Foundations of cost control by daniel traster chapter11

Labor Cost for Hourly Workers Hours Scheduled or worked X Hourly Rate • Preliminary means before benefits • Using scheduled hours yields standard cost • Using worked hours yields actual

chapter 11

Opening Questions

• For current workers, how do you know how much gross (pre-tax) income you should earn each week?

• How much money would you earn if you

worked 40 hours this week? 45 hours?

• Are you ever scheduled for a certain number

of hours only to find that by week’s end

you’ve worked more or fewer hours?

Calculating Labor Costs

Labor Cost for Hourly Workers

Hours Scheduled (or worked) X Hourly

Rate

• Preliminary means before benefits

• Using scheduled hours yields standard cost

• Using worked hours yields actual cost

Labor Cost for Salaried Workers

Annual Salary ÷ 365 days

• Preliminary Labor Cost for any period of time

is the daily cost X the number of days in the period

Preliminary Weekly Labor Cost = Preliminary Daily Labor Cost X 7

Accounting for Benefits

Preliminary Labor Cost X (1 + benefits

percent)

All workers have some benefits cost, even

if just for social security and workers’

comp Benefits and costs may differ between employees Benefits cost typically calculated as a percent of wages or salary

Employee is scheduled for 39.5 hours at

$9.50/hour Benefits cost is 13.8% What

is the employee’s standard labor cost?

Department Labor Cost

• Computerized labor cost spreadsheet

includes (for each employee):

―name

―title

―hourly or daily pay rate

―benefits percent

―hours (either scheduled or worked)

• Enter formulas in advance and the manager only needs to enter each employee’s hours each week.

• For department or company labor cost, add the labor costs for all of the employees

Department Labor Cost (cont.)

Standard vs Actual Labor Costs

• Actual and Standard are rarely identical

• Salaried workers earn the same amount, but hourly workers may have schedules adjusted

• Big variances between standard and actual labor costs may be sign of poor management

Labor Cost Percent

• Actual and standard costs in dollars may vary greatly as business volume changes, but

labor cost percents should be close

• Labor cost percents compare labor cost to

total sales

Labor Cost Percent Formula

• Labor Cost and Sales must cover same time period

• Standard labor cost % uses standard labor

cost and sales dollars

• Actual labor cost % uses actual labor cost and sales dollars

Sales ($)

=

Example 11f

Standard = $12,100 ÷ $38,000 = 31.8%

Actual = $12,850 ÷ $39,400 = 32.6%

• Labor cost went up despite stronger sales

• Poor performance by management

Restaurant budgets $12,100 in weekly labor cost and $38,000 in weekly sales

Actual figures for that week are $12,850 in labor and $39,400 in sales Compare

standard and actual weekly labor costs for the restaurant.

How Labor Cost relates to Profit

Fixed costs do not change with business volume,

so higher sales beyond budget should

generate greater profits if management

controls variable costs

Profit (not labor cost) is the ultimate measure

of management performance, so reduced

labor cost only helps profit if other costs are not equally increased

Measuring and Improving Performance

• Some measures evaluate each employee’s

performance

• Other measures evaluate a team of workers when a productivity value cannot be assigned

to each worker separately

Person - Hours are

the sum of work hours completed

by all the people in a group or team

for a given period of time

Sales per Person or Person-Hour

Sales per person compares dollars in sales generated by each server and comes from POS.

Sale per Person-Hour

Total Sales for a Period Person-Hours for a Period

=

Example 11g

Person-hours = 5 workers X 4 hours = 20

Sales per hour = $8,425 ÷ 20

Covers per Person

Covers per person measures the number of customers served by each server; comes

from POS Servers who handle more customers are more valuable

Covers per Person-Hour

Covers for a Period Person-Hours in a Period

=

11:00 – 2:00 for lunch service and serve

295 covers What is this team’s covers per person-hour?

Sales and Covers per Person-Hour

• Sales per hour and covers per hour are meaningless in an absolute sense Measure to set a baseline and then improve efficiency from there.

person-• They help interpret labor cost numbers,

which are impacted somewhat by varying

wage rates of the employees scheduled

Errors per Cover

Errors per Cover (cont.)

• Errors per cover should always be a decimal well below 1.

• Errors per cover should not change with

business volume, or management must act to improve employee work quality

Errors per Cover

Errors in a Period Covers in Same Period

=

Factors that Impact Performance

and Labor Cost

Employees Effectively Forecasting Accurately Reducing Injuries and Illness

Prime Cost

Labor Cost and Food Cost sometimes work

together Cutting labor by buying pre-fab ingredients can increase food cost and leave profit stagnant

Prime Cost Percent

Prime Cost %

Prime Cost

Sales

=

Prime Cost (cont.)

• Reducing prime cost % (by reducing food,

beverage, or labor cost without increasing the others) usually leads to higher profits

• Prime cost % must not be cut at the expense

of the business’s quality standards or term revenue and profit may suffer.

long-Example 11l

• Restaurant budgets $18,430 for cost of goods sold and $21,070 in labor cost for January

• Sales are forecast to be $70,000

• At month’s end, actual figures are

―$16,590 for cost of goods sold

―$19,962 for labor cost

―$64,800 in sales

Compare restaurant’s standard and

actual prime costs and prime cost

percents.

Costs were controlled very well in a month that

fell below sales targets

36