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What is Cost Control??? Minimizing costs the company must expend without sacrificing the end product (service/food) that the customer receives.

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Fixed Costs
Remain relatively constant in short run:

Management salaries Rent expense Insurance expense Property taxes Depreciation expense Interest expense

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Variable Costs
Vary in relation to business volume:

Food costs Beverage costs Labor costs Supplies cost

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Cost-Volume-Profit (CVP) Assumptions/Limitations

Fixed costs remain constant
Variable costs vary directly with revenue Revenue relates directly to volume All costs divided into fixed costs or variable costs Only quantitative factors are considered

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Revenue and Expense

Revenue - Expenses = Profit Revenue Desired Profit = Ideal Expense

Expense Revenue = %

Expense

Revenue (100%) - Food and Beverage Cost % - Labor Cost % - Other Expense % = Profit %
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Cost of Food & Bev

Once you know the average number of people selecting a given menu item, and the total number of guests who made the selections, you can compute the popularity index, which is defined as the percentage of total guests choosing a given menu item from a list of alternatives. Popularity Index =Total Number of a Specific Menu Item Sold Total Number of All Menu Items Sold

The basic formula for individual menu item forecasting, based on an items individual sales history, is as follows:

Number of Guests Expected x Item Popularity Index = Predicted Number of That Item to Be Sold
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Calculating Food Cost

Determining Actual Food Expense Cost of food sold is the dollar amount of all food actually sold, thrown away, wasted or stolen. It is computed as follows: Beginning Inventory PLUS

Purchases
= Goods Available for Sale MINUS Ending Inventory

= Cost of Food Consumed

MINUS Employee Meals
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= Cost of Food Sold

Six Column Reporting

Six Column Food Cost % Estimate

1. Purchases Today Sales Today = Cost % Today

2. Purchases to Date Sales to Date = Cost % to Date

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Calculating Beverage Cost

Beginning Inventory PLUS Purchases = Goods Available for Sale

Less
Ending Inventory Less

Transfers from Bar

Plus Transfers to Bar
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Principles of Cost Percentages

The food cost percentage equation is extremely interesting. In its simplest form, it can be represented as: where A = Cost of Goods Sold B = Sales C = Cost Percentage

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If costs can be kept constant but sales increase, the cost percentage goes down. If costs remain constant but sales decline, cost percentage increases. If costs go up at the same rate sales go up, your cost percentage will remain unchanged. If costs can be reduced but sales remain constant, the cost percentage goes down. If costs increase with no increase in sales, the cost percentage will go up.

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Labor Cost
Labor Expense includes salaries and wages, but it consists of other labor-related costs as well. Payroll refers to the gross pay received by an employee in exchange for his or her work. A salaried employee receives the same income per week or month regardless of the number of hours worked. Minimum staff is used to designate the least number of employees, or payroll dollars, required to operate a facility or department within the facility. Fixed Payroll refers to the amount an operation pays in salaries. Variable Payroll consists of those dollars paid to hourly employees. Sometimes employees have both a fixed and variable element to their pay.

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Factors in Designing Control Systems

Accuracy
Timeliness Objectivity

Realism
Appropriateness Flexibility

Consistency
Priority Cost

Specificity
Acceptability

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Important Control Definitions

Control: Process used by managers to direct, regulate and restrain the actions of people so that the established goals of an enterprise may be achieved Cost Control: Process used by managers to regulate costs and guard against excessive costs Standards:Rules or measures established for making comparisons and judgments Standard cost: Cost of goods and services identified, approved and accepted by management
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Important Control Definitions

Standard procedures: Procedures that have been established as the correct methods, routines and techniques for day-to-day operations Budget: Realistic expression of managements goals and objectives expressed in financial terms Control system: Collection of interrelated and

interdependent control techniques and procedures in use in a given food and beverage operation
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Steps in the Control Process

Establish standards
Measure actual operating results Compare actual to standard

Take corrective action

Evaluate corrective action

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The control process consists of four steps.

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 performances with established standards. 4. Take appropriate action to correct deviations from standards.
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Control techniques available to a manager include the following.

- Establishing standards
- Establishing procedures - Training

- Setting examples
- Observing and correcting employee actions - Requiring records and reports - Disciplining employees - Preparing and following budgets
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Standardized Recipes
The standardized recipe controls both the quantity and quality of what the kitchen will produce. It consists of the procedures to be used in preparing and serving each of your menu items. The standardized recipe is the key to menu item consistency, and ultimately, operational success. In general, standardized recipes contain the following information:
1. 2. Item name Total yield (number of servings)

3.
4. 5. 6. 7.

Portion size
Ingredient list Preparation/method section Cooking time and temperature Special instructions, if necessary
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8.2009, Educational Institute cost (optional) Recipe

Budgeting
Developing the Budget To establish any type of budget, you need to have the following information available: 1. Prior period operating results 2. Assumptions of next period operations 3. Goals 4. Monitoring policies

annual budget achievement budget

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A budget is simply a forecast or estimate of projected revenue, expense, and profit. The 28-day-period approach to budgeting divides a year into 13 equal periods of 28 days each. This helps the manager compare performance from one period to the next without having to compensate for extra days in any one period.

If significant variations with planned results from a budget occur, management must:
1. 2. 3. Define the problem Determine the cause Take corrective action

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Multi-Unit Budgeting
Bottom-up budgeting
Operating budgets assembled at unit level Unit-level budgets rolled up the organization Budgets geared specifically to individual operations Creates ownership at unit manager level

Top-down budgeting
Operating budgets developed at corporate level

Budgets passed down to unit levels

Corporate profit requirements made part of

individual unit plans

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Budget Development Process

Calculate projected revenue levels.
Revenue histories Current factors

Economic variables
Other factors Special concerns

Determine profit requirements. Calculate projected expense levels.

Simple mark-up method Percentage method

Zero-based budget calculations

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Developing the Budget To establish any type of budget, you need to have the following information available:
1. Prior period operating results
2. Examine the external environment to assess any conditions that could affect sales volume in the coming year 3. Review any planned changes in the operation that would affect sales volume 4. Determine the nature and extent of changes in cost levels 5. Have the projections for sales, costs and profits approved by management

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Estimating ExpensesMark-Up Method

Estimates future expenses on basis of current expense

levels Amounts of current expense levels are increased/decreased for new operating budget Assumes all costs were reasonable during current year Inefficiency could be extended into the new budget

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Estimating ExpensesPercentage Method

Based on current percentage of each expense relative

to revenue Applies same cost percentages of current year to upcoming year Assumes all costs were reasonable during current year Inefficiency could be extended into the new budget

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Estimating ExpensesZero-Based Method

Builds new budgeted expenses from a zero base
Current and previous years amounts/percentages are

ignored Each expense item justified on its own merit Avoids extending inefficiency into new budget but requires considerable time/effort

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Variance Analysis
Identifies differences between budgeted plans and actual results Equations below: positive variances are favorable; negative variances are unfavorable
Revenue Variances = Actual Amount Budgeted Amount Expense Variances = Budgeted Amount Actual Amount

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Additional Terms
Control process
Flexible budget Operating budget Procedures Quality standards Quantity standards Sales control Static budget

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Just as the P&L tells you about your past performance, the budget is developed to help you achieve your future goals.

To prepare the budget and stay within it assures you predetermined profit levels. The effective foodservice operator builds his or her budget, monitors it closely, modifies it

when necessary, and achieves the desired results.

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 Monitoring the Budget

In general, the budget should be monitored in each of the following three areas:

1. Revenue
2. Expense 3. Profit

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To determine a food budget, compute the estimated food cost as follows:

1. Last Years Average Food Cost per Meal = Last Years Cost of Food / Total Meals Served
2. Last Years Food Cost per Meal + % Estimated Increase in Food Costs = This Years Food Cost per Meal 3. This Years Food Cost Per Meal x Number of Meals to Be Served This Year = Estimated Cost of Food This Year
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 To determine a labor budget, compute the estimated labor cost as follows: 1. Last Years Labor Cost per Meal = Last Years Cost of Labor / Total Meals Served 2. Last Years Labor Cost per Meal + % Estimated Increase in Labor Cost = This Years Labor Cost per Meal 3. This Years Labor Cost per Meal x Number of Meals to Be Served This Year = Estimated Cost of Labor This Year
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 As business conditions change, changes in the budget

are to be expected. This is because budgets are based on a specific set of assumptions, and as these assumptions change, so too does the budget that follows from the assumptions.
Budgeted profit must be realized if the operation is to

provide adequate returns for owner and investor.

The primary goal of management is to generate the

profits necessary for the successful continuation of the business. Budgeting for these profits is a fundamental step in the process.

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