Therefore, companies make price/output decisions solely on variable costs. Kaplan and Cooper (1988) point out that the problem with this contribution margin approach (direct costing) lies with the fact that, over the last three decades, the costs that increased the most in many businesses were fixed costs. Nevertheless, companies still apply arbitrary allocation methods to fixed costs, making fixed costs look like a unit product costs. However, Kaplan and Cooper (1990) state that this approach is useful for short-term cost forecasting and optimization, but does not yield maximum results when it comes to decisions such as product mix, pricing, and makeversus-buy. Kaplan and Cooper (1988) expressed that their ABC research has shown that most fixed costs are, in fact, variable in nature.

Even though it originated more than 50 years ago, ABC has come into the forefront of corporate decision-making in the last decade. ABC became a formal discipline in 1986, as a result of a project conducted by the Consortium for Advanced Manufacturing-International (CAM-1), which instituted a project team including Robert Kaplan, Robin Cooper, and James Brimson (Daley, 2002). The project's goal was to improve cost accounting techniques, and CAM-1 worked with the National Association of Accountants to create a collection of cost accounting techniques that later became known as ABC. According to this project, "Activity-Based Costing is a common-sense method of assigning costs." (Daley, 2002; pg. 115). Managers can create ABC systems according to their companies' needs.

Turney (1991) slated that, since cost information is used to make crucial strategic and operational decisions, reliable cost information is most important in order to avoid a variety of competitive problems. According to Turney (1991), companies are not able to identify these problems unless they implement ABC. The information collected in an ABC system is used to address the following issues (Turney, 1991):

1. Which types of activities use the most resources?

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2. What types of resources are required for these activities?

Where are the opportunities to reduce cost?

What are the opportunities for profitable shifting of focus towards more profitable products, services, or customers?

In addition, Turricy (1991) suggests that ABC can provide answers to the following fundamental questions:

Are the wrong products sold?

Are the wrong customers served?

Do product designs raise costs unnecessarily?

Does the process design increase costs?

S. Does the structure of the organization raise costs?

Do costs increase despite cost cutting programs?

Are decisions to source offshore followed by cost increases?"

In contrast to traditional (unit-based) cost systems, which typically apply one cost driver and assign overhead costs in proportion to production volume, ABC is a two-stage cost system that assumes that not all overhead resources are consumed in strict proportion to production volume (Cooper, 1990). An ABC system identifies two or more allocation bases (cost drivers) depending on the complexity of the company (Cooper, 1990; Garrison and Noreen, 1997). Cooper (1990) identifies the following additional allocation bases used in an ABC system:

1. Batch-level bases (assuming that certain resources are consumed in direct proportion to number of batches of each type product produced); and,

2. Product-level bases (assuming that certain resources are consumed to develop different products).

4. Difference between Traditional Cost Accounting and ABC

Cooper & Kaplan (1992) stated that companies are in need of two reporting systems. They compare traditional (periodic) financial statements, which only provide information on the cost of activities supplied in a particular period, with ABC, which furnishes information on the quantity and costs of activities actually used.

Cooper and Kaplan (1992) define the measurement of unused capacity as a critical connection between the costs of resources used, as measured by an ABC model, and the costs of resources available, as reported by the organization's periodic financial statements. For example, the purchasing department of a manufacturing firm employs 10 full-time employees at a monthly cost of $25,000. Each employee can process 125 orders during the month, resulting in a price of $20 per order. Therefore, the total capability of purchase orders to be processed is 1,250 a month. If, during a given month, only 1000 orders are processed, the price per order would increase. On the other hand, in this scenario, an ABC system would assign an unused capacity of $5,000, as 1,000 orders produce an actual cost of $20,000 for activities used in contrast to the $25,000 of activities supplied (total monthly salaries paid to the employees). Cooper & Kaplan (1992) define this relationship as follows:

Activity Availability= Activity Usage + Unused Capacity

They elaborate that the two reporting systems provide uniquely separate types of information. Traditional systems report on resources supplied and treat operating expenses as fixed costs, therefore failing to investigate the questions of why and what resources are used.

Cooper & Kaplan (1992) point out that the quantity of resources fluctuates in each period based on the activities performed for any given product produced.

They then suggest that ABC can establish the costs of using these resources even though they do not vary in the short-run. Managers are able to observe changes in demand for activities and are able to adjust the level of supply of such activities. For example, if a new product is added to the product mix, a plant manager may be able to forecast an increased demand for purchasing activities that may exceed the current supply of purchasing personnel (Cooper and Kaplan, 1992). Further, the additional purchasing costs can be traced to the new product, allowing managers to evaluate whether the new product is truly profitable.

ABC provides more accurate information than do traditional methods in several ways. First, ABC infers that activities are the antecedents of cost and that cost objects create the demand for activities (Turney, 1991). Generally, activities are not defined in conventional cost systems, as cost assignment is to departments or cost centers. Second, ABC assigns activity costs to costs based on activity drivers that accurately measure the consumption of the activity. An activity driver is a measure of the expenditure of an activity by a cost object (a product or service). An activity-based approach reveals both the quantity of overhead resources used and the cost of unused capacity. On the other hand, conventional costing uses direct labor hours or costs as the activity driver. These traditional volume drivers are calculated based on budgeted production rather than practical capacity. Therefore, activity drivers used to assign cost, such as direct labor, area limited measure of the accurate use of an activity by the product. Consequently, conventional costing; inaccurate product costing (Tumey, 1991; Cooper & Kaplan; 1992, Cokins, 1993; Cokins, 2001; Daly, 2002). Furthermore, ABC allows for more appropriate costing because of the use of activity drivers distinct to each activity in contrast to conventional systems, which only permit limited activity drivers (direct labor, machine hours, units, produced).

Another distinction between traditional costing and ABC is that ABC recognizes different levels of activities in most organizations (Cooper, 1990; Turney, 1991; Cokins, 1993; Cokins, 2001; Daly, 2002). Conventional costing only incorporates unit activity drivers, which does not account for non-unit activity drivers correctly. By lumping all overhead costs together, some products are assigned costs they did not incur and others are charged too little (Daly, 2002). Garrison & Noreen (1997) illustrate this dilemma with an example of a company producing two products: CD units and tape units. Budgeted sales and production costs are as follows:

Tape units= 200,000 units x 2 hour labor = 400,000 hours;

CD units := 50,000 units x 2 hours labor = 100,000 hour; and

Total labor hours forecasted 500,000.

5. Problems with Traditional Cost Systems

Kaplan and Cooper (1988) first noted that the misallocation of overhead could distort the true costs of products in manufacturing; Cost systems typically assigned overhead costs using a two-stage procedure in direct relationship to production volume. Cooper (1990) states that such a unit-based system is a flawed system and is predominant in U. S. manufacturing companies, creating a problem. For example, when production volume increases by 20 percent, so do direct labor or material hours. If they are used to assign overhead in the second stage, the system will assign 20 percent more overhead costs to the product.

However, since not all direct resources increase proportionally to production volume, the cost assigned to the product will be distorted (Martin, 1998). Research has established that traditional product costing; the impact of diversity and variety on cost, which provides inaccurate data (Johnson & Kaplan, 1987; Cooper, 1990; Cooper & Kaplan, 1991; Cokins, 1993; Cokins, 2002). Traditional costing is inappropriate when products and service lines are diverse and heterogeneity exists in processes, customer demands, and customers. Furthermore, traditional costing provides false information when overhead expenses are high and profit margins are small.

According to Rotch (1991), service enterprises display similar conditions since they provide a diversity of services. For example, in a hospital, different rates are charged for different types of care; e.g., private rooms versus intensive care units. However, inside these different categories, the rate charged was the same even though patients received diverse levels of care (Rotch, 1991). Traditionally, this problem is addressed by non-direct costs allocated arbitrarily, which fails to establish a close match of costs and outputs. For example, most manufacturing companies have customarily used labor as the basis for indirect cost allocation to products. However, in the manufacturing industry, labor gradually became less significant as a portion of total cost, and the continued practice of using labor as the basis of allocation contributed to a misleading image of a company's cost structure (O'Guin, 1991; Hicks, 1992). In service companies, overhead costs today represent approximately 67 percent of total costs. Therefore, the practice of using inappropriate allocation bases to assign overhead costs distorts product cost even more in comparison to the manufacturing industry (Schmidgall, 1997; Lin, et al., 2001).

6. Problems with ABC

Data collection process for this system is very time consuming.

The capital expenditure on the activity based system and its subsequent running costs can be a road block for firms.

The system is very transparent which some managers would not approve of as

they would like to keep some things out of the view of the owners of the


7. Benefits of ABC

The first and most important advantage is the accuracy in the process of costing

with regards to the product line, the end-users of the product, the stock-keeping

units employed by the management and the channel and category which

streamline the flow of the product from the producer to the end user.

This system better assists in the process of understanding the concept of overhead

costs i.e. the allocation of common business resources as they are used by

specific product lines and their relation to specific cost driver.

The system is easy to understand and interpret is it is accessible, useable and practically implement able across all norms of business set-ups.

This process uses unitary cost, or marginal cost as the computation base in contrast to the traditional cost accounting methods which employ total cost.

The system works exceptionally well will quality improvement and up gradation programs e.g. Six Sigma

This system is particularly helpful in identifying and ear-marking some of the

matters business activities which are a burden or stress on the business i.e.

wasteful or non value adding services.

The system also works exceptionally with performance management systems

which are employed by most human resource departments in contemporary


This process allows companies to implement costing strategies across another

diagonal of the firm as business processes, supply chains and value addition

channels are ably and optimally analyzed in this process.

This system mimics the actual business process as the appropriation of common pool resources takes place in the same way as common resources are used in the business.

8. Application of ABC in Hospitality Industry

8.1. Reasons for application of ABC

The only study that could be found discussing the implementation of ABC systems in the hotel industry was Keller's (1994) "Activity-Based Costing for the Hotel Industry". The main objective of Keller's study was to determine true profitability of the Rooms and the Food and Beverage departments in a hotel. This was accomplished by tracing the undistributed operating expenses to the individual departments by applying ABC methods. Keller conducted a preliminary study that determined that very few hotels have implemented ABC systems. One of the hotels that had not implemented ABC agreed to an ABC pilot study, intended to establish accurate cost information. Keller (1994) explains that ABC applied in a hotel could investigate specific issues, such as the relationship between overhead costs and ,guest satisfaction, or vendor selection, or making lease versus buy decisions.

8.2. Implementation of ABC

Berts and Kock (1995) conducted a brief analysis on ABC implementation in the hospitality industry and concluded that the best way to trace overhead costs is probably to use a mixture of ABC analysis and traditional calculations. The authors suggest the allocation of smaller and more complex costs in the traditional way by dividing the costs by the available capacity and then distributing them to the product. Further, they recommend using ABC for distributing larger costs. The authors explain that hospitality overhead costs such as labor, fringe benefits, occupation, and operating costs need to be distributed to activities. This can be accomplished by conducting time studies. The authors also suggest that the time consumed should be based on an average time estimate, because there can be large variation in the time it takes to perform various activities. Berts and Kock (1995) also explain that it is not possible to charge a different price when it takes 15 minutes instead of 10 minutes to cook a meal. They further suggest to conduct time studies in order to measure the time consumed to take orders and to serve drinks and food. The data collected is then used to allocate overhead in a traditional manner according to average number of customers served. Unfortunately, the authors did not elaborate in detail how to accomplish these tasks.

Keller (1994) conducted an ABC pilot study in the hotel business by strictly following Tumey's (1991) implementation suggestions. The first step was to convince management to change. A sponsor was found to initiate the idea of using ABC within the hotel. This sponsor convinced the hotel's executive committee that their present cost information may have been distorted. This was followed by the development of the implementation plan. The first step of this plan was to formulate the objectives and to describe what can be achieved. For example, in order to determine whether guest satisfaction scores were too low, it was expected that ABC could deliver reports on performance measures and number of customer complaints. However, Keller (1994) does not describe how the system was to accomplish this task.

The next step (Turney, 1991; Keller, 1994), suggests that the organizational structure needs to be described and an ABC committee needs to be established. Keller (1994) states that this team will actually do the project implementation so it should consist of people who can lend their expertise to create the system in a way that the hotel's objectives can be achieved. Keller also recommends that adequate training is needed for creating a successful ABC system for a hotel, followed by a complete schedule and a budget. After these initial steps, the data are collected. Keller (1994) suggests that the data can be found as described below.

First, the general ledger contains all overhead costs and these data represent the starting point for assigning overhead costs to activities. Second, the information about activities can be collected by asking the employees, who are experts at particular tasks. Keller (1994) refers to several methods, which can be applied to gain this knowledge as described by Tumey (1991), such as observations, timekeeping systems, questionnaires, storyboards, or interviews. Finally, the information about cost drivers can be found in the hotel's information system. For example, Keller (1994) states that the restaurant's pointof-sales system can provide information such as the number of particular menu items sold and the total number of covers (meals) sold.

After the data collection process, Keller (1994) discusses the data entry process, which may occur via hand entry or electronic transfer, depending on the design of the system. She further suggests that the ABC information should be entered in the computer system of the Front Office and the point-of-sale system to avoid future hand entry.

Keller (1994) further describes six major steps crucial to the ABC design process. As the first step, she describes the task of identifying activities, which is accomplished through functional composition of the organizational structure from larger functions into smaller functions. The second step involves the use of the general ledger to establish the cost of the different activities. At this point, she suggests that the general ledger should be reconstructed by combining similar accounts, decomposing it to department levels, and adjusting uneconomic items. Turney (1991) recommend that there is no need to follow generally accepted accounting principles because ABC's primary purpose is not financial reporting but business improvement. Therefore, Turney (1991) recommends that depreciation be recalculated on a consumption basis.

The next step in the design process, as suggested by Keller (1994), is the creation of activity centers, which are clusters of activities labeled by attributes. This process is followed by defining resource drivers, which define the consumption of activities.

Keller (1994) suggests using four rules to identify resource drivers.

Assign the cost of sustaining activities to primary activities.

Using tracing whenever possible;

Use common sense to determine how to allocate; and,

Separate effort and non-effort costs.

Keller (1994) explains that sustaining activities are activities that benefit other activities, which should be allocated to the activities they benefit. Tracing is the assignment of costs based on specific data. For example, the amount of cleaning supplies used to clean a standard guest room can be traced to certain activities. Resources are often shared by several activities, and since specific data cannot be provided, common sense needs to be applied in allocating them. Finally, she defines effort costs as salaries and benefits, and non-effort costs are resources other than salaries and related costs. Examples of non-effort costs are utilities, entertainment, and travel. Effort costs are determined through estimation by asking the employees in questionnaires or interviews. The information gathered in this manner can be displayed in an effort analysis worksheet, which summarizes information on who does what and the time spent on it. Percentages are used to trace effort costs to activities. Non-effort costs should be traced to activities. Cost information is often hard to find, since the general ledger does not record costs by activities (Tumey, 1991).

The next step applied according to Keller (1994) is to assign attributes to the activities. Attributes are labels that attach meaning to activities. Keller (1994) suggests that the label "guest" can be used to identify activities that support the guests, and the attribute "service" to activities that are conducted to serve the employees.

Keller (1994) adopted the last step in the design process completely from Turney (1991). Both authors state that there are several rules that need to be followed when selecting activity drivers. First, drivers must match the type of activity and correlate with the consumption of the activity. Keller (1994) states that, for example, if a batch-level driver is suitable, than a unit level driver should not be applied. Keller (1994) illustrates this with the situation of a ballroom set-up. A choice can be made between the number of hours or the number of set-ups. Using the number of set-ups is appropriate if the effort per set-up is the same, and the number of set-up hours should be applied if there is a variation between set-up efforts. Moreover, the number of drivers should be minimized and have a modest cost of measurement, which can be achieved by not selecting drivers that require measurement that is not available. Finally, activity drivers should encourage improved performance. For example, if the housekeeping supervisor's time spent in room inspections is an activity driver, it encourages attention to the time and cost spent on room inspections. The final step, as explained by Keller (1994), involves using ABC designers to ensure successful use of the system. For example, ABC information should be distributed throughout the hotel and should be updated on a continual basis

8.3. Results and benefits of ABC

Keller's (1994) ABC pilot project revealed that the distribution of expenses between departments, therefore true profitability of departments, changed drastically. For example, the profit margin of the Rooms ]Department increased while the Food and Beverage Department now displayed a loss. She states that, after concluding her ABC pilot study, managers were more aware of the benefits of ABC and were surprised how the profit and loss figures changed. Costs were no longer considered fixed and undistributable. Afterwards, hotel managers were able to streamline activities by eliminating unnecessary activities and improving value-added tasks. Improving value-added activities further assisted in providing improved customer service and value to the customer. Keller (1994) suggests that such efforts will result in improved bottom lines for hotels; therefore, it represents a win/win situation for both managers and customers.

8.4. Challenges and Limitations of ABC

In general, Berts and Kock (1995) state that the application of ABC to the restaurant and hospitality sector is more complex than in other service industries. The authors suggest that because these industries sell both services and goods, tracing activity costs to products is very difficult. They state that a discussion with hospitality managers revealed a perception that applying ABC to the hospitality industry is not feasible, because implementation costs would probably be more than benefits received from such system.

In Keller's (1994) preliminary study, hotel managers also expressed the idea that they did not perceive any benefits from implementing ABC in the hotel industry. However, her study revealed that some of the respondents had, in fact, applied Activity-Based Costing and found it very useful in assisting managers in their decision-making processes.

8.5. Application to the Restaurant Industry

The implementation of ABC in the restaurant business can reap the benefits already realized in the manufacturing and service industries. Keller's study disproved Berts and Kock's (1995) claims that hotel managers reject the application of ABC in their industry and that the same will likely be true in the restaurant industry. Most hotel managers who rejected the infeasibility of ABC were not very familiar with ABC concepts. The same is true for restaurant managers and controllers, as was discussed in Chapter One of this dissertation. Most of the restaurant controllers discarded the idea of ABC as a manufacturing concept not adaptable to restaurants. However, many of the processes in the restaurant business are of a manufacturing nature, such as most food production activities and batch level activities in the front-of-the-house (FOH) area.

Keller's study also revealed a large discrepancy between profit and loss data before and after ABC's application. Even though restaurants do not have many different departments, unlike hotels, it will still be crucial to determine correct expenses in both the FOH and the BOH, because the chef, dining room managers, and bar managers should not be held accountable for incorrect cost data. Furthermore, managers will be able to improve performance and processes if they have the appropriate data.

According to Berts and Kock (1995), the best way to trace overhead costs is probably to use a mixture of ABC analysis and traditional calculations. They recommend the use of ABC for distributing larger costs, such as hospitality overhead (labor, fringe benefits, occupation, and operating costs), which need to be distributed to activities. This notion is quite applicable to the restaurant industry, as labor and related costs represent a very large proportion of total costs and are traceable because tasks are repetitive. The authors further suggest that the time consumed should be based on an average time estimate because there can be variations in activities. Berts and Kock (1995) also recommend conducting time studies to measure the time consumed to take orders and serve drinks and food.

They recommend that this collected data then be used to allocate overhead in a traditional manner according to the average number of customers served. However, this dissertation will demonstrate that such data can be used to calculate Activity-Based Costs. Finally, it can be suggested upon Berts and Kock's (1995) concept that overhead costs in restaurants are best treated with a combination of ABC and traditional methods because many expenses that cannot be traced to particular activities (such as occupation costs, depreciation, marketing, accounting, or general and administrative expenses) need to be allocated in an arbitrary manner, as described in Chapter Three.

Generally, it can be suggested that the restaurant industry will profit from ABC implementation for at least two reasons. First, currently the industry does not at all trace or only partially traces overhead costs to menu items through some attempt to incorporate labor costs. Second, the industry is very task intensive and will greatly benefit from an approach that analyzes activities in detail and which assists in reducing non-value-added activities and in improving activities that provide value to the customer.