Comprehensive Project Costing

QUESTION

Restaurants offer a variety of menu items which have different sizes, ingredients, packaging, and demand. In addition, made-to-order restaurants go one step further and may have different renditions of the same menu items based on how a customer orders them. Take for example, Chipotle, for the same price, steak tacos could be “crispy” or “soft”, may have white, brown, or no rice, may or may not contain one of three types of salsa, could have cheese or sour cream or neither, and may or may not have lettuce, black or pinto beans, or other vegetables. Combinations for that one menu item are virtually endless!

Profit margins in the restaurant industry are small, and operating costs are high. Good product costing is essential for survival in the business. This project option will allow you to apply your knowledge of product costing to the restaurant industry.

1. Select a nationally recognized fast casual restaurant chain that offers made-to-order menu items, except a restaurant primarily engaged in making pizza. Some examples would be Chipotle Mexican Grill, Five Guys, Noodles & Co., Panera Bread, and Dunkin Donuts.
   1. For the restaurant chain you have selected, you will need to research and locate company information, menus, and financial information to assist you with the requirements of this project.
   2. Not every chain will have the same financial information available, so it may be necessary to generate your own “fictitious” data in order to complete the required tasks. If you do need to create data, be clear in your computations which data is taken from publicly available information (provide the sources) and which data has been generated by you.
2. Choose 3 menu items from the menu of the restaurant. Familiarize yourself with the products including the ingredients, processing method, general selling price in your area, packaging requirements, and accessories (straw, sweetener, fork/knife, condiments, etc.). In Module 3, you will be submitting this information as part of your Portfolio Project milestone.
3. From the cost information you were able to find or generated on your own, provide responses in Microsoft Excel to the following questions. Reference your calculations to show tracing where numbers come from. (For assistance with Microsoft Excel, please refer to Lynda.com for tutorials.)
   1. Compute the cost of each product under the simple/traditional costing method. For period costs, use direct labor hours.
   2. Compute the net operating profit margin of each product using the simple/traditional costing method.
   3. Compute the total overhead and period cost allocation under activity-based costing (ABC) assumptions for each product.
   4. Compute the per unit ABC cost of each product.
   5. Compute the net profit margin of each product using the ABC costing method.
   6. Compare the net profit margin of the products under the simple/traditional cost assignment and the ABC assignment for each product. Evaluate the difference.
4. In a Microsoft Word document, write an accompanying memo explaining to the CEO what the costing methods are, the differences between the methods, and which method seems to make sense in this scenario. Also include the pros and cons of the method you are recommending, and why you feel the pros outweigh the cons.

Your paper should meet the following requirements:

• Minimally 7-10 pages in length (not including the title page and the reference page).
• Assignment should follow APA guidelines with respect to use of subheadings, 1” margins, and double spacing.
• References should include your textbook plus 2 additional credible academic references. All sources used, including your textbook must be referenced; paraphrased and quoted material must have accompanying citations and cited per APA guidelines.
• Use of CSU Global Library is necessary.

• ANSWER

• Costing Methods in the Restaurant Industry: A Comparison of Traditional Costing and Activity-Based Costing (ABC)

  Costing Methods

  Traditional Costing Method

     – The traditional costing method assigns costs to products based on a single allocation base, such as direct labor hours, machine hours, or material costs.

     – It assumes that indirect costs are driven by a single factor and that all products consume indirect costs in proportion to the allocation base (Altawati et al., 2018).

     – Under the traditional method, indirect costs are allocated to products using a predetermined overhead rate.

     – It provides a simpler and less time-consuming approach to cost allocation but may result in cost distortions if the allocation base does not accurately represent the cost drivers.

   Activity-Based Costing (ABC) Method

     – ABC is a more refined costing method that assigns costs to products based on the activities involved in their production and the resources consumed by those activities.

     – It recognizes that products consume activities, and activities consume resources, allowing for a more accurate allocation of costs.

     – ABC involves identifying cost drivers, which are the factors that cause costs to vary in relation to the production of different products.

     – By assigning costs based on multiple cost drivers, ABC provides a more detailed and accurate representation of the true costs of producing each product.

     – ABC is particularly useful when products have diverse characteristics and require different activities and resources for their production.

  Differences between Traditional Costing and ABC

  Cost Allocation: Traditional costing uses a single allocation base, whereas ABC uses multiple cost drivers to allocate costs based on different activities and resources consumed.

  Cost Accuracy: ABC provides a more accurate representation of costs by considering multiple cost drivers and their varying impact on different products. Traditional costing may result in cost distortions if the chosen allocation base does not accurately reflect the cost drivers.

  Complexity: ABC requires more detailed data collection and analysis, as it involves identifying cost drivers and tracking resource consumption across different activities. Traditional costing is simpler and less time-consuming.

  Cost Distortions: Traditional costing may allocate a higher proportion of indirect costs to low-volume products and a lower proportion to high-volume products, leading to cost distortions. ABC reduces the likelihood of cost distortions by assigning costs based on specific activities and resources consumed (Tuncel et al., 2005).

  Cost Management: ABC provides more accurate cost information, enabling managers to make more informed decisions about product pricing, process improvement, and resource allocation.

  Based on the scenario you provided, a made-to-order restaurant chain like Chipotle, where menu items can have various ingredients and customization options, ABC seems more appropriate than traditional costing. ABC can capture the diverse activities and resources involved in producing different renditions of the same menu item. This would result in more accurate product costs, enabling the restaurant to make informed pricing decisions and better manage its operations.

  Pros of ABC

  Accurate Cost Allocation: ABC provides a more accurate allocation of costs to products by considering multiple cost drivers and their varying impact on each product.

  Informed Decision Making: With accurate cost information, managers can make informed decisions about pricing, product mix, process improvements, and resource allocation.

  Cost Visibility: ABC highlights the costs associated with different activities, enabling management to identify areas for cost reduction or process improvement.

  Enhanced Product Pricing: ABC helps determine the true cost of producing

   each menu item, allowing for better pricing decisions that reflect the actual costs involved.

   Resource Optimization: By understanding the resource consumption patterns of different activities, ABC can help optimize resource allocation and improve efficiency.

  Cons of ABC

   Data Collection Complexity: ABC requires detailed data collection and analysis, which can be time-consuming and resource-intensive (Bertorelle et al., 2010).

   Implementation Cost: Implementing an ABC system may involve costs related to software, training, and data collection infrastructure.

  Subjectivity in Cost Driver Selection: Selecting the appropriate cost drivers for each activity may involve some subjectivity, requiring careful analysis and expert judgment.

  In conclusion, considering the complexities of menu customization and the need for accurate cost allocation, implementing an activity-based costing (ABC) system would likely benefit a made-to-order restaurant chain like Chipotle. ABC would provide more accurate cost information, facilitate informed decision-making, and help optimize pricing, resource allocation, and process improvement efforts. Although implementing ABC involves some complexity and costs, the benefits of accurate cost allocation and improved management decisions outweigh the potential drawbacks.

  References

  Altawati, N. O. M. T., Kim-Soon, N., Ahmad, A. R., & Elmabrok, A. A. (2018). A Review of Traditional Cost System versus Activity Based Costing Approaches. Advanced Science Letters, 24(6), 4688–4694. https://doi.org/10.1166/asl.2018.11682 

  Bertorelle, G., Benazzo, A., & Mona, S. (2010). ABC as a flexible framework to estimate demography over space and time: some cons, many pros. Molecular Ecology, 19(13), 2609–2625. https://doi.org/10.1111/j.1365-294x.2010.04690.x 

  Tuncel, G., Akyol, D. E., Bayhan, G. M., & Koker, U. (2005). Application of Activity-Based Costing in a Manufacturing Company: A Comparison with Traditional Costing. In Springer eBooks (pp. 562–569). https://doi.org/10.1007/11428862_77 

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