HM 306 – FOOD AND BEVERAGE COST CONTROL

FOOD PURCHASING CONTROL

THE CONTROL PROCESS — PURCHASING AND RECEIVING

Responsibility for Purchasing
Responsibility for purchasing can be assigned to any one of several persons in
foodservice operations, depending on organizational structure and management policies. It is not
uncommon to find owners or managers taking the responsibility for purchasing in some
establishments, whereas in others the purchasing duties may be assigned to a chef or a steward.
In some hotel/motel operations, foods may even be ordered by someone in a purchasing
department who has responsibility for purchasing all supplies used in the property.
To facilitate discussion at this point, responsibility for food purchasing is arbitrarily
assigned to a steward. This does not mean that the authors believe that this responsibility should
always be given to a steward; on the contrary, the determination of who should be assigned
responsibility for food purchasing must be based on the situations and conditions existing in the
specific foodservice operation. The important point here is that, for control purposes, the
authority to purchase foods and the responsibility for doing so should be assigned to one
individual. That individual can then be held accountable for the system of control procedures
established by the food controller.
Perishables and Nonperishables
The types of foods to be purchased for any foodservice enterprise can be divided into two
categories: perishables and nonperishables. Because there are significant differences between the
approaches to purchasing foods in these categories, it is important to differentiate between them.
Perishable foods are those items, typically fresh foods, that have a comparatively short
useful life after they have been received. Various kinds of lettuce and fresh fish, for example,
begin to lose their quality very quickly. Some fresh meats and cheeses will retain their quality for
somewhat longer periods, but the quality of these foods will begin to deteriorate much sooner
than will the quality of many nonperishables — cans of tomato puree, for example.
Perishables, then, should be purchased for immediate use in order to take advantage of
the quality desired at the time of purchase. If a steward is always careful to purchase the best
quality available for intended use, it would be wasteful and costly not to use that carefully
selected quality.
Nonperishable foods have longer shelf lives. Frequently referred to as groceries or
staples, they may be stored in the packages or containers in which they are received, often on
shelves and at room temperature, for weeks or even months. They do not deteriorate quickly as
long as they are unopened and kept at reasonable temperatures.
Nonperishables are typically purchased and stored in cans, bottles, bags, and boxes; the
storage area in which they are kept, usually called a storeroom, would resemble the shelves of a
supermarket to the layperson. Frozen foods are generally considered to be nonperishables
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because they last a considerable period of time as long as they are kept frozen. Because these
foods do not deteriorate quickly, it is possible to keep a reasonable supply of them on hand, for
use as needed.
For example, a restaurant that uses an average of four No. 10 cans of whole, peeled
tomatoes daily (more than four cases per week) can keep a supply of eight cases on hand without
running any risk of spoilage. Foods that typically fall into this category of nonperishables include
salt, sugar, canned fruits and vegetables, spices, and flavorings. It is important to note that each
food service operation must determine which foods are considered perishable and which foods
are considered nonperishable.
There is little disagreement over the perishability of fresh ripened tomatoes or lettuce, or
the non-perishability of most canned goods. However, many would disagree over whether to
consider meats, eggs, or frozen products perishable or nonperishable. Geographic location
frequently determines whether particular foods are considered perishable or nonperishable.
Meats can also be considered perishable or nonperishable. Many establishments order and
receive fresh meats daily and purchase only a sufficient supply to last one or two days. Others
purchase meats frozen or in larger quantities. In the former case, meats might be considered
perishable, in the latter nonperishable.
In general, the farther away foodservice establishments are located from seafood and
meat - producing areas, the more likely that fish and meat will be considered nonperishable.
Rapid transportation allows many establishments to obtain fresh perishables very quickly, even
in remote areas. However, the high transportation cost of obtaining fresh perishable foods in
these areas will cause many establishments to purchase frozen perishables at a lesser price. The
category that each establishment puts various foods into is not critical. The importance of
categorizing each food into perishable and nonperishable has to do with the amount of each food
that should be purchased, how often it should be purchased, and how its cost is treated when
calculating a daily, weekly, or monthly food cost.

DEVELOPING STANDARDS AND STANDARD PROCEDURES FOR

PURCHASING
The primary purpose of establishing control over purchasing is to ensure a continuing
supply of sufficient quantities of the necessary foods, each of the qualities appropriate to its
intended use, purchased at the most favorable price. Therefore, we will discuss purchasing from
this point of view first by establishing the essential standards and standard procedures for
effective purchasing.

Standards must be developed for the following:

1. Quality of food purchased
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2. Quantity of food purchased

3. Prices at which food is purchased
Establishing Quality Standards
Before any intelligent purchasing can be done, someone in management must determine
which foods, both perishables and nonperishables, will be required for day - to - day operations.
The basis for creating a list of these foods is the menu. However, this is not as easy as it may at
first appear. For example, most restaurants use tomatoes and tomato products for a variety of
purposes — as salad ingredients, as sauce ingredients, and so on. At the same time, tomatoes and
tomato products are available for purchase, fresh and processed in various grades. Before
purchasing, important decisions must be made about brands, sizes, packaging, grades, and degree
of freshness, among other things.
Developing a complete list of foods and their characteristics for a food service operation
is clearly a complex and time-consuming enterprise. It must be done, however, if one is to
establish effective control over purchasing. If a restaurant is to produce products of consistent
quality, it must use raw materials of consistent quality. Therefore, it is important that the food
controller, in cooperation with other members of the management team, draw up the list of all
food items to be purchased, including those specific and distinctive characteristics that best
describe the desired quality of each.
These carefully written descriptions are known as standard purchase specifications
and are often based on grading standards established by the federal government or, in some
instances when federal grading standards are considered too broad, on grading standards
common in the appropriate market. However, food service operators are not restricted to these
possibilities. Many write specifications that are far more precise and thus more useful for
indicating to purveyors the exact quality desired. Once these standard purchase specifications
have been developed, they can be printed and distributed to potential purveyors to ensure that
each fully understands the restaurant’s exact requirements.
Standard purchase specifications, if carefully prepared, are useful in at least six ways:
1. They force owners or managers to determine exact requirements in advance for any
product.
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2. They are often useful in

menu preparation. For example, it is
possible to use one cut of meat,
purchased to specifications, to prepare
several different menu items.
3. They eliminate
misunderstandings between stewards
and purveyors.
4. Circulation of specifications
for one product to several purveyors
makes true competitive bidding
possible.
5. They eliminate the need for
detailed verbal descriptions of a
product each time it is ordered.
6. They facilitate checking
food as it is received.
Although specifications are
written at one particular time, they
need not be considered fixed for all
time. If conditions change, they can
be rewritten and recirculated. Stewards who use computers have an easier time rewriting
specifications. They simply need to bring up a specification on the monitor and make the
necessary changes. This critically important step — the determination of quality standards and
the development of standard purchase specifications — helps ensure that all foods purchased will
be of the desired quality for their intended use.
Establishing Quantity Standards
Although purchase specifications can be established at one particular time and merely
reviewed and updated on occasion, quantity standards for purchasing are subject to continual
review and revision, often on a daily basis. All foods deteriorate in time, some more quickly than
others, and it is the food controller’ s job to establish a system to ensure that quantities purchased
will be needed immediately or in the relatively near future. In cooperation with the steward, the
food controller does this by instituting procedures for determining the appropriate quantity for
each item to be purchased. These procedures are based principally on the useful life of the
commodity.
Establishing Price Standards
Having established purchase specifications so that purchasing personnel know the
appropriate quality to buy, and inventory procedures to determine the quantity to buy, one can
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turn to the question of price. Because it is desirable to buy products of the appropriate quality in
adequate quantities at the lowest possible price, it is important to ensure that food purchases are
made on the basis of competitive prices obtained from several possible suppliers. The availability
of supply sources varies considerably from one location to another. Major metropolitan areas, for
example, tend to offer the greatest number of possibilities, both in terms of different categories
of suppliers and number of suppliers in each category.
In contrast, remote rural areas tend to offer few possibilities; sometimes establishments in
remote areas must be content with what they can get. In general, depending on ownership policy,
availability of suppliers, and general market conditions, foodservice operators depend on
suppliers who can be grouped in the following general categories:
 Wholesalers
 Local producers
 Manufacturers
 Packers
 Local farmers
 Retailers
 Cooperative associations
CENTRALIZED PURCHASING
No discussion of purchasing procedures would be complete without some mention of
centralized purchasing systems, widely used by chain operations and occasionally established by
small groups of independent operators with similar needs. Under a centralized purchasing
system, the requirements of individual units are relayed to a central office, which determines
total requirements of all units and then purchases that total, either for delivery to the individual
units by the dealer or for delivery to a central warehouse. This method obviously requires that a
whole system for distribution be maintained and operated by the organization doing the
centralized purchasing. Both advantages and disadvantages to such centralized systems should be
understood by anyone involved in food management.
Advantages of Centralized Purchasing
1. Foods and beverages can be purchased at lower prices because of volume.
2. Desired quality can be obtained more readily because the purchasing agent has a
greater choice of markets.
3. Foods can be obtained that meet the purchaser’s exact specifications.
4. Larger inventories can be maintained, ensuring reliable supply to individual units.
5. The possibilities for dishonest purchasing in individual units are greatly reduced.
Disadvantages of Centralized Purchasing
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1. Each unit must accept the standard item in stock and has little freedom to purchase for
its own particular needs
2. Individual units may not be able to take advantage of local specials at reduced prices.
3. Menus are normally standardized, thus limiting the individual unit manager’s freedom
to change a menu.
Finally, it should be noted that decisions about whether to adopt a centralized purchasing
system are normally made by top management, not by food controllers. However, there are times
when food controllers are asked to give their advice and opinions. To do so, they must
understand the advantages and disadvantages of centralized purchasing.

BEVERAGE PURCHASING CONTROL

BEVERAGE PURCHASING
As with food purchasing, it is important to implement beverage purchasing controls. There are
three primary purposes of beverage purchasing controls:
1. To maintain an appropriate supply of ingredients for producing beverage products
2. To ensure that the quality of ingredients purchased is appropriate for their intended use
3. To ensure that ingredients are purchased at optimum prices
As always, the key to successful control is to establish suitable standards and standard
procedures. The starting point is to determine who is responsible for beverage purchasing.

RESPONSIBILITY FOR BEVERAGE PURCHASING

The nature and size of an operation often dictate who is responsible for purchasing beverages. In small,
owner - operated establishments, the responsibility is normally that of the owner. In others, it may be that
of the manager. In some large operations, purchasing responsibility may be delegated to a purchasing
agent, a steward, or a beverage manager. The job title of the individual responsible for beverage
purchasing is of little consequence. The important point is that one individual should be given
responsibility and be held accountable for all beverage purchasing. For control purposes, it is desirable to
assign the responsibility to someone who is not directly engaged in either the preparation or the sale of
drinks.

ESTABLISHING STANDARDS FOR BEVERAGE PURCHASING

For beverage purchasing, standards must be developed for the following:
1. Quality
2. Quantity
3. Price
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1. Quality Standards
Alcoholic beverages purchased for bars may be divided into two classes according to use:
call brands and pouring brands. A call brand is one used only if the specific brand is requested
by a customer; a pouring brand is one used whenever a customer does not specify a call brand. If
a customer simply orders a “ scotch and soda, ” he or she would be given the pouring brand.
In contrast, if a specific brand of scotch is ordered (e.g., Dewar ’ s White Label), the
customer is given the call brand specifically requested, assuming it is available. The usual
practice is for management to designate one low - to medium - priced brand in each category of
spirits as the pouring brand. The specific brands selected as the pouring brands will vary with the
clientele and the price structure. Once pouring brands have been identified, all other brands
become call brands.
The selection of pouring brands is an important first step in establishing both quality and
cost standards. Before establishing quality standards for alcoholic beverages, one must first weigh
several considerations, including product cost, customer preferences, and product popularity,
among others. Most people will agree on the extremes — that certain 25 - year - old scotches are
of high quality and that particularly inexpensive gins are of very low quality — but between these
extremes there is a vast area for legitimate differences of opinion. The extent of the need for each
of the three different types of alcoholic beverages must be determined before any purchase
decisions can be made.
Quantity Standards
Because beverage products are not highly perishable if stored properly, beverages can be
purchased far less frequently than perishable foods. This is not to say that beverages are
nonperishable, however. Canned and bottled beers should be used within approximately three
months of packaging. Draft beers should be consumed within one month. Some wines have
comparatively limited lives, whereas others, those that improve with age, can and should be
stored for some period before use. Most spirits can be stored almost indefinitely. Thus,
perishability is not a critical factor in establishing quantity standards for beverages. Other factors
are far more significant.
There are eight principal factors used to establish quantity standards for beverage
purchasing:
1. Frequency with which management chooses to place orders
2. Storage space available
3. Funds available for inventory purchases
4. Delivery schedules set by purveyors
5. Minimum order requirements set by purveyors
6. Price discounts for volume orders
7. Price specials available
8. Limited availability of some items
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Some of these considerations are more important than others. Most establishments, for
example, have limited storage space, and this is clearly a factor in establishing quantity standards.
So is the number of times that management will permit orders to be placed. It would be foolish to
place orders for any item too frequently, so quantity standards must be such that the number of
orders placed over time is kept to a minimum. Availability of funds can be another severely
limiting factor.
Beverage purchases require relatively large cash outlays, either at the time of delivery or
very soon thereafter, depending on local regulations. Thus, if the necessary cash is not normally
available for purchasing large quantities, it may be necessary to purchase smaller amounts and
place orders more frequently. And although management may choose to order a given item
frequently, the purveyor may not be willing to deliver more often than once every other week. In
addition, purveyors may establish minimum order quantities for some items. Wines, for example,
must often be purchased by the case.
To establish quantity standards for beverages, management must take several factors into
account. This is best done by those who have considerable experience with beverage management
and are fully informed about all aspects of the beverage operation, including its financial status.
Price Standards
Assuming that quality standards have been established and appropriate purchase
quantities are known, the next step is to ensure that all beverage purchases are made at the
optimum price. Any discussion of price standards is complicated somewhat by laws that vary
from state to state.
In general, states may be divided into two groups:
1. License states, where beverage wholesalers (and sometimes manufacturers and
distributors as well) are permitted to sell alcoholic beverages directly to hotels, restaurants, and
similar operations. This often results in competitive pricing of brands in the market.
2. Control states, where the state government actually sells some or all alcoholic
beverages through its own network of stores (or those that are franchised by the state), thus
exercising complete control over prices. The practices of control states vary considerably from
one to another. Some sell all alcoholic beverages through state outlets; others sell spirits and
wines through state outlets but permit beer to be sold through private beer distributors. In others,
beer and wines are sold in private retail outlets, and state outlets sell spirits as well as wine. In
control states, by the way, it is typically illegal for hotels and restaurants to purchase alcoholic
beverages out of state.
Obtaining the optimum price for spirits is simple in a control state. There is only one
price for each brand: the price set by the state. Because all available brands are sold by the state
outlet, one need only determine whether to buy a particular brand at the established price. Control
states do offer special prices on some items from time to time, and beverage buyers usually watch
for these opportunities. Additionally, hotels and restaurants frequently receive discounts from
established prices.

ESTABLISHING STANDARD PROCEDURES FOR BEVERAGE PURCHASING

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Having established standards for purchasing beverages, the next step is to establish standard
procedures. In beverage purchasing, standard procedures are needed to do two things:
1. To determine order quantities
2. To process orders
1. 1. Determining Order Quantities: Basic Methods
There are two basic methods for determining order quantities. The first, known as the periodic
order method, is based on fixed order dates and variable order quantities; the second, the perpetual order
method, uses variable order dates and fixed reorder quantities.
1.2 Periodic Order Method.
The periodic order method requires that order dates be fixed so that there are equal operating
periods between order dates. Ordering may be done weekly, biweekly, or on any other regular schedule,
depending on the decisions of management with respect to such considerations as frequency of ordering,
storage space to be devoted to beverages, and funds available for inventory purchases, as well as on
purveyors ’ delivery schedules and the anticipated consumption of beverages.
1.3 Perpetual Order Method.
The perpetual order method requires fixed purchase quantities and variable order dates. Its use
depends on the establishment of a perpetual inventory system for beverages, with paper perpetual
inventory cards on which all purchases and issues are recorded carefully and in a timely manner. Today,
perpetual inventory records are more likely to be created in a computer database. The perpetual inventory
is normally maintained in a location other than the beverage storeroom. However, as an alternative, some
managers attach perpetual inventory cards to the shelves on which the beverages are stored.
2.1 Processing Orders
Whenever practical, it is advisable to establish a purchasing routine that requires formal written
purchase orders. In most large hotels and many large restaurants, formal purchase requests serve as the
basis for ordering.
In a large hotel, the purchasing routine may be the following: A wine steward, as the person in
charge of maintaining the beverage inventory and stockroom, prepares a purchase request, similar to that
illustrated in Figure 13.5 , just after the first of the month. The purchase request is prepared in duplicate,
with the original being forwarded to the purchasing agent in the accounting department. In some
establishments, the purchasing agent
is required to secure the manager ’ s
written approval on the purchase
request before placing any order. The
order placed is recorded on a form
known as a purchase order, illustrated
in Figure 13.6 .
The purchase order is made
up in quadruplicate. The four copies are distributed as follows:
(1) The original is sent to the firm from which the beverages had been ordered,
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(2) one copy is sent to the wine steward to confirm that the order has been placed,
(3) another copy is sent to the receiving clerk so that he or she knows what deliveries to expect
and will be able to verify that the
quantities and brands delivered are
correct, and
(4) the final copy is kept by
the purchasing agent. Obviously, not
all establishments follow such
detailed purchasing routines for
beverages. However, because written
records reduce misunderstandings
and disputes, it is advisable in all
instances to maintain a written
record of purchases, preferably on a
purchase order, to verify the
accuracy of deliveries received.
Written purchase orders
eliminate disputes over brands and quantities ordered, prices quoted, and delivery dates. Because the
purchase of alcoholic beverages involves the outlay of considerable amounts of cash, it is wise to
establish a system (the purchase order method or some other) to reduce or eliminate the possibilities for
error.

LABOR CONTROL

EMPLOYEE COMPENSATION
Because labor cost, or employee compensation, consumes such a major share of sales
dollars in food and beverage operations, it is important to understand the various components of
labor cost before proceeding to the discussion of labor cost control.
The term compensation is used to refer to all forms of pay and other rewards going to
employees as a result of their employment. In the hospitality industry, employees receive two
forms of current compensation, direct and indirect. In addition, many receive deferred
compensation.

CURRENT COMPENSATION

DIRECT COMPENSATION
Direct compensation is received by the employee directly related to that person’s
job. It is base pay plus overtime, or incentive pay that an employee receives, and includes
salaries, wages, tips, bonuses, and commissions.
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Traditionally, the term salary is used to refer to a fixed dollar amount of

compensation paid on a weekly, monthly, or annual basis, regardless of the actual number
of hours worked. Wages, in contrast, always take the actual number of hours worked into
account. Wages for a given employee are calculated by multiplying the employee’s
hourly rate by the number of hours worked, up to the number of hours at which overtime
rates apply. At that point, the hourly rate increases, but the same procedure is followed to
calculate overtime wages.

Tips, also known as gratuities, although not paid from an employer’s revenues,
are also compensation in the eyes of the law and are so treated by federal and state
agencies for purposes of calculating such taxes as income tax, and Social Security tax,
and Medicare tax. Many workers in the hospitality industry earn more from tips than
from wages.

Bonus is a term that refers to a dollar amount exceeding an employee’s regular

wages or salary, given as a reward for some type of job performance, or to show
appreciation for service to the business at holiday time.

Commissions, by contrast, are dollar amounts calculated as percentages of sales.

Travel agents and some banquet managers commonly earn commissions on their sales.
So do many convention and event planners and catering sales staff.

INDIRECT COMPENSATION

Indirect compensation is that benefit to a current employee other than direct

compensation. It is a social contract between employee and employer and is typically
designed to attract and keep loyal employees. It includes everything from legally required
programs to those that the employer decides to provide.
It may include paid vacations, health benefits, life insurance, free meals, free-
living accommodations, use of recreational facilities operated by the employer,
discounts on accommodations at other properties within a chain, and many other
possibilities, including the use of a company vehicle, reimbursement for outside classes,
childcare while the employee is at work, counseling of various kinds, sick leave pay, and
funeral leave.

Paid vacation is among the most common forms of indirect compensation

available to employees in the hospitality industry today. It should be noted that in some
countries, paid vacations are required by law.
Paid vacations are typically linked to the length of service with the employer. In
many instances, employees are awarded a basic vacation period with payments
amounting to two weeks per year. Those whose length of service reaches some
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predetermined number of years (e.g., five) are given an additional week with pay so that
they are able to take three weeks off with pay each year.

Health benefits, including medical, dental, and optical insurance, are among the
most sought-after forms of indirect compensation. They are also among the costliest.
Health benefits are commonly in the form of an insurance plan, some or all of the costs of
which are paid by the employer, who also assumes the entire cost of administering the
health insurance plan, hiring personnel in the human resources office to process forms,
maintain records, and generally attend to the myriad details associated with any such
plan.

Life insurance coverage, another popular form of indirect compensation,

provides protection for the families of covered employees, thus saving these employees
the considerable costs that can be associated with life insurance coverage.

Many establishments provide meals to employees during their working hours.

Thus, foodservice employees assigned to work from 7:00 A.M. to 3:00 P.M. may be
permitted to have breakfast and lunch on premises. In hotels and other large properties
where this is permitted, special facilities may be set up to be used by employees. In some
cases, one or more members of the kitchen staff may be assigned exclusively to the
preparation of employees’ meals. Including meals in a compensation package is generally
very popular with employees, who gain substantially from this very tangible benefit.
Increasingly, employers are offering counseling of various forms, including
alcohol and drug counseling, counseling for various family problems such as divorce,
death in the family, and so on.
In some lodging properties, part of the employees’ compensation package may
include living accommodations. This is particularly true in resort hotels, but not
uncommon in some large transient hotels. In the former, living accommodations may be
available to all employees; in the latter, accommodations are likely to be limited to some
of the managerial staff who are expected to be on call 24 hours a day.
Many resort properties include in their employees’ compensation packages the
right to use various recreational facilities during the hours they are off duty. Thus,
employees at ski resorts may have access to the slopes, those at beach resorts may be able
to use special beaches and such equipment like water skis and sailboats during their off-
hours, and employees at hotels with swimming pools and/or exercise facilities might be
granted use of these facilities during off-peak hours, and workers at golf and tennis
resorts may be able to use those facilities during certain times of the day.
Many hotel and motel chain organizations offer their employees special
discounted rates on accommodations. Those who choose to travel during their vacation
periods find this an extremely useful and valuable form of indirect compensation.
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DEFERRED COMPENSATION

Deferred compensation is defined as compensation received by an employee after

the conclusion of his or her period of employment. Two of the most important forms of
deferred compensation are pension benefits and that collective group of benefits
generally known as Social Security. The employer is required by law to match the
amounts withheld from employees’ paychecks for Social Security. As of this writing, that
rate is 6.2 percent of the employee’ s gross salary. An additional 1.45 percent is withheld
and matched by the employer to cover Medicare.
It is obviously important for the owners and managers of food and beverage
operations to have broad and comprehensive knowledge of the various forms of
compensation found in the industry, all of which have some impact, direct or indirect, on
the overall cost of labor in an establishment.

DETERMINANTS OF TOTAL LABOR COSTS AND LABOR COST PERCENTS

The cost of labor is affected by several important considerations. Some of these are
within the scope of a manager’s control but others are not. Each plays a role in determining the
total cost of labor and labor cost percent in food or beverage operations. Each can, therefore, be
described as a determinant of labor cost or labor cost percent. Direct employee costs, indirect
costs, and deferred costs are considered part of the total labor costs.
The determinants discussed in the following sections are have a direct effect on the total
cost of labor or on the cost of labor expressed as a percentage of sales. Some affect both. The
significance of each varies from one establishment to another. Although the following discussion
treats each briefly and singly, one must keep in mind that these determinants are so
interdependent that managers do not normally have the luxury of dealing with them one at a time
in this fashion.

LABOR TURNOVER RATE

Labor turnover rate, a ratio relating the number of departing employees to the
total number of employees on the staff and usually expressed as a percentage, has
traditionally been very high in the foodservice industry. It has been commonly measured
at 100 percent per year across the industry, with some establishments having rates as high
as 300 percent.

TRAINING
Training can be a key factor in reducing the labor turnover rate in a restaurant.
Over the years, many studies have shown some relationship between extent of training
and turnover rate. Generally, restaurants with training programs that are both extensive
and effective tend to have employees who report greater job satisfaction than those in
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restaurants where training is ignored. In restaurants with good training programs,

customers often report that they receive better service and that staff members appear to be
more friendly and attentive. Where this is the case, the working environment is more
pleasant, and this makes for lower turnover rates.
LABOR CONTRACTS
The presence or absence of labor contracts will always be an important factor
affecting labor costs. Where employees are organized (i.e., members of unions) and labor
contracts exist, wages for each category of employee are likely to be higher than they
would be in the absence of a union. In addition, such fringe benefits as vacation pay, sick
pay, employees’ meals, and health insurance are more likely to be found where union
organizations and contracts exist.
Although the effects of wages and fringe benefits on labor costs are apparent in
situations where labor contracts exist, other factors also have a significant effect. Of
primary concern are provisions in labor contracts that limit management’s freedom to
change work rules. Such contracts typically restrict management’s ability to arbitrarily
alter the duties of an employee in a particular job category.
One effect of this may be to force the employer to hire someone for a job even
when existing employees may have the time and ability to do the job. This would
obviously increase the total labor cost.

USE OF PART-TIME STAFF

The use of part-time staff in place of full-time staff can have a significant impact
on labor costs. The extent of the impact depends, obviously, on the difference between
the full-time wage and the part-time wage for specific types of work and on the extent to
which part-time help is used.

OUTSOURCING
Outsourcing is arranging to have work done on a contract basis by outside
organizations rather than by full-time employees. It can also affect labor costs. Some
establishments, for example, no longer rely on full-time employees to clean the premises
at night, after the close of business. Instead, the owners and managers have engaged firms
that contract to perform night cleaning services for a fixed amount per month.

HOURS OF OPERATION
Obviously, the number of hours that a restaurant operates will have a significant
impact on labor costs. A restaurant open only for dinner will have lower labor costs than
that same operation open for three meals each day. However, decisions concerning the
number of hours of operation involve more considerations than the mere cost of labor

WEATHER
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Of all the determinants of labor cost, the weather is clearly one that is completely
beyond any manager’s control, but it can have a significant impact on labor cost
percentages. Weather often affects sales volume, which, in turn, affects staffing levels in
our industry. Bad weather, such as heavy rain or snow, deters potential customers from
venturing out to restaurants. Interestingly, identical weather conditions typically increase
sales volume in hotel dining rooms for the very same reason: Those who may have gone
out to other restaurants remain in the hotel to avoid the weather.

COMPETENT MANAGEMENT
The cost of labor is always affected by management’s ability to plan, organize,
control, direct, and lead the organization in such a way that the desired level of employee
performance is obtained at the appropriate level of cost.
Competent management requires, among other things, that managers have clear
conceptions of important elements of the work at hand, including the nature of the work
to be done; the number and types of employees required to do it; the measurement of
suitable performance; the scheduling of employees to optimize performance levels; the
training, facilities, equipment, and other materials required; and how, when, and in what
quantities these resources are to be utilized.
The manager’s ability to motivate, direct, and lead will determine the quality of
work and level of performance.

LABOR COST CONTROL

Labor cost control is a significant part of labor control. It is a process used by managers
to direct, regulate, and restrain employees’ actions in order to obtain desired levels of
performance at appropriate levels of cost. To the inexperienced owner or manager, labor cost
control is sometimes mistakenly taken to suggest the mere reduction of payroll costs to their
irreducible minimum. This can be achieved by employing a bare minimum number of people
paid the minimum legal wage.
Appropriate performance levels differ from establishment to establishment. For some
(fast-food restaurants serving frozen, portioned products that need only be heated and served by
comparatively unskilled labor), desired levels of performance may be such that minimum-wage
employees are appropriate; for others (fine restaurants attempting to offer the finest food, wines,
and service in their areas), appropriate levels of performance may be such that wages
considerably above those prevailing in the area may be required. But the level of performance is
not simply a function of wage rates. Unskilled employees in fast-food establishments cannot
perform at appropriate levels unless they are provided with the appropriate equipment, given
suitable training, placed in a working environment conducive to getting work done, and
supervised in a manner that will inspire them to work and remain on the staff. This is also true
for highly skilled employees in the finest restaurants. Suitable wage levels do not guarantee
HM 306 – FOOD AND BEVERAGE COST CONTROL

appropriate performance. Many other factors are involved in ensuring suitable levels of
performance.

THE PURPOSE OF LABOR COST CONTROL

The primary purpose of labor cost control is to maximize the efficiency of the
labor force in a manner consistent with the established standards of quality and service.
Ideally, each employee’s services will be utilized as effectively as possible. There should
be a sufficient number of dishwashers working to ensure that dishes are washed as
efficiently as possible, but there should be no time when dishwashers stand around with
no work to do. Similarly, a sufficient number of servers should ensure that all customers
are served as quickly as possible while standards of service are maintained, but at no time
should there be more than a sufficient number to serve the customers in the restaurant.

CONTROL PROCESS
These four steps are as important to labor cost control as they are to both food
cost control and beverage cost control. They will provide the framework for the
discussion of labor cost control.
1. Establish standards and standard procedures for operation.
2. Train all individuals to follow established standards and standard procedures.
3. Monitor performance and compare actual performance with established
standards.
4. Take appropriate action to correct deviations from standards.