1. What Is Cost Control? 1
Controlling Foodservice Costs
OH 1-1

2. Chapter Learning Objectives
Describe the relationship between standards and controlling costs.
Identify the types of costs incurred by a restaurant or foodservice organization.
Classify foodservice costs as controllable or noncontrollable.
Describe and give examples of controllable and noncontrollable costs.
Instructor’s Notes
Indicate that these objectives (competencies) drive the information in the chapter and in this session.
The chapter learning objectives continue on the next slide.
Ask the following question, “What are some costs other than food and labor that restaurants must pay if they are to stay open?

3. Chapter Learning Objectives continued
Classify foodservice costs as variable, semivariable, or fixed.
Describe and give examples of variable, semivariable, and fixed costs.
Explain the basic foodservice cost control process.
Instructor’s Notes
Point out that the terms, “costs” and “expenses,” are often used interchangeably.
Indicate that a restaurant cannot stay in business unless it is profitable. In order for a manager to be effective, he or she must understand all costs associated with running the business.
Ask the following question, “What can happen to a business if costs get out of line?”

4. Characteristics of Controls
Contribute to profit making
Start with the menu
Affect all areas of the operation
Are formalized through a restaurant’s policies and procedures
Instructor’s Note
Ask students the following question, “What controls do you use in monitoring your own daily activities?”
Explain that quality controls help ensure guest satisfaction.

5. Cost Standards Are used to compare actual results to planned results
Are established by management
Standards may be designed to
Ensure a profit
Stay within the budget
Achieve planned quality levels
Instructor’s Note
Ask the following question, “What are some food-related standards that might be different in a hospital foodservice compared to a commercial restaurant?”
Point out that standards can relate to food quality, employee performance, and profit goals. Explain that there is a direct relationship between controlling costs and achieving profit standards.

6. Excessive costs reduce restaurant profitability.
Costs Impact Profit
Instructor’s Notes
Explain to students that increases in total costs can be positive (the result of increased sales) or negative (the result of inefficiencies).
Excessive costs reduce restaurant profitability.

7. Types of Costs Controllable Costs Noncontrollable Costs Food Insurance
Labor
Cleaning supplies
Noncontrollable Costs
Insurance
Mortgage payments
Cost of licenses
Instructor’s Notes
Point out that controllable costs generally vary with changes in sales volume.
Ask students to provide other examples of noncontrollable costs.

8. Types of Costs continued
Fixed Costs
Do not vary with sales volume
Do not change from one accounting period to the next
Variable Costs
Increases and decreases are directly related to sales volume
Semivariable Costs
Increase or decrease with changes in sales volume, but not in direct proportion
Contain both fixed and variable components
Instructor’s Notes
Define the term “accounting period” for students.
Ask students to name some fixed costs that are different from that mentioned in the text (insurance).
Most fixed costs are established by a restaurant’s owners. Ask, “Who actually determines which fixed costs a restaurant incurs?”
Describe to students an example of “variable costs,” such as the number of napkins used in a restaurant that presets its dining room tables with a napkin at each place setting.

9. Variable Costs Directly affect profitability
Can be controlled by management
Are compared to an established standard
Instructor’s Notes
Explain the relationship between the manager’s ability to control variable costs and the restaurant’s profitability.
Ask students the following question, “On a hot day, are a restaurant’s air conditioning costs fixed, variable, or semivariable?”

10. Prime Costs Include those expenses classified as
Food
Labor
Are directly controlled by management
Make up the majority of a restaurant’s total costs
Are directly related to profitability
Instructor’s Notes
Explain to students the logic behind the “65 percent rule of thumb” mentioned on page 9 of the text.

11. Prime Costs continued
The costs of food and labor are a restaurant’s greatest expenses.

12. The Cost Control Process Steps
Step 1 – Collect sales and cost data.
Step 2 – Monitor and analyze sales and costs.
Step 3 – Take corrective action as appropriate.
Instructor’s Notes
Explain the role of the POS in assisting with Steps 1 and 2 in the cost control process.
Ask students the following question, “What are some appropriate corrective actions to take when costs are excessive?”

13. The Cost Control Process
Step 1 – Collect sales and cost data.
Yearly and monthly data are used for budgets and income statements.
Weekly and monthly data are used for purchasing and scheduling.
Meal period data are used for production planning.
Instructor’s Notes
Ask students the following question, “Where do managers obtain sales and cost data?”

14. The Cost Control Process continued
Step 2 – Monitor and analyze sales and costs.
Evaluate
The line item’s name
Budgeted cost
Actual cost
Cost difference
Percentage difference
Instructor’s Notes
Review the method used to compute a percentage (see next slide or Appendix, if needed).
Ask students to suggest acceptable reasons why an expense could be “out of line” with budget (i.e. extreme weather and its relationship to energy costs).

15. The Cost Control Process continued
Step 2 – Monitor and analyze sales and costs.
Compare actual sales and costs to
Budget (line item review)
Operational standards
Historical information
Identify variances
Instructor’s Notes
Point out that comparing actual sales and costs to budgeted sales and costs can be done through a line item review.
Explain that variances can be expressed in dollars and percentages.
Review the method used to compute a percentage (see next slide or Appendix, if needed).
Ask students to suggest acceptable reasons why an expense could be “out of line” with budget (i.e. extreme weather and its relationship to energy costs).

16. Computation of Percent Difference
Actual cost of $48,000
Budgeted cost of $45,000
Actual cost –
Budgeted cost =
Cost difference
$48, – $45,000
$3,000

17. Computation of Percent Difference continued
Cost difference ÷
Cost budgeted =
Percent difference
$3,000 ÷ $45,000
0.067, or 6.7%

18. Cost Variations Can be preventable May be unpreventable
Take corrective action on preventable cost variations
Instructor’s Notes
Ask students to provide examples of preventable cost variations.
Ask students for examples of “unpreventable” cost variations (i.e. increases in product costs and mandatory increases in the minimum wage).

19. The Cost Control Process continued
Step 3 – Take corrective action as appropriate.
Variations from anticipated results may be
Large and significant
Small, but still significant
Small and insignificant
Instructor’s Notes
Ask the following question, “How will the corrective actions you consider for implementation be influenced by each of these possible types of variations?”
Ask students to suggest examples of each of these potential outcomes along with suggested corrective actions.

20. Corrective Actions for Cost Control
To reduce food cost
Reduce portion size.
Replace the item with a lower cost alternative.
Feature menu items with higher profit margins (lower costs).
Raise menu prices.
Instructor’s Notes
Explain that raising menu prices should only be undertaken when cost controls are working effectively. Increases in menu price are not a substitute for good management.
Ask students about which actions they believe guests would most like managers to implement.

21. Corrective Actions for Cost Control continued
To reduce food waste
Monitor portion control.
Monitor food storage and rotation.
Monitor food purchasing (buy appropriate amounts).
Minimize production errors.
Instructor’s Notes
Explain the relationship between portion cost control and the total amount of food used by a restaurant.
Explain the important role of communication in minimizing production errors.

22. Corrective Actions for Cost Control continued
To reduce labor cost
Reduce the number of employees on the schedule.
Ask employees to end their shift early if they are not needed.
Cross-train staff.
Instructor’s Notes
Ask students to suggest two or more different jobs that could be held by one employee (i.e. server/ cashier/ hostess).
Mention that some restaurants have policies to pay employees for a minimum number of hours if they are scheduled to work but are subsequently sent home early.

23. Corrective Actions for Cost Control continued
Do you think food or labor costs are higher in this restaurant?
Why?

24. How Would You Answer the Following Questions?
Who is responsible for the size of a restaurant’s fixed expense?
Which of the following vary with sales volume?
Fixed expense
Semivariable expense
Variable expense
Both B and C
Who is responsible for monitoring controllable costs?
What two components make up “prime cost?”
Instructor’s Notes
Answers
The restaurant’s owners D
The manager
Food costs and Labor costs
Indicate that the last part of this discussion will provide a review of definitions for the key terms used in the chapter.

25. Key Term Review Control Controllable cost Corrective action
Cost of food sold
Fixed cost
Gross profit
Income statement
Labor expense
Line item review
Loss
Instructor’s Notes
Control—method of exercising some amount of power over events or situations to achieve a particular result
Controllable cost—cost that management can directly control
Corrective action—steps to correct a problem when there are variances between budget plans and actual operating results
Cost of food sold—dollar amount spent on food. Calculation: opening inventory plus purchases, minus the ending inventory.
Fixed cost—cost that remains the same regardless of sales volume
Gross profit—amount of money made after the cost of food sold is subtracted from food sales
Income statement—report showing sales, costs, and the profit or loss of a business
Labor expense—the payroll for hourly employees and salaried management. It also includes FICA and Medicare payments and employee benefit costs.
Line item review—a comparison of all budgeted items against operating results with differences noted
Loss—when expenses are greater than sales
Indicate that there were additional key terms discussed in the chapter.

26. Key Term Review continued
Noncontrollable cost
Prime cost
Profit
Sales
Semivariable cost
Standard
Total expense
Variable cost
Instructor’s Notes
Noncontrollable cost—cost over which management has little or no control
Prime costs—two highest costs in most operations; food and labor
Profit—dollar amount remaining after all operational expenses are subtracted from sales
Sales—dollar amount the restaurant has taken in from food purchased by customers
Semivariable cost—cost that increases and decreases as, respectively, sales increase and decrease, but not in direct proportion
Standard—measure established to compare levels of attainment for a goal or other measure of adequacy
Total expense—includes labor, as well as all other controllable and noncontrollable expenses
Variable cost—cost that should increase and decrease in direct proportion to sales

27. Chapter Learning Objectives— What Did You Learn?
Describe the relationship between standards and controlling costs.
Identify the types of costs incurred by a restaurant or foodservice organization.
Classify foodservice costs as controllable or noncontrollable.
Describe and give examples of controllable and noncontrollable costs.
Instructor’s Notes
Ask students to do a personal assessment of the extent to which they know the information or can perform the activity noted in each objective.

28. Chapter Learning Objectives— What Did You Learn? continued
Classify foodservice costs as variable, semivariable, or fixed.
Describe and give examples of variable, semivariable, and fixed costs.
Explain the basic foodservice cost control process.
Instructor’s Notes
Ask students how, when they become managers, they would assess whether their own employees understood the importance of controlling costs.