Chapter 1 Cost and Sales Concepts Principles of Food, Beverage, and Labour Cost Controls, Second Canadian Edition

Learning Objectives 1.1 Define types of costs; fixed, variable, directly variable, semivariable, controllable, noncontrollable, unit, total, prime, historical, and planned 1.2 Define sales and illustrate monetary and nonmonetary sales concepts 1.3 Describe the cost-to-sales relationships, identify cost-to- sales ratios and formulas to compute cost percent and sales price 1.4 Describe causes of industry-wide variations in cost percent 1.5 Explain the value of comparing current cost-to-sales ratios to previous periods Principles of Food, Beverage, and Labour Cost Controls, Second Canadian Edition

Sales - Expenses = Profit Important Concepts Sales: the amount of dollars you take in. Expenses: the costs of the items required to operate the business. Profit: the amount of dollars that remain after all expenses have been paid. Principles of Food, Beverage, and Labour Cost Controls, Second Canadian Edition Sales - Expenses = Profit

Sales - Expenses = Profit Important Concepts Principles of Food, Beverage, and Labour Cost Controls, Second Canadian Edition Sales - Expenses = Profit

Cost Concepts There are four costs a Food Service Manager must concern themselves with. Food costs Beverage costs Labour costs Overhead costs Principles of Food, Beverage, and Labour Cost Controls, Second Canadian Edition

Costs Food costs are the costs associated with actually producing the menu item. Foods are considered “consumed” when they have been used, wastefully or otherwise. Principles of Food, Beverage, and Labour Cost Controls, Second Canadian Edition The cost for a piece of meat is incurred when the piece is no longer available for the purpose for which it was purchased, regardless of whether it has been cooked, served, thrown away, spoiled, or even stolen.

Costs Beverage costs are the costs related to the sale of alcoholic beverages, and ingredients necessary to produce these drinks, such as garnishes. Principles of Food, Beverage, and Labour Cost Controls, Second Canadian Edition Non-alcoholic beverages are considered an expense in the food cost category.

Costs Labour costs include the cost of all employees necessary to run the business, and include salaries, wages and benefits Principles of Food, Beverage, and Labour Cost Controls, Second Canadian Edition The cost of labour is incurred when people are on paid duty, salary or hourly, whether or not they are working and whether they are paid at the end of a shift or at some later date, regardless of whether a sale is made.

Costs Overhead costs include all expenses that are neither food, beverage nor labour, such as utilities, rent, linen, etc. Principles of Food, Beverage, and Labour Cost Controls, Second Canadian Edition Overhead normally consists of all the fixed costs associated with operating the business.

Getting Started Good managers learn to understand, control, and manage their expenses. Percentages are the most common standard used for evaluating costs in the foodservice industry. Principles of Food, Beverage, and Labour Cost Controls, Second Canadian Edition

Various Types of Costs Fixed costs are those unaffected by changes in sales volume. Principles of Food, Beverage, and Labour Cost Controls, Second Canadian Edition

Various Types of Costs Variable costs are related to business volume. Principles of Food, Beverage, and Labour Cost Controls, Second Canadian Edition

Various Types of Costs Semivariable costs have both fixed and variable elements. Principles of Food, Beverage, and Labour Cost Controls, Second Canadian Edition

Costs Controllable costs are those that can be changed in the short term. Variable costs are normally controllable. Noncontrollable costs are those that cannot normally be changed in the short term. These are usually fixed costs.   Principles of Food, Beverage, and Labour Cost Controls, Second Canadian Edition

Costs Unit costs may be food or beverage portions or units of work. Total costs may be the total cost of labour for one period.   Principles of Food, Beverage, and Labour Cost Controls, Second Canadian Edition

Costs Prime cost is the sum of food costs, beverage costs, and labour costs (salaries and wages, plus employee benefits). Historical costs can be found in business records, books of account, and other similar records. Planned costs are projections of what costs will be or should be for a future period. Principles of Food, Beverage, and Labour Cost Controls, Second Canadian Edition

Monetary Sales Monetary terms include total sales and may be given by category (such as total food sales or total beverage sales), by server, or by seat (total dollar sales for a given time period divided by the number of seats in the restaurant). Other monetary terms include sales price, average sale, average cheque (the result of dividing total dollar sales by the number of sales or customers), and average sales per server. Principles of Food, Beverage, and Labour Cost Controls, Second Canadian Edition

Nonmonetary Sales Nonmonetary terms include total number sold (such as number of steaks sold in a given time period) and covers (one diner). Total covers refers to the total number of customers served in a given period. Other nonmonetary terms include seat turnover (the number of seats occupied during a given period divided by the number of seats) and sales mix (a term that describes the relative quantity sold of any menu item compared to other items in the same category). Principles of Food, Beverage, and Labour Cost Controls, Second Canadian Edition

VS Cost-To-Sales Ratio Costs in dollars compared with sales in dollars Principles of Food, Beverage, and Labour Cost Controls, Second Canadian Edition

Cost-To-Sales Ratio: Percents Food Cost = Food Cost % Food Sales  Beverage Cost = Beverage Cost % Beverage Sales Labour Costs = Labour Cost % Total Sales Principles of Food, Beverage, and Labour Cost Controls, Second Canadian Edition

Understanding the Income Statement A summary that details revenue, expenses and profit, for a given period of time, is called the Income Statement. It lists revenue, food and beverage cost, labour cost, other expenses, and profit (or loss). Illustrates the efficiency and profitability of an operation. Principles of Food, Beverage, and Labour Cost Controls, Second Canadian Edition

Simplified Income Statement Put in another format, the equation looks as follows: Revenue (100%) - Food & Beverage Cost % - Labour Cost % - Overhead Cost % = Profit % Principles of Food, Beverage, and Labour Cost Controls, Second Canadian Edition

Common Percentages Used Food and Beverage Cost Revenue = Food & Beverage Cost % 2. Labour Cost Revenue = Labour Cost % 3. Overhead Cost Revenue = Overhead Cost % 4. Profit Revenue = Profit % Principles of Food, Beverage, and Labour Cost Controls, Second Canadian Edition

Activity Simplified Profit and Loss Sales 100% Food Cost 349,725 33% Labour Cost 29% Overhead % Profit 7% Principles of Food, Beverage, and Labour Cost Controls, Second Canadian Edition

High labour & Ingredient cost Industry Variations High labour & Ingredient cost Low labour & High Ingredient cost Principles of Food, Beverage, and Labour Cost Controls, Second Canadian Edition

Using history to predict the future Monitoring Using history to predict the future Monday to Monday Week to Week Principles of Food, Beverage, and Labour Cost Controls, Second Canadian Edition Establishments that gather cost and sales information only monthly, quarterly, or annually may not be able to take effective and immediate remedial action, because the information is not sufficiently timely to shed light on current problems. Costs, once incurred, cannot be recouped.

Key Terms Average cheque, p. 17 Prime costs, p. 13 Average number of covers, p. 19 Sales, p. 14 Average sale, p. 17 Sales mix, p. 20 Average sale per server, p. 18 Sales price, p. 17 Controllable costs, p. 12 Seat turnover, p. 19 Cost, p. 9 Semivariable costs, p. 11 Cost per dollar of sale, p. 21 Total costs, p. 12 Cost percent, p. 21 Total covers, p. 19 Cover, p. 19 Total dollar sales by category, p. 15 Directly variable costs, p. 11 Total number sold, p. 19 Fixed costs, p. 10 Total sales, p. 15 Historical costs, p. 14 Total sales per seat, p. 17 Labour costs, p. 11 Total sales per server, p. 17 Noncontrollable costs, p. 12 Unit costs, p. 12 Overhead, p. 23 Variable costs, p. 11 Planned costs, p. 14 Principles of Food, Beverage, and Labour Cost Controls, Second Canadian Edition

Chapter Web Links Food Marketing Institute: www.fmi.org Canadian Restaurant and Foodservices Association: www.crfa.com Principles of Food, Beverage, and Labour Cost Controls, Second Canadian Edition

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