Hospitality Finance
Managing the Cost
of Labor
Welcome
Class Review
Past, Present, and Future
Exam
Annual Reports
Notes- Labor
Class Review
Where have we been?
Basic Accounting Knowledge
Basic Interpretation Skills
Basic Understanding of Controls
Where are we now?
Controls, Controls, Controls
Where are we going? Put into Practice
Labor
Cost Volume Profit
Operations and Budgets
Capital Feasibility
Class Review
Exam
Annual Reports
Main Ideas of Labor Control
Labor Expense in the Hospitality Industry
Assessing Labor Productivity
Maintaining a Productive Workforce
Measuring Current Labor Productivity
Managing Payroll Costs
Reducing Labor-Related Costs
Labor Expense in the Hospitality
Industry
Labor cost is critical since it comprises
approximately one third of revenues and
since foodservice, essentially a service
business, is dependent on the
motivation, training and skills of its
workforce
In today's market, labor is so expensive.
Methods must be used to accomplish
necessary tasks and stay within the
allotted labor budget.
In some foodservice establishments, the
cost of labor actually exceeds the cost of
food and beverage products.
Labor Expense in the Hospitality
Industry
Labor Expense includes salaries and
wages, but it consists of other labor-
related costs as well.
FICA taxes, unemployment taxes, worker's
compensation, group life insurance, health
insurance, pension plan payments, employee
meals, employee training, employee
transportation, employee uniforms, employee
housing, vacation/sick leave, tuition
reimbursement programs, and employee
incentives and bonuses.
Labor Expense in the Hospitality
Industry
Payroll refers to the gross pay received by
an employee in exchange for his or her
work.
A salaried employee receives the same
income per week or month regardless of
the number of hours worked.
Payroll is one part of labor expense.
Labor Expense in the Hospitality
Industry
Minimum staff is used to designate the
least number of employees, or payroll
dollars, needed to operate a facility or
department within the facility.
Fixed Payroll refers to the amount an
operation pays in salaries.
Variable Payroll consists of those dollars
paid to hourly employees.
Do not confuse minimum staff with fixed
and variable payroll.
Labor Expense in the Hospitality
Industry
Management has little control over
fixed labor expense, but nearly
100% control over variable labor
expense.
Labor expense refers to the total of
all costs associated with
maintaining a foodservice
workforce.
Total labor expense will always
exceed that of payroll.
Labor Expense in the Hospitality
Industry
Payroll is considered a "controllable"
labor expense, unlike FICA taxes and
insurance premiums.
But, in reality, managers may even be
able to influence some of the
noncontrollable labor expenses, such as
providing a training program to reduce
injuries and insurance premiums.
Labor Cost Problems
The Hospitality industry has four unique labor cost problems:
The industry tends to pay lower compensation, which attracts a
less competent sector of employees.
The industry employs a large number of teenagers, who tend to
be less reliable than older workers.
Based on current demographic trends, the percentage of
teenagers available in the population will be decreasing. It has
been predicted that there will be a shortfall of teenage workforce
for the food industry of up to 1 million workers in the near future.
The number of teenage workers shrunk by 11% between 1986
and 1990. This means that the foodservice industry will have to
rely more on elderly and handicapped employees.
Foodservice businesses experienced fluctuating levels of
activity throughout the week and the day which complicates the
scheduling of employees and their productivity.
What Determines Payroll
Cost?
Payroll costs are determined by three factors:
(1) the hourly rate of pay, (2) the level of fringe
benefits and (3) employee productivity.
Fringe benefits can be a significant portion of
payroll costs. These benefits can include:
vacation time, holiday pay, sick leave,
employee meals, social security (the
employer's share is 7.65% of employee's
salary), unemployment compensation
insurance, and medical insurance.
Fringe benefits
The foodservice has been rather stingy in providing extensive fringe
benefits to its workers. However this is changing. With the labor force
getting tighter and the need to reduce high turnover the industry is
improving the benefits offered to employees. Some of the major offerings
are:
Compulsory benefits. These include socials security (which both the
employer and employee must contribute an equal amount), workmen's
compensation and unemployment insurance.
Medical insurance. A very expensive benefit but one that highly valued by
workers. This benefit has been shown to reduce absenteeism. It can also
be a tool to reduce the industry's high turn over problem.
Retirement programs. These programs are generally restricted to
management but larger foodservice companies are extending these
benefits to its non-management workforce. The most popular type plans
are defined contribution in which both the employer and employee
contribute to a fund such as a mutual fund. These benefits also offer tax
advantage to the worker.
Profit sharing. These are generally restricted to management employees.
They designed to motivate employees to maximize the operation's
income. They are designed to create a "win, win" situation where both the
employee and stockholder benefit.
Assessing Labor Productivity
Productivity is important because it defines how much an employee is able
to get done each hour. Restaurant operations find it difficult to achieve full
productivity due to the peaks and valleys in the daily volume of business.
Management needs to be concerned with the labor cost per productive hour.
Productivity is the amount of work performed by an employee in a fixed
period of time.
There are many ways to assess labor productivity. In general,
productivity is measured in terms of the productivity ratio as follows:
Output
Input = Productivity Ratio
Example
If management was considering two potential employees:
(1) an employee who is to be paid $6 an hour plus $1.50
fringe benefit, and who takes an hour and a half to perform
a particular task versus
(2) another employee who is to earn $7 hour plus $2 in
fringe benefits, but performs the same task in one hour.
The first candidate performs the task at a cost of $11.25
(which would be $6 + $1.50 x 1.5 hours).
The second employee, although the higher paid individual,
is more productive since he performs the given task at a
lower cost: $9 ($7 + $2). Management's objective should be
to keep payroll cost as low as possible, not necessarily to
hire lower paid, but unproductive, employees.
Employee Hourly Pay Hourly Customers Cost Per Cost Productivity
Fringe Per hour Customer
Jones 8.00 2.00 25 0.40 4 1
Johnson 7.50 2.00 20 0.48 3 2
Dilbert 6.00 1.25 17 0.43 2 3
Houndog 5.85 0.75 12 0.55 1 4
If we just regard cost, Hounddog looks like the best bet at $6.60 per hour. However
considering productivity, this employee has the highest cost at $.55 per customer.
Jones occupies an opposite position with the highest cost per hour of $10.00 but the
lowest cost per customer $.40. The moral of the example is to consider productivity as
well as raw cost per hour.
Productivity Issues
The three basics elements that determine restaurant
productivity are:
The employees hired.
The equipment available to employees in the
performance of their duties.
The employees' work methods.
If employees are highly motivated, if equipment is
provided to reduce as much labor intensive work
as possible and if management uses well thought
out, efficient work methods, productivity should
be high.
Factors that tend to cause lower productivity in
the foodservice industry are:
The peaks and valleys in work volume.
The existence of many small single
restaurant enterprises.
Menus with numerous items that require the
restaurant's staff to produce many different
types of meals.
Frequent changes in menus
An inexperienced workforce hindered by low
pay and high turnover
Productivity is a critical in controlling restaurant costs. Fast food
operations have achieved high productivity through simplified
menus, automated equipment, self-service, pre-prepared foods
and simplified work processes. For example, a typical fast-food
operation is able to serve 100 patrons with 10.5 hours of labor
input, whereas it takes over 70 hours for a full-service operation to
handle the same number of patrons.
Management needs to be alert to any mismatch between work to
be done and number of workers available. Parkinson's Law states
that workers tend to adjust the pace of their effort in proportion to
the work that needs to be done; if there is less work to do, they
would work at a slower pace. This is often the case in the food
industry, with uneven flows of work, peaks and valleys of activities
and where employees often set their own work standards.
Strategies to Reduce Labor Cost.
The use of pre-prepared convenience foods. Pre-prepared and convenience foods are more
expensive, but they save labor and reduce food waste. Some large chain operations have
commissary kitchens that serve many of their restaurants. Commissary kitchens prepare
meals for inventory thereby realizing the benefits of factory type production.
Limit the number of items offered on their menus. Restaurants with specialized menus
attract those customers who want the types of meals offered. With a limited number of menu
items, restaurants are able to operate more efficiently. Restaurants with many items on their
menus incur high labor and food costs; they also have great difficulty in maintaining meal
quality.
Self-service salad bars, buffets and self-bussing of dishes.
Cross utilization of employees. For example, bus persons can assist servers by carrying
meals orders to the diners' tables.
Designing the restaurant with the layout, equipment and working conditions that facilitate
high productivity. Too often restaurant facilities are designed without any consideration to
worker efficiency. Chain restaurants have achieved efficiency and productivity by
standardizing their restaurant layouts and equipment.
Greater use of labor saving equipment. For example point-of-sales systems and terminals
improve the productivity of cashiers, kitchen and serving area personnel, accountants and
management. Hand held computer terminal are coming into use. Kitchen equipment can
increase productivity through improved microwave ranges and automated ranges and ovens.
Getting Effective Control of
Labor Cost
A seven-step program that management
can use to gain effective control of their
employees and to maintain and improve
productivity is as follows:
The Job
Personnel policies. Effective supervision needs to be backed up by
sound administrative policies. Policies should cover: recruiting, hiring,
orientation and training, supervisory policies, evaluations methods,
compensation and job termination.
A job analysis which consists of two parts: the job specification and the
job analysis.
· The job specification outlines the qualifications that a potential
employee needs to fill the job. This covers education and work history,
plus physical, mental and age requirements.
· The job description lists the tasks and duties to be performed. Job
descriptions are useful in hiring, training and orienting new employees.
When preparing a job analysis., management needs to review the entire
restaurant workload and determine how it is to be divided between
employees.
A good job analysis eliminates questions of who does what, prevents
work overlap and prevents individual employees from being
overworked or under worked.
Job Evaluation
In the process of job evaluation management attempts to specify
how workers fit into the organization. This can be done in three
ways:
Job analysis is a complete description of each of the jobs in the
organization. This is usually done through a job description that
sets forth the position name, code, salary grade, responsible
duties, qualifications, and reporting and supervisory
responsibilities.
How each job fits into the organization. This is done through an
organization chart which shows the reporting structure of the
organization.
A critical factor in job evaluation is to assure that each employee
receives the right wage. Factors such as labor supply, relation to
other companies, skills required, consistency within the
organization and supervisory responsibilities. This is
accomplished through wage and salary policies, which are
administered by personnel department.
Maintaining a Productive Workforce
10 Key Factors Affecting Employee Productivity
1. Employee Selection
2. Training
3. Supervision
4. Scheduling
5. Breaks
6. Morale
7. Menu
8. Convenience vs. Scratch Preparation
9. Equipment
10. Service Level Desired
Maintaining a Productive Workforce
Employee Selection
A job description is a listing of the tasks that
must be accomplished by the employee
hired to fill a particular position.
A job specification is a listing of the personal
characteristics needed to perform the tasks
contained in a particular job description.
Maintaining a Productive Workforce
The employment application is a document completed
by the candidate for employment.
Job interviews, if improperly performed, can subject
an employer to legal liability.
Preemployment testing is a common way to help
improve employee productivity.
Skills tests can include activities such as typing tests,
and computer application tests.
Psychological testing can include personality tests,
tests designed to predict performance, or tests of
mental ability.
Preemployment drug testing is used to determine if an
applicant uses drugs.
Maintaining a Productive Workforce
Increasingly, hospitality employers are
utilizing background checks prior to hiring
employees in selected positions.
Not conducting background checks on
some positions can subject the employer
to potential litigation under the doctrine of
negligent hiring, that is, a failure on the part
of an employer to exercise reasonable
care in the selection of employees.
Maintaining a Productive Workforce
Training
Effective training will improve job
satisfaction and instill in employees a
sense of well-being and accomplishment. It
will also reduce confusion, product waste,
and loss of guests.
Effective training begins with a good
orientation program.
Task training is the training undertaken to
ensure an employee has the skills to meet
productivity goals.
Maintaining a Productive Workforce
Steps for Training
Plan the training session.
Present the training session.
Evaluate the session’s effectiveness.
Retrain at the proper interval.
Maintaining a Productive
Workforce
Supervision
Proper supervision means assisting
employees in improving productivity.
This is why it is so important for managers
to be on the floor, in other words, in the
dining area, during meal periods.
Supervision issues
Management needs to deal with certain issues that can arise in supervising workers. Some the
critical ones are:
Absenteeism. Absenteeism to needs to kept to a minimum. Excessive absenteeism will increase
labor cost due to the need for replacements. Also service quality will suffer. Download here to see
a spreadsheet demonstrating the three absenteeism ratios discussed in the textbook.
Turnover. The foodservice is plagued with high turnover. Some estimate it at 10% per month or a
complete turnover in personnel in ten months. The consequences of this situation are
inexperienced workers, high training and hiring cost and diversion of management time to the
hiring process.
Overtime. Overtime can result in excess pay hours and premium pay. There may be times when
overtime is justified but it needs to be tightly controlled by management.
Employee well-being issues.
Employees with health problems will not be effective workers. Some of the issues that
management needs to deal with in these areas are:
Safety and accident prevention. Management needs to effective prevention programs to reduce
accident exposure in order to protect workers, reduce exposure liability claims and comply with
government laws and regulations.
Wellness programs. Management can encourage employee health through formal or informal
policies. If medical insurance is a fringe benefit, a formal wellness program could be cost justified
by reducing medical insurance premiums.
Substance abuse. Management needs to be alert to employees with drinking or drug problems.
Problems in this area can have devastating effects on productivity and worker morale. Employee
Assistance Programs has been an effective tool in dealing with these kinds of problems.
The Job-Standards, Forecasts
Work simplification is the study and analysis of each job to
determine the easiest and most productive way of performing its
duties. This includes changes in procedures, work layout, the use
of labor saving equipment, and the use of pre-processed foods.
Work simplification increases productivity and reduces labor cost.
Work production standards are developed from information in work
production records. The standards are measurements used to
judge a worker's productivity. These measurements, expressed in
sales dollars per day, meals produced per day, or in other
quantitative factors, measure employee productivity.
Workload forecasts are derived from the daily meal forecast.
Management, using work standards, calculates the number of
employees needed to handle the expected workload. Management's
goal should be the achievement the proper level of staffing
commensurate with the work to be done.
The Job-Scheduling
Scheduling of workers. After determining
the number of workers needed,
management must schedule the individual
workers in the proper time slots. The
process is complicated by fluctuations in
the number of customers served throughout
the day. Scheduling should ensure that the
proper number of employees are on hand to
handle the volume of work required
throughout the day.
Maintaining a Productive
Workforce
Scheduling
Even with highly productive employees,
poor employee scheduling by management
can result in low productivity ratios.
Proper scheduling ensures that the correct
number of employees is available to do the
necessary amount of work.
Split-shift, a technique used to match
individual employee work shifts with peaks
and valleys of customer demand.
Maintaining a Productive
Workforce
Breaks
Employees have both a physical and a
mental need for breaks from their work.
Employees need to know that management
cares enough to establish a break schedule
and stick to it.
Management should view breaks as a
necessary part of maintaining a highly
productive workforce, not as lost or wasted
time.
Block Scheduling-Scheduling patterns
are important. Foodservice operations
could schedule their workers on a block
basis. Workers would work as a group in
a regular shift (no overlap)
Staggered Scheduling-Because most
restaurants experience varying levels of
activities during the day, they a use a
staggered work schedule. Employees
arrive at different times building up to a
full staff level at meal times (overlap)
Job number control list
A number of restaurants use a procedure called a job number control
list to facilitate the staffing of the restaurant. Each job listed on the
control list needs to be analyzed, described and formalized. Quite often
a work production standard is used to determine the number of
positions required for each job type .
Under this system new employees must be hired for a specifically
numbered and classified job that is documented with a job description
and a job specification. People are not hired just because "the help is
needed."
Restaurants using the job number control list system must plan in
advance for the duties and responsibilities of each job in their
operations. Under this system overlapping jobs are avoided. No one is
added to the payroll on a permanent basis unless it is for a numbered
job.
Too often employees are hired for temporary needs, but they remain
staff on after the need is over. Having specific jobs listed on the job
control form doesn't mean that every job listed needs to be hired.
The list should provide the number of employees needed in a given
position to handle the highest possible volume. If the list provides for
10 cooks, but only 5 are justified by current business volume; then only
5 cooks should be hired.
Staff Equivalents
This question here involves the issue of full
time staff equivalents. To cover one full time,
365 day a year, position requires 1.55
employees:
Days in the year to be covered 365
Weekend days off (104)
Sick days (7)
Holidays (8)
Vacation (10)
Days worked by one employee 236
Full time equivalents to cover one position: 365/236
If a restaurant requires 40 employees on hand
each day of the year, then they would need to
hire 62 full-time employees (40 x 1.55).
Part-time workers
Part time workers are used extensively in the
foodservice industry. Part-time workers offer
advantages and disadvantages. The advantages are:
Because of the uneven activity in the daily operation of
a foodservice operation, part-time workers are used to
fill in for short periods of time when activity is high
Part-time employees are not as costly as full time
employees. They receive lower salaries and little or no
fringe benefits.
Part-time workers can be utilized to fill in on the
weekends and provide coverage when regular
employees have time off.
However, there are problems:
In a large city, it can be expensive for part-time
workers to commute to work. The cost of
transportation quite often cannot be justified
by income earned in a short work shift.
Using part-time employees increases the
number of individuals on the payroll.
There is more accounting work, such as the
writing of checks and the filling out of tax
forms
Part-time helps creates more scheduling
Labor scheduling problems
Management can encounter a number of the problems when scheduling
workers:
If a restaurant serves three meals a day, it is often impossible for one shift
to handle all three meals. On the other hand, the time period between
breakfast and dinner does not lend itself to two full shifts.
Foodservice operators experience peaks and valleys of activity during
normal work shifts, not the steady production encountered in a factory
setting.
The proper scheduling of workers requires accurate forecasts of daily
activity. The best forecast can be upset by weather or other factors
beyond management's control resulting in too few or too many workers.
The foodservice industry cannot use idle workers to produce meals for
inventory which can be released at another time when needed. The time of
idle workers cannot be stored and used at another busier time.
An intangible factor of scheduling relates to service quality. While
management may be able to determine the number of people needed to
handle a given number of customers, the issue of quality can be an
important variable in staffing.
The scheduling process
Foodservice labor scheduling proceeds in the following steps:
Develop work production standards for each position in the
restaurant.
Examine the daily activities of an operation's various units to
determine their busy and slow periods.
Determine how customer counts affects the different
organizational units within the restaurant.
Determine the number of workers or work hours needed to handle
forecasted customers in accordance with the operation's work
production standards.
Prepare the schedule based on the capabilities of each of the
organization's employees. The assignment should be based on a
number of factors such employee experience, rotation
considerations, wage rates and any legal restrictions such minors
work hours.
After completion of the above steps schedule the
employee for each workday.
After the schedule is finished it should be reviewed by
the next level of management (the restaurant
managers.). The review should cover issues such as;
(1) projected sales relationship to work hours, (2)
projected labor cost percent, (3) the number of
customers per labor hour, (4) labor cost per hour and
(5) any other criteria utilized by management.
After the schedule is approved, notify the individual
employees of their work schedule.
Review the schedule on an after fact basis to determine
how actual performance compares to schedule.
Determine if there is a need for change.
Maintaining a Productive
Workforce
Morale
Management must create a fun, motivating
environment for employees to work in.
Motivated groups usually work for a
management team that has created a vision,
communicated the vision to employees, and
ensured that employees share the vision.
Maintaining a Productive
Workforce
Creating a vision is nothing more than
finding a "purpose" for the workforce.
A shared purpose between management
and employees is important for the
development and maintenance of high
morale.
Recognize all employees for what they do
best – even the dishwasher.
Maintaining a Productive
Workforce
Employee turnover is high in some
sections of the hospitality industry.
By some estimates, it exceeds 200%
per year. You can measure your
turnover by using the following
formula:
Employee Turnover Rate = Number of Employees Separated
Number of Employees in Workforce
Maintaining a Productive
Workforce
Separated is the term used to describe
employees who have either quit, been
terminated, or in some other manner have
"separated" themselves from the operation.
Some foodservice operators prefer to
distinguish between voluntary and
involuntary separation.
A voluntary separation is one in which the
employee made the decision to leave the
organization.
An involuntary separation is one in which
management has caused the employee to
separate from the organization.
Maintaining a Productive
Workforce
The turnover formula can be
modified to create these two ratios:
Involuntary Employee Turnover Rate =
Number of Employees Involuntarily Separated
Number of Employees in Workforce
Voluntary Employee Turnover Rate =
Number of Employees Voluntarily Separated
Number of Employees in Workforce
Maintaining a Productive
Workforce
Turnover is expensive. This
expense is comprised of actual and
hidden costs. Actual costs include
interviewing and training time, while
hidden costs refer to the number of
dishes broken by a new dishwasher,
etc.
Maintaining a Productive
Workforce
Menu
In general, the more variety of items a
kitchen is asked to produce, the less
efficient that kitchen will be.
Menu items must also be selected to
complement the skill level of the
employees and the equipment available
to produce the menu item.
Since most operations change their
menus infrequently, it is critical that the
menu items selected can be prepared
efficiently and well.
Maintaining a Productive
Workforce
Convenience vs. Scratch Preparation
The decision of whether to "make" or
"buy" involves two major factors, the
product quality and the product cost.
It is important to remember that make
or buy decisions affect both food and
labor costs.
Management, often in consultation
with kitchen production staff, must
resolve make or buy decisions.
Maintaining a Productive Workforce
Equipment
Equipment should be properly maintained
and updated if employees are to be held
accountable for productivity standards or
gains.
Service Levels
When management varies service levels, it
varies employee productivity ratios.
Measuring Current Labor
Productivity
Ways to measure productivity
labor cost percentage
sales per labor hour
labor dollars per guest served
guests served per labor dollar
guests served per labor hour
Work Production Standards
Work production standards are quantitative expressions of the
amount of production expected from various types of jobs in a
specific period of time. These standards can stated in terms of
sales dollars or meals served per worker.
A server may be rated on the dollar volume of business handled
or on the number of covers handled. A coffee shop server might
be expected to handle forty-five to sixty covers in a two-meal
period, whereas a server in a more formal dining room could
only be expected to handle from 25 to 30 covers.
The standards will vary by job description. Unit production
standards can be expressed, for example, in covers by servers,
dishes washed by dishwashers, meals prepared by cooks and
patrons served by the cashier.
Food service operations usually use an employee workday as
the unit in which to express work standard performance. To
determine the number of employee workdays, divide work hours
by 8.
For example, if 100 hours of server time were used during a day,
then the number of workdays would be 12.5.
How are work standards
developed?
Work standards can be developed in a number of ways. Larger operations
may employ sophisticated techniques such as time and motion studies to
set their standards. Staff industrial engineers or outside consultants
would perform this service. The work standards would be determined for
one restaurant and then applied to the other restaurants of the chain.
If there are no industrial engineers or outside consultants available,
records of employee productivity can be used. By analyzing the work
performance history of the better employees over a period of time,
management can observe the range or distribution of work units
produced per day; the standard can then be based on the average or a
point within the center of observations.
Obviously it would not make sense to take the highest or the lowest point
as these might represent unusual circumstances. Once management has
established work standards for all employees, they can then monitor daily
performance against these standards.
Typically, new employees might be below standard but their performance
should improve over time. Work standards for the entire workforce can be
revised upward as the work force becomes more experienced.
How do work standards compare with percent
controls?
Work standards provide a definite baseline or
goal to achieve, and it is relatively
straightforward to observe how well each worker
performs against predetermined standards. It is
a simple matter for management to see if a
particular job is over or below standard. The
performance against standard can also give
information relating to the quality of service and
whether the particular job is overworked. Labor
cost percents provide less specific information.
They merely show the relationship between
labor cost and sales and this relationship can
vary if there is a change in either of these
categories
Measuring Current Labor Productivity
The labor cost percentage is computed
as follows:
Cost of Labor
Total Sales = Labor Cost %
It is important to realize that there are
several ways to define cost of labor – just
hourly, hourly and management, all costs
including payroll.
Measuring Current Labor Productivity
The most perishable commodity any
foodservice operator buys is the labor hour.
When not productively used, it disappears
forever.
This is why many operators prefer to
measure labor productivity in terms of the
amount of sales generated for each labor
hour used.
Total Sales
Labor Hours Used = Sales per Labor Hour
Measuring Current Labor Productivity
However, sales per labor hour neglects to
consider the amount paid to employees
per hour to generate the sales.
Labor Dollars per Guest Served
Cost of Labor
Guests Served = Labor Dollars per Guest Served
Measuring Current Labor Productivity
Guest Served per Labor Dollar
As a measure of productivity, guests
served per labor dollar expended has
advantages. It can be used by foodservice
units that do not routinely record dollar
sales figures.
Guests Served
Cost of Labor = Guests Served per Labor Dollar
Measuring Current Labor Productivity
Guests Served per Labor Hour is a true
measure of productivity, not a measure of
either cost and productivity or sales and
productivity.
It is extremely useful in comparing similar
units in areas with widely differing wage
rates or selling prices.
Guests Served
Labor Hours Used = Guests Served per Labor Hour
Measuring Current Labor
Productivity
Many operators prefer to compute
their productivity measures on a daily,
rather than on a weekly or monthly
basis. This can easily be done by
using a six-column form with cost of
labor, sales, and labor cost %.
An operator may establish labor
subcategories such as production,
service, sanitation, and management.
Measuring Current Labor
Productivity
Labor costs for each subcategory can
be estimated. By following the rules of
algebra and adding the word
“estimated,” the guests served per
labor dollar formula can be restated as
follows:
Number of Estimated Guests Served
Guests Served Per Labor Dollar = Estimated Cost of Labor
Managing Payroll Costs
Essentially, the management of payroll
costs is a four-step process, which
includes the following factors:
1. Determine productivity standards.
2. Forecast sales volume.
3. Schedule employees using productivity
standards and forecasted sales volume.
4. Analyze results.
Managing Payroll Costs
1. Determine productivity standards.
A productivity standard is defined as management's
view of what constitutes an appropriate productivity
ratio in a given foodservice unit or units.
Productivity standards represent what you should
reasonably expect in the way of output per unit of
labor input.
Productivity standards are typically based on the
following types of information: unit history, company
average, industry average, management experience,
or a combination of some or all of the above.
Managing Payroll Costs
2. Forecast sales volume.
Sales volume forecasting, when
combined with established productivity
standards, allows a foodservice operator
to determine the number of employees
needed to effectively service those
guests who will visit the facility.
Managing Payroll Costs
3. Schedule employees using
productivity standards and
forecasted sales volume.
You can establish a labor budget using
your productivity standards, your sales
forecast, and the labor cost percentage
formula you have already learned.
Managing Payroll Costs
Remember that the labor cost percentage
formula is defined as:
Cost of Labor
Total Sales = Labor Cost %
If you include the words “forecasted”,
“standard”, and “budget”, and follow the
rules of algebra, the labor cost percentage
formula can be restated as follows:
Forecasted Total Sales × Labor Cost % Standard
= Cost of Labor Budget
Managing Payroll Costs
You can establish a budget for total number of labor hours
needed to service your establishment.
Guests Served
Labor Hours Used = Guests Served per Labor Hour
If you include the words “forecasted,” “standard,” and
“budget,” and follow the rules of algebra, the guests
served per labor hour formula can be restated as
follows:
Forecasted Number of Guests Served
Guests Served per Labor Hour Standard = Labor Hours Budget
Managing Payroll Costs
Because employee schedules can only
be done in terms of either hours
scheduled or dollars spent, an employee
schedule recap form can be an effective
tool in any daily analysis of labor
productivity.
Since labor is purchased on a daily basis,
labor costs should be monitored on a
daily basis.
Managing Payroll Costs
Some foodservice managers practice an on-call
system whereby employees who are off duty are
assigned to on-call status.
Other managers practice a call-in system. In
this arrangement, employees who are off duty
are required to check in with management on a
daily basis to see if the volume is such that they
may be needed.
Schedule modifications should be done hourly,
if necessary.
It is critical to match labor usage with projected
volume.
Managing Payroll Costs
4. Analyze results.
To complete the job of managing
labor-related expense, you must now
analyze your results by comparing
actual labor cost to budgeted labor
cost.
Actual Amount
Budgeted Amount = % of Budget
Elements of the analysis
The two functions of labor cost analysis
are:
To determine whether labor costs are
over or below management established
standards.
To determine where in the operation the
deviations from standard are taking
place.
Managing Payroll Costs
Standard cost, that is the labor cost
needed to meet established productivity
standards, rather than "budgeted cost.”
In the case of labor, we may still be within
reasonable budget, though we may vary
greatly from the standard.
For this reason, the authors prefer the
term budgeted labor rather than standard
labor. Labor standards will always vary a
bit unless guest counts can be predicted
perfectly which, of course, is rarely the
case.
Difficulties in analyzing labor cost.
There are basically three difficulties in analyzing labor cost
problems:
Once it has been determined that labor costs are excessive
management needs to determine why. There can be a number of
factors: poor scheduling, poorly trained or inefficient employees,
excessive overtime, high employee turnover or high
absenteeism.
Another difficulty in analyzing labor cost is that the
discrepancies can occur in different parts of an operation and
balance each other out. For example, high labor cost in the
kitchen could be offset by low cost in the service area low. Each
of the labor components must be analyzed separately.
Discrepancies can balance out over time so labor cost needs to
be analyzed on a weekly, daily or even hourly basis. Sometimes
labor costs can be too low and result in poor service and
potential loss of customers.
Quality needs to be considered as well as
quantity. A particular server may not
serve as many patrons as other servers
but may have better rapport with the
customers and results in return business.
How important is labor cost?
By looking the following income
statement we can see labor's
significance,
Income Statement Sales
However labor cost percents costs can sometimes be
misleading:
Percentages, calculated on a weekly or monthly basis, will not
disclose daily discrepancies, which can often balance each
other out.
Menu price and employee wage rate changes in will affect the
relationship of sales to labor cost. If management uses labor
cost percents, they need to recognize when these changes take
place and adjust the percent standard accordingly.
Labor cost percents can be distorted by a number of
underlying causes, such as sick or vacation relief.
Comparing labor cost percents between restaurant operations,
which on the surface look similar, can be misleading. Labor
cost percents depends on a number of factors: menu pricing,
the amount of convenience foods used, buffet service, layout of
the restaurant, equipment utilized, local labor market and
services provided. Seemingly similar operations can have
vastly different cost percents because of these circumstances.
Labor Analysis
Reducing Labor-Related Costs
If management finds that labor costs are
too high, problem areas must be identified
and corrective action must be taken.
Ways to reduce fixed labor costs include;
improve productivity, increase sales
volume, combine jobs to eliminate fixed
positions, and reduce wages paid to the
fixed payroll employees.
Reducing Labor-Related Costs
One way to increase productivity and
reduce labor-related expense is through
employee empowerment, involving
employees in the decision-making
process.
Today, employees have come to realize
there is more to life than work.
Management, unable to always offer more
money, has been forced to come up with
new incentives.
Employees are seeking job satisfaction in
addition to salaries or wages.
Summary
Labor Expense in the Hospitality Industry
Assessing Labor Productivity
Maintaining a Productive Workforce
Measuring Current Labor Productivity
Managing Payroll Costs
Reducing Labor-Related Costs
Next Week
Cost-Volume-Profit
Budget Exercise Review