Presentation on theme: "What Is Cost Control? 1 Controlling Foodservice Costs OH 1-1."— Presentation transcript:
1 What Is Cost Control?1Controlling Foodservice CostsOH 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 NotesIndicate 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 NotesPoint 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 makingStart with the menuAffect all areas of the operationAre formalized through a restaurant’s policies and proceduresInstructor’s NoteAsk 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 managementStandards may be designed toEnsure a profitStay within the budgetAchieve planned quality levelsInstructor’s NoteAsk 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 ProfitInstructor’s NotesExplain 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 LaborCleaning suppliesNoncontrollable CostsInsuranceMortgage paymentsCost of licensesInstructor’s NotesPoint 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 CostsDo not vary with sales volumeDo not change from one accounting period to the nextVariable CostsIncreases and decreases are directly related to sales volumeSemivariable CostsIncrease or decrease with changes in sales volume, but not in direct proportionContain both fixed and variable componentsInstructor’s NotesDefine 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 managementAre compared to an established standardInstructor’s NotesExplain 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 FoodLaborAre directly controlled by managementMake up the majority of a restaurant’s total costsAre directly related to profitabilityInstructor’s NotesExplain to students the logic behind the “65 percent rule of thumb” mentioned on page 9 of the text.
11 Prime Costs continuedThe 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 NotesExplain 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 NotesAsk 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.EvaluateThe line item’s nameBudgeted costActual costCost differencePercentage differenceInstructor’s NotesReview 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 toBudget (line item review)Operational standardsHistorical informationIdentify variancesInstructor’s NotesPoint 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 $48,000Budgeted cost of $45,000Actual cost–Budgeted cost=Cost difference$48, – $45,000$3,000
17 Computation of Percent Difference continued Cost difference÷Cost budgeted=Percent difference$3,000 ÷ $45,0000.067, or 6.7%
18 Cost Variations Can be preventable May be unpreventable Take corrective action on preventable cost variationsInstructor’s NotesAsk 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 beLarge and significantSmall, but still significantSmall and insignificantInstructor’s NotesAsk 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 costReduce portion size.Replace the item with a lower cost alternative.Feature menu items with higher profit margins (lower costs).Raise menu prices.Instructor’s NotesExplain 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 wasteMonitor portion control.Monitor food storage and rotation.Monitor food purchasing (buy appropriate amounts).Minimize production errors.Instructor’s NotesExplain 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 costReduce the number of employees on the schedule.Ask employees to end their shift early if they are not needed.Cross-train staff.Instructor’s NotesAsk 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 expenseSemivariable expenseVariable expenseBoth B and CWho is responsible for monitoring controllable costs?What two components make up “prime cost?”Instructor’s NotesAnswersThe restaurant’s ownersDThe managerFood costs and Labor costsIndicate 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 soldFixed costGross profitIncome statementLabor expenseLine item reviewLossInstructor’s NotesControl—method of exercising some amount of power over events or situations to achieve a particular resultControllable cost—cost that management can directly controlCorrective action—steps to correct a problem when there are variances between budget plans and actual operating resultsCost 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 volumeGross profit—amount of money made after the cost of food sold is subtracted from food salesIncome statement—report showing sales, costs, and the profit or loss of a businessLabor 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 notedLoss—when expenses are greater than salesIndicate that there were additional key terms discussed in the chapter.
26 Key Term Review continued Noncontrollable costPrime costProfitSalesSemivariable costStandardTotal expenseVariable costInstructor’s NotesNoncontrollable cost—cost over which management has little or no controlPrime costs—two highest costs in most operations; food and laborProfit—dollar amount remaining after all operational expenses are subtracted from salesSales—dollar amount the restaurant has taken in from food purchased by customersSemivariable cost—cost that increases and decreases as, respectively, sales increase and decrease, but not in direct proportionStandard—measure established to compare levels of attainment for a goal or other measure of adequacyTotal expense—includes labor, as well as all other controllable and noncontrollable expensesVariable 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 NotesAsk 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 NotesAsk students how, when they become managers, they would assess whether their own employees understood the importance of controlling costs.