Principles of food, beverage, and labor cost controls [9th ed] 9780471783473, 0471783471

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NINTH EDITION



LAST H1 HEAD



PRINCIPLES OF FOOD, BEVERAGE, AND LABOR COST CONTROLS Paul R. Dittmer J. Desmond Keefe III

JOHN WILEY & SONS, INC.

i



NINTH EDITION



LAST H1 HEAD



PRINCIPLES OF FOOD, BEVERAGE, AND LABOR COST CONTROLS Paul R. Dittmer J. Desmond Keefe III

JOHN WILEY & SONS, INC.

i

This book is printed on acid-free paper. Copyright © 2009 by John Wiley & Sons, Inc. All rights reserved Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-646-8600, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, 201-748-6011, fax 201-748-6008, or online at http://www.wiley.com/go/permissions. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. Designations used by companies to distinguish their products are often claimed as trademarks. In all instances where John Wiley & Sons, Inc. is aware of a claim, the product names appear in initial capital or all capital letters. Readers, however, should contact the appropriate companies for more complete information regarding trademarks and registration. For general information on our other products and services, or technical support, please contact our Customer Care Department within the United States at 800-762-2974, outside the United States at 317-572-3993 or fax 317-572-4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our Web site at http://www.wiley.com. Library of Congress Cataloging-in-Publication Data: Dittmer, Paul. Principles of food, beverage, and labor cost controls / Paul R. Dittmer, J. Desmond Keefe III. — 9th ed. p. cm. Includes index. ISBN 978-0-471-78347-3 (cloth/CD: alk. paper) 1. Food service—Cost control. I. Keefe, J. Desmond. II. Title. TX911.3.C65D57 2009 647.95068—dc22 2008001373 Printed in the United States of America 10

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CONTENTS



PREFACE IX

PART I INTRODUCTION TO FOOD, BEVERAGE, AND LABOR CONTROLS 1

CHAPTER 1

COST AND SALES CONCEPTS 3 INTRODUCTION 4

•

COST CONCEPTS 10

THE COST-TO-SALES RATIO: COST PERCENT 22 KEY TERMS IN THIS CHAPTER 32

•

•

SALES CONCEPTS 16

•

•

CHAPTER ESSENTIALS 31

QUESTIONS AND PROBLEMS 32

•

•

EXCEL EXERCISES 35

CHAPTER 2

THE CONTROL PROCESS INTRODUCTION 40

•

CONTROL SYSTEMS 60 ESSENTIALS 66

•

CONTROL 40 •

•

THE CONTROL PROCESS 43

COST–BENEFIT RATIO 64

•

KEY TERMS IN THIS CHAPTER 66

•

QUESTIONS AND PROBLEMS 67

CHAPTER 3

39

•

EXCEL EXERCISES 70

COST/VOLUME/PROFIT RELATIONSHIPS INTRODUCTION 72

•

•

BISTRO 80

71

THE COST/VOLUME/PROFIT EQUATION 75

VARIABLE RATE AND CONTRIBUTION RATE 78 POINT 80

•

•

BREAK-EVEN

COST/VOLUME/PROFIT CALCULATIONS FOR THE GRANDVIEW

•

COST CONTROL AND THE COST/VOLUME/PROFIT EQUATION 87

CHAPTER ESSENTIALS 91 AND PROBLEMS 91

•

•

KEY TERMS IN THIS CHAPTER 91

•

QUESTIONS

EXCEL EXERCISES 94

PART II FOOD CONTROL 95

CHAPTER 4

FOOD PURCHASING AND RECEIVING CONTROL 97 INTRODUCTION 98 RECEIVING 98

•

•

THE CONTROL PROCESS—PURCHASING AND

DEVELOPING STANDARDS AND STANDARD PROCEDURES

FOR PURCHASING 101

•

STANDING ORDERS 123

•

RECEIVING

CONTROLS 123

•

ESTABLISHING STANDARD PROCEDURES FOR

RECEIVING 125

•

CHAPTER ESSENTIALS 133

CHAPTER 134 EXERCISES 136

•

CHAPTER

• •

•

QUESTIONS AND PROBLEMS 134 WEB ADDRESSES 137

KEY TERMS IN THIS •

EXCEL

•

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CONTENTS

CHAPTER 5

FOOD STORING AND ISSUING CONTROL 139 INTRODUCTION 140

•

STORING CONTROL: ESTABLISHING STANDARDS AND

STANDARD PROCEDURES FOR STORING 140 BEVERAGE TRANSFERS 150

•

•

IN THIS CHAPTER 156

QUESTIONS AND PROBLEMS 156

•

•

CHAPTER ESSENTIALS 156

FOOD AND KEY TERMS •

EXCEL

WEB ADDRESS 162

FOOD PRODUCTION CONTROL I: PORTIONS 163 INTRODUCTION 164 PROCEDURES 164

• •

ESTABLISHING STANDARDS AND STANDARD CALCULATING STANDARD PORTION COSTS 170

•

ADVANTAGES AND DISADVANTAGES OF STANDARDIZED YIELD 190

•

USING YIELD PERCENTAGES 191

CHAPTER

ESSENTIALS 193 PROBLEMS 194

CHAPTER 7

ISSUING CONTROL: ESTABLISHING •

EXERCISES 162

CHAPTER 6

•

STANDARDS AND STANDARD PROCEDURES FOR ISSUING 145

•

•

RECIPE SOFTWARE 192

KEY TERMS IN THIS CHAPTER 193

•

EXCEL EXERCISES 198

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•

•

QUESTIONS AND

WEB ADDRESS 198

FOOD PRODUCTION CONTROL II: QUANTITIES 199 INTRODUCTION 200 PROCEDURES 200

• •

ESTABLISHING STANDARDS AND STANDARD DETERMINING PRODUCTION QUANTITIES 212

CONTROL OF PREPORTIONED ENTRÉES 221 CHAPTER ESSENTIALS 223

•

QUESTIONS AND PROBLEMS 224

•

KEY TERMS IN THIS CHAPTER 224 •

•

A WORD OF CAUTION 223

EXCEL EXERCISES 225

•

•

• WEB

ADDRESS 225

CHAPTER 8

MONITORING FOODSERVICE OPERATIONS I: MONTHLY INVENTORY AND MONTHLY FOOD COST 227 INTRODUCTION 228 MANAGEMENT 243 ESSENTIALS 250 PROBLEMS 251

CHAPTER 9

• •

• •

MONTHLY INVENTORY 229

•

INVENTORY TURNOVER 247

•

KEY TERMS IN THIS CHAPTER 250 EXCEL EXERCISES 254

•

REPORTS TO CHAPTER •

QUESTIONS AND

WEB ADDRESS 255

MONITORING FOODSERVICE OPERATIONS II: DAILY FOOD COST 257 INTRODUCTION 258

•

DETERMINING DAILY FOOD COST 258

BOOK VERSUS ACTUAL INVENTORY COMPARISON 269 ESSENTIALS 273 PROBLEMS 274

• •

KEY TERMS IN THIS CHAPTER 274 EXCEL EXERCISES 278

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•

CHAPTER •

QUESTIONS AND



CONTENTS

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CHAPTER 10 MONITORING FOODSERVICE OPERATIONS III: ACTUAL VERSUS STANDARD FOOD COSTS 279 INTRODUCTION 280

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DETERMINING STANDARD COST 281

ACTUAL AND STANDARD COSTS 281 CHAPTER ESSENTIALS 297 AND PROBLEMS 297

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•

•

COMPARING

PERIODIC COMPARISON 293

KEY TERMS IN THIS CHAPTER 297

•

• QUESTIONS

EXCEL EXERCISES 300

CHAPTER 11 MENU ENGINEERING AND ANALYSIS 301 INTRODUCTION 302

•

MENU ENGINEERING 303

ANALYSIS 309

•

SOLD 314

CHAPTER ESSENTIALS 316

•

CHAPTER 316

MENU

USING 100 PERCENT OF THE AVERAGE FOR NUMBER

•

EXERCISES 319

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•

KEY TERMS IN THIS

QUESTIONS AND PROBLEMS 316

•

•

EXCEL

WEB ADDRESSES 319

CHAPTER 12 CONTROLLING FOOD SALES 321 INTRODUCTION 322

•

THE GOALS OF SALES CONTROL 322

OPTIMIZING THE NUMBER OF CUSTOMERS 323 PROFIT 332

•

•

CONTROLLING REVENUE 343

MANUAL MEANS 345

•

CHAPTER ESSENTIALS 354 AND PROBLEMS 355

MAXIMIZING •

REVENUE CONTROL USING

REVENUE CONTROL USING COMPUTERS 352 •

•

•

KEY TERMS IN THIS CHAPTER 355

•

• QUESTIONS

EXCEL EXERCISE 356

PART III BEVERAGE CONTROL 357

CHAPTER 13 BEVERAGE PURCHASING CONTROL 359 INTRODUCTION 360

•

CONTROL PROCESS AND PURCHASING 360

ALCOHOLIC BEVERAGES 361 PURCHASING 369 CHAPTER 383

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•

EXERCISES 385

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•

NONALCOHOLIC BEVERAGES 368

CHAPTER ESSENTIALS 383

•

QUESTIONS AND PROBLEMS 384

• •

•

EXCEL

WEB ADDRESSES 386

CHAPTER 14 BEVERAGE RECEIVING, STORING, AND ISSUING CONTROL 387 INTRODUCTION 388 ISSUING 399 CHAPTER 408 EXERCISES 409

•

•

RECEIVING 388

CHAPTER ESSENTIALS 408

• •

•

STORING 392 •

QUESTIONS AND PROBLEMS 408 WEB ADDRESSES 409

BEVERAGE

KEY TERMS IN THIS

•

KEY TERMS IN THIS •

EXCEL

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CONTENTS

CHAPTER 15 BEVERAGE PRODUCTION CONTROL 411 INTRODUCTION 412 CONTROL 412

•

•

OBJECTIVES OF BEVERAGE PRODUCTION

ESTABLISHING STANDARDS AND STANDARD PROCEDURES FOR

PRODUCTION 413

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CHAPTER 436

QUESTIONS AND PROBLEMS 436

EXERCISES 438

• •

CHAPTER ESSENTIALS 436

•

KEY TERMS IN THIS •

EXCEL

WEB ADDRESSES 438

CHAPTER 16 MONITORING BEVERAGE OPERATIONS 439 INTRODUCTION 440

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APPROACH 456

THE SALES VALUE APPROACH 457

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TURNOVER 466 CHAPTER 469 EXERCISES 473

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THE COST APPROACH 440

CHAPTER ESSENTIALS 468

•

•

INVENTORY

KEY TERMS IN THIS

QUESTIONS AND PROBLEMS 469

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THE LIQUID MEASURE •

•

EXCEL

WEB ADDRESSES 474

CHAPTER 17 BEVERAGE SALES CONTROL 475 INTRODUCTION 476 CONTROL 476

•

ESSENTIALS 490

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GUEST CHECKS AND CONTROL 486

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CHAPTER

KEY TERMS IN THIS CHAPTER 491

•

QUESTIONS AND

•

PROBLEMS 491

•

THE OBJECTIVES OF BEVERAGE SALES

EXCEL EXERCISE 492

PART IV LABOR CONTROL 493

CHAPTER 18 LABOR COST CONSIDERATIONS 495 INTRODUCTION 496

•

EMPLOYEE COMPENSATION 496

OF TOTAL LABOR COSTS AND LABOR COST PERCENTS 499 CONTROL 513 CHAPTER 516

CHAPTER19

• •

CHAPTER ESSENTIALS 515

•

QUESTIONS AND PROBLEMS 516

• •

DETERMINANTS LABOR COST

KEY TERMS IN THIS •

EXCEL EXERCISES 517

ESTABLISHING PERFORMANCE STANDARDS 519 INTRODUCTION 520

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ESTABLISHING PERFORMANCE STANDARDS AND

STANDARD PROCEDURES 520

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PREPARING JOB DESCRIPTIONS 526

ORGANIZING THE ENTERPRISE 523 •

SCHEDULING EMPLOYEES 531

PERFORMANCE STANDARDS BASED ON TEST PERIOD 547 REQUIREMENTS 548 COST 552

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CHAPTER 553 EXERCISES 556

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CHAPTER ESSENTIALS 553 • •

•

STANDARD WORK HOURS 550 •

WEB ADDRESSES 557

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•

STANDARD STAFFING •

STANDARD

KEY TERMS IN THIS

QUESTIONS AND PROBLEMS 554

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EXCEL



CONTENTS

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CHAPTER 20 TRAINING STAFF 559 INTRODUCTION 560 OF TRAINING 561

• •

A DEFINITION OF TRAINING 560 THE TRAINING PROGRAM 561

VERSUS LOCALIZED TRAINING 575 ESSENTIALS 578

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PROBLEMS 579

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•

THE PURPOSE

CENTRALIZED

TRAINING MANUALS 576

KEY TERMS IN THIS CHAPTER 578

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•

EXCEL EXERCISES 580

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CHAPTER

QUESTIONS AND

WEB ADDRESSES 581

CHAPTER 21 MONITORING PERFORMANCE AND TAKING CORRECTIVE ACTION 583 INTRODUCTION 584

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MONITORING PERFORMANCE 584

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TAKING

CORRECTIVE ACTION TO ADDRESS DISCREPANCIES BETWEEN STANDARDS AND PERFORMANCE 594 CHAPTER 599 •

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QUESTIONS AND PROBLEMS 599

EXCEL EXERCISE 601

GLOSSARY 603 INDEX 623

CHAPTER ESSENTIALS 599

• •

KEY TERMS IN THIS WEB ADDRESS 601



PREFACE



TO THE STUDENT Successful restaurant personnel, including chefs, restaurant managers, food and beverage controllers, dining room managers, and stewards have many skills. Among them is the ability to keep costs at predetermined levels. They understand that successful operations require that costs be carefully established and monitored so that profit will result. After all, most profitable restaurants have only about a 10 percent profit margin on sales after taking all costs into consideration. Food, beverage, and labor costs generally represent between 60% and 70% of the toal costs of a restaurant operation. If these costs are not carefully established and monitored, they can gradually increase until profit is eliminated and losses are sustained. This text has been written to provide the student with the necessary principles to keep restaurant costs under control so that a profitable operation can be sustained. Putting these principles into practice will not guarantee a profit, because there are other necessary elements for a successful restaurant. But they are absolutely necessary if a profit is to be maintained. Chain operations such as Red Lobster, Olive Garden, Burger King, and Wendy ’s have learned long ago the necessity of keeping cost under control They supply high-quality products to their restaurants and establish procedures that guarantee food, beverage, and labor costs will be kept within predetermined bounds. Independent restaurants must do the same if profits are to be realized. Learn these principles well and you will stand a much better chance of being successful in your chosen profession.



TO THE INSTRUCTOR This text has been developed for use in courses introducing food, beverage, and labor cost controls to students preparing for careers in food and beverage management as well as hotels and other enterprises where this knowledge is necessary. This edition consists of 21 chapters, divided into four parts, as follows: Part I offers an introduction to food, beverage, and labor cost controls, defining a number of key terms and concepts and providing a foundation for the balance of the work as well as some sense of its scope. It identifies

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PREFACE

working definitions for the terms cost and sales, discusses the control process in some detail, and introduces the basics of cost/volume/profit analysis. Part II addresses the application of the four-step control process to the primary phases of foodservice operations: purchasing, receiving, storing, issuing, and production. Specific techniques and procedures for each phase are explained and discussed in detail. Three chapters are devoted to determining costs and using them as monitoring devices in foodservice operations. One chapter deals specifically with menu analysis. Another discusses food sales control, offering a broad definition of the term and providing detailed discussion of several approaches to sales control. Part III discusses the application of the four-step control process to the various beverage operations: purchasing, receiving, storing, issuing, and production. Here, too, specific techniques and procedures for each phase are explained and discussed in detail. One chapter is devoted to the principal methods used to monitor beverage operations. The final chapter in Part III specifically addresses beverage sales control, offering a broad definition of the term and providing detailed discussions of several approaches to controlling beverage sales. Part IV is a four-chapter exposition of labor cost control. The first of the four explores the factors affecting labor cost and labor cost percentage. Admittedly, some of these are beyond the control of management, but it is important for managers to know about them. The second chapter discusses the need for performance standards. This leads naturally to a chapter on training, a topic many believe to be central to labor cost control. The concluding chapter in Part IV deals with monitoring performance and taking corrective action. The authors recognize that most food and beverage operations are computerized to a great extent. Thus, each of the chapters in Parts I, II, and III incorporates a discussion of computer use in food and beverage operations. Additionally, Excel computer exercises are provided at the end of each chapter, utilizing the CD-ROM found in the back of this book. In developing and revising the text, flexibility has always been a key concern. For example, each of the four parts can generally stand alone. Except for Part I, eliminating any other part will not make it difficult to use the remaining parts. Thus, in courses without beverage components, instructors may prefer to skip Part III. And instructors in courses that do not include labor cost control can choose to ignore Part IV. The book has a greater number of chapters than many instructors use in a one-term course. In our view, this is a virtue, because it provides instructors with opportunities to select chapters dealing with specific topics identified in

PREFACE



xi

their course syllabus. We believe this is the best way to meet the varying needs of instructors in the broad range of courses and programs in this field. Because a great many chapters include more questions and problems than most will be inclined to assign, instructors will find it easy to make selective use of the end-of-chapter exercises for written assignment or for in-class discussion. For those instructors who will use this text as a supplement to train management personnel, Chapter 20 is particularly useful. It outlines specific training methods, and provides various thoughts on training methods that can be best utilized in different circumstances.



FEATURES Chapters are organized in the folowing manner. 1. Chapter objectives are listed at the beginning of each chapter. 2. Chapter 1 illustrates a hypothetical restaurant, and each chapter thereafter continues a discussion of that restaurant, relating the control procedures discussed in that chapter to the hypothetical restaurant. 3. A discussion of established computer programs that perform control procedures in each chapter is included. Web references for these programs are listed at the end of the chapter. 4. Chapter essentials and key terms in that chapter are shown at the end of each chapter discussion. 5. Substantial numbers of questions and problems are listed at the end of each chapter. 6. A running exercise for a hypothetical restaurant in Excel is included at the end of each chapter, and the CD-ROM for that exercise is included in the text. An additional feature is a glossary of all key terms listed in the text. It is found at the conclusion of text material.



NEW TO THIS EDITION This edition contains the following new features. Each chapter has been updated with current material and outdated material has been eliminated. All figures have been updated. All chapters contain a discussion of computer

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PREFACE

programs that perform the procedures outlined in the chapters. Web addresses for these programs are shown at the end of each chapter. A CD-ROM is included with the text for students use in doing Excel problems at the end of each chapter.



SUPPLEMENTARY MATERIALS An Instructor’s Manual (ISBN: 978-0-470-25732-6) to accompany the textbook is available to qualified adopters upon request from the publisher. It contains answers to the end-of-chapter questions and problems, along with various other materials designed to assist in the classroom. A companion Web site, at www.wiley/college/dittmer, is also available for instructors with this text, which includes the Instructor’s Manual and PowerPoint slides as well as the solutions to the Excel exercises. WebCT and Blackboard online courses are available for this book. Visit www.wiley.com/college/dittmer and click on “Blackboard” or “WebCT” in the Title Information box, or contact your Wiley representative. A newly created Study Guide (ISBN: 978-0-470-14056-7) provides several additional resources to help students review material and exercises to strengthen their knowledge of key concepts.



ACKNOWLEDGMENTS We would like to thank those who provided their comments about how to improve this edition of Food, Beverage, and Labor Cost Controls by reviewing it in various stages of development: Eric Breckoff, J. Sargeant Reynolds Community College Dr. Jaemin Cha, Niagara University Dr. Charles Godwin Ogbeide, Southwestern Minnesota University Jeff Igel, Fox Valley Technical College Ken Narcavage, Western Culinary Institute Terri Melincoff, New England Culinary Institute Dori Finley, East Carolina University Lloyd Shelton, Northern Arizona University Armando Trujillo, Pima Community College/Northern Arizona University Partnership Cliff Wener, College of Lake County

PREFACE



xiii

And those who reviewed earlier editions of this book: Earl Arrowwood, Jr., Bucks County Community College James A. Bardi, the Berks Campus of Pennsylvania State University Patricia S. Bartholomew, New York Technical College of the City University of New York Kevin Bedard, of Canopy ’s Training Restaurant, a program of the Educational Opportunity Center, State University of New York at Brockport Anthony Bruno, Nassau Community College Mary Ann Caroll, Keystone Junior College Prakash Chathoth, San Francisco State University Frank C. Constantino, New York Technical College of the City University of New York John Drysdale, Johnson County Community College David Dyer, University of Central Florida Michael Evans, Appalachian State University Julie Fain, New Hampshire College George G. Fenich, University of New Orleans T.C. Girard, Southern Illinois University, Carbondale Robert A. Heath, Birmingham (U.K.) College of Food, Tourism, and Creative Studies Stephen K. Holzinger, New York Technical College of the City University of New York John Peter Laloganes, Cooking & Hospitality Institute of Chicago Charles Latour, Northern Virginia Community College Fredrick Laughlin, Jr., Northwestern Michigan College Chris Letchinger, Kendall College Edward F. McIntyre. Birmingham (U.K.) College of Food, Tourism, and Creative Studies Paul McVety, Johnson and Wales University Fedele J. Panzarino, New York Technical College of the City University of New York Wallace Rande, Northern Arizona University Larry Ross, Georgia State University Rodney Rudolph, State University of New York Technical College at Delhi Warren Sackler, Rochester Institute of Technology Andrew R. Schwartz, Sullivan County Community College

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PREFACE

Jeffrey A. Sheldon, Cincinnati State Technical & Community College Allan Sherwin, Harry Lundeberg School of Seamanship Robert Sobigraj, Johnson County Community College Don St. Hillaire, California State Polytechnic University-Pomona John Stefanelli, University of Nevada, Las Vegas Clorice Thomas-Haysbert, Delaware State University David Tishkoff, Columbus State Community College David Tucker, Widener University Clifford Wener, College of Lake County



PART I



INTRODUCTION TO FOOD, BEVERAGE, AND LABOR CONTROLS This text outlines the elements and procedures for food, beverage, and labor cost control. But before discussing these topics, it is necessary to define the terminology used in the text and to discuss two other very important preliminary topics. These are outlined in the first three chapters. Chapter 1 is devoted to the basic concepts of costs and sales and their many variations and uses. Chapter 2 examines the concept of control—what exactly do we mean by it and what are the many ways we institute it? Chapter 3 is a necessary chapter dealing with break-even analysis and the ramifications associated with the various ways an establishment can break even and make a profit. In addition, it discusses the financial consequences of inadequate control over costs. As you begin your journey into this subject, keep in mind that cost control is absolutely necessary for a profitable operation. Learn the principles outlined in this text well, because all foodservice personnel at the supervisory and higher levels have an obligation to control those costs under their jurisdiction.



CHAPTER 1



COST AND SALES CONCEPTS • LEARNING OBJECTIVES • After reading this chapter, you should be able to: 1. Define the terms cost and sales. 2. Define and provide an example of the following types of costs: fixed, directly variable, semivariable, controllable, noncontrollable, unit, total, prime, historical, and planned. 3. Provide several examples illustrating monetary and nonmonetary sales concepts. 4. Describe the significance of cost-to-sales relationships and identify several cost-to-sales ratios important in food and beverage management. 5. Identify the formulas used to compute cost percent and sales price. 6. Describe factors that cause industrywide variations in cost percentages. 7. Explain the value of comparing current cost-to-sales ratios with those for previous periods.

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INTRODUCTION

CHAPTER 1

COST AND SALES CONCEPTS

A Taste of Tuscany Until she decided to purchase a restaurant two years ago, Joan Bailey had been a successful advertising executive. Her annual income was substantial, and she augmented it by investing in some profitable real estate ventures with her brother. However, her position in advertising required that she travel several days a week, and over time the travel became wearisome to her. This made her decide to give up the advertising business in favor of operating her own business. On the advice of her brother, she decided to go into the restaurant business, even though she lacked previous experience in the field. After all her years of travel, she thought she knew more about restaurants from the customer’s point of view than most restaurateurs. So she began to look around for an appropriate property. Fortunately, she soon found a place just 12 miles from her home, located on a main road on the outskirts of a city of 75,000 people. The building and equipment were only six years old and apparently in fine condition, and the retiring owner was anxious to sell at a very fair price. The owner’s books revealed a successful operation, with a restaurant profit of approximately $165,000 per year. Joan Bailey decided to buy. The restaurant, A Taste of Tuscany, had 150 seats. It was open seven days a week, from 5 to 10 P.M., serving a varied menu but emphasizing northern Italian food. Joan believed she would be able to run it successfully with a small and dedicated staff. In the first year, Joan’s profits were less than those of the previous owner. After two years, profits were continuing to decline. The restaurant was simply not showing an adequate profit, even though Joan had increased the volume of business over that of the previous owner. The place was reasonably busy, her customers often complimented her on the food, and her staff appeared to be loyal and helpful in every way. The truth was that Joan Bailey was operating a popular, but not very profitable, food and beverage business. At the end of the second full year of operation, the statement of income prepared by her accountant revealed a restaurant profit of $48,455 (see Figure 1.1). It quickly became apparent to Joan, her family, and her accountant that unless something could be done to make the restaurant more profitable, the operation would not be worth the effort required.

The Grandview Bistro Just a few miles down the road from A Taste of Tuscany, the Grandview Bistro is owned and operated by Bill Young. After four years in the Air Force, Bill had

INTRODUCTION



5

• FIGURE 1.1 • A Taste of Tuscany Income Statement, Year Ended December 31, 20XX

Sales Food Beverage Total sales Cost of Sales Food Beverage Total cost of sales Gross Profit Controllable Expenses Salaries and wages Employee benefits Other controllable expenses Total Controllable Expenses Income before Occupancy Costs, Interest, Depreciation, and Income Taxes Occupancy Costs Interest Depreciation Total Restaurant Profit

$1,686,740 $297,660 $1,984,400 $708,431 $95,251 $803,682 $1,180,718 $535,788 $133,947 $242,660 $912,395 $268,323

$132,608 $27,060 $60,200 $219,868 $48,455

worked for an insurance company for a few years before enrolling in a nearby college to study hospitality management. His interest in the food and beverage sector of the hospitality industry began during his high school days, when he worked part time at the local unit of a national fast-food chain. Although his interest had grown steadily over the years, it took considerable courage for him to give up a fairly promising insurance career to go back to school. He earned a degree in hospitality management and then went to work as the assistant manager in a local restaurant. Over the next several years, he worked in three food and beverage operations in the area, including A Taste of Tuscany, before deciding that he was ready to own and operate his own restaurant. With the help of his family and a local bank, Bill was able to purchase the Grandview Bistro, a fairly popular establishment with the same type

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CHAPTER 1

COST AND SALES CONCEPTS

of menu as A Taste of Tuscany, as well as comparable prices and hours of operation. The only differences to the casual observer were size and location: The Grandview Bistro had only 75 seats and was in a somewhat less favorable location. The menu for the Grandview Bistro is illustrated in Figure 1.2.

• FIGURE 1.2 • The Grandview Bistro Menu SOUPS

Anasazi Bean and Roasted Corn with Chilies Beautiful purple beans with corn, chilies, celery, onions, and just enough spice $4.95

MANHATTAN STYLE FISH CHOWDER Traditional New York style tomato-based soup with haddock, swordfish, shrimp, and scallops $8.25 APPETIZERS

DUCK EMPANADAS Tender roast duck encased in an empanada purse, served with roasted poblano vegetable sauce $7.65

GNOCCHI GRILLED VEGETABLE TARTLETS Semolina and potato tartlet shells filled with grilled sliced eggplant, zucchini, fennel, and fire-roasted tomato, garnished with shaved parmesan $6.50

SMOKED SALMON CHEESECAKE Smoked salmon and Gruyère cheese baked in a savory crust served with Cucumber Dill Cream Sauce $8.20

OYSTERS ROCKEFELLER Six Chesapeake Bay oysters baked on the half shell with spinach, onions, and hollandaise sauce $9.35

EGGPLANT ROULADE Thinly sliced fresh eggplant stuffed with ricotta, mozzarella, and goat cheese and served with a tomato basil sauce $5.50

SHIITAKE MUSHROOMS Sautéed wild mushroom and goat cheese layered in phyllo dough $5.50



INTRODUCTION

7

SALADS

Mesclun Greens Topped with Hazelnuts Warm herbed chevre cheese and Dijon vinaigrette $4.95

CRACKED WHEAT SALAD Tossed with a citrus and green onion vinaigrette $4.75

CAESAR SALAD Topped with roasted garlic cornbread croutons and a Southwest-inspired dressing $5.45 ENTRÉES

All entrées served with vegetables du jour and your choice of pasta, baked potato, or wild rice and choice of house salad or traditional Caesar salad.

BLACK ANGUS NEW YORK STRIP STEAK 12-ounce prime steak charbroiled and topped with crimini mushrooms $23.65

TOURNEDOS ROSSINI Two 3-ounce fillets of beef pan-seared and topped with foie gras, truffles, and a Madeira sauce $24.75

ROASTED MUSCOVY DUCK BREAST Maple-infused jus lie, cashew and scallion rice, and spaghetti squash prima vera $21.40

LAMB CHOPS SALTIMBOCCA Succulent lamb chops sautéed with thin slices of prosciutto and served with a sage white burgundy butter sauce over angel hair pasta $21.50

LOIN OF PORK À MAISON Tender pork served with our sauce du jour $20.50

SAUTÉED GINGER SHRIMP* Gulf shrimp, bean sprouts, snow peas, enoki mushrooms, and scallions in an Asian glass noodle salad with a light ginger-sesame dressing $18.00

VEGETARIAN PORTOBELLO BURRITO* Grilled portobello mushrooms and monterey jack cheese baked in a flour tortilla with chipotle aioli and jicama and sweet potato cole slaw $16.50

TEA-SMOKED SALMON* Atlantic salmon lightly smoked and finished in the oven, accompanied by Italian white beans, fusilli, and saffron broth served with lemon baby spinach $19.20 (Continued )

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PAN-SEARED CHICKEN* Breast of chicken, sliced Canadian bacon, and toasted pine nuts with a Honey Adobo Chipotle Sauce $16.50

PARMESAN-CRUSTED VEAL STEAK* Provimi-veal à la Francaise accompanied by braised bok choy and roasted potatoes $20.85

STEAK DIANE WITH A FIVE-PEPPER CREAM SAUCE Prime New York Sirloin prepared to your specifications with a rich flavorful sauce, duchesse potatoes, and asparagus $24.75

CHICKEN ALBUFERA Chicken breast sautéed with shallots and artichoke hearts in a brandy cream sauce finished with red pepper butter $16.45

TROUT GRENOBLOISE Sautéed brook trout served with lemon and capers $19.00

SHRIMP À LA MARSEILLE Large shrimp served in a light tomato sauce, seasoned with our fine herbs and pernod $19.95

FRUITS DE MER Lobster, shrimp, and scallops tossed in a light basil cream with fresh romano, served over thin pasta $21.40

CATCH OF THE DAY Fresh fillet of fish sautéed and served with lemon $16.50 DESSERTS

Ginger-Lime Cheesecakelettes Served with crystallized ginger $3.85

CHOCOLATE TORTE WITH CHERRY ICE* Chocolate, walnuts, and vanilla baked in a soufflé cup served with a cherry, ricotta, and maple syrup ice $4.40

FRESH FRUIT TART Prepared with the finest and freshest fruit of the season $2.75 *Heart-healthy items

INTRODUCTION



9

Under the previous owner, the restaurant had shown a profit of $65,000 per year. But Bill felt sure he could increase the profit by applying the principles he had learned in the college’s hospitality management program. The employees he inherited with the restaurant were both loyal and cooperative, and he found them receptive to the changes that he made gradually over the first year of operation. None of the changes were dramatically apparent to the customers; in fact, at the end of the first year, most had not noticed any changes at all. In general, they were as pleased with the establishment as they had been when Bill first took it over, and they continued to return. In addition, newcomers tried the restaurant, liked it, and became regular customers. At the end of the first full year of operation, Bill’s accountant presented him with a statement of income showing a restaurant profit of $128,702 (see Figure 1.3). • FIGURE 1.3 • The Grandview Bistro Income Statement, Year Ended December 31, 20XX

Sales Food Beverage Total Sales Cost of Sales Food Beverage Total Cost of Sales Gross Profit Controllable Expenses Salaries and wages Employee benefits Other controllable expenses Total Controllable Expenses Income before Occupancy Costs, Interest, Depreciation, and Income Taxes Occupancy Costs Interest Depreciation Total occupancy costs, interest, and depreciation Restaurant Profit

$891,687 $157,356 $1,049,043 $312,090 $39,339 $351,429 $697,614 $209,809 $47,207 $162,602 $419,618 $277,996

$89,169 $13,875 $46,250 $149,294 $128,702

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The statement confirmed Bill’s expectations. It proved to him that his management of the operation was effective in the ways he had anticipated. At the end of his first year, he looked to the future with confidence. A comparison of the statements of income for these two restaurants reveals some very important facts. As one might expect, A Taste of Tuscany, with twice as many seats as the Grandview Bistro, as well as a comparable menu and comparable prices, shows approximately twice the dollar volume of sales. However, despite the apparently favorable sales comparison, the restaurant profit for A Taste of Tuscany is considerably less than the Grandview Bistro. Because the difference between sales and restaurant profit on each statement of income is represented by costs of various kinds, we can infer that part of the difficulty with A Taste of Tuscany is somehow related to cost. The costs of operation seem to be in more favorable proportion to sales at the Grandview Bistro. Initially, we must look to the nature of these costs and their relations to sales to find the differences between the two establishments. It is possible that the costs of operation are not well regulated, or controlled, by A Taste of Tuscany. It is also possible that sales are not well controlled, and that if Joan Bailey is going to increase her profit to a desirable level, she must begin by exercising greater control over the several kinds of operating costs, as well as over sales. The statement of income from the Grandview Bistro suggests that Bill Young has kept both costs and sales under control, and, as we shall see, this is critically important to the success of his business. Comparative investigation of the two restaurants would reveal that Bill Young had instituted various control procedures in the Grandview Bistro that are noticeably absent in Joan Bailey ’s business. These control procedures are important features of a computer program that plays a significant part in the operation of the Grandview Bistro. These procedures have enabled Bill to manage his business more effectively. It will be important, therefore, to look closely at the nature and effect of these control procedures in succeeding chapters. However, before proceeding, it will be useful to establish clear definitions of the terms cost, sales, and control. Cost and sales will be defined and discussed in this chapter; control will be covered in Chapter 2.



COST CONCEPTS

Definition of Cost Accountants define a cost as a reduction in the value of an asset for the purpose of securing benefit or gain. That definition, although technically

COST CONCEPTS



11

correct, is not very useful in a basic discussion of controls, so we will modify it somewhat. As we use the term in our discussion of cost control in the food and beverage business, cost is defined as the expense to a foodservice establishment for goods or services when the goods are consumed or the services are rendered. Foods and beverages are considered “consumed” when they have been used, wastefully or otherwise, and are no longer available for the purposes for which they were acquired. Thus, the cost of a piece of meat is incurred when the piece is no longer available for the purpose for which it was purchased, because it has been cooked, served, or thrown away because it has spoiled, or even because it has been stolen. The cost of labor is incurred when people are on duty, whether or not they are working and whether they are paid at the end of a shift or at some later date. The cost of any item may be expressed in a variety of units: weight, volume, or total value. The cost of meat, for example, can be expressed as a value per piece, per pound, or per individual portion. The cost of liquor can be expressed as a value per bottle, per drink, or per ounce. Labor costs can be expressed as value per hour (an hourly wage, for example) or value per week (a weekly salary). Costs can be viewed in several different ways, and it will be useful to identify some of them before proceeding.

Fixed and Variable Costs The terms fixed and variable are used to distinguish between those costs that have no direct relationship to business volume and those that do.

Fixed Costs Fixed costs are normally unaffected by changes in sales volume. They are said to have little direct relationship to the business volume because they do not change significantly when the number of sales increases or decreases. Insurance premiums, real estate taxes, and depreciation on equipment are examples of fixed costs. Real estate taxes, after all, are set by governmental authorities and are based on a government’s need for a determined amount of total revenue. The real estate taxes for an individual establishment are based on the appraised value of the assessed property as real estate. Real estate taxes do not change when the sales volume in an establishment changes. All fixed costs change over time, sometimes increasing and sometimes decreasing. However, changes in fixed costs are not normally related to short-term changes in business volume. They are sometimes tied indirectly

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to long-term volume changes. For example, an increase in the cost of insurance premiums may be attributable to an insurance company ’s perception of increased risk associated with higher volume. Even though the increase in insurance cost is somehow related to an increase in volume, the cost of insurance is still considered a fixed cost. Advertising expense is another example: Larger establishments tend to spend more on advertising because their larger sales volume makes larger amounts of money available for the purpose, but advertising expense is still considered a fixed cost. The term fixed should never be taken to mean static or unchanging, but merely to indicate that any changes that may occur in such costs are related only indirectly or distantly to changes in volume. Sometimes, in fact, changes in fixed costs are wholly unrelated to changes in volume, as with real estate taxes. Other examples of costs that are generally considered fixed include repairs and maintenance, rent or occupancy costs, most utility costs, and the costs of professional services, such as accounting.

Variable Costs Variable costs are clearly related to business volume. As business volume increases, variable costs will increase; as volume decreases, variable costs should decrease as well. The obvious examples of variable costs are food, beverages, and labor. However, there are significant differences between the behavior of food and beverage costs and the behavior of labor costs. Food and beverage costs are considered directly variable costs. Directly variable costs are directly linked to volume of business, so that every increase or decrease in volume brings a corresponding increase or decrease in cost. Every time a restaurant sells an order of steak, it incurs a cost for the meat. Similarly, each sale of a bottle of beer at the bar results in a cost for the beer. Total directly variable costs, then, increase or decrease—or at least should increase or decrease—in direct proportion to sales volume. Payroll costs (including salaries and wages and employee benefits, and often referred to as labor costs) present an interesting contrast. Foodservice employees may be divided into two categories—those whose numbers will remain constant despite normal fluctuations in business volume, and those whose numbers and consequent total costs should logically (and often will) vary with normal changes in business volume. The first category includes such personnel as the manager, bookkeeper, chef, and cashier. In terms of the preceding definition, they are fixed-cost personnel. Their numbers and costs may change, but not because of short-term changes in business volume. The second category includes the servers, or the waitstaff. As business volume changes, their numbers and total costs can be expected to increase

COST CONCEPTS



13

or decrease accordingly. Both fixed-cost and variable-cost employees are included in one category on the statement of income: salaries and wages. Because payroll cost has both the fixed element and the variable element, it is known as a semivariable cost, meaning that a portion of it should change with short-term changes in business volume and another portion should not. It must be noted that each establishment must determine which employees should be fixed-cost personnel and which should be variable cost. In some specialized cases, it is possible for payroll to consist entirely of either fixed-cost or variable-cost personnel. For example, there are some restaurants in which the entire staff works for hourly wages. In these cases, numbers of hours worked and consequent costs are almost wholly related to business volume. Conversely, in some smaller restaurants, employees may all be on regular salaries, in which case labor cost is considered fixed.

Controllable and Noncontrollable Costs Costs may also be labeled controllable and noncontrollable. Controllable costs can be changed in the short term. Variable costs are normally controllable. The cost of food or beverages, for example, can be changed in several ways—by changing portion sizes, by changing ingredients in a recipe, or by changing the quality of the products purchased. The cost of labor can be increased or decreased in the short term by hiring additional employees or by laying some off, by increasing or decreasing the hours of work, or, in some instances, by increasing or decreasing wages. In addition, certain fixed costs are controllable, including advertising and promotion, utilities, repairs and maintenance, and administrative and general expenses, a category that includes office supplies, postage, and telephone expenses, among others. It is possible for owners or managers to make decisions that will change any of these in the short term. In contrast, noncontrollable costs cannot normally be changed in the short term. These are usually fixed costs, and a list of the more common ones would include rent, interest on a mortgage, real estate taxes, license fees, and depreciation. Managers do not normally have the ability to change any of these costs in the near term.

Unit and Total Costs It is also important to distinguish between unit costs and total costs. The units may be food or beverage portions, as in the cost of one steak or one

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martini, or units of work, as in the hourly rate for an employee. It is also useful to consider costs in terms of totals, as in the total cost of all food served in one period, such as a week or a month, or the total cost of labor for one period. The costs on a statement of income are all total costs, rather than unit costs. These concepts are best illustrated by example. In the Grandview Bistro, where steaks are cut from strip loins, a strip loin was purchased for $98.25. If one entire strip were consumed in one day, the total cost would be $98.25. However, the cost per unit (the steak) depends on the number of steaks cut from the strip. If there are 15, the unit cost is an average of $6.55. No two of the 15 steaks are likely to have identical costs, because it is not normally possible for a butcher to cut all steaks to exactly the same weight. In the food and beverage business, we commonly deal with average unit costs, rather than actual unit costs. It is important to know unit costs for purposes of establishing menu prices and determining unit profitability. Total costs, including those that appear in statements of income, are normally used for broader purposes, including determining the relationship between total costs and total sales—as discussed later in this chapter—and determining overall profitability of operations. It is important to note that, as business volume changes, total and unit costs are affected in different ways. Assume that a restaurant has a fixed cost for rent of $2,000 per month. If 2,000 customers were served during a period of one month, the fixed cost of rent per customer would be $1.00. If, in the succeeding month, the number of customers increased to 4,000, the total fixed cost for rent would not change, but the fixed cost per unit (customer) would be reduced from $1.00 to $0.50. A similar analysis may be done with variable cost