Determinant of Total Labor Costs and Labor Cost Percent.

Introduction
The cost labor is affected by several important considerations. Each plays role in
determining total cost of labor and labor cost percent in food and beverages
operation.
Direct employee cost, indirect cost and deferred cost are considered part of the
labor costs. The determinants discussed in the following sections that have a direct
effect on the total labor costs or on the cost of labor expressed as percentages of
sales.

1. 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 food services industry.

A measure of a plant's ability to retain workers, expressed as a percentage
of the production workforce that departs annually-or an annualized rate of

employee departures.
High turnover rates often indicate employee dissatisfaction with either

working conditions or compensation.

High labor turnover rate generally result in higher labor costs.

2. Training
- All job required some level of training
- Training may entail merely showing a new dishwasher the location of the
-

dish machine and explaining the operation of the controls.

On another level training may involve a meeting to familiarize the cook

with the nature of the menu or the preferences of the restaurants clientele
Training must included daily meetings with servers to make sure that each
understands the menu fully and is aware of which items it is most

beneficial to sell.
Training can be key factor in reducing the labor turnover rate in restaurant.
Restaurants that have training programs that are both extensive and
effective tend to have employees who report greater job satisfaction.

3. Labor legislation
- Also known as labor law

Is mediates the relationship between workers (employees), employers,

trade unions and the government.

Collective labor law relates to the tripartite relationship between

employee, employer and union.

Individual labor legislation concerns employees' rights at work and through

the contract for work

Is differs considerably from state to state, and thus the net effect of
legislation on labor cost for any particular food operation must be
discussed in term in effect in particular state where the operation is

located.
Minimum wage - the lowest wage permitted by law or by a special

agreement.
Minimum amount of compensation an employee must receive for
performing labor. Minimum wages are typically established by contract or
legislation by the government

4. Labor contracts
- contract between labor and management governing wages and benefits
-

and working conditions

Labor contracts vary by individual company and specific responsibilities,

but all must consist of general guidelines.

That includes description of duties, the length of the agreement, what type
of payment will be made and risks of the contractor undertaking the

project.
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.

5. Use of part time staff

- Place of full time staff can have a significant impact on labor cost.
- Staff employed for less than the normal weekly full-time hours, for which
-

all entitlements are paid on a pro-rata basis

There are no legal guidelines that determine whether or not an employee
is a part time or full time employee.
3

A determination of whether an employee is working part time depends on

the company's policy and practice of defining employees and the hours

required to be considered full time.

For example of labor cost for full time cooks is calculated:
Wages: 7 cooks x 35 hours x RM10 per hours = RM2450
Benefits:
RM2450 x 20% = RM490

For part time cooks

Wages: 15shifts x 7 hours x RM6 per hour = RM630
Benefits:
RM630 x 10% = RM 63
New total labor cost = RM3633

6. Outsourcing
Is a contracting out of a business process to a third-party
- Outsourcing sometimes involves transferring employees and assets from
-

one firm to another

A practice used by different companies to reduce costs by transferring

portions of work to outside suppliers rather than completing it internally

Outsourcing is an effective cost-saving strategy when used properly. It is
sometimes more affordable to purchase a good from companies with
comparative advantages than it is to produce the good internally.

7. Sales volume
- The quantity or

number

normal operations of

of goods sold
a company in

or services sold
a

in

the

specified period.

In the food service industry, sales volume equates to the number of food
-

related items or beverages sold within a particular time period.

For example, in a restaurant, sales volume for one evening would total the
number of appetizers, salads, entrees, sides, desserts, alcoholic and nonalcoholic beverages sold. When add together the price that the restaurant
charges the consumer, it will give you the total sales volume for that
particular evening.

Sales volume plays a key role in the profitability of a restaurant within the

food service industry.

Many managers use the previous year's sales volume on a particular day,
such as Valentine's Day, to determine how much food they will need to
order for this year. If they order too much, there will be a lot of waste

8. Location
- Known that labor cost vary from one part of the country to another
- Labor costs as percentages of sales may not be lower at all because of
the lower menu prices effect in such areas.

9. Equipment
- If given the task to cook like making pasta or peeling potatoes, lower costs
can often result from doing this work with modern equipment than
-

traditional hand method.

Old equipment in poor condition often requires more time to accomplish a

given job than equipment that newer.

The amount of equipment in use , as well as its variety and condition has
considerable effects on labor cost

10. Preparation
- All foodservice operations on a scale of a 0 to 100 to reflect the amount of
-

preparation required on the premises.

The item that pre-cooked fully prepared and proportioned, thus requiring

minimal preparation beyond reheating prior to sale.

Fast food restaurant have considerably lower labor cost than those
offering continental dishes to customers who have gourmet taste.

11. Service
- The action of helping or doing work for someone.
- An industry made
up

of companies that

primarily earn revenue through providing intangible products and services.

5

Service industry

companies

are

involved

in

retail, transport, distribution, food services, as well as other service-

dominated businesses.
For establishment at the lower end of the scale, labor cost for the service
tends to be minimal.

12. Menu
list of dishes available in a restaurant
In a restaurant, a menu is a presentation of food and beverage offerings.
-

A menu may be a la carte or table d'hte

For controlling labor costs, it is less costly to prepare 300 portions of an

item than it is to prepare 30 portions each of different items.

Totally, limiting the numbers and varieties of menu items is a factor of
considerable importance in the control of labor cost.

13. Hours of operation

- The number of hours that a restaurant operates will have significant impact
-

on labor cost.
Restaurant that open only for dinner will have lower labor cost than that

same operation open for three meals each day.

Every operation have overhead cost that exits regardless of whether

restaurant is open or closed.

This includes rent or mortgage payments, salaries not based on hours,

insurance premiums, depreciation, property taxes, and so on.

As long as additional revenue gained by staying open is greater than the
additional cost incurred during that period of time, remaining open is
desirable from financial viewpoint.

14. Weather

Is clearly one that is completely beyond any managers control, but it can

have significant impact on labor cost percentages.

It also can affect sales volume which is in turn, affects staffing levels in our

industry.
Bad weather deters potential customers from venturing out to restaurants.
In weather condition, it can increase sales volume in hotel dining rooms for
the very same reason.

15. Competent management

- Cost of labor always affected by managements ability to plan, organize,
control, direct and lead the organization in such way that the desired level
-

of employee performance is obtained at the appropriated level of cost.

Managers ability to motivate, direct and lead will determine the quality of

work and level of performance.

If have good management will have positive effect but if have poor
management will have negative effect of labor costs.

Conclusion
For the determinants of labor cost it is apparent that each of these must be taken
into account in analyzing labor costs. Each manager or owner must base the desired
and optimal labor cost and labor cost percentages for an operation on an array of
relevant factors and must recognize that labor cost in particular operation will be
affected to a greater or lesser extent by the various determinants discussed.
The impact of each of these varies considerably from one establishment to
another. Having addressed the element of employee compensation and some major
determinants of labor cost and labor cost percent, it is now appropriate to turn our
attention to the primary subject of the part of the text of labor cost control.