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Cost Control Review Sheet
Key points from ManageFirst Cost Control Book
Terms in this set (60)
Characteristics of Controls
-They contribute to profit making
-It starts with the menu
-Affects all areas within the operation
-The policies and procedures help to formalize controls
Types of Costs
-Controllable Costs: Food, Labor, Cleaning Supplies
-Noncontrollable Costs: Insurance, Mortgage Payments, Cost of Licenses
-Fixed Costs: Do not vary with sales volume
-Variable Costs: Increases and decreases are directly related to sales volume
-Semi-Variable: Increases and decreases are related to changes with sales volume, but not in direct proportion. Contains both fixed and variable components
An example, if the price of chicken increases and no action is taken, the establishment's overall food cost will increase. To respond,managers can either raise the selling price of all chicken entrées, reduce portions, reposition the items on the menu, or eliminate chicken from the menu altogether. By taking action, managers have controlled the increased cost of chicken, resulting in no increase in the establishment's overall food cost.
An example of a noncontrollable cost is insurance. As noted previously, once an insurance policy has been negotiated, managers have no control over the cost of that policy. Another example is license fees. They have no control over the rate charged for bar or occupation licenses. A final example is the operation's lease or mortgage. Once signed, managers have virtually no control over this cost.
Fixed costs are those costs that remain the same regardless of sales volume. Insurance is an example of a fixed cost. Once insurance policies have been negotiated, the cost remains the same throughout the term of the policy. For example, if the cost of insuring the business is $1,000 per month, it will remain at $1,000 every month. Even if the establishment has sales of $10,000 one month, $20,000 the next month, and $15,000 the following month, the insurance cost will always be $1,000 per month. The cost does not change when sales change.
Variable costs increase and decrease in direct proportion to sales. Food cost is one example. As sales increase, more food is purchased to replenish inventory. Likewise, as sales decrease, less food is purchased. If adequate controls are in place and there is little waste or theft, the amount of food used is in direct proportion to sales.
Labor cost is one example. Managers are normally paid a salary that remains the same regardless of the operation's sales volume. If the manager and chef are collectively paid $120,000 per year, they will receive that amount regardless of whether the operation brings in $1 million or $1.3 million per year. Thus, the management salary is a fixed cost. On the other hand, employees such as waitstaff and line cooks are paid hourly wages and are scheduled according to anticipated sales. As a result, the cost of hourly staff increases as sales increase and decreases as sales decrease. If proper scheduling is used, the cost will increase and decrease in direct proportion to sales.
Prime cost is an operation's total food cost, beverage cost, and labor costs for a specific time period, usually a week or a month. In calculating labor costs, include salaries, hourly staff wages, payroll taxes, benefits, workers' compensation, and all other payroll-related expenses. All three areas (food cost, beverage cost, and labor costs) create opportunities for losses through waste, spoilage, theft, and poor scheduling. Unfortunately, a problem in any of the three areas of prime cost can be very expensive.
How to Calculate Prime Cost:
Food Cost + Beverage Cost + Labor Cost = Prime Cost
Prime Costs as a percentage of sales
Total cost of sales + Total labor costs = Prime cost
Then, to calculate prime cost as a percentage of total sales, use this formula:
Prime cost / Total Sales = Prime Cost as a % of total sales
Prime Costs & Management
-Remember that this is the area of costs that management has control over
-Make up the majority of a restaurant's total costs
-Are directly related to profitability
Budget as a control tool
Actual Results - Budgeted Results = Variance
-If the budgeted amount is higher than actual results then the variance is negative
-If the budgeted amount is lower than actual results then the variance is positive
(Actual Results - Budgeted Results) / Budgeted Results = % Variance
-The principal element in cost control
-The various steps takes a look at revenues, customer count, popularity of menu items
-Predicting accurately and planning properly to be profitable
-Relies heavily on history and current conditions
1) Total anticipated volume
2) external environment
3) sales of each item on the menu
Leads to development of schedule, proper purchasing, and proper production
Revenue - Expenses = Profit
-Full Service: Prime costs 65% or Lower
-QSR: Prime costs 60% or Lower
-This reflects line items that the manager can control
-Full Service: 18-20% of total sales
-QSR: 23-25% of total sales
-The difference between full service and QSR is the cost of labor.
Cost of Sales Formula
(Opening Inventory + Purchases) - Closing Inventory = Costs of Sales
Food Cost Formula
Food Cost / Food Sales = Food Cost %
- focused on dollar amounts that give us a percentage
-AP: As Purchased, whole
-EP: Edible Portion, part
-Yield % = what is left available for sale
-Waste % = what is left that is unusable
Waste % = 100% - Yield %
Setting a Menu Price
-Markup depending on the range or category of the restaurant
Factors affecting the menu price
The selling price on the menu is not always the same price that is derived from one of the formulas. Other factors must also be taken into account when pricing a menu, including the market, location, economic climate, competition, and the perceived value by the customer. One of the most important ways managers use a menu as a cost control device is to determine if the menu items are priced appropriately. Food costs change, so it is very important that recipe cost cards are updated regularly. If the cost goes up and the selling price is not adjusted accordingly, the standard food cost percentage will not be met and the profit of the operation will be reduced. Portion size must also be controlled or it will impact food cost and profit.
Price Value Relationship
Value perception is customer's opinion of a product's value to him or her. Typically, high prices are associated with high quality and low prices with lower quality. However, the total restaurant or foodservice package helps establish value perception. Guests consider factors including service, ambiance, conveniences, and reputation when determining what they feel is a fair value for their dining experience. The connection between the selling price of an item and its worth to the customer is known as
the price-value relationship.
Total recipe cost ÷ Number of portions = Standard portion cost
Food Cost Percentage Method
-Food costs is a % of sales
-Does Not Include Labor Cost
-It is a good starting point for a manager determining costs
1) 1.00 ÷ Standard food cost percentage = Factor
2) Factor X Menu item cost = Selling price
Contribution Margin Method
-It includes all menu items, all menu items compete equally so all should contribute to profit equally
1) (All other costs + Profit) / Number of Customers = Avg. Contribution Margin
2) Food Cost + Contribution Margin = Selling Price
-Minimum price is the starting point, there is a relationship between Total Food Cost and all other costs that can be used to set a menu price
1) (Nonfood costs + Target profit) ÷ Food costs = Ratio
2) Food costs x Ratio = Nonfood costs and target profit
3) Food costs + Nonfood costs + Target profit = Selling price
Prime Cost Method
-factor food cost and labor cost into the pricing method since these are our prime costs
1) Determine TCPD
2) Find labor cost per guest
3) Determine Prime Cost per guest
4) Determine Prime Cost Percentage (food cost % + labor cost %)
5) Determine MMP
Direct Labor + Food Cost = Prime Cost
Prime Cost Method Formula
Prime cost + Prime cost percentage = Selling price
Q Factor Method
- "Q" factor refers to the quotient or cost of all other food items served with an entrée. The cost of these food items must be included in the final plate cost for an operation to be profitable.
- Includes cost of all other items served with entree
- All complimentary items
-May be useful for larger franchises that can track each cost
-This method still does not include Labor Cost, only includes food cost of items
- Popularity % = what each item represents to the entire number of items sold
- What remains of the sales price after food cost has been covered
No.1 - Star: Popular and Profitable
No.2 - Plowhorse: Popular and Unprofitable
No.3 - Puzzle: Unpopular and Profitable
No.4 - Dog: Unpopular and Unprofitable
Information on a Specification, buying the right product
-Name of item
-trade association requirements
-AP: Price of an item before any trim or waste has been considered
-EP: Price of an item after all trim and waste has been taken into account
-Butcher Test: Breaking down an item, measures the loss from deboning, trimming, and portioning meats, fish, and poultry
-Cooking Loss Tests: To measure loss from the actual cooking process (ex:meatloaf)
-Tells us what is left to be served to the customer.
-Sales histories tell what has occurred in the past
Sales forecasts predict what will occur in the near future
Tracks the guest's menu preferences and are developed from historical data
-Use popularity % and history to determine the amount of product to have on hand
Means an operation has enough stock on hand to get the kitchen through until the next order is delivered.
Purchase Methods - The Right Supplier
-One method per operation
-Determined on the type of operation it is
-One Stop Shop
-Verify purchase order and the invoice match and then examine that the items match.
-Storage: refrigeration, freezers, dry storage, chemical storage
-Issuing: part of the control process, a requisition form is necessary to know where the product is going.
Time and temperature
Time and temperature control means having policies and procedures in place to monitor the amount of time and the ongoing temperature of food products in the flow of food. Different food products have different temperature requirements. Food items left in the temperature danger zone of 41°F to 135°F (5°C to 57°C) for a total of more than four hours are an unacceptable risk and must be disposed of. Time and temperature control is not just for perishables. Dry goods also benefit from storage at the proper temperature.
-The rate at which the entire inventory is used, replaced, or turned
-The average foodservice turnover is about every 2 to 2 1/2 weeks
-This means most items are used within 1-28 days
Calculating Inventory Turnover
1) (Opening Inventory Value + Closing Inventory Value) / 2 = Average Inventory
2) Cost of Food Sold / Average Inventory = Inventory Turnover Rate
Calculating "number of days of inventory" on hand
1) Calculate Average Daily Food Cost: Food cost ÷ Number of days in period = Average daily food cost
2) Calculate days sales in inventory: Ending Food Inventory / Average Daily Food Cost = Days Sales in Inventory
-FIFO: The FIFO method is commonly used to ensure that refrigerated, frozen, and dry products are properly rotated during storage. Using FIFO helps guarantee that the inventory is turned over in a proper manner. In the FIFO method, an older product is used before a more recently purchased product.
-LIFO: By using the most recently received product, the manager ensures that guests receive the freshest product possible.
Actual Price Method
Actual price method is also known as the specific unit cost method. In the actual price method, the actual price paid for the product is the cost that is listed on the closing inventory sheet
Cost per case / Cans per case = Cost per can
1) Desired Yield / Current Recipe Yield = Conversion Factor
2) Conversion Factor X Current Ingredient Amount = Desired Ingredient Amount
-Must convert each ingredient in the item individually
-If converting to a larger yield, the conversion factor will be greater than 1
-If converting to a smaller yield, the conversion factor will be less than 1
-Controlling expenses is only one part of cost control
-Prevent "skips" to maintain contribution margin
-Portion control is the amount of food in a serving as determined by the standardized recipe or the company standard. Portion control starts with the menu listing. Quite often the menu will list items with their corresponding portion size.
-Refers to size, quality, quantity, cost.
Concerns about Portion Control
-ensures a positive price-value relationship in each guest's mind
-prevents running out of a product
-over portioning is not fair to the restaurant owners
-under portioning is not fair to the guests
Things to Remember
-Modern systems are not foolproof
-credit and debit cards have a cost associated with their use that is passed on to the establishment
-Servers need to possess knowledge about item to reduce returns
-Costly items should be monitored because they are more vulnerable to theft and fraudulent sales
- Labor cost includes payroll cost, the employer's contribution to FICA and Medicare, workers' compensation insurance, and employee benefits. It is also important to distinguish that payroll cost is the gross (pay before taxes are de- ducted), not net, total of employee paychecks. Adding payroll costs, employer's FICA contribution, employer's Medicare contribution, and the costs associated with employee benefits gives managers the total labor cost.
Sales and Labor Cost
-If you're generating more sales then your establishment will need to have more labor scheduled.
Forecasting Labor Costs
Step 1:Determine total available labor dollars:
1) Standard labor cost % X Projected Sales = Total available labor dollars
Step 2:Subtract costs of benefits and deductions:
2) Amount available for labor - Benefits and deductions = Remaining payroll available
Step 3:Subtract fixed labor costs
3) Payroll dollars available - Fixed-cost salaries = Dollars for variable-cost employees
-A change in the percentage is more important than the percentage itself
Employee Turnover Formula
1) Persons hired per year/ Average number of employees = Turnover
2) Turnover x 100 = Turnover rate percentage
Revenue Collection System
1) Charge guest for every item they order: Undercharging is the term used when not enough revenue is collected. Undercharging will affect the profits, budget numbers, food and labor costs, and cash flow. - Overcharging is the act of charging more than the amount that should have been charged and collected.
2) Collect the Revenue: Identify the employee collecting the money. Collect the correct amount of money. Properly record the transaction.
3) Protect Cash Assets: most theft or fraud happens after the collecting and recording process is over.
Four Step Revenue Security System
1) Verify Product Sales
2) Verify Guest Charges
3) Verify Payment
4) Verify Deposits
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