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					Review Mid Term & Homework
Quiz #3
Chapters 9 & 10
Last Homework Assignment
Chapters 9-10
•Operating Budgets
•Accounting Aspects
of Food & Beverage
Control
Upon completion of this unit, each student will be
  able to:
 Understand how operational budgets are to be
  managed.
 Understand the various types of operational
  budgets.
 Forecast foodservice revenues and guest counts.
 Forecast foodservice operating expenses.
 Prepare an operating budget utilizing historical
  data.
 Calculate food cost, food cost percentage and
  inventory turn over.
   Determine a capital budget based on
    operational needs and prioritization.
    Perform various cost benefit analysis methods
    for fixed assets.
   Budgets will help you better manage your
    restaurant.
   They are a valuable tool used to help
    forecast/predict your revenues, estimate your
    expenses and insure that your profits meet
    your expectations.
   Remember Profit is not just what is left over,
    you must plan ahead and treat profit as an
    “expense” in order to keep your restaurant a
    viable operation.
   The primary need is for a 1 year Operating
    Budget that is detailed on a monthly basis and
    addresses items on the Income Statement.
   This is a detailed plan that outlines estimated
    revenues, expenses and profits – rolled up for
    each department.
   Accountability and responsibility can be
    assigned to managers for each department to
    achieve the budgeted revenue, expense and
    profit goals.
   Capital Budget- A budget that relates to the
    acquisition of equipment, land, property
    improvements and other fixed assets.

   Cash Budget- A budget that estimates cash
    receipts and disbursements during a specified
    time period.
   Departmental Budget- A budget that estimates
    revenue and allocated expenses for a specific
    department within the restaurant

   Master Budget- A budget that combines
    operating, capital, and cash budgets for each
    specific department within the restaurant
   Control- As managers our job is to organize,
    direct and manage all financial aspects of our
    business to assure we are meeting the overall
    profit goals of the business and to do this we
    use the budget as our plan or “blueprint”.

   5 Step Management Process:
   1) Establish Standards
   2) Assess Actual Operating Results
   3) Compare Standard Revenues and Expenses
    with Actual Revenues and Expenses to
    determine causes of differences.
   4) Take Corrective Action if needed.
   5) Evaluate the Results of the Corrective Action
    Process.
1st Step: Determine Expected Revenues
2nd Step: Determine Profit Requirements
3rd Step: Estimate Expenses to be incurred

   Usually the Owner or Manager in a smaller
    operation has the responsibility of setting the
    budget.
   In Large operations it is usually a collaborative
    effort amongst the various departments.
   Can also be dictated to you from a headquarters
    with targets pre-determined.
   Sales Histories
       Past sales can help identify trends
   Current/Anticipated Changes
       New competition, road construction, remodeling
        projects
   Economic Variables
       Inflation, people spend less money (demand lower
        prices), yet your costs are increasing.
   Department Considerations
       Food, Beverage and other revenues should be
        estimated separately
   Revenues projected in the budget are used for:
       Providing required profits
       Paying necessary expenses


   Many Managers assess expense levels after
    revenue is estimated, profit is then what is “left
    over”.
   Instead you should figure first what you want
    your profit to be, then see where the expenses
    have to be in order to make your profit.
   Fixed Costs – Based on your contracts or givens.
   Variable Costs – Expenses that change in direct
    proportion to the related revenue.
   Food and Beverage costs are variable costs and
    typically follow an increase or decrease in the
    adjoining revenue category.
   Usually these expenses are measured, forecasted,
    budgeted as a percentage of sales (i.e. 32% Food
    cost – 28% Beverage Cost) and according to the
    established standard
 Mark up method - variable expenses are
  budgeted by the same amount of increase or
  decrease that sales are projected to change
Ex: If Sales are expected to ↑ 5% and last years
  food cost was $425,000, we would increase the
  budgeted food cost by 5% to $462,250.
 The problem with this approach is that , if
  $425,000 was too high for food cost, you are
  perpetuating this problem by budgeting from
  that as a base.
   Another method: Current percentage
    This method budgets expenses based on what the
      current percentages are for cost categories.
Ex: If food costs ran 34% for last year, next year
  we budget food costs at 34% of the new
  budgeted sales forecast.
 This method also carries the same possible
  deficiencies of the current year forward into the
  planning for the upcoming year.
   Final method: Zero – based budgeting
    This method starts from a zero expense level for every
      category and through justification arrives at a new
      budgeted cost. MUCH more accurate, however,
      requires a tremendous amount of time.
   Most commonly used for overhead expenses
    categories such as repair and maintenance,
    office supplies, etc.
   The difference between budgeted and actual
    amounts in any revenue or expense account.
   Analysis should be undertaken when this
    difference exceeds a pre-established amount
   Corrective Action needs to be taken quickly to
    make the appropriate adjustments.

   Budget Re-forecasting- The process by which
    revenue and expense data in an operating
    budget are revised to reflect current economic
    conditions.
To Reduce        Implement These Corrective Actions
Food Cost        Reduce portion size
                 Replace food with more cost-effective ingredients
                 Feature items with higher profit margins
                 Raise menu prices
Food Waste       Monitor portion control
                 Monitor food storage and rotation
                 Monitor food ordering
                 Improve order communication to reduce production errors
Inventory Cost   Order appropriate quantities-avoid having too much or too
                 little in storage
Labor Cost       Reduce # of employees on schedule
                 Ask employees to end their shifts early
                 Schedule cross trained staff (server/cashier/host)
   Capital Budget does not include day-to-day
    operating expenses and does not roll up into an
    operations P&L (FFEs’)
   What type of costs are included in capital
    budgets
   Steps in the Capital Budget Process
    1. Assess the Capital Needs
    2. Evaluate the Identified Needs
    3. Prioritize & Justify the List of Needs
   Step 1: Assess Capital Needs
     Safety, regulatory or code issues should be
      addressed first
     Aesthetic needs that will impact sales
      should be considered
     Operational needs that will impact
      productivity should be considered
   Step 2: Evaluate Identified Needs
       Conduct a cost/benefit analysis to include Return on
        Investment (ROI)
         Rate of Return
        Income or savings    ÷     Net Amount =          Rate
        generated by project       invested in project   of return

         Payback Period
        Net cash outlay     ÷      Annual net income = Payback
        for project                or savings for project period
 Step 3: Prioritize and Justify the List of Items
Highest priority must be given to the following:
       Items that pose a safety risk either to customers or
        employees, i.e. broken equipment, frayed carpet, etc.
       Items that cause the operation to fall beneath local
        codes (fire, health, etc.)


Final review and approval of Capital Budgets
   usually falls to the owners, CEO, COO, etc.
   Write the Operating Budget for Roger’s for
    January through March from the data
    provided.
   As managers our prime costs are the most
    controllable: food (beverage) and labor
   Food costs must be understood and managed
    and we have multiple tools to help us
    accomplish this task
       Must understand how we get our food cost
       Must understand how we get our food cost percent
       Must understand what is our standard
   Figuring food cost percentage



Food cost ÷ Sales = Food cost percentage
   A process that provides the Manager with
    information about a menu item’s profitability
    and popularity to aid menu planning, design
    and pricing decisions.

   The menu is not just a piece of paper in the
    restaurant. It is THE most important piece of
    paper in the restaurant. It not only tells your
    guests what you have to offer, it sets the tone
    for your profitability.
   Three Critical Tools to begin the Menu
    Engineering Analysis
       Standardized recipes
       Recipe Pre-Costing
         Determining the current market cost for the quantity of
         ingredients needed to produce one portion of a menu
         item.
       Consistent Recipe Use
         If your staff isn’t trained how to use and follow the
         recipes, then having recipes or pre-costing will do you
         no good!
   Menu Engineering emphasizes the
    “Contribution Margin”, in other words what
    does each item contribute to pay for fixed costs
    and the bottom line?
   Formula: food item sales – food item cost
   Takes into account the “Menu Sales Mix” (what
    percentage of sales each item represents)
   It separates menu items into categories based
    on popularity and profitability.
Menu          Number Pop     Food      Selling   Item     Total       Total        Men
Item          Sold   Index % Cost      Price     CM       Cost        Sales        CM


Strip Steak     145    23.4    $7.50   $23.65    $16.15    $1087.50     $3429.25   $234


Ginger          116    18.7    $5.20   $18.00    $12.80     $603.20     $2088.00   $148
Shrimp

Duck            21      3.3    $7.30   $21.50    $14.20     $153.30      $451.50    $29
Breast

Lamb            11      1.8    $6.90   $22.00    $15.10      $75.90      $242.05    $16
Chops

Pork Loin       45      7.3    $6.30   $20.50    $14.20     $283.50      $922.50    $63

Vegetarian      50      8.2    $3.80   $16.50    $12.70     $190.00      $825.00    $63
Burrito

Veal Steak      120    19.4    $6.35   $20.85    $14.50     $762.00     $2502.00   $174


Steak           111    17.9    $7.75   $24.75    $17.00     $860.25     $2747.25   $188
Diane

                619    100%                                $4015.65    $13207.55   $919

Average        77.38   12.5%                                              30.4%      $1
                                       Menu Item
Menu Item Pop Category   CM Category
                                       Class
Strip Steak     H              H           Star

Ginger Shrimp   H              L         Plow Horse

Duck Breast     L              L            Dog

Lamb Chops      L              H          Puzzle

Pork Loin       L              L            Dog

Burrito         L              L            Dog

Veal Steak      H              L         Plow Horse

Steak Diane     H              H            Star
     High




                     H/L           H/H
Popularity




                     L/L           L/H



Low                                      High
             Contribution Margin
   In large operations there is often a purchasing
    department. This is where all ordering and
    receiving is handled.
   Various departments request (requisition)
    items needed, and requisitions are given to the
    Accounting dept. to make sure everything is
    accurately billed and accounted for.

   Collusion- A secret agreement between two or
    more persons to defraud the restaurant.
   Food cost is typically calculated on a monthly
    basis.
   However if it can be calculated daily for even
    tighter controls. This is especially necessary if
    there is a problem.
   Inventory- Too high of inventory opens you up
    to more theft and waste. Too low, obviously
    you are not able to serve your customers what
    they want.
   FIFO- First in, First Out- The most common
    method of accounting for inventory.
   This method assumes that products are
    withdrawn from inventory in the order in
    which they were received and entered into
    storage. Value of inventory is based on the
    most recent price of product.
   LIFO is the opposite. Last in, First out. This
    way the value of the inventory is represented
    by the unit cost of items in inventory the
    longest (oldest price first).
   Actual Cost- Considers the actual price paid for
    each product in inventory.
   Weighted Average- Considers the quantity of
    each product purchased and then the inventory
    value is based on the average price weighted
    by the quantity purchased.
   Physical Inventory- taking an actual physical
    count and valuation on hand at the close of the
    accounting period.
   Inventories should not be completed by the
    person responsible for ordering, because the
    purpose of the inventory is to confirm the
    quantity of product that should be in
    inventory.
   Perpetual Inventory- Allows a running balance
    to be kept of the quantity of items in stock at
    any point in time.
   Inventory Turnover Rate- the number of times
    in a given accounting period that inventory is
    converted into revenue. This “inventory
    turnover rate” measures the rate at which
    inventory is turned into food or beverage costs
    required to generate food or beverage revenue.

   Issuing- The process of removing food or
    beverage from inventory and moving them
    into production cycles.
   Accurate inventory is necessary to calculate an
    accurate food cost.
   If the inventory isn’t counted correctly, costed
    correctly, or calculated correctly you will not
    have a true picture of how well your restaurant
    is doing.
   Consistency in the month to month inventory
    is important. Consistent counting, rounding,
    estimates, etc…
Beginning Inventory + Purchases –
Ending Inventory = Cost of Goods Sold

Example:
Beginning Inventory $9,500
   + Purchases      $16,500
                  = $26,000
- Ending Inventory $8,000
= Total Cost        $18,000
   Products costs (Food and Beverage) and labor
    costs, which represents the two LARGEST
    expenses of almost every restaurant.

   Prime cost is often used to weigh the option of
    making an item from scratch or purchasing it
    ready to use.
 Read Chapters 11-12
 Assignment #4-
  Complete Roger’s Operating Budget
  Make recommendations for Alex’s Ale
   and Grill capital improvement process.

				
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posted:1/30/2013
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