Menu engineering and activity‐based costing – can they work together in a restaurant?

Purpose – This research paper aims to examine whether using menu engineering (ME) together with activity‐based costing (ABC) for menu analysis gives new insights about true menu profitability. The traditional ME approach only uses food cost to determine the contribution margin of individual menu items. This combined approach uses both food and traceable operating costs to estimate contribution margins more accurately. Design/methodology/approach – An improved menu engineering model was developed and tested in a buffet restaurant in Hong Kong. Direct observation of restaurant activities allowed most costs to be traced (not simply allocated) to individual menu items. Findings – The results found that only three of 20 dinner menu entrées were profitable. This unique insight would not have been possible using traditional ME methods alone. The results also showed that ABC methods are applicable to a buffet‐style restaurant. Research limitations/implications – Only a single restaurant and only the dinner menu were examined in this study. Future research should apply the model used herein to other restaurant types located in different geographical areas in an effort in order to validate the approach. Practical implications – The paper suggests that ME can be improved upon by first assessing variable costs using ABC methods. Thus, the extra effort required to apply ABC in a restaurant appears to be worthwhile. Originality/value – The paper combines two disparate analytic techniques (ME and ABC) in a new approach that reveals a menu's true profit and loss picture. The paper also makes several modifications to the traditional ME approach.