Prepared by:

J.P.Pineda
Is the practice of identifying
and reducing business
expenses to increase profits
Revenues
 Is the income that a business has from its normal business activities, usually from
the sale of goods and services to customers.
 Must be large enough to sustain operating expenses with extra provision for profit.
Note:
 The break-even point must be determined so that the operator is aware of the
critical volume of sales to sustain its viability.
 To have allowance for profit, the sales must exceed the break-even point.
Cost of Operations
 Defined as the sum of expenditure incurred periodically and measured during any
point in time in such period.

 Must be regulated such all expenses conform to the budget so that the profit
margin can be realized.
 Profit margin is one of the commonly used profitability ratios to gauge profitability
of a business activity.
 It represents how much percentage of sales has turned into profits.
Note:
 Profit margin is calculated by dividing the net profits by net sales, or by dividing
the net income by revenue realized over a given time period. In the context of
profit margin calculations, net profit and net income are used interchangeably.
Similarly, sales and revenue are used interchangeably. Net profit is determined by
subtracting all the associated expenses, including costs towards raw material,
labor, operations, rentals, interest payments and taxes, from the total revenue
generated.
Mathematically,

Profit Margin = Net Profits (or Income) / Net Sales (or Revenue)
= (Net Sales - Expenses) / Net Sales
= 1- (Expenses / Net Sales)
Example:
If a business realized net sales worth 100,000 in the previous quarter and spent a
total of 80,000 towards various expenses, then
Profit Margin = 1 - (80,000 / 100,000)
= 1- 0.8
= 0.2 or 20%
It indicates that over the quarter, the business managed to generate profits worth 20
cents for every dollar worth of sale. Let’s consider this example as the base case for
future comparisons that follow.
Establish standards or goals
 All departments must establish their budget for supplies, materials and other
operating expense.
 This usually in the form of a fixed ratio over gross sales like:
A cost of sales (food cost) ----------------35 – 40%
Beverage cost -------------------------------18 – 25%
Labor cost ------------------------------------15 – 24%
Operating cost ------------------------------20 – 30%
Profit -------------------------------------------20%
Measure actual performance
Compare actual cost VS. Budget
 The CCD must consistently monitor the consumption and expenses of all units/
departments against the standards (budget).
 The cost controller shall validate the actual cost and then prepare a variance report
which is presented to the departments and to the Operations manager for
feedback.
Analyze Variance
 Any cost variance should be analyzed and acted upon immediately before they
accumulate and result to deficits.

Note:
 Variance- The fact or quality of being different, divergent, or inconsistent.
 Deficits- The amount by which something, especially a sum of money, is too small.
- An excess of expenditure or liabilities over income or assets in a given
period.
Take corrective action

 Whatever the proven causes of the variance have to be corrected immediately,

otherwise they will accumulate and the desired profit will not be attained.
 AREAS OF CONTROL
 Forecasting, budgeting and standard setting
 Distributing responsibilities and defining
accountabilities for results
 Menu Planning
 Ordering and Purchasing
CONTROL MEASURES
• Establishment of sales forecast
• Budget for each cost item
• Desired profit and other performance targets
• Identifying and distributing operational tasks and
responsibilities
• Defining accountabilities for results.
• Preparation for menus
• Standardization
• Costing and pricing of recipes
• Test of quality and yield
• Use of purchase specification
• Calculation of requirements based on accurate
allocations and par stock
• Test for quality and yield
• Competitive bidding
 AREAS OF CONTROL CONTROL MEASURES
 Receiving of stocks • Inspection of stocks against quality standards
and purchase specifications
• Use of receiving reports
 Storage and Inventory • Limitation of access
• Classification of stocks
• Use of tags and labels
• Regular inventory
• Reconciliation of actual VS. expected stock
balance
 Requisition and Issuance • Establishment of par stock requirements
• Use of requisition forms
• Use of FIFO system (First In, First Out)
Note: Par stock- is the standard way to determine the minimum level of
supplies to meet daily demands of daily operation.
 AREAS OF CONTROL
 Production and Service
 Audit and Recording of Transactions
 Corrective Measures
CONTROL MEASURES
• Use of standard recipe
• Recycling of left-overs
• Adherence to standard serving portions
• Use of order slips
• Audit of sales VS. issued portions
• Recording of daily sales
• Receipts
• Invoices
• Purchases
• Monitoring performance VS. targets and
standards
• Analyzing variances
• Taking corrective action