Value management and activitybased costing model in the

Tunisian restaurantAmel Ben Hadj Salem-Mhamdia and Bahia Bejar GhadhabIndustrial Department (ENIT), National School of Engineers of Tunis,

Tunis-El Manar, Tunisia

Abstract

Purpose – The purpose of this study is to show how using value management (VM) together withactivity based costing (ABC) for menu analysis helps managers to estimate contribution margins moreprecisely and to analyze customer satisfaction. This new approach is considered an appropriate toolfor guiding and directing the process of making decisions.

Design/methodology/approach – In this research a case study is employed to examine whetherthe application of the ABC/VM approach can improve the decision-making process in a Tunisian a lacarte restaurant. Data were collected over the period of a month using direct observations of restaurantactivities to calculate profitability, and a questionnaire was administered to determine customersatisfaction.

Findings – The results show that six of 11 menu items were profitable. The results also show thatmanagers should analyze profitability and customer point of view simultaneously in order to informthe decision-making process.

Research limitations/implications – Only a single a la carte-style restaurant and the dinner menuwas examined in this study. Future research should apply the model to other restaurant types in orderto validate the model.

Practical implications – The paper suggests that using activity based costing with valuemanagement can enhance the quality of the decision-making process. It demonstrates to managershow they can reduce their costs and improve resource allocation, taking into consideration customerneeds and satisfaction.

Originality/value – The paper combines two analytic techniques (VM and ABC) that reveal amenu’s true profit and loss picture and a menu item’s value.

Keywords Restaurants, Activity based costing, Value management, Profit, Activity based costs,Tunisia, Hospitality services

Paper type Research paper

1. IntroductionTourism is nowadays considered to be a primary industry in the world. WithinTunisia, it constitutes an important source of income (World Banking Report, 2008).The contemporary restaurant industry is highly competitive and is central to thesuccess of the tourism industry. It contributes an increase of more than 6 percent to theTunisian Gross Domestic Product (GDP) (World Banking Report, 2008). It is a verychallenging and competitive business. However, it is characterized by small profitmargins and relatively high failure rates (Bell, 2002). Restaurant managers find itdifficult to simultaneously improve customer satisfaction and profit. The purpose ofthis study is to discover how to increase the ability of finding an appropriate balance

The current issue and full text archive of this journal is available at

www.emeraldinsight.com/0959-6119.htm

VM and ABCmodel

269

Received 9 January 2011Revised 5 April 2011

3 July 2011Accepted 6 August 2011

International Journal ofContemporary Hospitality

ManagementVol. 24 No. 2, 2012

pp. 269-288q Emerald Group Publishing Limited

0959-6119DOI 10.1108/09596111211206178

between serving customers’ diverse needs while pricing menu items that will achievean adequate profitability level in a Tunisian “a la carte”-style restaurant. Most costmodels used in the 1980s were developed much earlier in the century at a time whenlabor was the most important factor in production and product and service variety waslimited (Douglas, 2005). For example, in restaurant operations, undistributed operatingexpenses, such as labor and fixed costs, represented a large percentage of arestaurant’s total cost structure (Bell, 2002). These fixed charges were largely ignoredwhen menu prices were established (Schmidgall, 1997). Thus, the use of costinformation based on traditional “cost models” distorted economic facts and led toinappropriate decision making and ineffective action (Douglas, 2005). In the restaurantindustry, prices are established by making up variable cost percentages, by intuition, orby the trial and error method (Raab et al., 2009). As restaurant managers often donot know the true profitability of their various menu items (Raab and Mayer, 2007;Raab et al., 2010), managers can no longer afford to price their menus based onmarking up their variable product costs. They may need to use new approaches inorder to survive and prosper. An approach that may help restaurants to analyze theirprofitability is activity-based costing (ABC) (Raab and Mayer, 2007). Researchersrecommend using ABC to support the improvement process (Turney, 1991) and todevelop cost-effective product designs (Cooper and Turney, 1989). ABC has also beensuggested as an appropriate tool for guiding and directing the process of improvement(Waeytens and Bruggeman, 1994). Furthermore, the efficacy of ABC has beenattributed to its ability to reflect real production processes (Turney, 1989);its quantification of resource usage (Turney, 1992); its consideration ofinterdependence between activities (McNair, 1990) and its effect on managers’behaviors (Cooper and Turney, 1989). Although, ABC systems are most oftenassociated with use by manufacturing companies, they can be applied to all types oforganizations (Rotch, 1990; Tanju and Helmi, 1991), including the restaurant industry(Cooper, 1989; Raab, 2003; Raab and Mayer, 2007; Vaughn et al., 2010). In his research,Cooper (1989) proposed using an ABC model and Raab (2003) adapted this model torestaurants and showed that it was a feasible way to gain detailed insight into theoperating profit margins of individual menu items. In this case, the ABC restaurantmodel was tested at a buffet-style restaurant in Hong Kong (Raab et al., 2004, but thestudy confirmed that the ABC restaurant model (Raab, 2003) could also be applied toother restaurant types.

One of the problems with the implementation of the activity-based costing approachis the lack of expertise in the identification and analysis of activities (Ben Mzoughiaand Bejar-Ghadhab, 2004). Furthermore, Reeve (1996) asserts that managers oftenabandon the process of implementing ABC because the expenses of ABC deploymentare high. Roberts and Silvester (1996) linked the abandoning of the implementation ofABC to the complexity of the collection of the data. Boisvert (1998) proposed afunctional, economical, and multidisciplinary approach based on value management(VM) and adapted it for the implementation of ABC. VM enables an organization toachieve the greatest progress towards its stated goals with the use of minimumresources (Value Management Guidelines, 2001). This current study seeks to determinewhether the application of an ABC approach coupled with the VM (ABC/VM) approachcan assist in analyzing the profitability of an “a la carte” restaurant. This analysis

IJCHM24,2

270

looks at the products, which in the case of a restaurant are the meals offered, and theactivities of the restaurant such as serving the customer, cleaning the restaurant, etc.This paper proposes an ABC/VM model, which combines ABC and VM approachesand allows managers to extract the best value using both customer satisfaction andcost of product. First, a general overview of ABC and VM concepts is presented.Secondly, the three phases of the ABC/VM model are developed. Finally, the paperpresents a restaurant case study to illustrate how the ABC/VM model can improvebusiness decisions.

2. ABC system coupled with value management (VM)2.1 Literature reviewIn management accounting literature, there is a consensus that all companies face aheterogeneous set of decision-making situations. Accounting information is producedin a certain accounting context to support the decision-making process(Hopwood, 1996). Anderson (2005) considers strategic cost management to bedeliberate decision making that is aimed at aligning the firm’s cost structure with itsstrategy and evaluating the efficiency of the organization in delivering the strategy. Hestates that strategic cost management consists of two aspects: structural costmanagement that focuses on establishing a competitive cost structure and executionalcost management that focuses on cost effective execution of the strategy. However,both forms of strategic cost management focus on increased performance from only afirm’s perspective, neglecting the increasing importance of value co-creation betweenthe firm and the customer (Gersch et al., 2010). Anderson (2005) claims thatmanagement accounting research virtually ignores managing costs in the portion ofthe value chain connecting the firm to the end customer.

Management accounting research literature has also devoted only limited attentionto customer profitability (Foster and Gupta, 1994; Guilding et al., 2001). Based onmarketing literature, we assume that the main role of customer profitabilityassessment is to supply information that assists managers in their decision makingrather than to reduce goal divergence problems (Davila and Wouters, 2006).

Managers need certain information to improve management efficiency. They alsoneed the answers to two very important questions: what are the profitability sourcesand how can performance best be improved (Blagoje and Ljilja, 1999)? Managerscannot make reliable decisions without complete cost information, which emphasizesthe need to calculate activity-based costs for each product. Noone and Griffin (1997)explored potential costing techniques for customer profitability analysis applicationand proposed activity-based costing as an appropriate and effective costing method toapply in customer profitability analysis. The ABC approach treats the customer as theobject of cost analysis, paralleling the analysis of “costs of ownership” for suppliers(Niraj et al., 2001; Narayanan and Sarkar, 2002; Anderson, 2005). The emphasis is ongaining a better understanding of indirect cost behavior and thus discovering whatincurs overhead costs, changing over time the steps of the value chain. The ABCliterature defines an activity as any discrete task that an organization undertakes tomake or deliver a product or service and a cost driver as a factor that causes or drivesan activity’s costs (Ittner, 1999). Thus, the ABC system is designed and implemented

VM and ABCmodel

271

on the premise that products consume activities, activities consume resources, andresources consume costs (Sprow, 1992).

However, the implementation of activity-based costing is often accompanied bymany problems (Sartorius and Eitzen, 2007; Cohen et al., 2005). Cohen et al. (2005)consider that, in selecting, designing, and maintaining an optimal ABC model(Plowman, 2005), the indifference of top-management and/or resistance fromemployees and management and the complex nature of ABC are among theprincipal difficulties when implementing ABC.

Activity-based costing coupled with value management is an attempt to deal withthese problems. It can help to determine which products or services are profitable,which customers are the most valuable, whether processes are value added or not, andwhere efforts toward improvement should be made. Value management was conceivedduring the 1940s when, because of fewer available resources for non-war efforts,General Electric designed a concept where lowering costing inputs through creativethinking resulted in a product with the same functionality (Male et al., 2007). Today,VM deals with both increased benefits and decreased cost, and is defined as aformalized open structure that focuses on removing causes of unnecessary cost,thereby delivering the best possible solutions, as well as potentially exposingunforeseen problems (Koga, 2000). The value management model (VM) is a structured,systematic, and analytical process that seeks to achieve all the necessary functions atthe lowest total cost consistent with required levels of quality and performance (ValueManagement Guidelines, 2001). VM aims to maximize the overall performance of anorganization (EN 1325-1, 1996). It is also considered an effective way for companies tomanage their services. VM is based on fundamental principles: management byobjectives (the concept of function), finding optimum solutions, streamlining selectionthrough indicators, a blend of skills with teamwork, cross-communication, anddevelopment of people and groups. VM is also concerned with improvingand sustaining a desirable balance between the needs of stakeholders and theresources needed to satisfy them. Stakeholder value judgments vary and VM reconcilesdiffering priorities to deliver best value for all stakeholders. Value managementrequires innovative thinking and the best practices on all levels of an organization(Knox, 2002), valuable core competences (Walter and Jones, 2001), mission, strategy,and systems (Dummond, 2000, and a supportive corporate culture that focuses oncustomers’ expressed and latent needs (Mittal and Sheth, 2001; Narver et al., 2004;Paulin et al., 2006; Weinstein and Pohlman, 1998; Walter and Jones, 2001). In fact, VMallows the goals of an organization to be achieved. Functional analysis(Norme francaise: NF X 50-100, 1996; EN 1325-1, 1996) and function analysis systemtechnique (FAST) (Bejar, 2003a,b) are at the core of the VM approach. Functionalanalysis allows the identification of attributes expected by the customer (Miles, 1989;Moriceau, 2000; Norme francaise NF X 50-100) as well as the organization performingthese attributes. It is a semantic clarification in the service context of the definition ofeach service. The “Function Analysis System Technique” is also an important analysistool. It is used to clarify the relationship between the functions expected by a customerand the activities and tasks developed by the organization it serves (Bejar, 2003a,b). Itdescribes the item or system under study and permits the team to think through thefunctions that the item or system performs. FAST can also explore innovative avenues

IJCHM24,2

272

for performing functions. Regarding Activity-based Costing methodology, it leads tofacilitating the identification of cost drivers and identifying high cost functions so asto explore improvements (Kenney, 2001). The FAST diagram also allows managers tofocus on essential functions in order to fulfill product requirements and identify highcost functions to explore improvements. It can also be used to develop criteria in orderto maintain high service quality levels and improve service. These criteria allow one tomeasure customer satisfaction.

In this study, we use internal and external functional analysis and the FASTdiagram to identify restaurant activity in order to determine the costs of the product.

2.2 Conceptual frameworkWe proposed a model to implement ABC approach in restaurants using VM, whichincorporates both profitability and customer satisfaction. The developed model(Figure 1) is composed of three essential phases:

(1) a company’s functions and activities;

(2) cost evaluation; and

(3) analysis and improvement.

2.2.1 Company’s functions and activities. Using value management we distinguish twotypes of functions: the external and internal functions. The terminology “externalfunctions” designates the “front office” and refers to activities seen by the customerand where he participates in the process and the delivery of the service act. The“internal functions” are also called “back office”. They do not necessarily involve thecustomer in the production and delivery of the service but can directly or indirectlyinfluence perceptions if eventually they are linked to the service experience(Zeithamall et al., 2006). For example, if you sit in a restaurant as a customer you will beinfluenced by what you see or experience. You may not be in contact with the cook inthe kitchen or in the cleaning of the kitchen, although you may gain an impression ofthe cook and the kitchen if the plate is dirty and the temperature of the food isinadequate. The link between “external” and “internal” functions or “back and front”offices refers also to the service blueprint in the service marketing literature andserves as a way to identify (the indicators) the critical path of the customer experience.The identification of these critical paths provides key strategic knowledge used bythe service provider to enhance the customer experience which, in turn, creates ahigher level of satisfaction and future positive behavior (Zeithamall et al., 2006;Lovelock and Wirtz, 2008).

Figure 1.VM/ABC model

VM and ABCmodel

273

In this study, we identify a company’s functions using external functional analysisas a semantic clarification in the service context of the definition of each service.For this purpose, all customers’ steps (from arrival until departure) are considered,and for each step service functions are identified as a reference to the customersatisfaction level. To serve the customer, the company implements a set of differentactivities and tasks that we identify by applying “internal functional analysis”(Bejar, 2003a).

To establish the relation between functions, activities, and tasks, we used theFunctional Analysis System Technique (FAST) diagram (Demarle and Shillito, 1984).This diagram starts with the more global functions of the total system and thenextends to specific functions of individual components. Hence, every external functionis achieved thanks to activities developed within the enterprise. The identification offunctions, activities, and products guarantees communication between all stakeholders(Ben Mzoughia and Bejar-Ghadhab, 2004).

Before measuring the costs of menu items, we should define:. the “object of the work” (to what or for whom work is done) (Cokins, 1993), what

makes the final object of the analysis (the product, services, customers,restaurants, suppliers, etc); and

. the cost drivers, the central concept of the Activity-based Costing system.

A cost driver is an event associated with an activity that results in the consumption ofa firm’s resources (Babad and Balachandran, 1993). Traditional cost accounting usesone cost driver (direct labor or machine hours) as the basis for allocating anoverhead cost. This can be inaccurate and misleading because it may apply toomuch cost to one product and not enough to another. An ABC systemachieves improved accuracy in the estimation of costs by using cost drivers to tracethe cost of activities to those products associated with the resources consumed bythose activities (Babad and Balachandran, 1993). To identify cost drivers, we usea FAST diagram to determine what activities must be performed to produce aproduct. Departmental managers can often identify these cost drivers. The costs mightbe based on the machine set ups required for each product run. Each of the activitiesthat have an effect on the cost of a product is a cost driver. Ideally, all cost drivers for aproduct are identified, but in practice the number of drivers is usually limited to those,which have most significant impact on cost.

2.2.2 Cost evaluation. To evaluate the costs of activities, we start by the allocation ofresources into different activities using the resource drivers. Then, we sum the costof the consumed resources multiplied by the volume of consumption of resourcesaccording to the equation (1).

CAi ¼Xn

j¼1FijCRj ð1Þ

with:

CRj: Cost of resources RJ.

Fij: Volume of consumption of resources Rj by activity Ai.

CAi: Cost of activity Ai.

IJCHM24,2

274

Generally, cost objects consume activities, which consume resources. So we calculatethe cost of the cost objects by summing the cost of activities multiplied by the volumeof consumption of activity and the direct costs (direct costs are the costs of the rawmaterials which are necessary to produce the cost object). The expression of the cost ofthe cost object is illustrated by the equation (2).

Ccoi ¼Xn

j¼1NijCAj þ Direct cos ts ð2Þ

with:

Ccoi: Cost of the “Cost Object” i.

Nij: Volume of consumption.

CAj: Cost of activity Aj.

2.2.3 Analysis and improvement. The restaurant industry assembles and offers various“foundational components” both tangible (for example, meals, tables, etc) andintangible (for example, a smile, a welcome greeting, etc) that consumers combinetogether in idiosyncratic ways to determine value (Namasivayam, 2005;Noone et al., 2010). In the present restaurant case analysis, we focused on therestaurant’s products, i.e. the relationship between the satisfaction of many differingneeds (tangible and intangible) and resources used in doing so. The fewer resources orthe greater satisfaction leads to the greater value for the customer and management.Internal and external stakeholders may all hold differing views of what representsvalue. The aim of value management is to reconcile these differences and enable anorganization to achieve the greatest progress towards its stated goals with the use ofminimum resources (EN 1325-1, 1996). Maximizing value creation implies theelimination of non-value adding activities in all functional areas of the value chain(Waeytens and Bruggeman, 1994).

In order to make it easier to enhance the decision-making process, a diagram(customer satisfaction, profitability) is presented (see Figure 2).

Activity-based costing, coupled with value management, can play a significant rolein the cost justification of menu items and in supporting decision-making processes.This new approach can provide information that allows a restaurant to determinewhich improvement projects should be implemented and is a means of determiningwhich ones to pursue first in order to improve the value and to reduce the cost ofactivities of non-profitable products. Without this insight into prioritization, arestaurant can pursue several low impact improvement projects at great costs and littlegain, while overlooking other projects that might have a tremendous impact.

3. MethodologyIn this research, a case study is employed to show whether using VM, together withABC for menu analysis, gives new insight into true menu profitability and value.According to Yin (2003), case studies support the theory and are suitable for examiningthe questions of “how” and “why” (Yin, 2003).This case study was conducted on aTunisian “a la carte” restaurant, “Fish Market”, which has ten employees. Theoccupancy rate of this restaurant is 60 percent. To calculate the costs of the menu

VM and ABCmodel

275

items, we directly observed the restaurant’s activities and, based on a functionalanalysis, a customer satisfaction questionnaire was developed with the help of therestaurateurs. The questionnaire related to the restaurant’s functions and to thedifferent products served. Seven criteria (dimensions) were identified: entertainment,quality of service, quality of product, hygiene, comfort, price, and availability. Thedesign of the questionnaire was comprised of two parts:

(1) basic information about the customer – namely the name, nationality,occupation, age; and

(2) elements with regards to different criteria identified.

The questionnaires were handed out in September 2009. They were distributed to 100customers visiting the restaurant and consuming the products. A total of 67 answeredquestionnaires were received. Customer satisfaction was measured using a five-pointscale, ranging from 1 (“unsatisfied”) to 5 (“very satisfied”). We then calculated thepercentage of customer satisfaction.

Results of the case studyIn this section, we describe the results of the study conducted within the scope of thisresearch.

Table I provides 11 products or cost objects identified (From P1 to P11). Looking atthe customers’ overall experience from reservation to check out, the functional analysisprovided management with eight service functions:

(1) serve customer (F1);

(2) restaurant setup (F2);

(3) purchase (F3);

(4) provisioning (F4);

(5) function structure (F5);

Figure 2.Customersatisfaction-profitabilitydiagram

IJCHM24,2

276

(6) production function (F6);

(7) support production (F7); and

(8) new product and menu conception (F8).

The functional analysis of the organization allows an inventory of all internalactivities. We presented a FAST diagram in the Appendix.

Taking into consideration the point of view of management and the company’sinitial objectives, each activity was weighed. The results of applying thedeveloped model to the Tunisian “a la carte” restaurant’s menu are summarized inTables II and III as bills of activity, which is a standard output of ABC analysis.Table II represents a completed bill of activity for one of the products proposed andTable III shows an ABC cost and customer satisfaction with the different productsproposed in the menu.

4.1 Activity-based Costing results: activity analysisTable II provides an overview of the activities involved in the product,salade de chevrettes aux fenouils, showing the resources used, the cost pool rates,and the cost for each activity. We did the same for the other ten items on the menu inorder to analyze the average profit and value of the menu.

To help the manager make decisions about potential changes and to orient andprioritize the improvement project, we constructed the following diagram (Wa/Ca)(Figure 3). Activity costs can be taken into account as part of the decision-makingprocess and as motivating efforts to reduce or eliminate non-value-added activities.This analysis allows managers to easily identify costly activities which will aid themanagers in identifying which necessary actions should be taken in order to reduce thecosts of serving customers (Dalci, 2010).

From a restaurant’s organizational point of view (Wa/Ca), three activities,i.e. production activities (A2), production support activities (A3), and restaurantactivities (A8), consume around 80 percent of the resources allocated. The activitiesrelated to production are the most costly ones, representing 39 percent of the total costof the product. The Pareto diagram illustrates how overall energy consumption(electricity, gas, and water) amounts to approximately 80 percent of the resourcesallocated to restaurant service (Figure 4).

The most important asset of restaurant organization is investing in employeeperformance as a key strategy for success. In this restaurant, a management group,composed of people from different disciplines, looked at the different results presentedabove and focused on the following:

Cold entrees Hot entrees Principal dishes

P1: Salade de chevrettes au fenouil P5: Sardines grillees P9: Plat poisson merouP2: Salade de seiches aux olives P6: Poele de calamars aux

legumesP10: Plat crevettesroyales

P3: Salade de calamars a la tomate P7: Chevrettes sautees a l’ail P11: Plat poissons diversP4: Filet de maquereau marine auvinaigre

P8: Rouleau de fruits de mer Table I.Menu items

VM and ABCmodel

277

ActivitiesWeight

(Wa)Resource used

(quantity)Cost pool

ratesTotalcost

% of activitycost – (Ca)

Raw materials 11.198Chevrette 1.3 7 9.100Fenouil 0.5 0.350 0.175Laitue 0.3 1.500 0.450Vinaigrette, huile d’olive 0.2 4.114 0.823Others 5% 12.964 0.648

Back office activitiesA1: Purchasing activities 3% 1.89 5Purchase of raw materials 1.5 0.06 20 1.2Purchase of material, equipment,clothing, menu impression, etc 1.5 0.1 50 0.69A2: Production activities 17% 15.36 38Cleaning 6 10 1 10Cutting raw materials 2 2 1 2Mixing raw materials 2 0.36 1 0.36Preparing product 7 2 1,5 3A3: Production support activities 33% 8.6 21Managing the kitchen 6 0,5 1 0.5Lunch production 3 1 0.1 0.1Supervising quality and hygiene of theproduct, equipment, and the local 12 10 0.3 3Maintaining production equipment 4 1 2 2Watching kitchen equipment 8 0.3 10 3A4: Provisioning activities 5% 1 2Stocking raw materials 3 2 0.2 0.4Taking away the raw material 0.5 1 0.1 0.1Managing stock 1.5 1 0.5 0.5A5: Structure activities 7% 1.8 5Preparing budget 2 1 3 0.5Preparing report to high management 1 0.2 2 0.4Managing and training the team 3 3 2 0.4Administration 1 1 0.5 0.5A6: New product – menu conceptionactivities 2% 0,1 0Proposing and creating new product 0.75 0 0.05 0Preparing menu 1 1 0.2 0.1Validating new product proposed 0.25 0 0.1 0A7: Activities of set up of the restaurant 11% 5 12Cleaning the space 6 1 1 1Organizing and preparing the restaurant 5 2 2 4

Front office activitiesA8: Restaurant activities 20% 6.85 17Welcoming the customer and takingcommand 5 1 0.75 0.75Disencumbering the table 5 3 0.2 0.6Managing customer payment 5 2 0.5 1Serving the command 5 4.5 1 4.5Total cost 51.8Cost of all activities 40.6

Notes: All costs shown are for September 2009 in TD (Tunisian Dinar); Item ABC cost of the product salade dechevrettes aux fenouils – Calculation details: Weight: data: determined by the point of view of the management andthe company’s initial objectives; Resource used: data; Cost pool rate: data; Total cost ¼ resource used (quantity) *

cost pool rate; % of activity cost ¼ activity cost/(sum of the activity cost)

Table II.ABC details of productsalade de chevrettes auxfenouils (cost of 13 platesof the salades dechevrettes aux fenouils)

IJCHM24,2

278

. enhancing the organization ( job description and training), in particular aroundthe maintenance process; and

. finding solutions related to the consumption of fuel, gas, and water in therestaurant, thus reducing the cost of preparation.

These two functions could contribute to reducing the costs of preparing food,concentrating on the quality of ingredients and/or quantity served, enhancing indirect

ProductsConsumption

average

ABC itemcost(TD)

Itemprice(TD)

Operationprofit(TD)

Totalprofit(TD)

Customersatisfaction

(%)

Salade de chevrettes aufenouil 13 3.97 5 1.03 13.39 85Salade de seiches auxolives 17 4.39 4 20.39 26.63 91Salade de calamars auxtomates 11 4.25 5 0.75 8.25 55Filet de maquereaumarine au vinaigre 9 4.35 5 0.65 5.85 88Sardines grillees 2 3.47 3 20.47 20.94 30Poele de calamars auxlegumes 7 5.19 6 0.81 5.67 70Chevrettes sautees a l’ail 5 4.29 5.5 1.21 6.05 95Rouleau de fruits de mer 8 5.21 6 0.79 6.32 98Plat merou 4 11.31 9.5 21.81 27.24 68Plat crevettes royales 13 10.57 9.5 21.07 213.91 75Plats poissons divers 11 11.12 9.5 21.62 217.82 90Total 100 20.13 21.01Average profit 20.11

Notes: ABC item cost, item price, operation profit and total profit are in TD; Calculation details:Consumption average: data; ABC item cost: data; Item price: data; Operation profit ¼ item price-itemABC cost; Total profit ¼ operation profit *average of consumption; Customer satisfaction ¼ data

Table III.ABC/VM menu

Figure 3.“Importance/cost”

diagram of the restaurantactivities

VM and ABCmodel

279

attributes such as entertainment, quality of service, and eventually changingcustomers’ perception of price.

4.2 Value Management and Activity-based Costing results: product cost and customersatisfaction analysisTable III displays the ABC costs of different products proposed on the menu. Thepercentage of consumption of each item in the menu was calculated by the restaurantmanager during the period of this study (quantity consumed of each product/totalquantity consumption of all products), which in total had to equal 100 percent.Operating profits were calculated by subtracting each item’s ABC cost from the itemprice. The total profit of each menu item was calculated by multiplying the operation’sprofit by the consumption average. As a result of this information, the costs ofoperation and the total profit for each product were established. If we consider all menuitems during the period of the study, we conclude that the restaurant lost 1.01 TD. Theresults revealed that all items displayed a positive operating profit except for five menuitems: salade de seiches aux olives, sardines grillees, plat merou, plat crevettes royales,and plat poissons divers.

Furthermore, an average operating profit of 0.01 TD was computed by dividing thetotal operating profit by the total number of items on the menu (20.13 TD/11).This average figure could then be compared to each item’s operating profit,which allowed each item to be classified versus the average. On this basis, three items( plat merou, plat crevettes royales, and plats poissons divers), which represent theprincipal dishes, showed the greatest negative profitability and were the mostconsumed by customers.

Using only the ABC results, managers could make errors if they decided to reducethe costs or increase the prices without considering the customer’s point of view. Inorder to improve decision making and to avoid this risk, we suggested that managersmust consider, simultaneously, customer point of view and profitability. For this

Figure 4.Consumption analysis ofactivity (A2) “production”

IJCHM24,2

280

purpose, we developed a visual tool (diagram CS/P: Figure 2) presenting both of thesepoints of view. In collaboration with the restaurant manager, we fixed 80 percent as atarget for customer satisfaction. For profitability, the managers fixed zero as theextreme limit. These two limits divided the diagram into four zones associatedwith three types of decisions (1 – Benchmark, 2 – Improvement and/or Innovation,and 3 – Innovation).

The Benchmark zone group products have high customer satisfaction and highprofitability. For this product, it is useful to apply a benchmark taking intoconsideration customer feedback and production system details to ascertain the bestpractices so that managers can standardize these practices in their restaurants. In thiscase study, four products can be considered in the Benchmark zone group(salade de chevrettes au fenouil, filet de maquereau marine au vinaigre, chevrettessautees a l’ail, and rouleau de fruits de mer).

The Innovation zone contains products that do not satisfy customers and are notprofitable. Managers should implement innovative ways to reduce costs of productionand improve customer satisfaction. They should understand what drives guests’choices. The open innovation approach can be useful in order to assure continuousimprovement. In our case, innovative action should be implemented regarding threeproducts (sardine grillee, plat poisson merou, and plat crevettes royales) on the menu.

Two zones of diagram CS/P concern improvement and or innovative decisions: thefirst zone contains the product characterized by low profitability and highcustomer satisfaction. The second zone regroups the products which have highprofitability and low customer satisfaction. In our study it was found that the fouritems, (salade de seiche aux olives, plat poissons divers, poele de calamar aux legumes,and salade de calamar aux tomates), should be improved.

The products, salade de seiche aux olives and plat poissons divers, are costly butappreciated by the customers. So managers have to analyze the cost structure and findways to reduce the costs. The benchmarking applied gives alternatives, which can beadopted.

For the products, salade de calamar aux tomates and poele de calamar aux legumes,the profitability is high and customer satisfaction is low. Using the questionnaire, wefound that customers claimed that these products were neither fresh nor delicious.Managers must, therefore, do further analysis of the whole process, from purchase todelivery, to ameliorate these problems. The best practices found for benchmarkproducts can be helpful in this case.

Discussions and managerial implicationsThe results of this study show that using the activity-based costing approach coupledwith value management in the context of decision making in an “a la carte” restaurantis a feasible way of gaining detailed insight into an item’s value. The combination ofABC and VM approaches allows managers to extract the best value combination whiletaking into consideration both customer satisfaction and cost of product. Thisimproves the decision-making process and orients managers to improvements, whichwill yield the most profit.

The ABC/VM systems permit managers to identify what is being done withresources under their control. When profitability and customer satisfaction are low,

VM and ABCmodel

281

activities related to the product should become targets for cost reduction andimprovement. Restaurant management can use the results of ABC/ VM to evaluatewhich products to retain and which items to re-price, according to market conditionsand customer demand.

This study demonstrated that activity-based costing, coupled with valuemanagement, produce distinctly different results than a traditional menu costanalysis would. The simultaneous considerations of customer point of view andprofitability allowed us to determine that only four products were efficient and thatseven products caused problems for the restaurant. When using only ABC results, wefound that only three items reflected the dissatisfaction of the management. So, basedon these findings, we noted that using ABC and VM was more effective and gave moreaccurate results.

The results of this study suggest that simultaneously analyzing customersatisfaction and profitability can have significant benefits for restaurant management.Through implementation of the improvement project, we can, at the same time, satisfyboth managers and customers.

ABC costs can now be used to establish a menu item price that will assure a profit.Furthermore, ABC costs can provide operators with the information they need in orderto determine whether they can afford to adjust their prices, according to competitiveproduct offerings (Raab et al., 2010).

The two proposed diagrams (Wa/Ca) and (CS/P) can help managers make decisionsand orient and prioritize the improvement project. The diagram (Wa/Ca) allowsmanagers to easily identify costly activities and to implement actions to analyze theircost structure. Using the diagram CS/P, we can ascertain how both customersatisfaction and the profitability of products can be improved, taking intoconsideration customer needs and the activity cost structure analysis. All theinformation gained from an ABC/VM study should be shared with the employees ofthe establishment so that they can understand how to conduct activities in a moreefficient manner. Once employees and management comprehend the potentialopportunities of an ABC system, they can manage the restaurant and execute tasks inmore profitable ways, while delivering real value to the customer. Thus, all menu itemsthat are unprofitable should be eliminated, except for items that are priced low forpromotional purposes (Raab et al., 2009). Taking such steps will help managers fullyrealize the potential benefits of using an ABC approach to invigorate the profitpotential of their restaurants (Raab et al., 2010).

The proposed model which combines the two approaches: activity-based costingand value management is also an attempt to deal with the problems of implementingABC. The use of VM tools, such as functional analysis and the FAST diagram,facilitates the identification of the activities: the resources driver, the activity driver,and the cost object. It also helps to determine which products or services are profitable,which customers are the most valuable, whether processes are value added or not, andwhere efforts toward improvement should be made.

The approach, which combines the ABC system and value management concepts,as well as the engineering system, can be considered to be a qualitative approach toidentifying the basics of service orientation and how both parties perceive the serviceexperience in a specific cultural context. Using ABC/VM methods, a manager of a

IJCHM24,2

282

restaurant can now analyze actual underlying profitability and customer satisfaction,taking into consideration the entire restaurant’s cost structure and the customer’s pointof view. This is not only true for an “a la carte”-style restaurant, as was demonstratedin this study, but also for other types of restaurants, as was demonstrated by Raab andMayer (2007). Armed with this knowledge, managers can take the necessary steps toalter their operations and reconfigure their menus to improve customer value and theirfacilities’ bottom-line profitability instead of merely guessing (based solely on foodcosts) that the changes they make will actually lead to improved profitability.

Conclusion and limitationsIn this study, we showed that an activity-based costing system coupled with valuemanagement was successfully adapted to an “a la carte” restaurant in Tunisia. Theproposed model allowed us to determine the costs and to analyze customer satisfactionof each item on the proposed menu. This process resulted in the establishment of thecosts of different activities involved in all menu items. The study was able tocalculate the earnings generated by different proposed products and provide productvalue for the menu items by calculating operating profit margin and customersatisfaction with the different products. This study confirmed Raab and Mayer’s (2007)conclusion that the use of ABC is a feasible approach to product costing in a restaurant.

The results of this study suggest that adopting an ABC/VM approach may havesignificant benefits for restaurant management. This combined approach enhances thequality of the decision-making process. Although it was applied to an “a la carte”-stylerestaurant, its implications can be broadly extended to virtually all types ofrestaurants. In particular, it may be especially useful for restaurants that are sufferingfrom a lack of profit (Raab and Mayer, 2007).

Among the principal limitations of this study was its exploratory nature, thenumber of samples used (only a single restaurant in Tunisia), the period of theimplementation of the ABC/VM model (only one month), the number of distributedquestionnaires, and the number of responses (only 67 responses). Management shouldalso calculate ABC costs for other months in order to determine all the reasons foroverall negative profit margins. In addition, management should conduct a pricesensitivity analysis in order to learn about the price elasticity patterns of the menu(Raab and Mayer, 2007). Nevertheless, despite these limitations, the studydemonstrated that ABC/VM can develop cost-effective products and orientmanagers to improvements by measuring value. It has been suggested as anappropriate tool for guiding and directing the process of making decisions.

References

Anderson, S.W. (2005), “Managing costs and cost structure throughout the value chain: researchon strategic cost management”, working paper, Department of Accounting and BusinessInformation Systems, University of Melbourne, Melbourne.

Babad, Y. and Balachandran, M. (1993), “Cost driver optimization in activity based costing”,The Accounting Review, Vol. 68 No. 3, pp. 563-4.

Bejar, B. (2003a), “L’implantation des methodes ABC/ABM par les outils du Management par laValeur”, Revue Francaise de Gestion Industrielle, Vol. 22 No. 2, pp. 34-52.

VM and ABCmodel

283

Bejar, B. (2003b), “Le couple (TQM. MV) au service de la formation de l’ingenieur genieindustriel”, pp. 26-9, 5eme Congres International de Genie Industriel, Quebec, Canada.

Bell, D. (2002), Food & Beverage Cost Control – Course Packet, Department of ReprographicServices, University of Nevada, Las Vegas, NV.

Ben Mzoughia, M. and Bejar-Ghadhab, B. (2004), “Modelisation de l’ABC/ABM dans unebanque”, ASAC (Administrative Sciences Association of Canada).

Blagoje, N. and Ljilja, A. (1999), “Total quality management and activity-based costing”,Economics and Organization, Vol. 1 No. 7, pp. 1-8.

Boisvert, H. (1998), “La comptabilite par activites. Collection pratiques de pointe en comptabilitede management”, Editions du Renouveau Pedagogique (ERPI), Comptabilite demanagement.

Cohen, S., Venieris, G. and Kaimenaki, E. (2005), “ABC: adopters, supporters, deniers andunawares”, Managerial Auditing Journal, Vol. 20 No. 9, pp. 981-1001.

Cokins, G. (1993), “An ABC manager’s primer”, IMA publication, No. 93282.

Cooper, R. (1989), “The rise of activity-based costing – part 4: what do activity-based costsystems look like?”, Journal of Cost Management, Spring, pp. 38-49.

Cooper, R. and Turney, P.B. (1989), “Using ABC to modify behavior”, working paper.

Dalci, I., Tanis, V. and Kosan, L. (2010), “Customer profitability analysis with time-drivenactivity-based costing: a case study in a hotel”, International Journal of ContemporaryHospitality Management, Vol. 22 No. 5, pp. 609-37.

Davila, A. and Wouters, M. (2006), “Management accounting in the manufacturing sector:managing costs at the design and production stages”, in Chapman, C.S., Hopwood, A.G.and Shields, M.D. (Eds), Handbook of Management Accounting Research, Vol. 2, Elsevier,New York, NY.

Demarle, D.J. and Shillito, M.L. (1984), Handbook of Industrial Engineering, Wiley, New York,NY.

Douglas, D. (2005), “Good decisions require good models: developing activity-based solutionsthat work for decision makers”, Cost Management, Vol. 19 No. 3, p. 32.

Dummond, E.J. (2000), “Value management: an underlying framework”, International Journal ofOperations & Production Management, Vol. 20 No. 9, pp. 1062-77.

EN 1325-1 (1996), “Vocabulary for value management, value analysis and functional analysis –part 1: value analysis and functional analysis”, German version.

Foster, G. and Gupta, M. (1994), “Marketing, cost management and management accounting”,Journal of Management Accounting Research, Vol. 6 No. 3, pp. 43-77.

Gersch, M., Scholer, B. and Hewing, M. (2010), “Service dominant logic and business processblueprinting: enhancing the view on performance by integrating the customerperspective”, AMCIS 2010 Proceedings.

Guilding, C., Kennedy, D. and McManus, L. (2001), “Extending the boundaries of customeraccounting: applications in the hotel industry”, Journal of Hospitality and TourismResearch, Vol. 5 No. 2, pp. 173-94.

Hopwood, A. (1996), “Looking across rather than up and down: on the need to explore the lateralprocessing of information”, Accounting, Organizations and Society, Vol. 21 No. 6,pp. 589-90.

Ittner, C.D. (1999), “Activity based costing concepts for quality improvement”, EuropeanManagement Journal, Vol. 17 No. 5, pp. 492-500.

IJCHM24,2

284

Kenney, W.R. (2001), “Accounting scholarship: what is uniquely ours?”, The Accounting Review,Vol. 76 No. 2, pp. 275-84.

Knox, S. (2002), “The boardroom agenda: developing the innovative organization”, CorporateGovernance: The International Journal of Effective Broad Performance, Vol. 2 No. 1,pp. 27-36.

Koga, J. (2000), “Does value management have a place in project management?”,SAVE International Conference Proceedings.

Lovelock, C. and Wirtz, J. (2008), Services Marketing: People, Technology and Strategy, PearsonPrentice Hall, Upper Saddle River, NJ.

McNair, C.J. (1990), “Interdependence and control: traditional vs activity-based responsibilityaccounting”, Journal of Cost Management, Summer, pp. 15-23.

Male, S., Kelly, J., Gronqvist, M. and Graham, D. (2007), “Managing value as a management stylefor projects”, International Journal of Project Management, Vol. 25 No. 2, pp. 107-14.

Miles, L.D. (1989), Techniques of Value Analysis, McGraw Hill, New York, NY.

Mittal, B. and Sheth, J.N. (2001), Value Space: Winning the Battle for Market Leadership,McGraw Hill, New York, NY.

Moriceau, P. (2000), “La norme europeenne sur le management par la valeur”, Revue la Valeur,No. 84, pp. 15-17.

Namasivayam, K. (2005), “Connecting organizational human resource practices to consumersatisfaction: outlining a potential causal mechanism”, International Journal of ServiceIndustry Management, Vol. 16 Nos 3/4, pp. 253-70.

Narayanan, V.G. and Sarkar, R.G. (2002), “The impact of activity-based costing on managerialdecisions at Insteel Industries – a field study”, Journal of Economics & ManagementStrategy, Vol. 11 No. 2, pp. 257-88.

Narver, J.C., Slater, S.F. and McLachlan, D.L. (2004), “Responsive and proactive marketorientation and new-product success”, Journal of Product Innovation Management,Vol. 21 No. 5, pp. 334-47.

Niraj, R., Gupta, M. and Narasimhan, C. (2001), “Customer profitability in a supply chain”,Journal of Marketing, Vol. 65 No. 3, pp. 1-16.

Noone, B. and Griffin, P. (1997), “Enhancing yield management with customer profitabilityanalysis”, International Journal of Contemporary Hospitality Management, Vol. 9 No. 2,pp. 75-9.

Noone, B.M., Namasivayam, K. and Tomlinson, H.S. (2010), “Examining the application of SixSigma in the service exchange”, Managing Service Quality, Vol. 20 No. 3, pp. 273-93.

Norme francaise: NF X 50-100 (1996), “Analyse Fonctionnelle – Caracteristiques fondamentales”,Association francaise de normalisation (Afnor).

Paulin, M., Ferguson, R.J. and Bergeron, J. (2006), “Service climate and organizationalcommitment: the importance of customer linkages”, Journal of Business Research,Vol. 59, pp. 906-15.

Plowman, B. (2005), “Case study: changing customer behaviour to increase profitability”,available at: www.bettermanagement.com (accessed 25 December 2005).

Raab, C. (2003), “The feasibility of activity-based costing in the restaurant industry”,unpublished doctoral dissertation, University of Nevada, Las Vegas, NV.

Raab, C. and Mayer, K. (2007), “Menu engineering and activity-based costing – can they worktogether in a restaurant?”, International Journal of Contemporary Hospitality Management,Vol. 19 No. 11, pp. 43-52.

VM and ABCmodel

285

Raab, C., Mayer, K. and Shoemaker, S. (2010), “Menu engineering using activity-based costing:an exploratory study using a profit factor comparison approach”, Journal of Hospitality& Tourism Research, Vol. 34 No. 2, pp. 204-24.

Raab, C., Mayer, K., Kim, Y-S. and Shoemaker, S. (2009), “Price-sensitivity measurement: a toolfor restaurant menu pricing”, Journal of Hospitality & Tourism Research, Vol. 33 No. 1,pp. 93-105.

Raab, C., Mayer, K., Ramdeen, C. and Ng, S. (2004), “The application of activity-based costing in aHong Kong buffet restaurant”, Proceedings of the CHRIE Annual Convention of 2004,Orlando, FL, August 1-4, pp. 1-4.

Reeve, J. (1996), “L’activity-based management en question”, L’Expansion Management Review,pp. 31-41.

Roberts, M. and Silvester, K. (1996), “Pourquoi l’ABC a echoue et comment il peut encore reussir”,L’Expansion Management Review, pp. 34-44.

Rotch, W. (1990), “Activity-based costing in service industries”, Journal of Cost Management,Summer, pp. 4-14.

Sartorius, K. and Eitzen, C. (2007), “The design and implementation of activity-based costing(ABC): a South African survey”, Meditari Accountancy Research, Vol. 15 No. 2, pp. 1-21.

Schmidgall, R. (1997), Hospitality Industry Managerial Accounting, Educational Institute,Lansing, MI.

Sprow, E. (1992), “The new ABCs of cost justification”, Manufacturing Engineering, Vol. 106,pp. 30-1.

Tanju, D.W. and Helmi, M. (1991), “ABCs for internal auditors”, Internal Auditor, pp. 33-7.

Turney, P. (1992), “Activity-based management”, Management Accounting, Vol. 73 No. 7,pp. 20-5.

Turney, P. (1989), “Using ABC to achieve manufacturing excellence”, Journal of CostManagement, Summer, pp. 23-31.

Turney, P. (1991), “How activity-based costing helps reduce cost”, Journal of Cost Management,Winter, pp. 29-35.

Value Management Guideline (2001), “New South Wales Department of Public Works andServices Cataloguing-in-Publication data”, January, pp. 5-6.

Vaughn, P., Raab, C. and Nelson, K.B. (2010), “The application of activity-based costing to asupport kitchen in a Las Vegas casino”, International Journal of Contemporary HospitalityManagement, Vol. 22 No. 7, pp. 1033-47.

Waeytens, D. and Bruggeman, W. (1994), “Barriers to successful implementation of ABC forcontinuous improvement: a case study”, International Journal of Production Economics,Vol. 36, pp. 39-52.

Walter, D. and Jones, P. (2001), “Value and value chains in healthcare: a quality managementperspective”, The TQM Magazine, Vol. 13 No. 5, pp. 319-33.

Weinstein, A. and Pohlman, R.A. (1998), “Customer value: a new paradigm for marketingmanagement”, Advance in Business Studies, Vol. 6 No. 10, pp. 89-97.

World Banking Report (2008), “Integration mondiale de la Tunisie: une nouvelle generation dereformes pour booster la croissance et l’emploi”, Tunisie.

Yin, R.K. (2003), Case Study Research: Design and Methods, Sage, Thousand Oaks, CA.

Zeithamall, V., Bitner, M.J. and Gremler, D.D. (2006), Services Marketing, McGraw Hill, Irwin,New York, NY.

IJCHM24,2

286

Appendix

Figure A1.FAST of restaurant

VM and ABCmodel

287

About the authorsAmel Ben Hadj Salem-Mhamdia graduated from the National School of Engineers of Tunis,Tunisia, where she successfully completed her Master’s degree. She is currently continuing herstudies on the doctoral level. She works as an assistant in the Industrial Engineering Departmentat ENIT. Amel Ben Hadj Salem-Mhamdia is the corresponding author and can be contacted at:amel_benhadjsalem@yahoo.fr

Bahia Bejar Ghadhab is an Assistant Professor in the Industrial Engineering Department atthe ENIT, and is responsible for the research unit “Value Management and Open Innovation”MaVOI at ENIT. She received her doctorate in science – Inorganic Chemistry – in 1990. She hadhabilitation in Industrial Engineering “TQM/MV” in 2004. She had European Certification:Facilitator and Trainer in Management by the Value (MV) issued by the French Association forValue Analysis (AFAV).

IJCHM24,2

288

To purchase reprints of this article please e-mail: reprints@emeraldinsight.comOr visit our web site for further details: www.emeraldinsight.com/reprints