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What Is Cost Control? 1 Controlling Foodservice Costs OH 1-1.

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Presentation on theme: "What Is Cost Control? 1 Controlling Foodservice Costs OH 1-1."— Presentation transcript:

1 What Is Cost Control? 1 Controlling Foodservice Costs OH 1-1

2 Chapter Learning Objectives
Describe the relationship between standards and controlling costs. Identify the types of costs incurred by a restaurant or foodservice organization. Classify foodservice costs as controllable or noncontrollable. Describe and give examples of controllable and noncontrollable costs. Instructor’s Notes Indicate that these objectives (competencies) drive the information in the chapter and in this session. The chapter learning objectives continue on the next slide. Ask the following question, “What are some costs other than food and labor that restaurants must pay if they are to stay open?

3 Chapter Learning Objectives continued
Classify foodservice costs as variable, semivariable, or fixed. Describe and give examples of variable, semivariable, and fixed costs. Explain the basic foodservice cost control process. Instructor’s Notes Point out that the terms, “costs” and “expenses,” are often used interchangeably. Indicate that a restaurant cannot stay in business unless it is profitable. In order for a manager to be effective, he or she must understand all costs associated with running the business. Ask the following question, “What can happen to a business if costs get out of line?”

4 Characteristics of Controls
Contribute to profit making Start with the menu Affect all areas of the operation Are formalized through a restaurant’s policies and procedures Instructor’s Note Ask students the following question, “What controls do you use in monitoring your own daily activities?” Explain that quality controls help ensure guest satisfaction.

5 Cost Standards Are used to compare actual results to planned results
Are established by management Standards may be designed to Ensure a profit Stay within the budget Achieve planned quality levels Instructor’s Note Ask the following question, “What are some food-related standards that might be different in a hospital foodservice compared to a commercial restaurant?” Point out that standards can relate to food quality, employee performance, and profit goals. Explain that there is a direct relationship between controlling costs and achieving profit standards.

6 Excessive costs reduce restaurant profitability.
Costs Impact Profit Instructor’s Notes Explain to students that increases in total costs can be positive (the result of increased sales) or negative (the result of inefficiencies). Excessive costs reduce restaurant profitability.

7 Types of Costs Controllable Costs Noncontrollable Costs Food Insurance
Labor Cleaning supplies Noncontrollable Costs Insurance Mortgage payments Cost of licenses Instructor’s Notes Point out that controllable costs generally vary with changes in sales volume. Ask students to provide other examples of noncontrollable costs.

8 Types of Costs continued
Fixed Costs Do not vary with sales volume Do not change from one accounting period to the next Variable Costs Increases and decreases are directly related to sales volume Semivariable Costs Increase or decrease with changes in sales volume, but not in direct proportion Contain both fixed and variable components Instructor’s Notes Define the term “accounting period” for students. Ask students to name some fixed costs that are different from that mentioned in the text (insurance). Most fixed costs are established by a restaurant’s owners. Ask, “Who actually determines which fixed costs a restaurant incurs?” Describe to students an example of “variable costs,” such as the number of napkins used in a restaurant that presets its dining room tables with a napkin at each place setting.

9 Variable Costs Directly affect profitability
Can be controlled by management Are compared to an established standard Instructor’s Notes Explain the relationship between the manager’s ability to control variable costs and the restaurant’s profitability. Ask students the following question, “On a hot day, are a restaurant’s air conditioning costs fixed, variable, or semivariable?”

10 Prime Costs Include those expenses classified as
Food Labor Are directly controlled by management Make up the majority of a restaurant’s total costs Are directly related to profitability Instructor’s Notes Explain to students the logic behind the “65 percent rule of thumb” mentioned on page 9 of the text.

11 Prime Costs continued The costs of food and labor are a restaurant’s greatest expenses.

12 The Cost Control Process Steps
Step 1 – Collect sales and cost data. Step 2 – Monitor and analyze sales and costs. Step 3 – Take corrective action as appropriate. Instructor’s Notes Explain the role of the POS in assisting with Steps 1 and 2 in the cost control process. Ask students the following question, “What are some appropriate corrective actions to take when costs are excessive?”

13 The Cost Control Process
Step 1 – Collect sales and cost data. Yearly and monthly data are used for budgets and income statements. Weekly and monthly data are used for purchasing and scheduling. Meal period data are used for production planning. Instructor’s Notes Ask students the following question, “Where do managers obtain sales and cost data?”

14 The Cost Control Process continued
Step 2 – Monitor and analyze sales and costs. Evaluate The line item’s name Budgeted cost Actual cost Cost difference Percentage difference Instructor’s Notes Review the method used to compute a percentage (see next slide or Appendix, if needed). Ask students to suggest acceptable reasons why an expense could be “out of line” with budget (i.e. extreme weather and its relationship to energy costs).

15 The Cost Control Process continued
Step 2 – Monitor and analyze sales and costs. Compare actual sales and costs to Budget (line item review) Operational standards Historical information Identify variances Instructor’s Notes Point out that comparing actual sales and costs to budgeted sales and costs can be done through a line item review. Explain that variances can be expressed in dollars and percentages. Review the method used to compute a percentage (see next slide or Appendix, if needed). Ask students to suggest acceptable reasons why an expense could be “out of line” with budget (i.e. extreme weather and its relationship to energy costs).

16 Computation of Percent Difference
Actual cost of $48,000 Budgeted cost of $45,000 Actual cost Budgeted cost = Cost difference $48, – $45,000 $3,000

17 Computation of Percent Difference continued
Cost difference ÷ Cost budgeted = Percent difference $3,000 ÷ $45,000 0.067, or 6.7%

18 Cost Variations Can be preventable May be unpreventable
Take corrective action on preventable cost variations Instructor’s Notes Ask students to provide examples of preventable cost variations. Ask students for examples of “unpreventable” cost variations (i.e. increases in product costs and mandatory increases in the minimum wage).

19 The Cost Control Process continued
Step 3 – Take corrective action as appropriate. Variations from anticipated results may be Large and significant Small, but still significant Small and insignificant Instructor’s Notes Ask the following question, “How will the corrective actions you consider for implementation be influenced by each of these possible types of variations?” Ask students to suggest examples of each of these potential outcomes along with suggested corrective actions.

20 Corrective Actions for Cost Control
To reduce food cost Reduce portion size. Replace the item with a lower cost alternative. Feature menu items with higher profit margins (lower costs). Raise menu prices. Instructor’s Notes Explain that raising menu prices should only be undertaken when cost controls are working effectively. Increases in menu price are not a substitute for good management. Ask students about which actions they believe guests would most like managers to implement.

21 Corrective Actions for Cost Control continued
To reduce food waste Monitor portion control. Monitor food storage and rotation. Monitor food purchasing (buy appropriate amounts). Minimize production errors. Instructor’s Notes Explain the relationship between portion cost control and the total amount of food used by a restaurant. Explain the important role of communication in minimizing production errors.

22 Corrective Actions for Cost Control continued
To reduce labor cost Reduce the number of employees on the schedule. Ask employees to end their shift early if they are not needed. Cross-train staff. Instructor’s Notes Ask students to suggest two or more different jobs that could be held by one employee (i.e. server/ cashier/ hostess). Mention that some restaurants have policies to pay employees for a minimum number of hours if they are scheduled to work but are subsequently sent home early.

23 Corrective Actions for Cost Control continued
Do you think food or labor costs are higher in this restaurant? Why?

24 How Would You Answer the Following Questions?
Who is responsible for the size of a restaurant’s fixed expense? Which of the following vary with sales volume? Fixed expense Semivariable expense Variable expense Both B and C Who is responsible for monitoring controllable costs? What two components make up “prime cost?” Instructor’s Notes Answers The restaurant’s owners D The manager Food costs and Labor costs Indicate that the last part of this discussion will provide a review of definitions for the key terms used in the chapter.

25 Key Term Review Control Controllable cost Corrective action
Cost of food sold Fixed cost Gross profit Income statement Labor expense Line item review Loss Instructor’s Notes Control—method of exercising some amount of power over events or situations to achieve a particular result Controllable cost—cost that management can directly control Corrective action—steps to correct a problem when there are variances between budget plans and actual operating results Cost of food sold—dollar amount spent on food. Calculation: opening inventory plus purchases, minus the ending inventory. Fixed cost—cost that remains the same regardless of sales volume Gross profit—amount of money made after the cost of food sold is subtracted from food sales Income statement—report showing sales, costs, and the profit or loss of a business Labor expense—the payroll for hourly employees and salaried management. It also includes FICA and Medicare payments and employee benefit costs. Line item review—a comparison of all budgeted items against operating results with differences noted Loss—when expenses are greater than sales Indicate that there were additional key terms discussed in the chapter.

26 Key Term Review continued
Noncontrollable cost Prime cost Profit Sales Semivariable cost Standard Total expense Variable cost Instructor’s Notes Noncontrollable cost—cost over which management has little or no control Prime costs—two highest costs in most operations; food and labor Profit—dollar amount remaining after all operational expenses are subtracted from sales Sales—dollar amount the restaurant has taken in from food purchased by customers Semivariable cost—cost that increases and decreases as, respectively, sales increase and decrease, but not in direct proportion Standard—measure established to compare levels of attainment for a goal or other measure of adequacy Total expense—includes labor, as well as all other controllable and noncontrollable expenses Variable cost—cost that should increase and decrease in direct proportion to sales

27 Chapter Learning Objectives— What Did You Learn?
Describe the relationship between standards and controlling costs. Identify the types of costs incurred by a restaurant or foodservice organization. Classify foodservice costs as controllable or noncontrollable. Describe and give examples of controllable and noncontrollable costs. Instructor’s Notes Ask students to do a personal assessment of the extent to which they know the information or can perform the activity noted in each objective.

28 Chapter Learning Objectives— What Did You Learn? continued
Classify foodservice costs as variable, semivariable, or fixed. Describe and give examples of variable, semivariable, and fixed costs. Explain the basic foodservice cost control process. Instructor’s Notes Ask students how, when they become managers, they would assess whether their own employees understood the importance of controlling costs.


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