Principles of food, beverage and labor cost controls

Preface viiAcknowledgments ix PART I Introduction to Food, Beverage, and Labor Controls 1CHAPTER 1 Cost and Sales Concepts 3 CHAPTER 2 The Control Process 31 CHAPTER 3 Cost/Volume/Profit

PRINCIPLES OF

FOOD, BEVERAGE, AND LABOR

COST CONTROLS

~ PRINCIPLES OF

FOOD, BEVERAGE, AND LABOR

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Library of Congress Cataloging-in-Publication Data

Dittmer, Paul.

Principles of food, beverage, and labor cost controls / Paul R Dittmer.—7th ed.

p cm.

ISBN 0-471-39703-2 (cloth : alk paper)

1 Food service—Cost controls I Title.

TX911.3.C65 D57 2002

Printed in the United States of America

10 9 8 7 6 5 4 3 2 1

Preface viiAcknowledgments ix

PART I Introduction to Food, Beverage, and Labor Controls 1CHAPTER 1 Cost and Sales Concepts 3

CHAPTER 2 The Control Process 31

CHAPTER 3 Cost/Volume/Profit Relationships 61

PART II Food Control 81CHAPTER 4 Food Purchasing Control 83

CHAPTER 5 Food Receiving Control 111

CHAPTER 6 Food Storing and Issuing Control 125

CHAPTER 7 Food Production Control I: Portions 151

CHAPTER 8 Food Production Control II: Quantities 181

CHAPTER 9 Monitoring Foodservice Operations I: Monthly Inventory and Monthly Food

Cost 205CHAPTER 10 Monitoring Foodservice Operations II: Daily Food Cost 233

CHAPTER 11 Monitoring Foodservice Operations III: Actual vs Standard Food Costs 249CHAPTER 12 Controlling Food Sales 267

PART III Beverage Control 309CHAPTER 13 Beverage Purchasing Control 311

CHAPTER 14 Beverage Receiving, Storing, and Issuing Control 337

CHAPTER 15 Beverage Production Control 359

CHAPTER 16 Monitoring Beverage Operations 385

CHAPTER 17 Beverage Sales Control 415

PART IV Labor Control 431

CHAPTER 18 Labor Cost Considerations 433

CHAPTER 19 Establishing Performance Standards 455

CHAPTER 20 Training Staff 489

CHAPTER 21 Monitoring Performance and Taking Corrective Action 509

Afterword 527Appendix: Cost/Volume/Profit In-Depth Analysis 529Glossary 543

Index 563

of its scope It identifies working definitions for the terms cost and sales, discusses the control process in some detail, and introduces

the basics of cost/volume/profit analysis

Part II addresses the application of the four-step control cess to the primary phases of foodservice operations: purchasing,receiving, storing, issuing, and production Specific techniques andprocedures for each phase are explained and discussed in detail.Three chapters are devoted to determining costs and using them

pro-as monitoring devices in foodservice operations One chapter dealsspecifically with food sales control, offering a broad definition of theterm and providing detailed discussion of several approaches tosales control

Part III discusses the application of the four-step control cess to the various beverage operations: purchasing, receiving,storing, issuing, and production Here, too, specific techniques andprocedures for each phase are explained and discussed in detail.One chapter is devoted to the principal methods used to monitorbeverage operations The final chapter in Part III specifically ad-dresses beverage sales control, offering a broad definition of theterm and providing detailed discussion of several approaches tocontrolling beverage sales

pro-Part IV is a four-chapter exposition of labor cost control The first

of the four explores the factors affecting labor cost and labor costpercentage Admittedly, some of these are beyond the control ofmanagement, but it is important for managers to know about them.The second chapter discusses the need for performance standards.This leads naturally to a chapter on training, a topic many believe to

be central to labor cost control The concluding chapter in Part IVdeals with monitoring performance and taking corrective action.The appendix is an expansion of Chapter 3, “Cost/Volume/Profit Relationships.” It is designed for students desiring a more in-depth understanding of this important topic The material in theappendix, while important, is not necessary for an understanding

of the principles discussed in the text

The author recognizes that most food and beverage operationsare computerized to some extent Thus, each of the chapters in Parts

I, II, and III has a concluding section dealing with computer tions; and Excel䉸 computer exercises are provided at the end of eachchapter, utilizing the floppy diskette found in the back of this book

opera-In developing and revising the text, flexibility has always been

a key concern For example, each of the four parts can generallystand alone Except for Part I, eliminating any other part will notmake it difficult to use the remaining parts Thus, in courses with-out beverage components, instructors may prefer to skip Part III.And instructors in courses that do not include labor cost controlcan choose to ignore Part IV

The book has a greater number of chapters than many tors use in a one-term course In our view, this is a virtue, because

instruc-it provides instructors winstruc-ith opportuninstruc-ities to select chapters dealingwith specific topics identified in their course syllabus We believethis is the best way to meet the varying needs of instructors in thebroad range of courses and programs in this field

Because a great many chapters include more questions andproblems than most will be inclined to assign, instructors will find

it easy to make selective use of the end-of-chapter exercises forwritten assignment or for in-class discussion

Supplementary Materials

An Instructor’s Manual (ISBN 0-471-20778-0) to accompany the

textbook is available to qualified adopters upon request from thepublisher It contains answers to the end-of-chapter questions andproblems, along with various other materials designed to assist inthe classroom

The National Restaurant Association (NRA) Educational

Foun-dation, in consultation with the author, has developed a Student Workbook for its ProMgmt certificate program The workbook con-

tains exercises and a study outline for each chapter, and a practicetest of 80 multiple-choice questions This practice test will assiststudents in preparation for the certificate examination

In addition, an Instructor’s Guide (ISBN 0-471-20876-0) is

available to qualified adopters to complement and highlight the

in-formation in the textbook and Student Workbook.

In revising this work, the author sincerely thanks Michael O’Fallon,Washington State University, and Marc Lubetkin, University ofHouston, for their assistance in reviewing the manuscript of the

Seventh Edition and suggesting changes and additions to the Sixth Edition.

In addition, the author would like to acknowledge reviewers ofthe previous editions:

Patricia S Bartholomew, Frank C Constantino, Stephen K.Holzinger, and Fedele J Panzarino, New York Technical College ofthe City University of New York; Julie Rain, New Hampshire Col-lege; Warren Sackler, Rochester Institute of Technology; Robert A.Heath and Edward F McIntyre, Birmingham (U.K.) College of Food,Tourism, and Creative Studies; Kevin Bedard, of Canopy’s TrainingRestaurant, a program of the Educational Opportunity Center,State University of New York at Brockport; Andrew R Schwarz, Sul-livan Country Community College; Allan Sherwin, LundebergSchool of Seamanship; James A Bardi, the Berks Campus of Penn-sylvania State University; Mary Ann Carroll, Keystone Junior Col-lege; George G Fenich, University of New Orleans; John Drysdale,Johnson Country Community College; Frederick Laughlin, Jr.,Northwestern Michigan College; Earl Arrowwood, Jr., Bucks Coun-try Community College; Rodney Rudolph, State University of NewYork of Technology at Delhi; John Stefanelli, University of Nevada,Las Vegas; Wallace Rande, Northern Arizona University; PaulMcVety, Johnson and Wales University; David Tucker, WidenerUniversity; Charles Latour, Northern Virginia Community College;Larry Ross, Georgia State University; Michael Evans, AppalachianState University; Chris Letchinger, Kendall College; AnthonyBruno, Nassau Community College; Don St Hilaire, CaliforniaState Polytechnic University-Pomona

Particular thanks goes to Millie Torres, Associate Managing itor at John Wiley & Sons, for her outstanding work in preparing

Ed-the Seventh Edition for publication.

If this edition of the text is successful, proving to be a usefuladdition to the growing number of professional texts available for

those planning careers in food and beverage management, ahealthy measure of credit will be due to the many individuals whosehelp we have acknowledged above If not—if the work is somewhatoff the mark—the author accepts full responsibility for the short-comings.

PRINCIPLES OF

FOOD, BEVERAGE, AND LABOR COST CONTROLS

~ PART I

Introduction to Food, Beverage, and Labor Controls

Cost and Sales Concepts

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

1 Define the terms cost and sales.

2 Define and provide an example of the following types of costs:

fixed, directly variable, semivariable, controllable, lable, unit, total, prime, historical, and planned

noncontrol-3 Provide several examples illustrating monetary and

nonmone-tary sales concepts

4 Describe the significance of cost-to-sales relationships and

identify several cost-to-sales ratios important in food and erage management

bev-5 Identify the formulas used to compute the following: cost

per-cent, sales price, maximum allowable cost per person

6 Describe factors that cause industry-wide variations in cost

percentages

7 Explain the value of comparing current cost-to-sales ratios with

those for previous periods

Introduction

The Rush Hour Inn

Until she decided to purchase a restaurant two years ago, KimRusher had been a successful advertising executive Her annualincome was substantial, and she augmented it by investing in someprofitable real estate ventures with her brother However, her po-sition in advertising required that she travel several days a week,and over time the travel became wearisome to her This made her

decide to give up the advertising business in favor of operating herown business.

On the advice of her brother, she decided to go into the rant business even though she lacked previous experience in thefield After all her years of travel, she thought she knew more aboutrestaurants from the customer’s point of view than most restau-rateurs So she began to look around for an appropriate property.Fortunately, she soon found a place just 12 miles from her home,located on a main road on the outskirts of a city of 75,000 people.The building and equipment were only six years old and apparently

restau-in fine condition, and the retirrestau-ing owner was anxious to sell at avery fair price The owner’s books revealed a successful operation,with a restaurant profit of approximately $165,000 per year KimRusher decided to buy The restaurant had 100 seats It was openseven days a week, from 6:00 A.M to 10:00P.M., serving a variedmenu of standard American fare Kim believed she would be able

to run it successfully with a small and dedicated staff

In the first year, Kim’s profits were less than those of the vious owner After two years, profits were continuing to decline Therestaurant was simply not showing an adequate profit, even thoughKim had increased the volume of business over that of the previousowner The place was reasonably busy, her customers often com-plimented her on the food, and her staff appeared to be loyal andhelpful in every way The truth was that Kim Rusher was operating

pre-a populpre-ar, but not very profitpre-able, food pre-and beverpre-age business Atthe end of the second full year of operation, the statement of incomeprepared by her accountant revealed a restaurant profit of $36,117(Figure 1.1)

It quickly became apparent to Kim, her family, and her ant that unless something could be done to make the restaurantmore profitable, the operation would not be worth the effort re-quired

account-The Graduate Restaurant

Just a few miles down the road from the Rush Hour Inn, Bill Youngowns and operates the Graduate Restaurant After four years inthe air force, Bill had worked for an insurance company for a fewyears before enrolling in a nearby college to study hospitality man-agement His interest in the food and beverage sector of the hos-pitality industry began in his high school days when he worked parttime in the local unit of a national fast-food chain Although hisinterest had grown steadily over the years, it took considerablecourage for him to give up a fairly promising insurance career to goback to school He earned a degree in hospitality management andthen went to work as the assistant manager in a local restaurant

Interest, Depreciation, and Income Taxes

Figure 1.1 The Rush Hour Inn income statement

Over the next several years he worked in three food and beverageoperations in the area, including the Rush Hour Inn, before decid-ing that he was ready to own and operate his own restaurant.With the help of his family and a local bank, Bill was able topurchase the Graduate Restaurant, a fairly popular establishmentwith the same type of menu as the Rush Hour Inn as well as com-parable prices and hours of operation In fact, the only differences

to the casual observer were size and location: The Graduate taurant had only 50 seats and was in a somewhat less favorablelocation

Res-Under the previous owner, the restaurant had shown a profit

of $65,000 per year But Bill felt sure he could increase the profit

by applying the principles he had learned in the college’s hospitalitymanagement program The employees he inherited with the res-taurant were both loyal and cooperative, and he found them recep-tive to the changes that he made gradually over the first year ofoperation None of the changes were dramatically apparent to thecustomers; in fact, at the end of the first year, most had not noticedany changes at all In general, they were as pleased with the estab-lishment as they had been when Jim first took it over, and they

INCOME STATEMENT

Year Ended December 31, 200XSales

Food $ 786,250.00Beverage $ 138,750.00 Total Sales $ 925,000.00Cost of Sales

Food $ 275,187.00Beverage $ 34,688.00 Total Cost of Sales $ 309,875.00Gross Profit $ 615,125.00Controllable Expenses

Salaries and Wages $ 185,000.00Employee Benefits $ 46,250.00Other Controllable Expenses $ 138,750.00 Total Controllable Expenses $ 370,000.00

245,125.00

$ Interest, Depreciation, and Income Taxes

Occupancy Costs $ 78,625.00Interest $ 13,875.00Depreciation $ 46,250.00 Total $ 138,750.00Restaurant Profit $ 106,375.00Income Before Occupancy Costs,

Figure 1.2 The Graduate Restaurant income statement

continued to return In addition, newcomers tried the restaurant,liked it, and became regular customers At the end of the first fullyear of operation, Bill’s accountant presented him with a statement

of income showing a restaurant profit of $106,375 (Figure 1.2).The statement confirmed Bill’s expectations It proved to himthat his management of the operation was effective in the ways hehad anticipated At the end of his first year, he looked to the futurewith confidence

A comparison of the statements of income for these two rants reveals some very important facts As one might expect, theRush Hour Inn, with twice as many seats as the Graduate Restau-rant, as well as a comparable menu and comparable prices, showsapproximately twice the dollar volume of sales However, in spite ofthe apparently favorable sales comparison, the restaurant profit forthe Rush Hour Inn is considerably less than the Graduate Restau-rant Because the difference between sales and restaurant profit oneach statement of income is represented by costs of various kinds,

restau-Cost Concepts 7

we can infer that part of the difficulty with the Rush Hour Inn issomehow related to cost The costs of operation seem to be in morefavorable proportion to sales in the Graduate Restaurant Initially,

we must look to the nature of these costs and their relations to sales

to find the differences between the two establishments It is sible that the costs of operation are not well regulated, or con-trolled, by the Rush Hour Inn It is also possible that sales are notwell controlled and that if Kim Rusher is going to increase her profit

pos-to a desirable level, she must begin by exercising greater controlover the several kinds of operating costs, as well as over sales.The statement of income from the Graduate Restaurant sug-gests that Bill Young has kept both costs and sales under control,and, as we shall see, this is critically important to the success ofhis business Comparative investigation of the two restaurantswould reveal that Bill Young had instituted various control proce-dures in the Graduate Restaurant that are noticeably absent in KimRusher’s business These control procedures are important fea-tures of a computer program that plays a significant part in theoperation of the Graduate Restaurant These procedures have en-abled Jim to manage his business more effectively It will be im-portant, therefore, to look closely at the nature and effect of thesecontrol procedures in succeeding chapters However, before pro-ceeding, it will be useful to establish clear definitions of the terms

cost, sales, and control Cost and sales will be defined and

dis-cussed in this chapter; control will be covered in Chapter 2

Cost Concepts

Definition of Cost

Accountants define a cost as a reduction in the value of an assetfor the purpose of securing benefit or gain That definition, al-though technically correct, is not very useful in a basic discussion

of controls, so we will modify it somewhat

As we use the term in our discussion of cost control in the food

and beverage business, cost is defined as the expense to a hotel or

restaurant for goods or services when the goods are consumed orthe services are rendered Foods and beverages are considered

“consumed” when they have been used, wastefully or otherwise,and are no longer available for the purposes for which they wereacquired Thus, the cost of a piece of meat is incurred when thepiece is no longer available for the purpose for which it was pur-chased, because it has been cooked, served, or thrown away be-cause it has spoiled, or even because it has been stolen The cost

of labor is incurred when people are on duty, whether or not theyare working and whether they are paid at the end of a shift or atsome later date.

The cost of any item may be expressed in a variety of units:weight, volume, or total value The cost of meat, for example, can

be expressed as a value per piece, per pound, or per individual tion The cost of liquor can be expressed as a value per bottle, perdrink, or per ounce Labor costs can be expressed as value per hour(an hourly wage, for example) or value per week (a weekly salary).Costs can be viewed in a number of different ways, and it will

por-be useful to identify some of them por-before proceeding

Fixed and Variable Costs

The terms fixed and variable are used to distinguish between those

costs that have no direct relationship to business volume and thosethat do

Fixed Costs Fixed costs are costs that are normally unaffected by changes

in sales volume They are said to have little direct relationship tothe business volume because they do not change significantly whenthe number of sales increases or decreases Insurance premiums,real estate taxes, and depreciation on equipment are examples offixed costs Real estate taxes, after all, are set by governmental au-thorities and are based on government’s need for a determinedamount of total revenue The taxes for an individual establishmentare based on the appraised value of the assessed property as realestate Real estate taxes do not change when the sales volume in

an establishment changes

All fixed costs change over time, of course, sometimes ing and sometimes decreasing However, changes in fixed costs arenot normally related to short-term changes in business volume.They are sometimes tied indirectly to long-term volume changes.For example, an increase in the cost of insurance premiums may

increas-be attributable to an insurance company’s perception of increasedrisk associated with higher volume Even though the increase ininsurance cost is somehow related to an increase in volume, thecost of insurance is still considered a fixed cost Advertising ex-pense is another example: Larger establishments tend to spendmore on advertising because their larger sales volume makes largeramounts of money available for the purpose, but advertising ex-pense is still considered a fixed cost

The term fixed should never be taken to mean static or

un-changing, but merely to indicate that any changes that may occur

in such costs are related only indirectly or distantly to changes in

Cost Concepts 9

volume Sometimes, in fact, changes in fixed costs are wholly related to changes in volume, as with real estate taxes Other ex-amples of costs that are generally considered fixed include repairsand maintenance, rent or occupancy costs, most utility costs, andthe costs of professional services, such as accounting

un-Variable Costs

Variable costs are costs that are clearly related to business

volume As business volume increases, variable costs will increase;

as volume decreases, variable costs should decrease too The vious examples of variable costs are food, beverages, and labor.However, there are significant differences between the behavior offood and beverage costs and the behavior of labor costs

ob-Food and beverage costs are considered directly variable costs

Directly variable costs are those that are directly linked to volume

of business, so that every increase or decrease in volume brings acorresponding increase or decrease in cost Every time a restaurantsells an order of steak, it incurs a cost for the meat Similarly, eachsale of a bottle of beer at the bar results in a cost for the beer Totaldirectly variable costs, then, increase or decrease—or at leastshould increase or decrease—in direct proportion to sales volume.Payroll costs (including salaries and wages and employee ben-

efits, and often referred to as labor costs) present an interesting

contrast Foodservice employees may be divided into two ries—those whose numbers will remain constant despite normalfluctuations in business volume, and those whose numbers andconsequent total costs should logically (and often will) vary withnormal changes in business volume The first category includessuch personnel as the manager, bookkeeper, chef, and cashier Interms of the preceding definition, they are fixed-cost personnel.Their numbers and costs may change, but not because of short-term changes in business volume The second category includesthe servers, or the waitstaff As business volume changes, theirnumbers and total costs can be expected to increase or decreaseaccordingly

catego-Both fixed-cost and variable-cost employees are included in onecategory on the statement of income: “Salaries and Wages.” Be-cause payroll cost has both the fixed element and the variable el-

ement, it is known as a semivariable cost, meaning that a portion

of it should change with short-term changes in business volume,and another portion should not

It must be noted that each individual establishment must makeits own determination of which employees should be fixed-cost per-sonnel and which should be variable-cost In some specializedcases, it is possible for payroll to consist entirely of either fixed-cost

or variable-cost personnel For example, there are some

restau-rants in which the entire staff works for hourly wages In thesecases, numbers of hours worked and consequent costs are almostwholly related to business volume Conversely, in some smaller res-taurants employees may all be on regular salaries, in which caselabor cost is considered fixed.

Controllable and Noncontrollable Costs

Costs may also be labeled controllable and noncontrollable

Con-trollable costs are those that can be changed in the short term.

Variable costs are normally controllable The cost of food or erages, for example, can be changed in several ways—by changingportion sizes, by changing ingredients in a recipe, or by changingthe quality of the products purchased

bev-The cost of labor can be increased or decreased in the shortterm by hiring additional employees or by laying some off, by in-creasing or decreasing the hours of work, or, in some instances, byincreasing or decreasing wages

In addition, certain fixed costs are controllable, including vertising and promotion, utilities, repairs and maintenance, andadministrative and general expenses, a category that includes of-fice supplies, postage, and telephone expenses, among others It ispossible for owners or managers to make decisions that will changeany of these in the short term

ad-In contrast, noncontrollable costs are those that cannot

nor-mally be changed in the short term These are usually fixed costs,and a list of the more common ones would include rent, interest on

a mortgage, real estate taxes, license fees, and depreciation agers do not normally have the ability to change any of these in thenear term

Man-Unit and Total Costs

It is also important to distinguish between unit costs and total costs The units may be food or beverage portions, as in the cost of

one steak or one martini, or units of work, as in the hourly rate for

an employee It is also useful to consider costs in terms of totals,

as in the total cost of all food served in one period, such as a week

or a month, or the total cost of labor for one period The costs on astatement of income are all total costs, rather than unit costs.These concepts are best illustrated by example In Sherwin’sSteak House, a restaurant where steaks are cut from strip loins, astrip loin was purchased for $63.75 If one entire strip were con-sumed in one day, the total cost would be $63.75 However, thecost per unit (the steak) depends on the number of steaks cut fromthe strip If there are 15, the unit cost is an average of $4.25 No 2

Cost Concepts 11

Cost Behavior as Business Volume Changes

Unit Costs Total Cost

Variable Cost Does not change Changes

It must be noted that this relationship does not always hold true.

As volume increases some variable costs have a tendency to decrease This is particularly true with variable labor costs, because workers become more productive with greater time utilization Food can be purchased cheaper in larger quantities and can thus reduce variable costs.

Figure 1.3 Cost behavior as business changes

of the 15 are likely to have identical costs, because it is not normallypossible for a butcher to cut all steaks to exactly the same weight

In the food and beverage business we commonly deal with averageunit costs, rather than actual unit costs It is important to knowunit costs for purposes of establishing menu prices and determin-ing unit profitability Total costs, including those that appear instatements of income, are normally used for broader purposes, in-cluding the determination of the relationship between total costsand total sales—as discussed later in this chapter—and for deter-mining overall profitability of operations

It is important to note that, as business volume changes, totaland unit costs are affected in different ways Assume that a restau-rant has a fixed cost for rent of $2,000 per month If 2,000 custom-ers were served during a period of one month, the fixed cost of rentper customer would be $1 If, in the succeeding month, the number

of customers increased to 4,000, the total fixed cost for rent wouldnot change, but the fixed cost per unit (customer) would be reducedfrom $1.00 to $.50

A similar analysis may be done with variable costs The variablecost for the steak described earlier is $4.25 per unit If 2,000 cus-tomers in a given month order steak, the total variable cost would

be $8,500, at $4.25 average unit cost per steak If, in the followingmonth, 4,000 customers order steak, the variable cost per unit (thesteak) should remain at $4.25, whereas the total variable cost for4,000 steaks increases to $17,000

The preceding paragraphs illustrate cost behavior only as ness volume increases, but it is important to recognize that costsbehave similarly as business volume decreases The relationshipshold true Figure 1.3 illustrates the behavior of fixed and variablecosts per unit and in total, as discussed earlier

busi-It is important to understand these relationships when dealingwith cost/volume/profit analysis and the calculation of break-evenpoints, which are discussed in Chapter 3.

Prime Cost

Prime cost is a term our industry uses to refer to the costs of

ma-terials and labor: food, beverages, and payroll Unfortunately, though everyone agrees that total food costs and total beveragecosts should be included in prime cost, there is no general agree-ment on the payroll cost component Some would include all payrollcosts, and others would include only the cost of kitchen staff Inthis text, prime cost is defined as the sum of food costs, beveragecosts, and labor costs (salaries and wages, plus employee benefits).These, taken together, represent the largest portion of total costsfor virtually all foodservice operations In addition, these costs cantypically be altered by management more easily than fixed costs.Consequently, prime cost is of the greatest interest to most ownersand managers The level and control of prime cost play a large part

al-in determal-inal-ing whether an establishment will meet its financialgoals In this text, we therefore concentrate on those controllablecosts that are most important in determining profit: food cost, bev-erage cost, and labor cost

Historical and Planned Costs

Two additional cost concepts are important for those seeking to

comprehend cost control: historical cost and planned cost The

definition of cost at the beginning of this chapter carries with it animplication that all costs are historical—that is, that they can befound in business records, books of account, financial statements,invoices, employees’ time cards, and other similar records His-torical costs are used for various important purposes, such as es-tablishing unit costs, determining menu prices, and comparingpresent with past labor costs However, the value of historical costs

is not limited to these few purposes Historical records of costs are

of particular value for planning—for determining in the presentwhat is likely to happen in the future Planning is among the mostimportant functions of management, and, in order to plan effec-tively, managers use historical costs to develop planned costs—projections of what costs will be or should be for a future period.Thus, historical costs are necessary for effective planning Thiskind of planning is often called budgeting, a topic to be discussed

in Chapter 2

Sales Concepts 13

Sales Concepts

A brief introduction to costs in food and beverage operations havingbeen given, it will be useful to establish a working definition of the

term sales and to examine some of the principal sales concepts

required for an understanding of control in foodservice

The term sales is used in a number of ways among

profession-als in the foodservice industry For the term to be meaningful, onemust be specific about the context in which it is used The followingparagraphs therefore define the term and explore some of the manyways it is used in the industry

Sales Defined

In general, the term sales is defined as revenue resulting from the

exchange of products and services for value In our industry, foodand beverage sales are exchanges of the products and services of arestaurant, bar, or related enterprise, for value We normally ex-press sales in monetary terms, although there are other possibili-ties Actually, there are two basic groups of terms normally used infood and beverage operations to express sales concepts: monetaryand nonmonetary

Monetary Terms

Total Sales Total sales is a term that refers to the total volume of sales

expressed in dollar terms This may be for any given time period,such as a week, a month, or a year For example, total dollar salesfor the Rush Hour Inn was expressed as $1,804,000 for the yearending December 31, 200X

Total Sales by Category Examples of total dollar sales by

cat-egory are total food sales or total beverage sales, referring to the

total dollar volume of sales for all items in one category By

exten-sion, we may see such terms as total steak sales or total seafood sales, referring to the total dollar volume of sales for all items in

those particular categories

Total Sales per Server Total sales per server is the total dollar

volume of sales for which a given server has been responsible in agiven time period, such as a meal period, a day, or a week Thesefigures are sometimes used by management to make judgmentsabout the comparative performance of two or more employees It

may be helpful, for example, to identify those servers responsiblefor the greatest and for the least dollar sales in a given period.

Total Sales per Seat Total sales per seat is the total dollar

sales for a given time period divided by the number of seats in therestaurant The normal time period used is one year This figure ismost frequently used by chain operations as a means for comparingsales results of one unit with those of another In addition, the Na-tional Restaurant Association determines this average nationally

so that individual operators may compare their results with those

of other similar restaurants

Sales Price Sales price refers to the amount charged each

cus-tomer purchasing one unit of a particular item The unit may be asingle item (e.g., an appetizer or an entre´e) or an entire meal, de-pending on the manner in which a restaurant prices its products.The sum of all sales prices charged for all items sold in a given timeperiod will be total dollar sales for that time period

Average Sale An average sale in business is determined by

adding individual sales to determine a total and then dividing thattotal by the number of individual sales There are two such aver-ages commonly calculated in food and beverage operations: averagesale per customer and average sale per server

Average Sale per Customer Average sale per customer is the

result of dividing total dollar sales by the number of sales or tomers For example, if total dollar sales for a given day in a res-taurant were $1,258 and the restaurant had served 183 customers,then the average dollar sale would be $6.87

cus-This average is determined as follows:

The average dollar sale concept is also expressed as the average check or the average cover, which are synonymous terms in our

industry The average dollar sale is used by foodservice operators

to compare the sales performance of one employee with that of other, to identify sales trends, and to compare the effectiveness ofvarious menus, menu listings, or sales promotions

an-This figure is of considerable interest to managers, who arelikely to be interested in following business trends If the averagesale decreases over time, management will probably investigate thereasons for the changes in customer spending habits Possibilitiesinclude a deterioration in service standards, customer dissatisfac-

Sales Concepts 15

tion with food quality, inadequate sales promotion, and changes inportion sizes

Average Sale per Server Average sale per server is total dollar

sales for an individual server divided by the number of customersserved by that individual This, too, is a figure used for comparativepurposes, and it is usually considered a better indicator of the salesability of a particular individual because, unlike total sales perserver, it eliminates differences caused by variations in the num-bers of persons served

All of these monetary sales concepts are common in the try and are likely to be encountered quickly by those seeking ca-reers in food and beverage management Yet there are a number ofnonmonetary sales concepts and terms that should also be under-stood

indus-Nonmonetary Terms

Total Number Sold Total number sold refers to the total

number of steaks, shrimp cocktails, or any other menu items sold

in a given time period This figure is useful in a number of ways.For example, foodservice managers use total number sold toidentify unpopular menu items, in order to eliminate such itemsfrom the menu In addition, historical records of total numbers ofspecific items sold are useful for forecasting sales Such forecastsare helpful in making decisions about purchasing and production.Total number of a specific item sold is a figure used to makejudgments about quantities in inventory and about sales records,

as discussed in later chapters

Covers Cover is a term used in our industry to describe one

diner, regardless of the quantity of food he or she consumes Anindividual consuming a continental breakfast in a hotel coffee shop

is counted as one cover So is another individual in the same coffeeshop who orders a full breakfast consisting of juice, eggs, bacon,toast, and coffee These two are counted as two covers

Total Covers Total covers refers to the total number of

cus-tomers served in a given period—an hour, a meal period, a day, aweek, or some other period Foodservice managers are usually par-ticularly interested in these figures, which are compared with fig-ures for similar periods in the past so that judgments can be madeabout business trends

Average Covers An average number of covers is determined

by dividing the total number of covers for a given time period bysome other number That number may be the number of hours in

Menu Item Entrées Sold Sales Mix

Figure 1.4 Sales mix for the Sherwood Island Lodge

a meal period, the number of days the establishment is open perweek, or the number of servers on duty during the time period,among many other possibilities The following are some of the morecommon:

The averages so derived can be of considerable help to a ager attempting to make judgments about such common questions

man-as the efficiency of service in the dining room, the effectiveness of

a promotional campaign, or the effectiveness of a particular server

Seat Turnover Seat turnover, most often called simply

turn-over or turns, refers to the number of seats occupied during a given

period (or the number of customers served during that period) vided by the number of seats available For example, if 150 personswere served luncheon in a dining room with 50 seats, seat turnoverwould be calculated as 3, obviously meaning that, on average, eachseat had been used three times during the period Seat turnovermay be calculated for any period, but is most often calculated for

di-a given medi-al period

Sales Mix Sales mix is a term used to describe the relative

quantity sold of any menu item as compared with other items inthe same category The relative quantities are normally percentages

of total unit sales and always total 100% For example, assume thatthe Sherwood Island Lodge offers a menu with five entre´e itemsrepresented by the letters A, B, C, D, and E Total portion sales foreach of these for the month of August are provided in Figure 1.4.During the month of August, a total of 8,000 entre´es were sold,

The Cost-to-Sales Ratio: Cost Percent 17

1,000 of which were portions of A Thus, sales of A represent 12.5percent of total unit sales, calculated as follows:

Similar calculations would be performed for items B, C, D, and

E, the results of which appear in Figure 1.4—that is, the sales mixfor the Sherwood Island Lodge, based on historical records

The Cost-to-Sales Ratio: Cost Percent

Raw dollar figures for directly variable and semivariable costs areseldom, if ever, of any particular significance for control purposes.Because these costs vary to some extent with business volume,they become significant only when expressed in relation to that vol-ume with which they vary Foodservice managers calculate costs

in dollars and compare those costs with sales in dollars This ables them to discuss the relationship between costs and sales,sometimes described as the cost per dollar of sale, the ratio of costs

en-to sales, or simply as the cost-en-to-sales ratio The industry uses thefollowing basic formula for calculating cost-to-sales ratio

The formula normally results in a decimal answer, and any imal can be converted to a percentage if one multiplies it by 100and adds a percent sign (%) This is the same as simply moving thedecimal point two places to the right and adding a percent sign.Because it is ordinarily used to calculate cost percents, the for-mula is commonly written as

This formula can then be extended to show the following tionships:

Consider the statements of income for the two establishmentsdescribed earlier—the Rush Hour Inn and the Graduate Restau-rant In the case of the Graduate Restaurant, we saw that food cost-

Graduate Restaurant Rush Hour InnFood Sales $ 786,250.00 $ 1,533,400.00Cost of Food Sold $ 275,187.00 $ 644,028.00Cost per Dollar of Sale $ 0.420.35 $Food Cost % 35% 42%

Figure 1.5 Comparison of costs and sales

ing $275,187 ultimately resulted in sales of $786,250 To mine the percentage of sales represented by cost, we divide cost bysales, as in the preceding formula, and multiply the resulting dec-imal answer by 100 in order to convert it to a percentage:

restau-The Cost-to-Sales Ratio: Cost Percent 19

Graduate Rush HourRestaurant InnFood Cost as a % of Food Sales 35.00% 42.00%

25.00% 32.00%Combine Food Cost and Beverage Cost

as a % of Total Sales 33.50% 40.50%Payroll as a % of Total Sales 25.00% 33.80%Overhead as a % of total Sales 30.00% 23.75%Beverage Cost as a % of Beverage Sales

Figure 1.6 Comparison of cost percentages

rants lies in the fact that the food cost per dollar of sale is $.07higher in one Expressed another way, one can say that the cost-to-sales ratio for food is 7 percent higher in the Rush Hour Inn It

is not until raw dollar figures have been converted to this form thatthere is any useful way of comparing them

Because food cost is variable, it increases and decreases withsales volume It would not be possible to make useful comparisonsbetween operating periods for one restaurant or between similarrestaurants (as in a chain, for example) unless one were to workwith cost percents, or with costs per dollar of sale Because cost-control figures in the hospitality industry are most commonly ex-pressed in terms of cost percents, we will deal with those figures inthis text In addition, because real dollar figures in real restaurantoperations seldom result in round numbers, our percents will beexpressed in tenths of 1 percent—35.9 percent or 36.2 percent, forexample This, too, is common in the hospitality industry and per-mits a greater degree of accuracy After all, in the case of the Grad-uate Restaurant, one-tenth of 1 percent of sales is $786.25, which

is a considerable number of real dollars

Using the preceding formula, it is now possible to develop achart (Figure 1.6) comparing cost percents in the two restaurants

It is both interesting and significant that the cost percents forthe components of prime cost—food, beverages, and labor—are allhigher at the Rush Hour Inn than they are at the Graduate Res-taurant The remaining costs are lower in the Rush Hour Inn whenexpressed as a percent of sales In foodservice these remaining

costs are often referred to as overhead costs In this text, the term

overhead cost is used to mean all costs other than prime cost

Over-head normally consists of all the fixed costs associated with ating the business One of the prime reasons that the overheadcosts of the Rush Hour Inn are lower than those of the GraduateRestaurant, when expressed as a percentage of sales, is the highersales volume of the Rush Hour Inn It is normal for high-volumerestaurants to have a lower overhead cost percentage than restau-

oper-rants with lower volume of sales Nevertheless, the Graduate taurant still makes a higher profit than the Rush Hour Inn.Sometimes the formula

If the given cost % were 30.0 % and the food cost for the itemwere $3.60, the appropriate sales price would be $12.00, as illus-trated here:

Suppose this banquet manager is dealing with a group willing

to spend $15.00 per person for a banquet, and the same given 30.0percent cost percent is to apply Calculation of the maximum per-missible cost per person is facilitated by rearranging the formulaonce again:

So the cost per person can be calculated as $4.50:

In summary, the cost percent formula can be written and used

in any one of three possible forms:

The foregoing discussion has assumed that food and beveragecosts are relatively stable over time and that one can readily predictfuture costs accurately Unfortunately, that is not normally thecase In spite of that fact, however, it is often necessary to quoteprices for functions to be held some months in the future To do so

The Cost-to-Sales Ratio: Cost Percent 21

with some reasonable degree of accuracy, one should consider bothseasonal fluctuations in costs and inflation rates For example, theprice of most shellfish is highest in New England during the wintermonths when the catch is smallest, and this fact should be takeninto account when quoting prices in July for a function to be held

in January Moreover, in times of inflation, various food costs crease at various rates These can frequently be anticipated bymanagement from published information and should be taken intoaccount when quoting future sales prices An example is the case

in-of an establishment quoting a banquet price for a date six months

in the future when the current rate of inflation is 10 percent on anannual basis If the current food cost for one item is calculated to

be $4.00, the manager may be reasonably sure that the cost will

be somewhat higher in six months Although it is not possible topredict a future cost with perfect accuracy, it is possible to approx-imate it A simple way is to assume that one-half of the annual ratewill apply to the first six months of the upcoming year, and thususe 5 percent (one-half of 10 percent) as the approximate futurecost—$4.20, in this case Assuming a preestablished food cost per-cent of 30 percent, sales price will be increased from $13.33 to

$14.00, as illustrated here

Mathematicians will immediately recognize that this tion is not wholly accurate However, it does offer a simple systemfor taking inflation into account and is clearly better than ignoringinflation completely

calcula-Industry-wide Variations in Cost Percents

Cost percents vary considerably from one foodservice operation toanother There are many possible reasons for these variations, sev-eral of which are discussed in the following paragraphs Some ofthe factors contributing to these variations are type of service, lo-cation, price structure, and type of menu

In very broad terms, there are two basic types of foodserviceoperations:

Those that operate at a low margin of profit per item served anddepend on relatively high business volume

Those that operate at a relatively high margin of profit per itemand therefore do not require such high business volume

It is apparent that if two operations—one of each type—were tohave any menu items in common, the menu price would tend to belower in the operation of the first type

Cost of Food and Beverages 40%

Other Controllable and Noncontrollable Costs 30%Profit Before Income Taxes 10%

Figure 1.7 Cost analysis for typical low-margin restaurant

The following examples of the cost structures of establishments

in these two categories are intended to serve only as illustrations

of relative costs The examples should not be taken to imply eitherthat these are standards for the industry or that any particularrestaurant should have or should strive to achieve the illustratedcost structure The cost structure for each individual restaurantmust be determined for that restaurant alone, the obvious pointbeing that, as percentages of sales, costs must always total lessthan 100.0 percent if the operation is to be profitable

Restaurants that depend principally on convenience foods—theso-called fast-food or quick-service operations—are generally in-cluded in the aforementioned first (low margin) category Because

of relatively lower menu prices, the food cost percents in these taurants tend to be higher However, they hire unskilled personnel,pay lower wages, and keep the number of employees at a minimum.This makes it possible for them to offset high food cost percent withlow labor cost and low labor cost percent A typical cost analysisfor such a restaurant is shown in Figure 1.7

res-Restaurants in the second (high margin) category tend to pend less on convenience foods, catering to customers who preferfresh foods (often prepared gourmet-style) and more personal ser-vice This type of food preparation and service usually requires agreater number of personnel who are more highly skilled and of-ten better paid This tends to keep the cost of labor higher inthese restaurants than in establishments of the first type cited.However, the food cost percent in such establishments tends to

de-be lower, partly de-because of higher menu prices An analysis ofcosts for a typical restaurant of this type would resemble that inFigure 1.8

It is important to note that operations in the first category quire greater numbers of customers to achieve a given dollar vol-ume of sales In the second example, partly because of higher menuprices, fewer customers are required to reach a given dollar volume

re-In general, it is possible to achieve a profit with fewer customers ifmenu prices are high

The Cost-to-Sales Ratio: Cost Percent 23

Cost of Food and Beverages 40%

Other Controllable and Noncontrollable Costs 30%Profit Before Income Taxes 10%

Figure 1.8 Cost analysis for typical high-margin restaurant

In the two examples cited, profit as a percentage of sales isshown to be 10.0 percent It must be remembered that these figuresare not to be taken as industry standards or even as necessarilydesirable standards Some experts believe that 5.0 percent profit isdesirable; others think that a lower percentage of profit will helpensure customer satisfaction and will induce customers to returnregularly If true, this would be likely to lengthen the business life

of a restaurant

The appropriate percentage of profit for a given restaurant must

be based on other factors, such as desired return on investment,the real and perceived risks of being in the foodservice business ascompared with other forms of investment, the return one mightexpect to earn in some other business, and a whole range of con-siderations involving the competition in a specific market In thelast analysis, evaluations and judgments about costs, sales, andprofits must be made on an individual, case-by-case basis Eachrestaurant tends to be unique

Monitoring Costs and Sales

It is obvious that total sales must exceed total costs if a foodserviceenterprise is to be profitable If costs exceed sales for an extendedperiod of time, the enterprise may eventually face bankruptcy Atthe very least, the owner will have to put additional funds into thebusiness to keep it going It is the job of the manager—and the costcontroller, if there is one—to be constantly aware of the costs ofoperating the business and to keep these costs below the level ofsales Fortunately, many smaller operations and most larger op-erations have the benefit of computers and industry—specific com-puter programs that automatically calculate the data described inthis chapter (see Chapter 3 for an example of such a program) Dailyreports printed out by the computer allow management to monitorvarious cost and sales information, as well as the important ratios(percents) These ratios are compared with the same ratios fromprevious periods, and judgments are made about whether the ra-tios are satisfactory If not, remedial steps must be taken to bring

these ratios into line with those of previous periods It is importantthat the cost and sales data used to calculate these ratios be fromlike periods Customarily, comparisons are made for specific days

of the week—Monday of last week compared with Monday of thisweek, for example Sometimes comparisons are made of like weeks

in two different months—the first week in June compared with thefirst week in July, for example Sometimes trends can be identified

by those who track these ratios from week to week

However, there are still many establishments in which cost andsales data are seldom examined and ratios are rarely calculated Ifthis is the case, it should be obvious that management is taking ahigh degree of risk

Establishments that gather cost and sales information onlymonthly, quarterly, or annually may not be able to take effectiveremedial action, because the information is not sufficiently timely

to shed light on current problems

Chapter Essentials

In this chapter, we defined cost as the term is used in the

foodser-vice industry and showed that all industry-related costs can beviewed from several perspectives, including fixed versus variable(with some variable costs being directly variable and others beingsemivariable), controllable versus noncontrollable, total versus

unit, and historical versus planned We defined the term prime cost

and showed how the components of the prime cost relate to one

another as well as to total sales We defined sales and illustrated a

number of special terms commonly used in the industry to discussand compare various ways of identifying and expressing sales.Monetary expressions of sales include total sales; total sales by cat-egory, by server, and by seat; sales prices; and average sale per

customer and per server We defined the term cover, and identified

such nonmonetary expressions of sales as total number sold, totalcovers, average covers, seat turnover, and sales mix We definedthe cost-to-sales ratio and provided the formulas used in industryfor various common calculations We also showed how cost-to-sales ratios may vary from one establishment to another through-out the industry Finally, we discussed the importance of monitor-ing cost and sales data and of calculating significant ratiosregularly An understanding of these concepts will provide the nec-essary foundation for those seeking to understand and apply thecontrol process in foodservice

Chapter Essentials 25

Key Terms in This Chapter

Average number of covers

Average sale

Average sale per customer

Average sale per server

Total coversTotal number soldTotal sales

Total sales by categoryTotal sales per seatTotal sales per serverUnit cost

Variable cost

Questions and Problems

1 Given the following information, calculate cost percentages.

Round your answers to the nearest tenth of a percent

a Cost percent 28.0%; Sales $500.00

b Cost percent 34.5%; Sales $2,400.00

c Cost percent 24.8%; Sales $225.00

d Cost percent 31.6%; Sales $1,065.00

e Cost percent 29.7%; Sales $790.00

f Cost percent 21.2%; Sales $4,100.00

3 Calculate sales, given the following figures for cost percent and

cost

a Cost percent 30.0%; Cost $90.00

b Cost percent 25.0%; Cost $500.00

c Cost percent 33.3%; Cost $1,000.00

d Cost percent 27.3%; Cost $1,300.40

e Cost percent 24.5%; Cost $88.20

f Cost percent 34.8%; Cost $1,113.60

4 List three examples of foodservice costs that are fixed Are they

controllable? Explain your answers

5 List three examples of foodservice costs that are variable Are

they controllable? Explain your answers

6 Write a short paragraph illustrating why a comparison of raw

dollar costs in two restaurants would not be meaningful, but

a comparison of the cost percents for food, beverages, labor,and overhead might be

7 The present cost to Lil’s Restaurant for one a` la carte steak is

$3.20 This is 40.0 percent of the menu sales price

a What is the present sales price?

b At an annual inflation rate of 11 percent, what is this steak

likely to cost one year from today?

c Using the cost calculated in (b) above, what should the

menu sales price be for this item in one year if the costpercent at that time is to be 38 percent?

d If you were a banquet manager planning a function six

months from now and planning to use this item, what unitcost would you plan for?

e The banquet manager in (d) above has already calculated

that the other items included in this banquet menu willhave increased in cost in six months from $2.00 to $2.11.What should the sales price per person be for this banquet

if the desired cost percentage is 40 percent?

8 In the Loner Inn, total fixed costs for October were $28,422.80.

In that month, 14,228 covers were served

a What was fixed cost per cover for October?

b Assume that fixed costs will increase by 2 percent in

No-vember Determine fixed cost per cover if the number ofcovers decreases by 10 percent in November

9 Joe’s Downtown Restaurant purchases domestic red wine at

$9.20 per bottle Each bottle contains 3 liters, the equivalent

of 101 ounces The wine is served in 5-ounce glasses, andmanagement allows for one ounce of spillage per 3 liter bottle

a What is the average unit cost per drink?

b What is the total cost of 60 glasses of wine?

c The banquet manager is planning a function for 120

per-sons for next Friday evening Each guest will be given oneglass of wine How many bottles should be ordered for theparty?

d What will be the unit cost of the wine? The total cost?

10 Sales records for luncheon in the Newmarket Restaurant for

a recent week were: