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Activity Based Costing & Decision Making at Welina Restaurant

Saman Shehzadi and Saima Batool have written this case under the supervision of Sir Sajjad Ahmed Mahesar at Sukkur IBA
University. This case solely provides material for class discussion. The authors do not intend to illustrate either effective or
ineffective handling of a managerial situation. The author may have disguised certain names and other identifying information to
protect confidentiality.

Miss Elsa was hired by the Welina restaurant as summer intern to look into the cost accounting
matters that café manager thought is important to investigate before taking any final step. Miss
Elsa had her degree in Accounting & Finance. In summer she thought to do an internship in
order to get practical implication of concepts. She was now working on the costing system of
Café Welina to help manager about further decision making.

About the Company:

Café Welina is a restaurant which is situated in Attock city of Punjab. Café Welina is operating in
the past 10 years. Firstly, it has opened as a local café, where only tea was being served. After
operating for three years as a cafeteria, they expand their business operations by providing the
snacks like Samosas, Kachuri, Chat, fries and Pakory. Their business starts to grow more
because all the local area population was joining them. Because a high number of people are
attending the café then, the business has earned enough capital to expand its area of
occupancy. They rented the shop which was beside it and reconstruct it in the same way.
After a great success, it is now four years that the business has expanded its services and menu
and repositioned it as Welina Restaurant. They have added different items which is traditional
and other international foods. There are three departments working for the company.

Food Sections Operating in Welina Restaurant:

There are three food sections operating in the Welina Restaurant. These three sections are the
source of revenue for the company.
1. International Food Menu
2. Traditional and Desi food (Ghar ka khana)
3. Sweet Section
1. International Food Menu:
In this section of the food, the company cooks and sales the Thai dishes, Italian dishes, Afghani
dishes and others. The food items are the different types of Pizzas, Fries, and healthy foods as
per dietitians’ recommendations, different types of foods with different sauces and others. This
section is incurring high costs because of the prices of different sauces, but the revenue is not
much. Only the items like Pizzas have good sales. It contributes only 23% to the total
restaurants’ revenue. There is high take away of foods in this section. This section’s revenue
and cost distribution is shown in Exhibit 01.

2. Traditional and Desi food (Ghar ka khana):

This section manufactures the foods which taste like home made, and it includes the traditional
Pakistani dishes like Biryani, different types of Karahi, other fried items and many other local
and ethnic traditional dishes. This section has the highest sales and so contributes about 52% of
the company’s sales. Both the number of dine inn and take away is high here. There is high take
away of foods in this section (Exhibit 02). This section’s revenue and cost distribution is shown
in Exhibit 01.

3. Sweet Section:
In this section, the different flavors of ice creams, shakes, juices and sweets are manufactured.
It contributes about 25% of the company’s sales. There is high take away of foods in this section
(Exhibit 02). This section’s revenue and cost distribution is shown in Exhibit 01.

Costing System of Welina:

The costing system of café Welina is in a way that they incur the cost for each item and
according to its cost they do the pricing. The cost consists of direct costs and indirect costs. The
direct costs comprise of the ingredients cost, packaging cost, and direct labor cost. The indirect
costs consist of rent, occupancy, utilities, insurance, depreciation, miscellaneous, marketing and
general and administration costs. There are three types of the staffs working for them. One
group of staffs are the cooks/chefs who prepare the overall meals of the restaurants. One
group is the helpers who are waiters, riders and who cleans the restaurant, and the last group is
the one who administer the restaurant the manager, billing employee and stock manager.
The company incurs a fixed depreciation cost which comprises of the depreciation expenses for
machinery like the machines which prepares ice-cream, pizza’s sauces, and sweet and culinary
that constantly needs to be replaced. All these are incurring expense of about 200,000 rupees
annually which is a fixed cost even if the restaurant does not have any sales. Moreover, the
fixed costs of the insurance are about 360,000 per year rupees which will incur in anyway.
Marketing cost include the flyer printing cost and the salary of employee overlooking the social
media page annually it is about 120,000. The general and administration are salary costs of
manager, stock in charge and billing employee. Utilities include 150,000 in rent of building and
50,000 in utilities while it increases for electricity in summer and for gas in winter. Fixed costs
are allocated equally among three sections (Exhibit 03).

Pricing Strategy:
The company is getting only 25% margin on each food items, like whatever the cost is, the
company charges 25% more than its prices, except the international food items on which they
charge about 35% because of the high overhead costs and fixed cost. Direct cost may fluctuate
because of ingredients uncertain cost but restaurant cannot change the items cost that easily.

Costing System Analysis of Welina Restaurant:

As Ms. Elsa was given the task of analyzing the poor performing section to dispose of. Because
international food menu and sweet section was incurring losses which was increasing gradually.
The relevant cost sheet for three sections is given in Exhibit 03.
As Ms. Elsa started to work on the company cost data, she found that dividing fixed cost equally
without analyzing the cost driver might be the cause to show losses for two sections. The three
sections of café do not contribute equally to revenue but they also differ in costs they incur. As
the café was selling most in desi food section so most of the chefs and helpers work for this
section. Chef’s cost is treated as direct labor cost so, its allocation was fine in direct cost of
meals prepared in any section. Ingredient costs are also allocated on job costing model each
day seeing the units sold and corresponding material withdrawn from store. Losses seemed not
right to her as margins in both sections were higher than desi foods. Ms. Elsa has come up with
following observation:
1. The ingredients used in desi food section were frequently procured and because of
commodity market price fluctuations profit margins were hard to maintain but bulk
order discount has helped to mitigate the effect.
2. As dine in ratio for desi food was higher, more percentage of utilities & occupancy cost
was allocated to this section.
3. Marketing cost was evenly distributed as marketing efforts were uniform for each
section.
4. International food menu has decreased the items in its initial list from range of different
too few items that were popular among people. The toping sauces can be made and
stored other few can last longer like vinegar and sauces etc. Other vegetables and
chicken are ordered with desi food section ingredient. As only 22% is consumed by this
section accordingly miscellaneous that include delivery, loading & unloading charges is
allocated to this section.
5. The ingredient procurement for sweet section is completely different like milk is ordered
daily while another ingredient is ordered once in month. So, all cost is classified in
 ingredient cost. As this section prepare less in items (that also vary in demand among
summer and winter season) only 18.5% of utilities should be allocated to it.
6. Rent is allocated on the basis of percentage of section sales in total revenue.
7. Helpers as work most of time with desi food section so, accordingly cost is divided
among sections (based on approximate time they spent with activities of different
sections). (Exhibit 05) summarize the labor cost for restaurant.
8. The first stage indirect allocation of cost for three sections is given in Exhibit 06.

Assignment Questions:
1. What threats are posed by the fluctuating commodity prices and how can company
manage this threat?
2. What efforts can be made to control cost of goods sold (COGS) for any section or
improve sales?
3. Should the restaurant get rid of loss-making food sections?
4. What does the indirect cost allocation suggested by Ms. Elsa indicate about the
profitability of different sections?
5. If restaurant wants to implement activity-based costing to determine the price for each
item in different section, will you support the idea or not?
6. What could be Ms. Elsa final recommendations about profit margins, COGS and cost
allocation of restaurant?
Exhibit 01:

Percentage Of Revenue and Indirect Cost in Total Sales & Cost of Restaurant
International Food Traditional and Desi Sweet Section
Menu food (Ghar ka khana)
Percentage of 23% 52% 25%
Revenue
Percentage of 33.33% 33.33% 33.33%
Indirect Cost

Exhibit 02:

Percentage Of Take Away and Dine in In Total Sales of Different Sections

Take-Away Dine-In
International Food Menu 70% 30%
Traditional and Desi food 60% 40%
(Ghar ka khana)
Sweet Section 50% 50%

Exhibit 03:
Per
Month
Revenue 1,357,000
COGS 717,340
Gross Profit 639,660
Other Fixed Costs
Marketing 8550
General & Admin 100,000
Rent 100,000
Utilities 50,000
Occupancy 30,000
Insurance 30,000
Miscellaneous expense 1,500
Depreciation expense 16667
Helpers (Riders, cleaners & helpers to 180,000
chefs)
Net Income 122,943
Exhibit 04:
Last Month Cost Allocation Sheet for Three Sections
International Desi Food Sweet Section
food
Revenue
266,110 601,640 289,250
COGS
164,988 373,017 179,335
Gross Profit
101,122 228,623 109,915
Other Fixed Costs
Marketing
2,850 2,850 2,850
General & Administration
33,330 33,330 33,330
Rent
33,330 33,330 33,330
Utilities
16,665 16,665 16,665
occupancy
9,999 9,999 9,999
Insurance
9,999 9,999 9,999
Miscellaneous expense
500 500 500
Depreciation expense
5,555 5,555 5,555
Helpers (Riders, cleaners & helpers to
chefs) 59,994 59,994 59,994
Income
(11,106) 116,395 (2,313)

Exhibit 05:

Labor Cost
Persons Salary per person Total
Monthly
Salary
Chefs 5 50000 250000
Helpers (Riders, cleaners & helpers to 6 30000 180000
chefs)
General & Administration 2 50,000 100,000
Exhibit 06:

Indirect Cost Allocation

International Desi Food Sweet
food Section
Marketing 33% 33% 33%
General & Administration 30% 40% 30%
Rent 23% 52% 25%
occupancy 19% 56% 25%
Utilities 14.50% 67% 18.50%
Insurance 33% 33% 33%
Miscellaneous expense 22% 78% _
Depreciation expense 27% 48% 25%
Helpers (Riders, cleaners & helpers to 20% 53% 27%
chefs)