1. Controlling Labor Costs9
Controlling Foodservice Costs
OH 9-1

2. Chapter Learning Objectives
Distinguish between fixed, variable, and semivariable costs.
Explain how payroll cost, Federal Insurance Contribution Act (FICA), Medicare, and employee benefits make up labor cost.
Describe the components and factors to consider in the development of a master schedule.
Explain the difference between a master schedule and a crew schedule.
Instructor’s Notes
Indicate that these objectives (competencies) drive the information in the chapter and in this session.

3. Chapter Learning Objectives continued
List the factors that affect labor cost.
Explain how direct factors, such as business volume, affect labor cost.
Calculate turnover rate percentage, total dollars for labor costs, dollars available for scheduling, and hours available for scheduling.
Explain how indirect factors, such as quality and productivity standards, affect labor costs.
Instructor’s Notes
Indicate that these objectives (competencies) drive the information in the chapter and in this session.

4. Types of Costs Fixed costs Variable costs Semivariable costs
Stay the same regardless of increases or decreases in volume
Variable costs
Increase or decrease with increases or decreases in volume
Semivariable costs
Part fixed and part variable; also increase or decrease (but at a slower rate) with increases or decreases in volume
Instructor’s Notes
Ask students to identify some fixed, variable, and semivariable costs. Examples could be
Fixed—rent, insurance, property taxes
Variable—food and liquor products
Semivariable—salaries (because with a large enough increase or decrease in volume, salaried employees are added or reduced from payrolls), and hourly labor costs.
Point out that in most cases, variable and semivariable costs are controlled by the manager.

5. Fixed and Variable Payroll Costs
Instructor’s Notes
Labor costs are semivariable. For example, the number of servers and cooks needed will vary as volume increases or decreases. In most cases, however, management staff will remain the same unless there are large changes in volume. Therefore, these variable and fixed costs, taken together, result in a semivariable cost that managers must control.

6. Total Labor Cost Consists Of
Pay
Includes employee’s hourly wages
Includes management salaries
Other Payroll Costs
Includes payroll taxes and assessments
Includes benefits costs
Instructor’s Notes
Explain that a restaurant’s total labor cost includes much more than the wages and salaries paid to its employees.
Indicate that, in many cases, employee benefits and payroll-related taxes can boost a restaurant’s labor cost 20% or more above its actual wages and salary costs. If the restaurant is unionized, these additional costs may be even higher.
Ask students to identify some benefits they have received as part of their own employment packages. Examples could include paid holidays, paid sick leave, and employee meals. Ask them to estimate the cost to the restaurant of providing these benefits.

7. Payroll Taxes and Assessments
Federal Insurance Contribution Act (FICA)
Federal retirement and medical benefit program
Paid through payroll taxes
Includes contributions from employees and employers
Currently set at a 6.2% employee/employer match
Instructor’s Notes
Explain to students that a 6.2 percent match means that the employee and the employer must each pay 6.2% of the employee’s gross pay into the program.

8. Payroll Taxes and Assessments continued
Medicare
Federal health-care program
Paid through payroll taxes
Includes contributions from employees and employers
Currently set at a 1.5% match
Instructor’s Notes
Explain that a 1.5 percent match means that the employee and employer must each pay 1.5 percent of the employee’s gross pay into the program.
Point out that the employer’s share of contributions for FICA and Medicare equals 7.7 percent (6.2 percent +1.5 percent = 7.7 percent) of a restaurant’s wages and salaries costs.

9. Payroll Taxes and Assessments continued
Federal and state programs
May be related to worker’s injury or compensation and/or unemployment insurance programs
City or local programs
May be related to taxes on gross payroll or other special assessments
Instructor’s Notes
Explain that managers must be aware of the applicable taxes to be collected in the specific area in which the restaurant is located.

10. Common Employee Benefits
Paid holidays
Paid vacations
Paid sick or personal days
Health insurance
Life insurance
Disability insurance
Dental insurance
Vision insurance
Company-funded retirement programs
Instructor’s Notes
Point out that not all restaurants offer all of the above employee benefits.
Explain that most restaurants also offer free or reduced-priced employee meals.
Ask students how important they believe benefit programs are to attracting the best workers in the local labor market.
Ask students if, when applying for a job, they inquire about job-related benefits (or do they ask about their wage rate only).

11. Labor Cost Percentage
Restaurant managers must relate the dollars spent for labor to the sales generated by those labor dollars.
Labor cost ÷
Sales =
Labor cost percent
Instructor’s Notes
Point out that labor cost percentage expresses the relationship between the dollars spent on labor in a specific time period and the sales generated by the restaurant in the same time period.

12. Estimated Daily Payroll Cost Percent
Step 1 – Divide weekly management cost by the number of days open per week to determine the daily management cost.
Step 2 – Add the variable (hourly) labor used per day to the daily fixed labor calculated in Step 1 above.
Step 3 – Divide the daily payroll costs by the estimated daily sales to determine the estimated daily payroll cost percent.
Instructor’s Notes
Explain that, in Step 1, management includes the cost of all fixed salary employees (i.e., bookkeepers, account clerks) and kitchen and dining room managers.
In Step 2, note that the estimate of labor usage must be based upon an estimated level of food sales.
Remind students that the operation’s actual payroll percentage will include all taxes and benefit costs as well as the amount of wages and salaries paid to employees.

13. Budget as Cost Control Tool
Budgets help control spending. They are best prepared after evaluating
Menu items to be served
Expertise needed to execute the menu
Methods of food preparation
Type of service
Facility’s location
Impact of holidays
Instructor’s Notes
Ask students if they use personal budgets to help them plan their own spending.
Explain that following a budget is a major responsibility of managers.
Ask students to identify some special events in their own area that would affect a manager’s budget estimates. Examples might include annual sporting events or festivals in the area.

14. Creating Schedules Perform historic sales analysis with
Yearly and monthly data from past income statements
Hourly, daily, and weekly point-of-sale (POS) data
If no POS is available, undertake a guest check analysis.
Instructor’s Notes
Explain that historical sales records are important because, in most cases, the best predictor of future restaurant sales is found in an analysis of the restaurant’s previous sales.

15. Creating Schedules continued
Sales Projections
An estimate of future sales
Include increases or decreases to historical sales patterns
Consider national and local economic trends
Instructor’s Notes
Ask students where they would look for information about national sales trends experienced by different restaurant industry segments.

16. Forecasting Labor Costs— A Three Step Process
Step 1 – Determine total available labor dollars.
Step 2 – Subtract costs of employee benefits and taxes.
Standard labor cost percent x
Projected sales =
Dollars available for labor
Instructor’s Notes
Explain that the standard labor cost percentage is established by management or the restaurant’s owners.
Indicate that payroll costs include the amount of wages and salaries paid, AND the cost of employee benefits and applicable taxes.
Dollars available for labor –
Benefits and taxes =
Remaining payroll available

17. Forecasting Labor Costs
Step 3 – Subtract fixed labor costs.
Payroll dollars available –
Fixed cost salaries =
Dollars available for variable-cost employees
Employee schedules are planned with this dollar amount to help ensure targeted labor costs are met!
Instructor’s Notes
Explain that managers must be aware of how much they are actually spending when they create employee schedules.
Point out the importance of maintaining control of fixed labor costs (salaries) and variable labor costs (wages).

18. Master Schedules Identify the Number of Required Employees
Forecasting servers
Divide estimated number of covers by the number of service hours to assess the covers per hour.
Divide covers per hour by the number of covers for each server.
Adjust, based on the employees’ skill.
Est. number of covers ÷
Number of service hours =
Covers per hour
Instructor’s Notes
Point out that lower cost employees allow managers to have more “people” on the schedule, but will likely reduce the amount of skill available to the operation.
Ask students why most managers want their “best,” but also their most expensive, staff members working when the restaurant is busiest.
Covers per hour ÷
Covers per server =
Number of servers

19. Master Schedules Identify the Number of Required Employees continued
Forecasting other positions
Subtract servers’ cost from the dollars available for variable-cost employees.
Divide the result by the average wage per hour.
Dollars available for variable-cost employees –
Server cost =
Dollars available for other positions
Instructor’s Notes
Ask, “Why are servers taken into account before calculating the number of hours available for other positions?”
Dollars available for other positions ÷
Average wage per hour =
Number of hours available for other positions

20. Validating the Master Schedule
The labor percent forecasted by the master schedule must match company standards.
Fixed payroll +
Variable payroll =
Total payroll
Total payroll
Taxes and benefits
Total labor cost
Total labor ÷
Sales
Total labor cost percent
Instructor’s Notes
Remind students that both fixed and variable payroll components will have taxes and benefits associated with them. These costs must be added to wages and salaries (payroll) to arrive at total labor costs.
Ask students to identify some reasons why a master schedule might generate an estimated labor cost percentage higher than the company’s standard. Typical answers will include low sales forecasts, high fixed labor costs, or excessive scheduling of variable labor staff.

21. Creating the Crew Schedule
Include specific employee names and reporting times
Should be distributed well in advance
Must ensure balance and equity for all employees
Instructor’s Notes
Ask, “What, do you suppose, is meant by ensuring balance and equity for all employees?”
Ask the following questions, “Have you ever had a schedule that you felt was unfair? If so, in what way was the schedule unfair? What could management have done to make the schedule more balanced and equitable?”

22. Creating the Crew Schedule continued
Goals of the crew schedule
Build flexibility.
Use accurate sales projections to ensure the right number of staff are assigned at the right times.
Consider legal restraints and company policies.
Instructor’s Notes
Point out that teenagers, school attendees, and others may have legal constraints on their work availability, and these requirements must be followed.
Explain that company policies may, for example, prohibit the scheduling of overtime or the scheduling of too many consecutive days of work without a day off.

23. Factors Directly Affecting Labor Costs
Sales levels
Time tracking
Time sheets
Timecards
Advanced electronic methods
Schedules and schedule modifications
Overtime
Benefits offered
Labor contracts
Instructor’s Notes
Explain that benefit costs (especially those related to health insurance) have risen rapidly in the past decade and are predicted to continue to increase at a rate faster than that of employee’s wages.

24. Another Factor Directly Affecting Labor Costs
Employee turnover
The number of employees hired to fill one position in a year’s time
Persons hired per year ÷
Average number of employees =
Turnover
Turnover x 100
Turnover rate percent
Instructor’s Notes
Point out that a skilled employee will always be more productive than an unskilled worker. For this reason, managers should train their staff well and reduce or eliminate employee turnover.
Tell students that you will provide an example and go to the next slide.

25. Another Factor Directly Affecting Labor Costs continued
Employee turnover example
300 hired ÷
100 needed = 3
3 x 100
300%
Instructor’s Notes
Point out to students that the answer to the first equation means that for every employee in the restaurant, three people were hired in the past year.
Ask students to identify some reasons for high levels of employee turnover in the restaurant industry.
Ask about possible reasons for high turnover levels in a specific restaurant.

26. Factors Indirectly Affecting Labor Costs
Adherence to Standards
Standards of employee performance are similar to standards of food quality.
Just as food standards can be quantified, so can worker productivity be quantified.
Instructor’s Notes
Ask about standards other than productivity standards that are commonly applied to servers. These could include issues related to the wearing of uniforms, punctuality, and attitude.

27. Some Productivity Standards
Sales ÷
Number of person-hours =
Sales per person- hour
Covers
Covers per person- hour
Total sales per server
Covers sold by server
Sales per cover
Instructor’s Notes
Explain that the number of employees working multiplied by the number of hours each works equals the total number of person-hours used.
Sales per person-hour can be calculated for any time period, such as for a single meal period, a day, a week, or a month. It can be used to measure the productivity of a cook’s line, as well as a team of servers. Explain that comparisons should be made to the same shifts (i.e., breakfast to breakfast and lunch to lunch).
Suggest that the covers per person-hour productivity standard is frequently used in settings such as college cafeterias, business dining, hospitals, and other large volume settings.
Explain that sales per cover can be used to compare the sales effectiveness of one server to another. Ask students to identify other reasons why there could be variation in this productivity measure. Answers are likely to include specific sections of a dining room to which servers are assigned (i.e., smoking vs. nonsmoking), the size of tables in the employees’ assigned sections, and the skill and experience of the server.

28. How Would You Answer the Following Questions?
Effective managers seek to closely monitor and thus regulate their restaurant’s (labor cost/labor cost percent).
Labor costs include only the wages and salaries paid directly to the employees. (True/False)
A master schedule includes all of the following except
Employee names
Days of the week
Employee shifts
Employee positions
Employee turnover rates cannot be influenced by managers. (True/False)
Instructor’s Notes
Labor cost percent
False A
Mention that the next section provides a review of the key terms in this chapter.

29. Key Term Review Budget Covers per server Crew schedule
Employee benefits
Employee turnover
Federal Insurance Contributions Act (FICA)
Job description
Labor contract
Instructor’s Notes
Budget—projection of sales, costs, and profit that is used to guide day-to-day operational decisions
Covers per server—number of customer meals that a server can serve in one hour
Crew schedule—chart that shows employees’ names and the days and times they are to work
Employee benefits—valuable, nonwage compensation provided to employees by employers
Employee turnover—number of employees hired to fill one position in one year’s time
Federal Insurance Contributions Act (FICA)—program for retirement and medical benefits administered by the Federal government and paid for by employers and employees
Job description—statement that details an employee’s duties and the standards to which he or she is expected to perform those duties
Labor contract—agreement between management and a union that represents the employees and deals with information about wages, employee benefits, hours, and working conditions

30. Key Term Review continued
Labor cost
Labor cost percent
Master schedule
Medicare
Overtime
Payroll dollars
Person-hour
Productivity standard
Quality standard
Return chart
Instructor’s Notes
Labor cost—includes, in addition to payroll cost, such costs as the employer’s contribution to FICA and Medicare, worker’s compensation insurance, and all employee benefits
Labor cost percent—ratio of labor cost and business volume (labor cost divided by sales volume equals labor cost percent)
Master schedule—template, usually a spreadsheet, showing the number of people needed in each position to operate the restaurant
Medicare—money set aside for health benefits for those who cannot afford them
Overtime—any hours worked over forty in a workweek
Payroll dollars—number of dollars available for payroll during a scheduling period
Person-hour—also referred to as labor hours; the total hours worked by hourly (variable-cost) employees for a given period of time
Productivity standard—level set by management to measure the quality and amount of work performed by an employee
Quality standard—level of excellence used to measure customer satisfaction
Return chart—chart that is filled out to explain why a customer returned an item to the kitchen

31. Chapter Learning Objectives— What Did You Learn?
Distinguish between fixed, variable, and semi- variable costs.
Explain how payroll cost, FICA, Medicare, and employee benefits make up labor cost.
Describe the components and factors to consider in the development of a master schedule.
Explain the difference between a master schedule and a crew schedule.
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.

32. Chapter Learning Objectives— What Did You Learn? continued
List the factors that affect labor cost.
Explain how direct factors such as business volume affect labor cost.
Calculate turnover rate percentage, total dollars for labor costs, dollars available for scheduling, and hours available for scheduling.
Explain how indirect factors such as quality and productivity standards affect labor 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.