Cost Control

1. Cost Control Chapter 8 Controlling Other Expenses

2. Main Ideas • Managing Other Expenses • Fixed, Variable, and Mixed Other Expenses • Controllable and Noncontrollable Other Expenses • Monitoring Other Expenses • Reducing Other Expenses • Technology Tools

3. Managing Other Expenses • Other expenses are those items that are neither food, beverage, nor labor. • Other expenses can account for a significant financial expenditure. • You must look for ways to control all of your expenses, but sometimes the environment in which you operate will act upon your facility to influence some of your costs in positive or negative ways.

4. Managing Other Expenses • In the past, serving water to each guest upon arrival in a restaurant was simply SOP (standard operating procedure) for many foodservice operations. The rising cost of energy has caused many foodservice operations to implement a policy of serving water on request rather than with each order. • Energy conservation and waste reduction are two examples of attempts to control and reduce other expenses. • Source reduction is working with food manufactures and wholesalers to reduce product packaging waste.

5. Managing Other Expenses • Each operation will have its own unique list of required other expenses. • Other expenses can constitute almost anything in the foodservice business. • Groupings, if used, should make sense to the operator and should be specific enough to let the operator know what is in each category. • Operators can use their own categories (names or numbers), or follow those used in the Uniform System of Accounts for Restaurants (USAR) recommended for use by the National Restaurant Association. • The lists are on pages 330-334

6. Managing Other Expenses • While there are many ways in which to consider other expenses, two views of these costs are particularly useful for the foodservice manager. • They are: • Fixed, variable, or mixed • Controllable or noncontrollable

7. Fixed, Variable, and Mixed Other Expenses • A fixed expense is one that remains constant despite increases or decreases in sales volume. • A variable expense is one that generally increases as sales volume increases, and decreases as sales volume decreases. • A mixed expense is one that has properties of both fixed and variable expenses. • Question #1 – Variable vs. Fixed expenses

8. Fixed, Variable, and Mixed Other Expenses • The following shows how fixed, variable, and mixed expenses behave as sales volume increases.

9. Fixed, Variable, and Mixed Other Expenses • Percents can be computed for other expenses as follows: • If an operator feels that a fixed expense percentage is too high, he or she must either increase sales or negotiate better rates. • When a fixed expense is too high or a variable expense is out of control, that management should act. This is called management by exception. • Question #2 – Example of Cost % for other expenses Other Expense Total Sales = Other Expense Cost % Rent Expense Total Sales = Rent Cost %

10. Controllable and Noncontrollable Other Expenses • A noncontrollable expense is one that the manager can neither increase nor decrease • A controllable expense is one in which decisions made by the manager can have an effect of either increasing or reducing the expense. • Management should focus its attention on controllable rather than noncontrollable expenses. • Question #3 – Controllable vs. Noncontrollable expenses

11. Monitoring Other Expenses • When managing other expenses, two control and monitoring alternatives are available. They are: • Other expense cost % • Other expense cost per guest • The cost per guest formula is of value when management believes it can be helpful, or the lack of sales figure makes the computation of other expense percentage impossible. Other Expenses Total Sales = Other Expense Cost % Other Expense Number of Guests Served = Other Expense Cost Per Guest

12. Reducing Other Expenses • It is useful to break down other expenses into four categories: food and beverage, labor, facility maintenance, and occupancy when devising strategies to lower costs. • In general, fixed costs related to food and beverage operations can only be reduced when measuring them as a percent of total sales. This can be done only by increasing the total sales figure. • Labor related expenses can also be considered partially fixed and partially variable. • To reduce costs related to labor, it is necessary to eliminate wasteful labor-related expenses. • However, if an operator attempts to reduce costs too much he or she may find the best workers employed elsewhere. • Reducing employee benefits while attempting to retain a well-qualified workforce is simply management at its worst.

13. Reducing Other Expenses • A properly designed and implemented preventative maintenance program can go a long way toward reducing equipment failure and thus decreasing equipment and facility-related costs. • Proper care of mechanical equipment prolongs its life and reduces operational costs. • One way to help ensure that costs are as low as possible is to use a competitive bid process before awarding contracts for serviced you require. • In the area of maintenance contracts, for areas such as kitchen or mechanical equipment, elevators, or grounds, it is recommended that these contracts be bid at least once per year. • Air-conditioning, plumbing, heating and refrigerated units should be inspected at least yearly, and kitchen equipment should be inspected at least monthly for purposes of preventative maintenance.

14. Reducing Other Expenses • Occupancy costs refer to those expenses incurred by the foodservice unit that are related to the occupancy of and payment for the physical facility it occupies. • For the foodservice manager who is not the owner, the majority of occupancy costs will be noncontrollable. • The owner should find ways to control occupancy costs such as rent and interest on debt, if possible. • If occupancy costs are unrealistically high, no amount of effective cost control can help “save” the operation’s profitability.

15. Technology Tools • Depending upon the specific food service operation, these costs can represent a significant portion of the operation’s total expense requirements. As a result, controlling these costs is just as important as controlling food and labor-related costs. • Software and hardware that can be purchased to assist in this area include applications that relate to: • Assessing and monitoring utilities cost • Minimizing energy costs via the use of motion-activated sensors • Managing equipment maintenance records • Tracking marketing costs/benefits • Menu and promotional materials printing - hardware and software • Analysis of communications costs (telephone tolls) • Analysis of all other expense costs on a per-guest basis • Analysis of all other expense costs on a “cost per dollar sale” basis

16. Technology Tools • Comparing building/contents insurance costs across alternative insurance providers • Software designed to assist in the preparation of the income statement, balance sheet, and the statement of cash flows. • Income tax management • Income tax filing • At the minimum, most independent operators should computerize their records related to taxes at all levels to ensure accuracy, safekeeping, and timeliness of required filings.