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Class Name Instructor Name Date, Semester Foundations of Cost Control Daniel Traster Labor Management and Control chapter 11.

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Presentation on theme: "Class Name Instructor Name Date, Semester Foundations of Cost Control Daniel Traster Labor Management and Control chapter 11."— Presentation transcript:

1 Class Name Instructor Name Date, Semester Foundations of Cost Control Daniel Traster Labor Management and Control chapter 11

2 Opening Questions For current workers, how do you know how much gross (pre-tax) income you should earn each week? How much money would you earn if you worked 40 hours this week? 45 hours? Are you ever scheduled for a certain number of hours only to find that by weeks end youve worked more or fewer hours? 2

3 Calculating Labor Costs Standard = budgeted Actual = the cost based on the real hours actually worked 3 Using a work schedule and a list of each employees hourly wages or annual salary, a manager can calculate a departments weekly standard labor cost.

4 Labor Cost for Hourly Workers Preliminary Labor Cost = Hours Scheduled (or worked) X Hourly Rate Preliminary means before benefits Using scheduled hours yields standard cost Using worked hours yields actual cost 4

5 Example 11a Note: Overtime earns 1.5 times the regular rate Preliminary Labor Cost =(40 hours X $11.75) + (5 hours X $11.75 X 1.5) = $470 + $88.13 = $558.13 5 Employee earns $11.75/hour and is scheduled for 45 hours this week. What is preliminary standard labor cost?

6 Salaried Workers Get the same size paycheck each week no matter how many hours or days they work Annual salaries can be divided into daily salaries by dividing by 365 days per year. 6

7 Labor Cost for Salaried Workers Preliminary Daily Labor Cost = Annual Salary ÷ 365 days Preliminary Labor Cost for any period of time is the daily cost X the number of days in the period EXAMPLE: Preliminary Weekly Labor Cost = Preliminary Daily Labor Cost X 7 7

8 Example 11b Pre. Daily Labor Cost = $40,000 ÷ 365 = $109.59 Pre. Weekly Labor Cost = $109.59 X 7 = $767.12 8 Salaried worker earns $40,000 per year. What is the weekly labor cost before benefits?

9 Accounting for Benefits Standard (or Actual) Labor Cost = Preliminary Labor Cost X (1 + benefits percent) 9 All workers have some benefits cost, even if just for social security and workers comp. Benefits and costs may differ between employees. Benefits cost typically calculated as a percent of wages or salary

10 Example 11c Pre. Labor Cost = 39.5 h X $9.50/h = $375.25 Standard Labor Cost = $375.25 X (1 + 0.138) = $427.03 10 Employee is scheduled for 39.5 hours at $9.50/hour. Benefits cost is 13.8%. What is the employees standard labor cost?

11 Example 11d Pre. Daily Labor Cost = $45,000 ÷ 365 = $123.29 Pre. Weekly Labor Cost = $123.29 X 7 = $863.03 Weekly Labor Cost = $863.03 X (1 + 0.283) = $1,107.27 11 Manager earns $45,000 annually with benefits package worth 28.3% of salary. What is the managers weekly labor cost?

12 Department Labor Cost Computerized labor cost spreadsheet includes (for each employee): name title hourly or daily pay rate benefits percent hours (either scheduled or worked) Enter formulas in advance and the manager only needs to enter each employees hours each week. For department or company labor cost, add the labor costs for all of the employees 12

13 Department Labor Cost (cont.) 13 can be forecast for days, weeks, months, or years. Longer time period forecasts are often less accurate Standard Labor Cost can be done by similar time frames, but because it is based on real numbers, it is always accurate. Actual Labor Cost

14 Standard vs. Actual Labor Costs Actual and Standard are rarely identical Salaried workers earn the same amount, but hourly workers may have schedules adjusted Big variances between standard and actual labor costs may be sign of poor management 14

15 Labor Cost Percent Actual and standard costs in dollars may vary greatly as business volume changes, but labor cost percents should be close Labor cost percents compare labor cost to total sales 15

16 Labor Cost Percent Formula Labor Cost and Sales must cover same time period Standard labor cost % uses standard labor cost and sales dollars Actual labor cost % uses actual labor cost and sales dollars 16 Labor Cost % Labor Cost ($) Sales ($) =

17 Example 11e Labor Cost % = $14,200 ÷ $48,500 = 0.293 or 29.3% 17 Calculate weekly standard labor cost percent if standard weekly labor cost is $14,200 and forecast sales for that week are $48,500.

18 Example 11f Standard = $12,100 ÷ $38,000 = 31.8% Actual = $12,850 ÷ $39,400 = 32.6% Labor cost went up despite stronger sales Poor performance by management 18 Restaurant budgets $12,100 in weekly labor cost and $38,000 in weekly sales. Actual figures for that week are $12,850 in labor and $39,400 in sales. Compare standard and actual weekly labor costs for the restaurant.

19 How Labor Cost relates to Profit 19 Fixed costs do not change with business volume, so higher sales beyond budget should generate greater profits if management controls variable costs. Profit (not labor cost) is the ultimate measure of management performance, so reduced labor cost only helps profit if other costs are not equally increased

20 Measuring and Improving Performance Some measures evaluate each employees performance Other measures evaluate a team of workers when a productivity value cannot be assigned to each worker separately Person-Hours are the sum of work hours completed by all the people in a group or team for a given period of time 20

21 Sales per Person or Person-Hour 21 Sales per person compares dollars in sales generated by each server and comes from POS. Sale per Person-Hour Total Sales for a Period Person-Hours for a Period =

22 Example 11g Person-hours = 5 workers X 4 hours = 20 Sales per person-hour = $8,425 ÷ 20 person-hours = $421.25/person-hour 22 During 4-hour dinner service, restaurant earns $8,425 in sales. 3 cooks and 2 dishwashers all work the full 4-hour shift. Calculate sales per person- hour for this team.

23 Covers per Person 23 Covers per person measures the number of customers served by each server; comes from POS. Servers who handle more customers are more valuable Covers per Person-Hour Covers for a Period Person-Hours in a Period =

24 Example 11h Person-hours = 4 workers X 3 hours = 12 Covers per person-hour = 295 covers ÷ 12 person-hours = 24.6 covers/person-hour 24 Team of 3 cooks and 1 dishwasher work from 11:00 – 2:00 for lunch service and serve 295 covers. What is this teams covers per person-hour?

25 Sales and Covers per Person-Hour Sales per person-hour and covers per person-hour are meaningless in an absolute sense. Measure to set a baseline and then improve efficiency from there. They help interpret labor cost numbers, which are impacted somewhat by varying wage rates of the employees scheduled 25

26 Errors per Cover Error or Void is a mistake that results in an unsellable dish (dropped, burned, customer-rejected, etc.) 26 Errors per cover measure quality of worker performance.

27 Errors per Cover (cont.) Errors per cover should always be a decimal well below 1. Errors per cover should not change with business volume, or management must act to improve employee work quality 27 Errors per Cover Errors in a Period Covers in Same Period =

28 Example 11i Errors per cover = 13 errors ÷ 417 covers = 0.031 errors/cover 28 Restaurant served 417 guests during dinner but had 13 food errors. What is this restaurants errors per cover rate?

29 Factors that Impact Performance and Labor Cost Turnover Scheduling Facility Layout Equipment Menu Outsourcing Training Motivating and Managing Employees Effectively Forecasting Accurately Reducing Injuries and Illness 29

30 Prime Cost 30 Labor Cost and Food Cost sometimes work together. Cutting labor by buying pre-fab ingredients can increase food cost and leave profit stagnant. Prime Cost Cost of Goods Sold Labor Cost

31 Example 11j Prime Cost = cost of goods sold + labor = $1,730 + $1,589 = $3,319 31 Weekly cost of goods sold is $1,730; labor cost for same week is $1,589. What is prime cost for that week?

32 Prime Cost Percent 32 Prime Cost % Prime Cost Sales =

33 Example 11k Prime Cost % = prime cost÷ sales = $3,319 ÷ $5,720 = 58.0% 33 Café has prime cost of $3,319 during same week it has sales of $5,720. What is cafés prime cost percent?

34 Prime Cost (cont.) Reducing prime cost % (by reducing food, beverage, or labor cost without increasing the others) usually leads to higher profits Prime cost % must not be cut at the expense of the businesss quality standards or long-term revenue and profit may suffer. 34

35 Example 11l Restaurant budgets $18,430 for cost of goods sold and $21,070 in labor cost for January. Sales are forecast to be $70,000. At months end, actual figures are $16,590 for cost of goods sold $19,962 for labor cost $64,800 in sales. 35 Compare restaurants standard and actual prime costs and prime cost percents.

36 Example 11l (cont.) Standard prime cost = $18,430 + $21,070 = $39,500 Actual prime cost = $16,590 + $19,962 = $36,552 Standard PC% = $39,500 ÷ $70,000 = 56.4% Actual PC% = $36,552 ÷ $64,800 = 56.4% Costs were controlled very well in a month that fell below sales targets 36

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