costing in hotel
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What is Cost Control???
Minimizing costs the company
must expend without sacrificingthe end product (service/food)
that the customer receives.
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Fixed CostsRemain relatively constant in short run:
Management salaries
Rent expense Insurance expense
Property taxes
Depreciation expense
Interest expense
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Variable CostsVary in relation to business volume:
Food costs
Beverage costs Labor costs
Supplies cost
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Cost-Volume-Profit (CVP)
Assumptions/Limitations Fixed costs remain constant
Variable costs vary directly with revenue
Revenue relates directly to volume All costs divided into fixed costs or variable costs
Only quantitative factors are considered
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Revenue and Expense
Revenue - Expenses = Profit
RevenueDesired Profit = Ideal Expense
Expense
Revenue = Expense
%Revenue (100%)
- Food and Beverage
Cost %
- Labor Cost %
- Other Expense %
= Profit %
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Cost of Food & Bev
Once you know the average number of people selecting a given menu
item, and the total number of guests who made the selections, you can
compute the popularity index, which is defined as the percentage of
total guests choosing a given menu item from a list of alternatives.
Popularity Index =Total Number of a Specific Menu Item Sold
Total Number of All Menu Items Sold
The basic formula for individual menu item forecasting,
based on an items individual sales history, is as follows:
Number of Guests Expected x Item Popularity Index
= Predicted Number of That Item to Be Sold
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Determining Actual Food Expense
Cost of food sold is the dollar amount of all food actually
sold, thrown away, wasted or stolen. It is computed as
follows:
Beginning Inventory
PLUS
Purchases
= Goods Available for Sale
MINUS
Ending Inventory
= Cost of Food Consumed
MINUS
Employee Meals
= Cost of Food Sold
Calculating Food Cost
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Six Column Reporting
Six Column Food Cost % Estimate
1. Purchases Today
Sales Today = Cost % Today2. Purchases to Date
Sales to Date = Cost % to Date
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Calculating Beverage CostBeginning Inventory
PLUS
Purchases
= Goods Available for Sale
Less
Ending Inventory
LessTransfers from Bar
Plus
Transfers to Bar
=
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Principles of Cost Percentages
The food cost percentage equation is extremely interesting.In its simplest form, it can be represented as:
whereA = Cost of Goods Sold
B = SalesC = Cost Percentage
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If costs can be kept constant but sales increase, the
cost percentage goes down.
If costs remain constant but sales decline, costpercentage increases.
If costs go up at the same rate sales go up, your cost
percentage will remain unchanged.
If costs can be reduced but sales remain constant, the
cost percentage goes down.
If costs increase with no increase in sales, the cost
percentage will go up.
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Labor CostLabor Expense includes salaries and wages, but it consistsof other labor-related costs as well.
Payroll refers to the gross pay received by an employee inexchange for his or her work.A salaried employee receives the same income per week ormonth regardless of the number of hours worked.Minimum staffis used to designate the least number of
employees, or payroll dollars, required to operate a facility ordepartment within the facility.Fixed Payroll refers to the amount an operation pays insalaries.Variable Payroll consists of those dollars paid to hourly
employees. Sometimes employees have both a fixed andvariable element to their pay.
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Factors in Designing Control
Systems Accuracy
Timeliness
Objectivity
Consistency
Priority
Cost
Realism
Appropriateness
Flexibility
Specificity
Acceptability
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Important Control DefinitionsControl: Process used by managers to direct,
regulate and restrain the actions of people sothat the established goals of an enterprise may
be achievedCost Control: Process used by managers to
regulate costs and guard against excessive costs Standards:Rules or measures established for
making comparisons and judgments Standard cost: Cost of goods and services
identified, approved and accepted bymanagement
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Important Control Definitions Standard procedures: Procedures that have
been established as the correct methods,routines and techniques for day-to-day
operationsBudget: Realistic expression of managements
goals and objectives expressed in financialterms
Control system: Collection of interrelated andinterdependent control techniques andprocedures in use in a given food and beverageoperation
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Steps in the Control Process Establish standards
Measure actual operating results
Compare actual to standard
Take corrective action
Evaluate corrective action
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The control process consists of
four steps. 1. Establish standards and standard procedures
for operation.
2. Train all individuals to follow establishedstandards and standard procedures.
3. Monitor performance and compare actualperformances with established
standards.4. Take appropriate action to correct deviations
from
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Control techniques available to a
manager include the following. - Establishing standards
- Establishing procedures
- Training - Setting examples
- Observing and correcting employee actions
- Requiring records and reports
- Disciplining employees
- Preparing and following budgets
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Standardized RecipesThe standardized recipe controls both the quantity and quality of what
the kitchen will produce. It consists of the procedures to be used in
preparing and serving each of your menu items. The standardized recipe
is the key to menu item consistency, and ultimately, operational success.
In general, standardized recipes contain the following information:
1. Item name
2. Total yield (number of servings)
3. Portion size
4. Ingredient list
5. Preparation/method section
6. Cooking time and temperature
7. Special instructions, if necessary
8. Recipe cost (optional)
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BudgetingDeveloping the Budget
To establish any type of budget, you need to have thefollowing information available:
1. Prior period operating results
2. Assumptions of next period operations
3. Goals
4. Monitoring policiesannual budgetachievement budget
A b d t i i l f t ti t f
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A budget is simply a forecast or estimate of
projected revenue, expense, and profit.
The 28-day-period approach to budgeting divides ayear into 13 equal periods of 28 days each. This
helps the manager compare performance from one
period to the next without having to compensate for
extra days in any one period.
If significant variations with planned results
from a budget occur, management must:
1. Define the problem
2. Determine the cause
3. Take corrective action
l i U i d i
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Multi-Unit BudgetingBottom-up budgeting
Operating budgets assembled at unit level
Unit-level budgets rolled up the organization Budgets geared specifically to individual operations
Creates ownership at unit manager level
Top-down budgeting
Operating budgets developed at corporate level
Budgets passed down to unit levels
Corporate profit requirements made part ofindividual unit plans
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Budget Development ProcessCalculate projected revenue levels.
Revenue histories
Current factors
Economic variables
Other factors
Special concerns
Determine profit requirements.
Calculate projected expense levels.
Simple mark-up method
Percentage method Zero-based budget calculations
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Developing the Budget
To establish any type of budget, you need to
have the following information available:1. Prior period operating results
2. Examine the external environment to assess any conditions thatcould affect sales volume in the coming year
3. Review any planned changes in the operation that would affectsales volume
4. Determine the nature and extent of changes in cost levels
5. Have the projections for sales, costs and profits approved bymanagement
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Estimating ExpensesMark-Up
Method Estimates future expenses on basis of current expense
levels
Amounts of current expense levels areincreased/decreased for new operating budget
Assumes all costs were reasonable during current year
Inefficiency could be extended into the
new budget
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Estimating ExpensesPercentage
Method Based on current percentage of each expense relative
to revenue
Applies same cost percentages of current year toupcoming year
Assumes all costs were reasonable during current year
Inefficiency could be extended into the
new budget
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Estimating ExpensesZero-Based
Method Builds new budgeted expenses from a zero base
Current and previous years amounts/percentages areignored
Each expense item justified on its own merit
Avoids extending inefficiency into new budget butrequires considerable time/effort
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Variance AnalysisIdentifies differences between budgeted plans and actualresults
Equations below: positive variances are favorable;negative variances are unfavorable
Revenue Variances = Actual Amount Budgeted Amount
Expense Variances = Budgeted Amount Actual Amount
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Additional Terms Control process
Flexible budget
Operating budget Procedures
Quality standards
Quantity standards
Sales control
Static budget
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Just as the P&L tells you about your past
performance, the budget is developed to help
you achieve your future goals.
To prepare the budget and stay within it assuresyou predetermined profit levels.
The effective foodservice operator builds his orher budget, monitors it closely, modifies it
when necessary, and achieves the desiredresults.
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Monitoring the Budget
In general, the budget should be monitored in
each of the following three areas:
1. Revenue
2. Expense
3. Profit
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To determine a food budget, compute the estimated
food cost as follows:
1. Last Years Average Food Cost per Meal
= Last Years Cost of Food / Total
Meals Served
2. Last Years Food Cost per Meal
+ % Estimated Increase in
Food Costs = This Years
Food Cost per Meal
3. This Years Food Cost Per Meal
x Number of Meals to Be
Served This Year = Estimated Cost
of Food This Year
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To determine a labor budget, compute the estimated
labor cost as follows:
1. Last Years Labor Cost per Meal
= Last Years Cost of Labor / Total Meals
Served
2. Last Years Labor Cost per Meal+ % Estimated Increase in
Labor Cost = This Years
Labor Cost per Meal
3. This Years Labor Cost per Mealx Number of Meals to Be Served This
Year = Estimated Cost of Labor This
Year
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As business conditions change, changes in the budgetare to be expected. This is because budgets are basedon a specific set of assumptions, and as theseassumptions change, so too does the budget thatfollows from the assumptions.
Budgeted profit must be realized if the operation is toprovide adequate returns for owner and investor.
The primary goal of management is to generate theprofits necessary for the successful continuation of the
business. Budgeting for these profits is a fundamentalstep in the process.