One major purpose of the USAR is to give managers and owners guidance on how to best report the individual other expenses their businesses incur. The reasons why this is important will become very clear in Chapter 9 (Analyzing Results Using the Income Statement) of this text.
While all other expenses incurred by a foodservice operation will affect the amount of profit it produces, in most cases, managers are best served by devoting their attention to controllable, rather than to non-controllable, other expenses.
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It makes little sense for Jo Ann to be concerned about the fact that her rent expense percentage varies monthly. If Jo Ann is comfortable with the six-month average rent percentage (5.88%), she is in control of and managing her other expense
“rent” category. If, however, Jo Ann feels that her rent expense percentage is too high, she has only two options. She must increase sales, and thereby reduce her rent expense percentage, or she must negotiate a lower monthly rental with her landlord.
When rent, or any type of other cost, is fixed, the expense as expressed by the percentage of sales will vary with sales volume. The total amount of the expense, however, does not change in response to changes in sales volume.
Some restaurant lease payment arrangements are not fixed, but, rather, are based on the sales revenue an operator achieves in the leased facility. To illustrate, assume that Jo Ann has a lease arrangement of this type, requiring her to pay 5 percent of her monthly sales revenue as rent. If that were the case, Jo Ann’s monthly lease payments would be completely variable, as shown in Figure 8.2.
Note that the dollar amount of Jo Ann’s rent under this arrangement ranges from a low of $6,000 (February) to a high of $8,200 (May). The percentage of her sales revenue that is devoted to rent, however, remains fixed at 5 percent.
A third type of lease that is common in the hospitality industry illustrates the fact that some other expenses are mixed, that is, there is both a fixed and a variable component to this type of expense. Figure 8.3 demonstrates such a lease arrange- ment. In it, Jo Ann pays a flat rent amount of $5,000 per month plus 1 percent of total sales revenue.
Under this arrangement, a major portion ($5,000) of Jo Ann’s lease is fixed, whereas a smaller amount (1% of revenue) is variable because the amount Jo Ann
FIGURE 8.1 Jo Ann’s Fixed Rent
For Period: 1/1–6/30
Month Rent Expense Sales Rent %
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'FCSVBSZ 6.67%
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FIGURE 8.2 Jo Ann’s Variable Rent
For Period: 1/1–6/30
Month Sales Rent % Rent Expense
+BOVBSZ
'FCSVBSZ
.BSDI
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.BZ
+VOF
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must pay each month varies based on her sales revenue. Mixed expenses of this type are common and often include items such as some energy costs, garbage pickup, cell phone use, some franchise fees, and other expenses where the operator must pay a base amount and then additional amounts are paid as usage or sales volume increases.
In summary, the total dollar amount of fixed expenses does not vary with sales volume, whereas the total dollar amount of variable expenses changes as volume changes. As a percentage of total sales, however, a fixed expense percentage decreases as sales increase, and a variable-expense percentage will not change with changes in sales.
A mixed expense has both fixed and variable components; therefore, as sales increase, the mixed-expense percentage decreases while the total dollar amount of the mixed expense increases. Figure 8.4 shows how fixed, variable, and mixed expenses are affected by increases in an operation’s sales volume.
A convenient way to remember the differences between fixed, variable, and mixed expenses is to consider a paper napkin holder and napkins on a cafeteria line.
The napkin holder is a fixed expense. One holder is sufficient, whether you serve 10 guests at lunch or 100 guests. The napkins themselves, however, are a variable expense. As you serve more guests (assuming each guest takes one napkin), you will incur a greater paper napkin expense. The cost of the napkin holder and napkins, if considered together, would be a mixed expense.
For some very large restaurant chains, it makes sense to separate some mixed expenses into their fixed and variable components, whereas smaller operations may elect, as in the case of the napkin holder and napkins, to combine these expenses.
The company you work for may make the choice of how to account for other expenses, or you may be free to record other expense costs in a manner you feel is best for your own operation.
Effective managers know they should not categorize controllable, non-controllable, fixed, variable, or mixed costs in terms of being either “good” or “bad.” Some expenses are, by their very nature, related to sales volume. Others are not. It is important to
FIGURE 8.3 Jo Ann’s Mixed Rent
For Period: 1/1–6/30
Month Sales
Fixed Rent Expense
1% Variable Rent Expense
Total Rent Expense
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FIGURE 8.4 Fixed, Variable, and Mixed Expense Behaviors as Sales Volume Increases
Expense As a Percentage of Sales Total Dollars
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remember that, in most cases, the goal of management is not to reduce, but rather to increase variable expenses in direct relation to increases in sales volume.
Expenses are required if you are to service your guests. In the example of the paper napkins, it is clear that management would prefer to use 100 paper napkins at lunch rather than 10. As long as the total cost of servicing guests is less than the amount charged to guests, increasing the number of guests served will increase variable other expenses, but it will increase profits as well.
Normal variations in expense percentages that relate only to whether an expense is fixed, variable, or mixed should not be of undue concern to management. It is only when a fixed expense is too high or a variable expense is out of control that management should act. This is called the concept of management by exception.
That is, if the expense is within an acceptable variation range, there is no need for management to intervene. You must take corrective action only when operational results are outside the range of acceptability. This approach keeps you from over- reacting to minor variations in expense, but allows you to monitor all-important expense-related activities.
When managing other expenses, two control and monitoring calculations can be helpful to you:
1. Other expense cost percentage 2. Other expense cost per guest
Each alternative can be used effectively in specific management situations; thus, it is important for you to understand both.
As you learned earlier in this chapter, the other expenses cost percentage is computed as follows:
Other
Total salesexpenses Other cost expenses %
=
Thus, for example, in a situation where a restaurant you operate incurs an advertising expense of $5,000 in a month, serves 10,000 guests, and achieves sales of $78,000 for that same month, you would compute your advertising expense percentage for that month as follows:
$ ,
$5,000 . % 78 000 =6 4
The other expense cost per guest is computed as follows:
Other expense
Number of guests served =Other expense costs per guest
Using the preceding formula, you would compute your advertising expense cost per guest as follows:
$ ,
, 5000 $ .
10 000 050
guests= per guest
The computation required to calculate an other expense percentage requires that the other expense cost category be divided by total sales. In many cases,