M01 nra5272 01_se_c01_final

ControllingFoodservice Costs

The Importanceof Cost Control

Chapter 1

Learning ObjectivesAfter completing this chapter, you should be able to:

• Explain how restaurant and foodservice costs affectprofitability.

• 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 cost.

• Explain the basic restaurant or foodservice cost controlprocess.

Chapter 1 The Importance of Cost Control

THE RELATIONSHIP BETWEEN COST AND PROFITABILITY


THE MANAGER’S ROLE IN COST CONTROL


Manager’s MathAnswer the Questions:

1.165 × 360 × $0.15 = $8,910

2.165 × 360 × $.25 = $14,850


TYPES OF COSTSFixed Costs

Variable Costs

Semivariable Costs

Controllable Costs

Noncontrollable Costs


Crossover of Cost Classifications


THE IMPORTANCE OF PRIME COST


Prime Cost as a Percentage of Total Sales


THE COST CONTROL PROCESSDeveloping Performance Standards


Monitoring Actual Performance


Comparing Actual Performance to Performance Standards


Addressing Performance Discrepancies

Chapter 1 The Importance of Cost Control - Summary

1. Explain how restaurant and foodservice costs affect profitability.• If costs get out of line, the profitability of a restaurant or

foodservice operation could be seriously jeopardized.

• Cost controls start with the menu and continue on through purchasing to receiving, storage, production, and finally, service.

• Without controls in place, an operation has no way of determining and evaluating whether the operation is profitable or meeting its budget.

• Controlling and reducing costs are both desirable trends for ensuring the ongoing financial health of an operation.


2. Describe the manager’s role in cost control.

• The size and scope of an operation will determine the extent to which its managers exercise direct control or delegate that responsibility to other staff.

• Managers, employees, and suppliers are expected to meet the standards set by management.

• Standards cover the entire spectrum of the restaurant and foodservice business.


3. Identify the types of costs incurred by restaurant and foodserviceoperations.• Costs can be classified in different ways.

• The most common classifications are fixed, variable, and semivariable costs.

• Fixed costs are those costs that remain the same regardless of sales volume, while variable costs increase or decrease in direct proportion to increases or decreases in sales volume.

• Semivariable costs increase when sales increase and decrease when sales decrease.

• However, change in semivariable costs is not directly proportional to sales.

• Costs also can be either controllable or noncontrollable.

• Controllable costs are those costs that managers can directly control.

• Noncontrollable costs are those costs over which managers have little or no control.


4. Explain the importance of controlling prime cost.

• The major costs that managers have to control are food cost, beverage cost, and labor cost.

• Together they are known as the prime cost, because they are the highest costs in the operation.

• For most operations, a prime cost of less than 65 percent is required for that establishment to be profitable.


5. Explain the basic restaurant or foodservice cost control process.• Managers are responsible for developing performance standards

for a given operation.

• The income statement allows managers to monitor actual financial performance.

• Once actual sales and costs are calculated, these figures are compared to budgeted amounts, operational standards, and historical information in order to identify any variances.

• When costs are determined to be out of line, the cause should be investigated and managers should take action to correct the problem.


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.


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.

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.

Quality standard A standard that sets the degree of excellence of raw materials, finished products, and production standards for the employees.

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.


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.


Chapter Images


Chapter Images continued

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Marketing

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