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4 Discussion
In this paper, we present an integrated model for effectively calculating values for cost drivers in an ABC model in restaurants. The model utilizes three techniques: discrete‐event simulation, ABC and ARM, which is one of the core data mining techniques. The purpose of this model is to allow for accurate estimations of cost drivers, whose estimation is difficult to make with the common methods of defining cost drivers.
The benefits of using ABC models have been extensively reported. ABC systems are able to trace overhead costs to individual products (Garrison and Noreen, 1997). Traditional costing seems inappropriate, in cases where processes are highly variant and product/service lines are diverse. These are typical conditions of service companies, where overhead costs today represent approximately two‐thirds of the total cost (Raab et al., 2009). In the restaurant industry, which is characterized by high degree of competitiveness, small profit margins and relatively high failure rate in the USA (Bell, 2002), the use of sophisticated cost systems is considered essential. For example, a study conducted by Raab and Mayer (2003) to a sample of 100 managers in US restaurants found that restaurant managers are increasingly aware of the need to trace some of their overhead costs, such as salaries and wages, to individual menu items.
ABC models have been developed and applied in the restaurant industry before (Raab and Mayer, 2007). These studies reveal the importance of applying ABC in restaurants and conclude that the distribution of expenses between departments changed drastically when ABC methods were applied, as opposed to more traditional pricing techniques (such as ME). However, the limited application of ABC in restaurants is attributed to the difficulties of tracing costs to activities and activities in customers and products in restaurants (Kunst and Lemmink, 1995). The study conducted by Raab and Mayer (2003) revealed that, although 50 per cent of the 100 restaurant managers attempted to measure processes and their costs, only one restaurant company was able to gain knowledge of their labour costs by calculating activity‐based labour costs.
The majority of studies that apply ABC in restaurants use observation techniques and interviews in order to identify and calculate values for cost drivers (Raab et al., 2009). However, as Anderson and Kaplan (2007) point out, a subtle and serious problem arises from the interview and survey process itself. They suggest that when people estimate how much time they spend on an activity, they do not record much idle or unused time. Therefore, almost all ABC systems calculate cost driver rates assuming that resources work at full capacity; this might lead to less accurate cost estimates. Finally, some activities, such as the time an employee has spent performing a particular task, are difficult to calculate in all cases, as these can change frequently (Munoz and Oksan, 2006). This is especially true in the services industry.
This study has extended the current knowledge in the area of cost accounting and cost driver estimation in the restaurant industry in three ways. First, it showed how to deal with diversity and heterogeneity in processes in the restaurant industry with the aid of discrete‐event simulation, hence revealing the interaction between the cost drivers. The simulation model that was built to assist the ABC system was based on the methodology presented by Beck and Nowak (2000). The model produces values for the cost drivers, representing variations in the processes (i.e. time spent on an activity). These values are in turn used by the ABC system to produce confidence interval estimations for the cost. Nevertheless, the use of simulation requires the model to be kept to low‐complexity levels, as this ensures the minimum variation in the results.
Second, it enabled the activity centres to be divided into more detailed activities, without raising concerns about compounding of errors; the simulation model produces a range of values; average values for the cost are therefore considered. Beck and Nowak (2000) report similar results when simulation average cost and ABC point estimates without simulation are used. The division of main activities into more detailed activities enables managers to gain insight about the utilization of resources by the activities. In cases where activities are grouped under main activities, this division is not possible, hence useful and precise information is lost.
Third, it introduced the method of ARM, which is one of the core data mining techniques, to assist simulation modelling in the calculation of the values of cost drivers. In the model produced by Beck and Nowak (2000), it is a prerequisite to have empirical distributions of all simulated cost drivers. The presented model overcomes this constraint and utilizes ARM to facilitate this process. The model is based on the proposition that associations between cost drivers, which are easy to estimate and cost drivers that are difficult to calculate, can supply the model with values for the latter. The presented model may equally be empowered by any other cost driver calculation method, such as systematic appraisal and collection of real data. However, these may be limited to a number of cost drivers.
One of the most important features of the methodology is the use of low‐complexity algorithms. For the same purpose, various methodologies could be used. However, techniques such as regression analysis are too complex and are based on some working hypothesis developed by its users. On the contrary, ARM is based on a user‐friendly platform and is free of assumptions. It also extracts all dependencies in one run (Kostakis et al., 2008).
Cooper and Kaplan (1988) introduced the concept of the optimal cost system; this system aims at minimising the sum of the cost measurement, i.e. those costs associated with the measurements required by the cost system. An optimal ABC model should aim at balancing the cost of errors made from inaccurate estimates with the cost of measurement. The presented methodology accomplishes this goal, as not only does it minimize the cost of measurement, but also reduces the cost of errors, by using modelling techniques, which can be tested for their sensitivity and verified with the physical system.
Al‐Omiri and Drury (2007) suggest that ABC cost systems can be either less or more sophisticated. The level of sophistication depends on the number of cost drivers and cost pools that these systems use. The use of more sophisticated cost systems increases the accuracy of cost information. Therefore, if the management of a restaurant is interested in using a more detailed and refined cost system, it might have to use some cost drivers that are difficult, expensive or time‐consuming to estimate.
Although this study has contributed to cost and management accounting in the restaurant industry, some limitations should be noted. This study has focused only on three activities and hence, the application has been limited to the BOH of the restaurant. The FOH activities have not been taken into account, somehow affecting the results of the simulation model. This, however, does not prevent the user to expand the model by incorporating more activities, providing that there exists a true relationship between the activities to be modelled. This will enable numerical dependencies to be extracted. Finally, the model does not incorporate customer demand for the different menu items. This parameter should be included in future work to allow for better recommendations regarding the pricing of various menu items.
5 Conclusion
This study has presented a new technique in the area of cost and management accounting in the restaurant industry. It utilizes three techniques to model ABC in restaurants. Discrete‐event simulation is used to generate values, which are in turn used to produce confidence interval estimates for the cost in an ABC model. The use of simulation reveals the dynamic behaviour of cost‐parameters in a production process. ARM assists the ABC model, by providing values for those cost drivers that are difficult to calculate.
The method results in considerable time saving, since it reduces the interview and survey practices for cost driver estimation. It also reduces the probability of making inaccurate estimations of cost drivers. This results into a more accurate and efficient cost accounting information in the restaurant industry
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