Cost

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Cost Sales Concepts

• HRT 276 Chapter 1

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Thanks to

• The information in this presentation comes from
  Chapter 1
• Principles of Food, Beverage, and Labor Cost
  Controls
• By Paul R. Dittmer
• 7th Edition. 2003. New York John Wiley Sons

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A foundation for cost discussions

• Why start with cost concepts?

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Definitions Cost Concepts

• COST expense for goods and services when
  consumed or rendered
• Consumed means that goods are no longer
  available for sale
• Value is usually measured in dollars and cents,
  and expressed in relation to a unit
• Unit examples per plate, ounce, pound, bottle,
  hour, customer (guest), etc.

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Definitions Cost Concepts

• FIXED COST normally unaffected by changes in
  sales volume
• Little direct relationship to volume
• Never unchanging or static, but changes are
  distant
• VARIABLE COST clearly related to changes in
  business volume
• Volume ?, Cost (in dollars) ?
• Volume ?, Cost (in dollars) ?

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Definitions Cost Concepts

• DIRECTLY VARIABLE COST directly linked to
  business volume
• Food cost
• Beverage cost
• SEMIVARIABLE COST a portion is directly linked
  to business volume
• Labor cost fixed element variable element
• Utility cost fixed element variable element

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Definitions Cost Concepts

• CONTROLLABLE COST cost that can be changed in
  the short term
• Variable costs are normally controllable
• Managers can normally control
• NON-CONTROLLABLE COST costs that can not be
  changed in the short term
• Fixed costs are normally non-controllable
• Managers can not control in the near term

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Definitions Cost Concepts

• UNIT COST costs expressed in units
• Average Unit Cost vs. Actual Unit Cost
• Usually expressed in dollars and cents
• Examples of each
• Used to determine menu pricing, item
  profitability

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Definitions Cost Concepts

• TOTAL COST the combination of all actual costs,
  usually in relation to a period of time
• May be expressed in categories or sub-categories
• Usually rounded to the nearest whole dollar
• Examples
• Used to determine overall profitability and
  relationships between costs and sales

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Definitions Cost Concepts

• As business volume changes, unit costs and total
  costs are affected in different ways

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Definitions Cost Concepts

• PRIME COST costs of materials and labor, but not
  overhead
• In a food and beverage operation
• Food cost (material)
• Beverage cost (material)
• Payroll Cost (labor)
• Labor cost may be just the variable cost portion
• Prime costs are the largest portion of total
  costs
• OVERHEAD COST costs other than prime

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Definitions Cost Concepts

• HISTORICAL COST based on the past (history)
• Found in the records of the operation
• Used to project planned costs
• PLANNED COST projected in the future
• Based on historical costs
• Planning or projecting future total costs is
  often called BUDGETING

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A foundation for sales discussions

• General sales concepts

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Definitions Sales ConceptsMonetary Terms

• SALES revenue resulting form the exchange of
  products and services for value
• Usually expressed in monetary terms
• Usually expressed in terms of time (hour, day,
  week, etc.)
• TOTAL SALES refers to the total volume of sales
  (in dollars) for a given timeframe

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Definitions Sales ConceptsMonetary Terms

• Some ways Total Sales are expressed
• Per category
• Per server
• Per seat
• SALES PRICE amount charged per unit
• Per meal
• Per drink

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Definitions Sales ConceptsMonetary Terms

• AVERAGE SALE total individual sales divided by
  the number of individual sales
• Average sales per customer
• Per Guest
• Per Head
• Check average (be careful when interpreting
  this!)
• Average sales per server

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Definitions Sales ConceptsNon-Monetary Terms

• TOTAL NUMBER SOLD an expression of volume
  expressed as units
• Examples
• 38 7-ounce Top Sirloins
• 66 Iced Teas
• When tracked, it becomes historical information
• Amounts are used to plan future expectations

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Definitions Sales ConceptsNon-Monetary Terms

• COVER used to describe volume in terms of
  customer counts
• Might be actual people
• Might be people ordering entrées
• In either case, be consistent
• TOTAL COVERS describes volume of in a given unit
  of time
• Per meal period
• Per day

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Definitions Sales ConceptsNon-Monetary Terms

• AVERAGE COVERS relates total covers for a given
  time period to some other number
• Covers per hours
• Total covers / of hours of operation
• Covers per day
• Total covers / of days of operation
• Covers per server
• Total covers / of servers

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Definitions Sales ConceptsNon-Monetary Terms

• SEAT TURNOVER number of seats occupied over a
  given time period
• Usually called simply turnover
• A measure of productivity
• SALES MIX quantity of an item sold as related to
  the total number of items sold
• Expressed as a percentage ()
• Usually within a product category

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The Cost-to-Sales Ratio

• We can now discuss the relationship of costs to
  sales

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Cost-to-Sales Ratio Cost Percent

• In general
• COST OVER SALES
• Cost / Sales Cost per dollar of sale
• Cost per dollar of sale x 100 Cost
• Think in terms of dollars and cents
• Cost 35, Sales 100 0.35 x 100 35
• Cost 443, Sales 1,265 0.35 x 100 35
• If this is a food cost, it means 35 of every
  food sale dollar is used to pay for the food sold

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Cost-to-Sales Ratio Cost Percent

• Keep in mind
• COST OVER SALES
• Cost of Goods Sold (COGS)
• Cost of Sales (COS)
• When discussed, percentage may be inferred!
• Remember
• Food Cost / Food Sales Food Cost
• Beverage Cost / Beverage Sales Beverage Cost
• Usually, we consider labor to be
• Labor Cost / TOTAL Sales Labor Cost
• (BE AWARE In the book, variable labor cost is
  sometimes a function of FOOD sales only)

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Cost-to-Sales Ratio Cost Percent

• OVERHEAD COSTS
• Costs other than prime costs
• Overhead costs, whether fixed or variable,
  controllable or non-controllable, are expressed
  as percentages of TOTAL sales unless you know
  otherwise

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Cost-to-Sales Ratio Cost Percent

• The Cost over Sales formula can be used in
  three ways
• Cost / Sales Cost
• Cost / Cost Sales ()
• Sales x Cost Cost ()

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Cost-to-Sales Ratio Cost PercentIndustry-wide
Variations

• In general
• Profit per item profit margin
• Low profit per item depends on high volume
• High profit per item may survive with lower
  volume
• Examples of this concept
• Food batch cooking vs. convenience foods
• Beverage wine vs. beer beer wine vs. full bar
• Labor high volume vs. low volume
• Note In the book, Figure 1.7 and 1.8 are the
  same!

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Cost-to-Sales The Income Statement

• Common terms used in industry
• Income Statement / Statement of Income
• Profit Loss (PL)
• Operating Statement
• What is it?
• A financial report representing a period of time,
  rather than at a point in time
• This report shows revenue (sales) and expense
  (costs) information for the period of time
• The difference between the two representing
  either profit or loss

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Cost-to-Sales The Income Statement

• PROFIT sales are greater than costs
• LOSS costs are greater than sales
• Standard Order
• Revenue (usually larger categories first)
• Expense (usually prime costs before overhead)
• Profit / Loss (usually last)

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Cost-to-Sales The Income Statement

• Other Terms
• Margin (usually a percentage)
• Gross Profit
• Operating Margin
• Net Profit

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To close

• While it is critical to be able to read, analyze,
  and interpret the Income Statement, the focus of
  this class is controlling prime costs
• Food
• Beverage
• Labor