costing in hotel

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2009, Educational Institute 0


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2009, Educational Institute

What is Cost Control???

Minimizing costs the company

must expend without sacrificingthe end product (service/food)

that the customer receives.

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Fixed CostsRemain relatively constant in short run:

Management salaries

Rent expense Insurance expense

Property taxes

Depreciation expense

Interest expense

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Variable CostsVary in relation to business volume:

Food costs

Beverage costs Labor costs

Supplies cost

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Cost-Volume-Profit (CVP)

Assumptions/Limitations Fixed costs remain constant

Variable costs vary directly with revenue

Revenue relates directly to volume All costs divided into fixed costs or variable costs

Only quantitative factors are considered

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Revenue and Expense

Revenue - Expenses = Profit

RevenueDesired Profit = Ideal Expense

Expense

Revenue = Expense

%Revenue (100%)

- Food and Beverage

Cost %

- Labor Cost %

- Other Expense %

= Profit %


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Cost of Food & Bev

Once you know the average number of people selecting a given menu

item, and the total number of guests who made the selections, you can

compute the popularity index, which is defined as the percentage of

total guests choosing a given menu item from a list of alternatives.

Popularity Index =Total Number of a Specific Menu Item Sold

Total Number of All Menu Items Sold

The basic formula for individual menu item forecasting,

based on an items individual sales history, is as follows:

Number of Guests Expected x Item Popularity Index

= Predicted Number of That Item to Be Sold



Determining Actual Food Expense

Cost of food sold is the dollar amount of all food actually

sold, thrown away, wasted or stolen. It is computed as

follows:

Beginning Inventory

PLUS

Purchases

= Goods Available for Sale

MINUS

Ending Inventory

= Cost of Food Consumed

MINUS

Employee Meals

= Cost of Food Sold

Calculating Food Cost



Six Column Reporting

Six Column Food Cost % Estimate

1. Purchases Today

Sales Today = Cost % Today2. Purchases to Date

Sales to Date = Cost % to Date



Calculating Beverage CostBeginning Inventory

PLUS

Purchases

= Goods Available for Sale

Less

Ending Inventory

LessTransfers from Bar

Plus

Transfers to Bar

=



Principles of Cost Percentages

The food cost percentage equation is extremely interesting.In its simplest form, it can be represented as:

whereA = Cost of Goods Sold

B = SalesC = Cost Percentage



If costs can be kept constant but sales increase, the

cost percentage goes down.

If costs remain constant but sales decline, costpercentage increases.

If costs go up at the same rate sales go up, your cost

percentage will remain unchanged.

If costs can be reduced but sales remain constant, the

cost percentage goes down.

If costs increase with no increase in sales, the cost

percentage will go up.



Labor CostLabor Expense includes salaries and wages, but it consistsof other labor-related costs as well.

Payroll refers to the gross pay received by an employee inexchange for his or her work.A salaried employee receives the same income per week ormonth regardless of the number of hours worked.Minimum staffis used to designate the least number of

employees, or payroll dollars, required to operate a facility ordepartment within the facility.Fixed Payroll refers to the amount an operation pays insalaries.Variable Payroll consists of those dollars paid to hourly

employees. Sometimes employees have both a fixed andvariable element to their pay.


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Factors in Designing Control

Systems Accuracy

Timeliness

Objectivity

Consistency

Priority

Cost

Realism

Appropriateness

Flexibility

Specificity

Acceptability

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Important Control DefinitionsControl: Process used by managers to direct,

regulate and restrain the actions of people sothat the established goals of an enterprise may

be achievedCost Control: Process used by managers to

regulate costs and guard against excessive costs Standards:Rules or measures established for

making comparisons and judgments Standard cost: Cost of goods and services

identified, approved and accepted bymanagement

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Important Control Definitions Standard procedures: Procedures that have

been established as the correct methods,routines and techniques for day-to-day

operationsBudget: Realistic expression of managements

goals and objectives expressed in financialterms

Control system: Collection of interrelated andinterdependent control techniques andprocedures in use in a given food and beverageoperation

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Steps in the Control Process Establish standards

Measure actual operating results

Compare actual to standard

Take corrective action

Evaluate corrective action

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The control process consists of

four steps. 1. Establish standards and standard procedures

for operation.

2. Train all individuals to follow establishedstandards and standard procedures.

3. Monitor performance and compare actualperformances with established

standards.4. Take appropriate action to correct deviations

from

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Control techniques available to a

manager include the following. - Establishing standards

- Establishing procedures

- Training - Setting examples

- Observing and correcting employee actions

- Requiring records and reports

- Disciplining employees

- Preparing and following budgets

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Standardized RecipesThe standardized recipe controls both the quantity and quality of what

the kitchen will produce. It consists of the procedures to be used in

preparing and serving each of your menu items. The standardized recipe

is the key to menu item consistency, and ultimately, operational success.

In general, standardized recipes contain the following information:

1. Item name

2. Total yield (number of servings)

3. Portion size

4. Ingredient list

5. Preparation/method section

6. Cooking time and temperature

7. Special instructions, if necessary

8. Recipe cost (optional)


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BudgetingDeveloping the Budget

To establish any type of budget, you need to have thefollowing information available:

1. Prior period operating results

2. Assumptions of next period operations

3. Goals

4. Monitoring policiesannual budgetachievement budget

A b d t i i l f t ti t f


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A budget is simply a forecast or estimate of

projected revenue, expense, and profit.

The 28-day-period approach to budgeting divides ayear into 13 equal periods of 28 days each. This

helps the manager compare performance from one

period to the next without having to compensate for

extra days in any one period.

If significant variations with planned results

from a budget occur, management must:

1. Define the problem

2. Determine the cause

3. Take corrective action

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Multi-Unit BudgetingBottom-up budgeting

Operating budgets assembled at unit level

Unit-level budgets rolled up the organization Budgets geared specifically to individual operations

Creates ownership at unit manager level

Top-down budgeting

Operating budgets developed at corporate level

Budgets passed down to unit levels

Corporate profit requirements made part ofindividual unit plans

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Budget Development ProcessCalculate projected revenue levels.

Revenue histories

Current factors

Economic variables

Other factors

Special concerns

Determine profit requirements.

Calculate projected expense levels.

Simple mark-up method

Percentage method Zero-based budget calculations

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Developing the Budget

To establish any type of budget, you need to

have the following information available:1. Prior period operating results

2. Examine the external environment to assess any conditions thatcould affect sales volume in the coming year

3. Review any planned changes in the operation that would affectsales volume

4. Determine the nature and extent of changes in cost levels

5. Have the projections for sales, costs and profits approved bymanagement

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Estimating ExpensesMark-Up

Method Estimates future expenses on basis of current expense

levels

Amounts of current expense levels areincreased/decreased for new operating budget

Assumes all costs were reasonable during current year

Inefficiency could be extended into the

new budget

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Estimating ExpensesPercentage

Method Based on current percentage of each expense relative

to revenue

Applies same cost percentages of current year toupcoming year

Assumes all costs were reasonable during current year

Inefficiency could be extended into the

new budget

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Estimating ExpensesZero-Based

Method Builds new budgeted expenses from a zero base

Current and previous years amounts/percentages areignored

Each expense item justified on its own merit

Avoids extending inefficiency into new budget butrequires considerable time/effort

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Variance AnalysisIdentifies differences between budgeted plans and actualresults

Equations below: positive variances are favorable;negative variances are unfavorable

Revenue Variances = Actual Amount Budgeted Amount

Expense Variances = Budgeted Amount Actual Amount

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Additional Terms Control process

Flexible budget

Operating budget Procedures

Quality standards

Quantity standards

Sales control

Static budget

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Just as the P&L tells you about your past

performance, the budget is developed to help

you achieve your future goals.

To prepare the budget and stay within it assuresyou predetermined profit levels.

The effective foodservice operator builds his orher budget, monitors it closely, modifies it

when necessary, and achieves the desiredresults.

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Monitoring the Budget

In general, the budget should be monitored in

each of the following three areas:

1. Revenue

2. Expense

3. Profit

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To determine a food budget, compute the estimated

food cost as follows:

1. Last Years Average Food Cost per Meal

= Last Years Cost of Food / Total

Meals Served

2. Last Years Food Cost per Meal

+ % Estimated Increase in

Food Costs = This Years

Food Cost per Meal

3. This Years Food Cost Per Meal

x Number of Meals to Be

Served This Year = Estimated Cost

of Food This Year


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To determine a labor budget, compute the estimated

labor cost as follows:

1. Last Years Labor Cost per Meal

= Last Years Cost of Labor / Total Meals

Served

2. Last Years Labor Cost per Meal+ % Estimated Increase in

Labor Cost = This Years

Labor Cost per Meal

3. This Years Labor Cost per Mealx Number of Meals to Be Served This

Year = Estimated Cost of Labor This

Year


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As business conditions change, changes in the budgetare to be expected. This is because budgets are basedon a specific set of assumptions, and as theseassumptions change, so too does the budget thatfollows from the assumptions.

Budgeted profit must be realized if the operation is toprovide adequate returns for owner and investor.

The primary goal of management is to generate theprofits necessary for the successful continuation of the

business. Budgeting for these profits is a fundamentalstep in the process.

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costing in hotel