controllable costs by abe20

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									PRINCIPLES OF FOOD, BEVERAGE, AND LABOR COST CONTROLS

CHAPTER 1

COST AND SALES CONCEPTS

COST CONCEPTS

Definition of Cost: The expense to a hotel or restaurant of goods and services is when
the goods are consumed or the services rendered. Food and beverages are considered
“consumed” when they have been used – wastefully or otherwise, and are no longer
available for the purpose for which they were acquired.

Fixed and Variable Costs

Fixed Cost – are those costs that are normally unaffected by changes in sales volume.
The term fixed should never be taken to mean unchanging, merely to indicate that any
changes that may occur in such costs are related only indirectly to changes in sales
volume.

               Examples: Rent, Utilities, Insurance Premiums

Variable Costs – are those costs that directly related to business volume. The obvious
variable costs are food and beverage. As business volume increases, so do these costs.
As business volume decreases, so do these costs.

Labor Costs – it is important to note that labor cost must be broken down into both Fixed
Cost and Variable Cost.

                  Variable Cost Employees – are those employees that vary depending
                   on business volume. Example: Wait-staff
                  Fixed Cost Employees – are those employees that remain constant
                   regardless of the amount of business volume.

Both fixed and variable cost employees are listed on the income statement under one
category called “salaries and wages.”

CONTROLLABLE AND NON-CONTROLLABLE COSTS

Controllable costs – are costs that can be changed in the short term. Variable costs are
normally controllable. Certain fixed costs are controllable, including advertising,
promotions, utilities, repairs, etc.

Non-Controllable Costs – those costs that cannot be changed in the short term. These
typically include items such rent, depreciation, and taxes.
PRIME COST

Prime costs is a term used in the food and beverage industry to refer to the cost of
materials and labor. In this class, we will define prime costs as:

               Prime Cost = Food Cost + Beverage Cost + Labor Cost

HISTORICAL AND PLANNED COSTS

Historical costs are figures that have already happened and can be found in the business
records.

Planned costs – using historical costs in the present to determine what is likely to happen
in a future period to come. These numbers are also used in budgeting.

COST-TO-SALES RATIOS

Because raw dollar figures for costs are of no REAL significance for control purposes,
we must express them in relation to the volume with which they vary. This is referred to
as the cost-sales ratio.

                       COST % = COST
                                SALES

Food Cost % = Food Cost
              Food Sales

Beverage Cost % = Bev Cost
                  Bev Sales

Labor Cost % = Labor Cost
               Total Sales

Examples of ways to use this formula:

To determine cost %:          Cost % = Cost          or      3.60 = 30%
                                       Sales                 12.00

To determine sales price given a desired cost %:

               Cost   =      Sale             or             3.60   = $12.00
               Cost %                                        0.30

To determine cost when the sales price and cost % are known:

               Sale X Cost % = Cost           or             $12.00 X 0.30 = $3.60
INDUSTRY WIDE VARIATIONS IN COST

Cost percents vary considerably from one foodservice operation to another. Some factors
contributing to these variations would be type of service, location, and type of menu.

                 Fast food – those that operate at a low margin of profit per item served
                  and depend on relatively high business volume.
                 Fine dining – those operations that operate at a relatively high margin
                  of profit and therefore do not require such high business volume.

SALES CONCEPTS

Definition of Sales – revenue resulting from the exchange of products and services of a
restaurant, bar, or related enterprise.

                 Monetary Sales
                 Non-Monetary Sales


POPULARITY INDEX

                 Sometimes referred to as a Sales Mix %, Popularity %, Sales Mix, or
                  Menu Mix %
                 In order for us to determine what customers might eat when they visit
                  our food service outlets, it is important to calculate a popularity index.
                  A popularity index is the ratio of the number of portions sold of a
                  given menu item to the total number of portions sold of all meu items
                  for the period.
                 Example: If during one lunch, we sold 10 portions of item A, 15
                  portions of item B, 5 portions of C, 10 portions of d, and 20 portions of
                  item E, then the popularity index of each item is as follows:

                      Item           Number Sold            Popularity Index

                      A              10                     16.7%

                      B              15                     25%

                      C              5                      8.3 %

                      D              10                     16.7%

                      E              20                     33.3 %

                                     60                     100 %

								
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