1. 1
The Importance
of Cost Control
OH 1-1

2. Chapter Learning Objectives
Explain how restaurant and foodservice costs affect profitability.
Describe the manager's role in cost control.
Identify the types of costs incurred by restaurant and foodservice operations.
Explain the importance of controlling prime costs.
Explain the basic restaurant and foodservice cost control process.
Notes
These objectives (competencies) drive the information in the chapter and in this session.
Ask the following question, “What are some costs other than food and labor that restaurants must pay if they are to stay open?
The terms, “costs” and “expenses,” are often used interchangeably.
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.
“What can happen to a business if costs get out of line?”

3. 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
Notes
“What controls do you use in monitoring your own daily activities?”
Quality controls help ensure guest satisfaction.

4. Relationship of Sales and Expenses
Sales (Income or Revenue) are 100%
In an Income Statement or Budget, the relationship of the Expenses to Sales is listed as a percent
Profit (or loss) is the percent of Sales left after all expenses have been stated
SALES – EXPENSES = PROFITS

5. 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
Notes:
Define the term “accounting period”.
Name some fixed costs that are different from that mentioned in the text (insurance).
Most fixed costs are established by a restaurant’s owners. “Who actually determines which fixed costs a restaurant incurs?”
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.

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

7. Types of Costs – relationship to sales
Crossover of cost classifications:
Variable and Semivariable costs are usually Controllable costs
Fixed costs are usually Noncontrollable costs
The only pure variable costs are Food and Beverage

8. Types of Costs Controllable Costs Noncontrollable Costs Food Insurance
Labor
Cleaning supplies
Noncontrollable Costs
Insurance
Mortgage payments
Cost of licenses
Notes:
Point out that controllable costs generally vary with changes in sales volume.
Provide other examples of noncontrollable costs.
Crossover of cost classifications:
Variable and Semivariable costs are usually Controllable costs
Fixed costs are usually Noncontrollable costs
The only pure variable costs are Food and Beverage

9. 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
Notes:
Food and labor are the two highest costs in the operation.
Total cost of sales + Total labor costs = Prime Cost
Prime cost ÷ Sales = Prime costs as a % of total sales.

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

11. Prime Cost Calculation

12. Percent of Total
A percentage is a way of expressing a number as a fraction.
For example, 45% (read as "forty-five percent") is equal to 45/100, or 0.45.
Percentages are used to express how large/small one quantity is, relative to another quantity.
Ratios are similarly an expression of one number relative to another.

13. 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

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

15. Prime Cost as a % of Total Sales

16. Cost Control Process Develop Performance Standards
Monitor Actual Performance
Compare Actual to Standard
Address Performance Discrepancies

17. 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
Notes:
“What are some food-related standards that might be different in a hospital foodservice compared to a commercial restaurant?”
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.
Standards can be based on industry ranges and/or individual establishments’ goals.
A measure of production volume in a restaurant is a cover, or one meal served.

18. Excessive costs reduce restaurant profitability.
Costs Impact Profit
Notes:
Increases in total costs can be positive (the result of increased sales) or negative (the result of inefficiencies).
Excessive costs reduce restaurant profitability.

19. Costs as a “Piece of the Pie”
In the top graph you will notice that the Operating Expenses are budgeted to be 62% of sales with Cost of Goods at 32% and Profit at 6%. Look what happened in the bottom left graph when our Cost of Goods rise to 34% our Profits decrease to 4%. Would your boss be happy with this result? NO
Now, look what happens if our Cost of Goods decreases to 30% our Profits rise to 8%! Would our boss be happy about this result? It depends, if that gain in profits was at the expense of good service or quality food it will impact future sales because it will effect customer satisfaction and the customers may not return.
In either case it is EXTREMELY important that you: A) know the budgeted amounts, and B) use all controls at your disposal to assure the expenses you can control meet the budgeted numbers.

20. Example of an Income Statement with %’s
Sales
$ ,450,000
100%
Cost of Food Sold
$ ,000
34%
Gross Profit
$ ,000
Labor Expense
$ ,500
29%
Other Controllable Expenses
$ ,000 6%
Non-Controllable Expenses
$ ,000
23%
Total Expenses
$ ,500
92%
Profit/Loss
$ ,500 8%
In the next slide, you will see how putting the actual numbers next to the budgeted numbers, you can determine where your opportunities are to control costs

21. Budget Actual Sales 1,450,000 Cost of Food Sold 493,000 Gross Profit
100%
Cost of Food Sold
493,000
34% 
Gross Profit
957,000
Labor Expense
420,500
29%
Other Controllable
93,000 6%
Non-Controllable Expenses
330,000
23%
Total Expenses
843,500
92%
Profit/Loss
113,500 8%
Sales
1,337,595
100%
Cost of Food Sold
494,333
37%
Gross Profit
843,262
Labor Expense
402,555
30%
Other Controllable
87,698 7%
Non-Controllable Expenses
330,000
25%
Total Expenses
1,314,586
99%
Profit/Loss
23,009 1%
Notice how not achieving the sales budget affects everything!
Food cost in dollars was over budget, and the sales were less than budget. Obviously this greatly contributed to the profit being less.
The labor cost was less in dollars, but with the reduced sales, the % of cost was higher.
The non-controllables were the same dollar, but once again, sales were lower, thus the non-controllables percent was higher.

22. The Cost Control Process Steps
Step 1 – Develop performance standards Collect sales and cost data
Step 2 – Monitor actual performance Monitor and analyze sales and cost data
Step 3 – Compare actual performance to standard Evaluate for discrepancies (variances)
Step 4 – Address performance discrepancies Take corrective action as appropriate.
Notes
The POS system is an important source of sales and cost data used in assisting with Steps 1 and 2 in the cost control process.
“What are some appropriate corrective actions to take when costs are excessive?”

23. The Cost Control Process
Step 1 – Develop performance standards
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.
Notes
“Where do managers obtain sales and cost data?”

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

25. The Cost Control Process continued
Step 3 – Compare actual performance to standard
Monitor and analyze sales and costs.
Compare actual sales and costs to
Budget (line item review)
Operational standards
Historical information
Identify variances
Notes
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).

26. 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

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

28. Cost Variations Can be preventable May be unpreventable
Take corrective action on preventable cost variations
Notes:
Provide examples of preventable cost variations.
Examples of “unpreventable” cost variations (i.e. increases in product costs and mandatory increases in the minimum wage).

29. The Cost Control Process continued
Step 4 – Address Performance Discrepancies
Take corrective action as appropriate.
Variations from anticipated results may be
Large and significant
Small, but still significant
Small and insignificant
Notes:
“How will the corrective actions you consider for implementation be influenced by each of these possible types of variations?”
Suggest examples of each of these potential outcomes along with suggested corrective actions.

30. Notes:
Raising menu prices should only be undertaken when cost controls are working effectively. Increases in menu price are not a substitute for good management.
Which actions do you believe guests would most like managers to implement?

31. 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.

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

33. 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?”
Answers
The restaurant’s owners D
The manager
Food costs and Labor costs

34. Key Terms:
Controllable cost A cost that a manager can directly control.
Controls A series of coordinated actions that help keep financial results within an acceptable target range.
Corrective action Steps that are taken to address a problem.
Cost structure The proportion or percentage of expense items to sales.
Cover One meal served to a customer.
Fixed cost A cost that remains the same regardless of sales volume.
Line item review The checking of every item on the budget against actual figures, and noting the difference, or variance.
Loss A situation that occurs when an operation’s expenses are greater than its sales.
Noncontrollable cost A cost over which a manager has little or no control.

35. Key Terms continued:
Operational standard The measures established for making comparisons and judgments about the degree of excellence in operations.
Prime cost An operation’s total food cost, beverage cost, and labor cost for a specific time period, usually a week or a month.
Profit The dollar amount that remains after all expenses are paid.
Quality standard A standard that sets the degree of excellence of raw materials, finished products, and production standards for the employees.
Quantity standard A standard that refers to weight, count, or volume measure, such as portion sizes for menu foods and beverages, and employee production standards such as one cook per 50 covers.
Sales The dollar amount the establishment has taken in for food and beverages.
Semivariable cost A cost that increases and decreases as sales increase and decrease, but not in direct proportion.

36. Key Terms continued:
Variable cost A cost that increases and decreases in direct proportion to sales.
Variance The difference between actual results (i.e., sales) and targeted or budgeted results.