CHAPTER 1

Revenue and Concepts

“An entrepreneur has mathematical formula

for success: Gauge overhead.”
Mark Lallemand, Owner of MyOverhead.com

General Objectives:

 Understand that Quality Management impacts on Cost Management.

 Understand the nature of Cost, its role in the management decision process.

 Develop creative thinking process in comparing standard cost from actual cost
and determine the factors that affect cost variances.

 Explain the importance of Cost Management in a Service industry and how will it
affect the profitability of the operations.

 Elevate the spirit of entrepreneurship and proprietorship in reference to cost

control system.

Introduction

Food Cost and Beverage Cost arc the cost of sales in the food service industry.
The accuracy of revenue projections for food and beverage is critical to determining
whether the business operation will be successful or not. Not only does the revenue
have to pay for all of the other expenses listed on the projected profit and loss
statement, but there should also be money left for the Profit the owner of the business is
hoping to earn.

True enough, food service manager is a very talented individual. He or she is

unique because all the functions of product sales, from item conceptualization to
product delivery are in their hands. He is the one in charge of securing raw materials,
producing a product and selling it — all under the same roof. However, whoever
manages a food and beverage operation must have a clear understanding of other
concepts not only from procurement of materials to reconciliations or problems if there
may have but also the computations of which to ensure profitability of the business.
 Management Task Checklist
Food Service Manufacturing Retail
Tasks
Manager Manager Manager
Secure Raw Materials Yes Yes No

Manufacture Product Yes Yes No

Distribute to End User Yes No No

Market to End User Yes No Yes

Reconcile Problems with
Yes No Yes
the End User

COST CONCEPTS

Cost for accountants is defined as the expense of a foodservice for

goods or services when the goods are consumed or the services are rendered. Foods
and beverage are considered "consumed" when they have been used, wasted or
otherwise, and are no longer available for the purposes for which they were acquired.
Thus, the cost of a piece of potato is incurred when the piece is no longer available for
the purpose for which it was purchased, because it has been cooked, served or thrown
away because it has spoiled or even because it has been stolen. The cost of labor is
incurred when people are on duty, whether or not they are working and whether they
are paid at the end of the shift or at some later date.

FIXED VARIABLE COSTS

Fixed costs are normally unaffected by changes in sales volume. They are said
to have little direct relationship to the business volume because they do not change
significantly when the number of sales increases or decreases. Insurance premiums,
real estate taxes and depreciation on equipment are examples of fixed costs.

Variable Costs are clearly related to business volume. Food and Beverage costs
are considered directly variable costs. Direct variable costs are directly linked to volume
of business so that every increase or decrease in volume brings a corresponding
increase or decrease in cost. As business volume increases, variable costs will
increase; as volume decreases, volume costs decrease as well. The obvious examples
of variable costs are food, beverages and labor.

PROFIT- The REWARD for SERVICE

Management's primary responsibility is to deliver a quality product or service to

the customer, at a price mutually agreeable to both parties. The quality must be such
that the consumer or end user of the product or service feels that excellent value is
received for the money they have spent. When this level is achieved, the business will
prosper. It is important to remember that guests cause businesses to incur costs. We do
not want to get in the mindset of reducing costs to the point where we think that "low
cost" is good and "High Cost" is bad.

Example: A restaurant with P 100,000.00 sales per day will undoubtedly have higher
costs than the same size restaurant with P 75,000.00 sales. If there are no
guests, there will be no costs. In a similar vein, when management attempts
to reduce costs with no regard of the impact on the balance between cost
management and guest satisfaction, the business will likely suffer.

Revenue Cost = Profit

People assume that if a product is purchased for P30 and sold for P60, the profit
generated is P30 or 100%. We may call it a Gross Profit (GP) but after all the expenses
like advertising, management salaries, rental, utilities and labor required to generate the
sales to name but a new are deducted, Net profit is then determined.

Example Problem:

A product is sold 70% higher than its initial cost of PI 35.

a) How much is the selling price?

b) How much is it Gross Profit?

Solution:

70% of PI 35 is P94.50. Adding this to the initial cost of PI 35 will give the value
of the selling price:

P135 + 94.50 1)229.50

Gross profit is P94.50 or simply subtract the selling price and the initial cost.

For non-profit institutions, it is the responsibility of the food service manager to

communicate this message to those who operate the
institution. Profit, whether defined as Sales minus Cost of in terms of reserved for the
future, is the result of planning, sound management and careful decision making.

CRITICAL POINT

Profit should not reality be viewed as what is left over after the bills are paid. I
fact, careful planning is necessary to earn profit. Thus, more appropriate formula which
rewards the business owner for the risk associated with business ownership or
investment is:

Revenue Desired Profit = Ideal Expenses

 Furthermore, the increase in profit should be equal to the reduction excessive
costs. This is illustrated by the following:

peso in profit.
Actual Standard
Sales P10,000.00 P10,000.00
Food Cost 3,800.00 3,400.00
Gross Profit 6,200.00 6,600.00

It should be immediately apparent that a P400 reduction in actual food costs

bringing actual food cost in line with the standard food cost will bring an identical
increase in gross profit. If this reduction can be achieved without increasing any other
costs (e.g. the cost of labo), then literally every peso or dollar served will be an
additional profit.

REVENUE or SALES

Revenue levels can actually be managed to some degree. In any business, it is

very crucial to understand revenue and its nature. Revenues are the results of units
sold. Some define it as the amount generated from a transaction in exchange of food or
product and services rendered. It varies with both the number of guests
(Transaction Count) and the amount spent by each guest (Average Check).

Revenue = Transaction Count x Average Check

Revenue or Sales in the food service industry is used in several ways among
professionals. For the term to be meaningful, one must be specific about the context in
which it is used. In general, the term sales is defined as revenue resulting from the
exchange of products and services. In our industry, food and beverage sales arc
exchanges of the products and services of a restaurant, bar, or related enterprise for
value. We normally express sales in monetary terms, although there are other
possibilities. can be increased by increasing also the number of guests or transactions
or by increasing the amount each guest spends, or by combination of both approaches.

Transaction Count refers to the number of transactions rang up in a cash

register. In a food establishment for instance, five customers may enter to dine-in but
only one may pay for the account of the group, this is just equivalent to one transaction.
On the other hand, if each of them pays for their own account, this is equivalent this
time to five (5) transactions.

Average Check is the result of dividing total peso sales by the number of
customers. In the food service industry, this is also known as Covers. Cover is a term
used in the industry to describe one diner, regardless of the quantity of food he or she
consumes. An individual consuming a continental breakfast in a hotel coffee shop is
counted as one cover. So is another individual in the same coffee shop who orders a full
breakfast consisting of juice, eggs bacon, toast and coffee. These two diners are
counted as covers.
Average Check = Sales / Number of Covers

Examples of management's effort to increase the number of guest's (transaction

count) choosing to come to the restaurant or food service operation are:

1. Adding seats and drive through windows

2. Extending operating hours
3. Buy one- take one promotional technique
4. Building additional foodservice units
5. Discount and Privilege cards
6. Loyalty cards
7. Discount scheme for a particular meal segment

Examples of efforts to increase the amount of money each guest spends:

1. Suggestive selling by service staff'

2. Creative menu pricing techniques
3. Discounts for vet" large purchases
4. Freebies for a specific amount of purchase (e.g. --- free umbrella for every purchase
worth P500, free flowing coffee for every purchase of P100)

Necessary steps should be taken by the business operators in order to generate

sales because the profit formula begins with revenue. Whatever the focus maybe,
whether it is increasing sales through adding guests, discounting, suggestive selling or
by increasing menu prices, it must be remembered that it is an extreme effective way of
increasing overall profitability but only if effective cost management systems are in
place. Effective cost management when coupled with management's aggressive attitude
toward meeting and exceeding guest's expectations can result in outstanding revenue
and profit performance.

SALES - COST Relationship

SALES - COST = PROFIT

or

SALES - COST = DEFICIT (LOSS)

 FOUR QUADRANTS OF S - C Relationship

The above four quadrant shows the Sales and Cost Relationship. When sales is
high and cost is low or enough to cover the expenses of the food service business, as
shown by first quadrant, profit begins to increase, thus, the primary objective of the
busines is then achieved.