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A Cost Control Overview

A Cost Control Overview

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Published by: Pankaj Kumar on Mar 23, 2011
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What is Cost Control???

Minimizing

costs the company must expend without sacrificing the end product (service/food) that the customer receives.

Revenue and Expense
Revenue - Expenses = Profit Revenue ± Desired Profit = Ideal Expense
Expense Revenue = Expense %

Revenue (100%) - Food and Beverage Cost % - Labor Cost % - Other Expense % = Profit %

A budget is simply a forecast or estimate of projected revenue, expense, and profit.
The 28-day-period approach to budgeting divides a year into 13 equal periods of 28 days each. This helps the manager compare performance from one period to the next without having to compensate for ³extra´ days in any one period. 
If significant variations with planned results from a budget occur, management must:

1. 2. 3.

Define the problem Determine the cause Take corrective action

Sales Forecasts
Advantages to Precise Sales Forecasts
1) 2) 3) 4) 5)

Revenue Estimates Expense $ Estimates Scheduling Workers Scheduling Food and Service Production needs Proper purchasing of amounts of food for immediate use. Increased operational efficiency ± lower pricing, increased benefits for workers. Increased dollars for growth Increased profit levels and stockholder value

6)

7) 8)

Sales This Year ± Sales Last Year = Variance 
Percentage variance indicates the percentage change in sales from one time period to the next. Sales This Year ±Sales Last Year Sales Last Year or Variance Sales Last Year = Percentage Variance = Percentage Variance 

Revenue forecast is calculated using the following formula: Forecast =Sales Last Year + (Sales Last Year X %Increase)

00 + % Increase Estimate) = Guest Count Forecast .Forecasting The guest count forecast is determined by multiplying guest count last year by the % increase estimate. and then adding the guest count last year. Guest Count Last Year + (Guest Count Last Year x % Increase Estimate) = Guest Count Forecast Or Guests Last Year x (1.

you can compute the popularity index. based on an item¶s individual sales history. which is defined as the percentage of total guests choosing a given menu item from a list of alternatives. Popularity Index =Total Number of a Specific Menu Item Sold Total Number of All Menu Items Sold The basic formula for individual menu item forecasting.Cost of Food & Bev ‡Once you know the average number of people selecting a given menu item. is as follows: Number of Guests Expected x Item Popularity Index = Predicted Number of That Item to Be Sold . and the total number of guests who made the selections.

8. 7.  In general.Standardized Recipes The standardized recipe controls both the quantity and quality of what the kitchen will produce. Item name Total yield (number of servings) Portion size Ingredient list Preparation/method section Cooking time and temperature Special instructions. 3. 5. 6. and ultimately. 2. 4. if necessary Recipe cost (optional) . operational success. standardized recipes contain the following information: 1. The standardized recipe is the key to menu item consistency. It consists of the procedures to be used in preparing and serving each of your menu items.

Converting Recipes ± Factor or Percentage Yield Desired Current Yield = Conversion Factor Ingredient Weight / Total Recipe Weight = % of Total then % of Total x Total Amount Required = New Recipe Amount .

Yield AP & EP Yield % = 1.00 .Waste.Waste % AP ± Waste (EP) AP EP Required Yield % = AP Required = Yield % EP Required =AP Required x Yield % .

It is computed as follows: Beginning Inventory PLUS Purchases = Goods Available for Sale MINUS Ending Inventory = Cost of Food Consumed MINUS Employee Meals = Cost of Food Sold . wasted or stolen. thrown away.Calculating Food Cost Determining Actual Food Expense  Cost of food sold is the dollar amount of all food actually sold.

00 $4.81 $792.20 0.60 $2.22% = Cost % Today .771.874.20 $4.947.23 $488.20 43.106.00% 39.63 $1.42 $0.19% Sunday $2.08% Tuesday $920.20 $10.03 $519.404. Purchases Today Sales Today 2.85% 83.006.26% Friday $1.03 $841. 0 $1.20 14.034.00 $2.Six Column Reporting Six Column Food Cost % Estimate 1.68% 63.285.22 $286.80% Saturday $2.927.00 40.955.26% 51.30% 75.58 $5.185.106.40 $1.956.50 $2.39% 109.30 $3.881. 0 130.748.70 50.46% Thursday $971.41 $7.40 $850.97% Wednesday $1.08% 130. Purchases to Date Sales to Date = Cost % to Date Sales Purchases Cost & Weekday Today To Date Today To Date Today To Date Monday $850.60 91.20 $3.947.467.40 $1.034.

Calculating Beverage Cost Beginning Inventory PLUS Purchases = Goods Available for Sale Less Ending Inventory Less Transfers from Bar Plus Transfers to Bar = Cost of Beverage Sold .

Calculating Sales Mix & Terms Item Dollar Sales Total Beverage Sales = Item % of Total Beverage Sales Two-key system Oxidation Broken case Empty for full system of managment .

F&B Production Necessary Components of F&B Production Planning: 1) Maintain Sales Histories 2) Forecast Future Sales Histories 3) Purchase and store needed F&B supplies 4) Plan daily production schedules 5) Issue needed products to production areas 6) Manage the food and beverage production process .

Controlling Product Issues Issues Today Sales Today = Beverage/Food Cost Estimate Today The six-column form requires only that the manager divide today¶s issues by today¶s sales to arrive at the today estimate as follows Issues ate -Jan -Jan -Jan -Jan 5-Jan 6-Jan -Jan Total Today Sales Beverage Cost Estimate To ate Today To ate Today To ate 9 5 9 5 50 50 65 6% 65 6% 5 0 6 6 6 9% 55 % 65 5 65 00 5 5 0 0 5% 95 % 9 5 5 9 9 0 06 50 9% 9 % 595 5 69 55 6 5 60 9 6% 05 % 00 6 59 5 0 5 5 % 55% 6 55 95 90 5 5 % % 6 55 90 5 5 % .

The ABC system attempts to combine both the physical and perpetual inventory systems. It separates inventory items into three main categories . A perpetual inventory system is one in which additions to and deletions from total inventory are recorded as they occur.Methods of Inventory Control A physical inventory is one in which an actual. physical count and valuation of all inventory on hand is taken at the beginning and close of each accounting period.

These items require only the simplest of inventory control systems .ABC Inventory System o o o Category A items are those that require tight control and the most accurate record keeping. which can make up 70% to 80% of the total inventory value. Category C items make up only 5% to 10% of the inventory value. Those are typically highvalue items. Category B items are those that make up 10% to 15% of the inventory value and require only routine control and record keeping.

Inventory Control Formulas Cost in Product Category Total Cost in All Categories = Proportion of Total Product Cost Cost as per Standardized Recipes Total Sales =Attainable Product Cost % Actual Product Cost Attainable Product Cost = Operational Efficiency Ratio .

it can be represented as: where A B =C A = Cost of Goods Sold B = Sales C = Cost Percentage .Principles of Cost Percentages The food cost percentage equation is extremely interesting. In its simplest form.

If costs go up at the same rate sales go up. the cost percentage goes down. the cost percentage goes down. If costs increase with no increase in sales. the cost percentage will go up.If costs can be kept constant but sales increase. your cost percentage will remain unchanged. If costs remain constant but sales decline. . If costs can be reduced but sales remain constant. cost percentage increases.

Managing F&B Pricing Standard Menu Daily Menu Cycle Menu Value Pricing Bundling .

6. 7. 5. 8.Factors Influencing Menu Pricing 1. Local competition Service levels Guest type Product quality Portion size Ambience Meal period Location Sales mix . 3. 4. 9. 2.

Selling Price Determination Cost of a Specific Food Item Sold Desired Food Cost % of That Item = Selling Price of That Item .

Multiplier Method 1.00 Desired Product Cost % = Pricing Factor Pricing Factor x Product Cost = Menu Price .

Contribution Margin Method Selling Price ± Product Cost = Contribution Margin Product Cost + Contribution Margin Desired = Selling Price .

B items. and C items. A items should comprise no more than 2 of the total product available. .Pricing Buffets Total Buffet Product Cost Guests Served = Buffet Product Cost per Guest The secret to keeping selling price low for a salad bar or buffet is to apply the ABC method. no more than 3 . .

Fixed Payroll refers to the amount an operation pays in salaries. Variable Payroll consists of those dollars paid to hourly employees.Labor Cost Labor Expense includes salaries and wages. required to operate a facility or department within the facility. Payroll refers to the gross pay received by an employee in exchange for his or her work. . or payroll dollars. Sometimes employees have both a fixed and variable element to their pay. Minimum staff is used to designate the least number of employees. A salaried employee receives the same income per week or month regardless of the number of hours worked. but it consists of other labor-related costs as well.

Productivity Standards Output Input =Productivity Ratio Cost of Labor Total Sales =Labor Cost % Total Sales Labor Hours Used = Sales per Labor Hour Cost of Labor Guests Served = Labor Dollars per Guest Served .

125 x 3000 Covers = 375 hours .Productivity and Scheduling Productivity = hour 7.5 covers = 60 = 0.125 Productivity X Forecast Cover = Scheduled Hours 0.

10 Key Factors Affecting Employee Productivity Employee Selection Training Supervision Scheduling Breaks Morale Menu Convenience vs. 6. 3.Factors Influencing Productivity 1. 2. 4. 10. 8. 5. 9. Scratch Preparation Equipment Service Level Desired . 7.

A job description is a listing of the tasks that must be accomplished by the employee hired to fill a particular position. Task training is the training undertaken to ensure an employee has the skills to meet productivity goals.A job specification is a listing of the personal characteristics needed to perform the tasks contained in a particular job description. .

A voluntary Employee Turnover Rate Number of Employees Separated Number of Employees in Workforce = .Employee Turnover Employee Turnover Rate = # of Employees Separated # of Employees in Workforce separation is one in which the employee made the decision to leave the organization. An involuntary separation is one in which management has caused the employee to separate from the organization.

 While there are many ways in which to consider other expenses. variable.Managing Other Expenses Other expenses are those items that are neither food. beverage.Controllable or non-controllable . two views of these costs are particularly useful for the foodservice manager. nor labor. They are: 1.Fixed. or mixed 2.

 The following shows how fixed. and mixed expenses behave as sales volume increases: Expense As a Percentage of Sales Fixed ecreases xpense Variable Remains the ame xpense Mixed xpense ecreases Total Dollars Remains the ame Increases Increases . variable.

and nonoperating expenses. operating expenses.  These three sections are arranged on the income statement from most controllable to least controllable by the foodservice manager.  The USAR can better be understood by dividing it into three sections: gross profit. the uniform systems of accounts have been established for many areas of the hospitality industry.Financial Analysis  To ensure that this financial information is presented in a way that is both useful and consistent. .

The income statement is an aggregate statement. Although this summary gives the manager a one-shot look at the performance of the operation. This means that all details associated with the sales. and profits of the foodservice establishment are summarized on the P L statement. the details are not included directly on the statement. Nonoperating expenses section is the least controllable by the foodservice manager. . cost. The operating expenses section is also under the control of the manager but more so on a weekly or monthly basis (with the exception of wages which you can control daily). interest paid to creditors for short-term or long-term debt is due regardless of the ability of the manager to control operations.The gross profit section consists of food and beverage sales and costs that can and should be controlled by the manager on a daily basis. For example.

etermine the difference between this period¶s sales minus last period¶s sales. 2.Analysis of Sales/Volume Overall sales increases or decreases can be computed using the following steps: 1. etermine sales for this accounting period. ivide the difference in #2 by last period's sales to determine percentage variance. 3. .

. erve the same number of guests at a higher check average. 2. erve more guests at a higher check average. There are several ways a foodservice operation experiences total sales (dollar) volume increases. erve more guests at the same check average. These are: 1. 3.

The procedure to adjust sales variance for known menu price increases is as follows: tep 1. tep 3. ubtract the result in tep 1 from this period's sales. tep 2. x: if prices were on all menu items. . Increase prior period sales (last year) by amount of the price increase. ivide the difference in tep 2 by the value of tep 1. increase the increased prior period sales by .

the cost percentage for the category Meats and eafood would be computed as follows: Meats and Seafood Cost Total Food Sales Seafood Cost % = Meats and . For instance.Analysis of Food Cost & Inventory A food cost percentage can be computed for each food sub-category.

the greater the frequency of orders and typically the smaller the inventory size. . Cost of Food Consumed Average Inventory Value= Food Inventory Turnover The higher the Food Inventory Turnover number.Inventory turnover refers to the number of times the total value of inventory has been purchased and replaced in an accounting period.

Analysis of Profit Net Income This Period ± Net Income Last Period Net Income Last Period = Profit Variance % .

Profit Planning Strategies .

. and contribution margin. popularity.Three of the most popular systems of menu analysis are: Variables Considered Analysis Method Matrix Overall Goal Minimize overall FC% Food Cost % Food Cost % Popularity Contribution Margin Contribution Margin Popularity Matrix Maximize CM Goal Value Analysis Contribution Margin % Algebraic Equation Popularity Selling Price Variable Cost % Food Cost % Achieving certain Profit Percentage Goals A matrix allows menu items to be placed into categories based on whether they are above or below menu item averages such as food cost %.

you are seeking menu items that have the effect of minimizing your overall food cost percentage. The characteristics of the menu items that fall into each of the four matrix squares are unique and thus should be marketed differently 1 ± High FC%. High Popularity % 1 FC% 2 3 Popularity % 4 . High Popularity % 3 ± Low FC%.When analyzing a menu using the Food Cost Percentage Method. Low Popularity % 4 ± Low FC%. Low Popularity % 2 ± High FC%.

1 ± High CM. Low Popularity % 1 CM$ 2 2 ± High CM. Low Popularity % 4 ± Low CM. High Popularity % 3 4 Popularity % .Each of the menu items that fall in the squares requires a special marketing strategy. High Popularity % 3 ± Low CM. depending on its square location.

Are the individual menu items selling well enough to warrant keeping them on the menu? 3.The selection of either food cost percentage or contribution margin as a menu analysis technique is really an attempt by the foodservice operator to answer the following questions: 1. Is the overall profit margin on my menu items satisfactory? . Are my menu items priced correctly? 2.

28 9.35 Menudo 0.32 umber Sold 147 200 82 117 125 168 225 152 Selling Variable Cost % Price (in decimal form) $12.95 0.28 9.The goal value formula is as follows: A x B x C x D = Goal Value A = 1.25 Mexican Salad 0.30 Chalupa Dinner 0.95 0.95 0.28 Burrito Dinner 0.95 x 0.40 = 370 .Food Cost % (Contribution Margin %) B = Item Popularity C = Selling Price D = 1.28 8.33 Taco Dinner 0.95 0.95 0.28 5.95 0.00 .28 8.(Variable Cost % + Food Cost %) Food Cost % Item (in decimal form) Fajita Plate 0.38 Enchilada Dinner 0.28 7.68 x 152 x 8.26 Overall Menu (Goal Value) 0.00 .28 Average Goal Value = 0.95 0.95 0.28 6.

74 0.40 171.4 $6.1 $9.4 $8. that is.95 0.0 $7.70 0.68 er l 147 200 82 117 125 168 225 152 elli aria le C st rice (i eci al f r ) G al al e $12.72 0.40 260.95 0.95 0.40 448.95 0.95 0.The computed goal value carries no unit designation.40 396.65 0. it is neither a percent nor a dollar figure because it is really a numerical target or score. Ite (i Fa ta ate nch ada D nner Menudo Me can a ad Cha upa D nner urr to D nner aco D nner Average C st eci al f r ) 0.3 $ 8.40 322.67 0. anything below would be considered an item that needs some re-thinking.40 517.40 472.95 0.4 370.0 .62 0.2 $9.95 0. Anything scoring above the average would be considered a good item.95 0.75 0.0 $5.

for a menu item in that it takes into account both important variable costs ± food and labor. % = Contribution Margin $/ Total Sales $ C. This is different than the C.Variable Costs = Contribution Margin C.Contribution margin for the overall operation is defined as the dollar amount that contributes to covering fixed costs and providings for a profit. Total Sales .M.M.M. per Guest = Contribution Margin $ / Guests .

use the following formula: Fixed Costs Contribution Margin % = Break-Even Point in Sales In terms of the number of guests that must be served in order to break even. use the following formula: Fixed Costs Contribution Margin per Unit (Guest) = Break-Even Point in Guests Served .To determine the dollar sales required to break even.

Food cost % 2. Variable cost %  Fixed costs are eliminated from the calculation because even if volume of sales equals zero. fixed costs still exist and must be paid. .  The information necessary to compute MSP is as follows: 1. Minimum payroll cost for the time period 3. Minimum Sales Point (MSP) is the dollar sales volume required to justify staying open for a given period of time.

Minimum Operating Cost = FC% +VC% MSP = Minimum Labor Cost 1 ± Minimum Operating Cost Or it could be written as: MSP = Minimum Labor Cost 1 ± (FC% + VC%) .

Goals 4.Budgeting Developing the Budget  To establish any type of budget. you need to have the following information available: 1. Assumptions of next period operations 3. Monitoring policies annual budget achievement budget . Prior period operating results 2.

Last Year¶s Food Cost per Meal + % Estimated Increase in Food Costs = This Year¶s Food Cost per Meal 3. compute the estimated food cost as follows: 1.To determine a food budget. Last Year¶s Average Food Cost per Meal = Last Year¶s Cost of Food / Total Meals Served 2. This Year¶s Food Cost Per Meal x Number of Meals to Be Served This Year = Estimated Cost of Food This Year .

Last Year¶s Labor Cost per Meal + stimated Increase in Labor Cost = This Year¶s Labor Cost per Meal 3. To determine a labor budget. Last Year¶s Labor Cost per Meal = Last Year¶s Cost of Labor / Total Meals erved 2. compute the estimated labor cost as follows: 1. This Year¶s Labor Cost per Meal Number of Meals to Be Served This Year = Estimated Cost of Labor This Year x .

The yardstick method helps you identify specific problems quickly and accurately. .Yardstick Method Some operators elect to utilize the yardstick method of calculating expense standards so determinations can be made as to whether variations in expenses are due to changes in sales volume. or other reasons such as waste or theft.

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