Cost ControlUnit 1

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1.1 Cost and Sales Concepts

Cost Concepts

Definition of Cost

 

• Defined as the expense to a hotel or restaurant for goods or services when the goods are consumed or the services are rendered.

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Cost Control

• May be expressed in a variety of units:– Weight– Volume– Total value– Portion– Per bottle– Per drink– Per hour– Per week

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Fixed Costs

•  Normally unaffected by changes in sales volume.

• Has little direct relationship to the business volume because they do not change when the number of sales increases or decreases.

• Examples of fixed costs are:– Insurance premiums– Real estate taxes– Depreciation on equipment

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• All fixed costs change over time, sometimes increasing and sometimes decreasing.

• However, changes are not normally related to short-term changes in business volume.

• They are sometimes indirectly tied to long-term volume changes.

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Variable Costs

• Costs that are clearly related to business volume.

• Some examples of variable costs are:– Food– Beverages– Labor

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• Food and beverage costs are considered directly variable costs.

• Directly variable costs are those that are directly linked to volume of business.

• Labor costs on the other hand are considered semi-variable costs.

• Semivariable costs are those that have elements of fixed and variable, which in this case labor.

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Controllable and Non-controllable Costs

• Costs may also be labeled controllable and noncontrollable.

• Controllable costs are those that can be changed in the short-term i.e. variable cost.

• Noncontrollable costs are those that cannot normally be changed in the short term i.e. fixed costs.

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Unit and Total Costs

•  Unit costs may be food and beverage portions i.e. one steak or one martini, or units of work, as in hourly rate for an employee.

• Total costs represent all the cost of the food served in one period.

• Total costs and unit costs are affected in different ways as illustrated by the following diagram. 

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Cost Behavior as Business Volume Changes

Type Unit Costs Total Costs

Fixed Costs Changes Does not change

Variable Costs Does not change

Changes

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Prime Cost

•  Defined as the sum of food costs, beverage costs and labor costs.

• It determines if establishment will meet its financial goals.

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Overhead Cost

•  Refer to all costs other than prime cost.

• Normally consist of all the fixed costs associated with operating the business.

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Sales Concepts

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• Definition of Sales

•  Defined as revenue resulting from the exchange of products and services for value.

• Two basic groups of terms normally used in food and beverage operations to express sales concepts:– Monetary– Nonmonetary

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Monetary Terms

•  Total Sales

• Refers to the total volume of sales expressed in dollar terms.

• This may be for any given time period such as:– Weekly– Monthly– Yearly

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• Total Sales by Category• Total sales by category are total food sales or

total beverage sales.• It refers to the total dollar volume of sales for

all items in one category.

• Total Sales per Server• Refers as the total dollar volume of sales for

which a given server has been responsible in a given time period such as:– A meal period– A day – A week

• Used to make judgments about the comparative performance of two or more employees.

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- The normal time period used is one year.- Most frequently used by chain operations as a means for comparing sales results of one unit with those of another.

• Total Sales per Seat• Refers to the total dollar sales for a

given time period.• The figure is obtained by:

Total Dollar Sales for a given period of time

/ Number of seats

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• Sales Price• Refers to the amount charged

each customer purchasing one unit of a particular item.

• The unit may be of single item (i.e. an appetizer) or an entire meal depending on how the restaurant prices its product.

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• Average Sale• Determined by using the following formula:

• Total Individual Sales / Total Number of Individual Sales

• There are two such averages commonly calculated:– Average sale per customer– Average sale per server

Total Individual Sales / Total Number of Individual Sales

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• Average Sale per Customer• Determined using the following formula:

• Also expressed as the average check or the average cover.• Used by managers to perform the following tasks:

– Comparison of employee performance– To identify sales trend– To compare effectiveness of various menu, menu

listings, or sales promotions. 

Total Dollar Sales / Number of Sales or Customer

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• Average Sale per Server• Can be obtained by using the following formula:

• Used for comparative purposes and it is usually considered a better indicator of the sales ability of a server.

Total Dollar Sales of A Server/

Number of Customers Served by A Server

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Nonmonetary Terms

•  Total Number Sold• Refers to the total number of

menu items sold in a given time period.

• Useful in a number of ways:– To identify unpopular menu

items– Used for forecasting sales.– Total number of specific items

sold - To make judgments about quantities in inventory and about sales records

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• Covers

• A term used to describe one diner, regardless of the quantity of food he or she consumes.

• Total Covers

• Refers to the total number of customer served in a given period of time.

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• Average Covers• Determined by using the following formula:

 

• Able to help a manager attempting to make judgments about common questions such as:– Efficiency of service in the dining room– Effectiveness of a promotional campaign– Effectiveness of a particular server.

Total Number of Covers for a given time period/

1.Number of hours in a meal period2.Number of days the establishment is open per week3.Number of server on duty during the time period

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• Seat Turnover

• Refers to the number of seats occupied during a given period.

• Derived using the following formula:

• May be calculated for any period, but is most often calculated for a given meal period.

Number of seats occupied (Number of customers served)

/Number of seat available

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• Sales Mix

• A term used to describe the relative quantity sold of any menu item as compared with other items in the same category.

• The relative quantities are normally percentages of total unit sales and always total 100%.

• An example of a sales mix distribution is as follow:

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MENU ITEMS ENTRÉES SOLD SALES MIXA 1,000 12.50%B 1,200 15.00%C 1,800 22.50%D 2,400 30.00%E 1,600 20.00%

TOTALS 8000 100.00%

Entrées Sold (1,000) / Total Entrées Sold (8,000)

•The formula used to obtain the percentages of each menu items is:

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• The Cost-to-Sales Ratio: Cost Percent

• Foodservice managers calculate costs in dollars and compare those costs with sales in dollars.

• Sometimes described as:– The cost per dollar sale– The ratio of costs to sales– Cost-to-sales ratio

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• The industry uses the following basic formula for calculating cost-to-sales ratio:

• Cost / Sales = Cost per dollar of sale x 100%

• To determine the sales price by using the available information, cost and cost%:

• Cost / Cost% = Sales (Sales price)

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• To determine the maximum permissible cost per person using the available information, spending budget and cost%:

• Sales x Cost % = Cost

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Industry-wide Variations in Cost Percents

•  Cost percents vary considerably from one foodservice operation to another.

• There are many possible reasons for these variations.– Type of service– Location– Price structure– Type of menu– Types of foodservice operations,

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