Cost control involves minimizing costs without sacrificing quality for customers. A budget forecasts revenue, expenses, and profit over periods like 28 days. If actual results vary significantly from the budget, management must define problems, determine causes, and take corrective action. Precise sales forecasts allow for accurate expense and staffing estimates, increasing operational efficiency and profitability.

1. What is Cost Control???
Minimizing costs the company must
expend without sacrificing the end
product (service/food) that the customer
receives.

2. Revenue and Expense
Revenue - Expenses = Profit
Revenue – Desired Profit = Ideal Expense
Expense
Revenue = Expense %
Revenue (100%)
- Food and Beverage Cost %
- Labor Cost %
- Other Expense %
= Profit %

3. A budget is simply a forecast or estimate of
projected revenue, expense, and profit.
The 28-day-period approach to budgeting divides a year 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

4. Sales Forecasts
Advantages to Precise Sales
Forecasts
1) Revenue Estimates
2) Expense $ Estimates
3) Scheduling Workers
4) Scheduling Food and Service Production needs
5) Proper purchasing of amounts of food for immediate
use.
6) Increased operational efficiency – lower pricing,
increased benefits for workers.
7) Increased dollars for growth
8) Increased profit levels and stockholder value

5. Sales This Year – Sales Last Year = Variance
Percentage variance indicates the percentage change in sales from one
time period to the next.
Sales This Year –Sales Last Year
Sales Last Year = Percentage Variance
or
Variance
Sales Last Year = Percentage Variance
 Revenue forecast is calculated using the following formula:
Forecast =Sales Last Year + (Sales Last Year X %Increase)

6. Forecasting
The guest count forecast is determined by multiplying
guest count last year by the % increase estimate, and then
adding the guest count last year.
Guest Count Last Year + (Guest Count Last Year x % Increase
Estimate) = Guest Count Forecast
Or
Guests Last Year x (1.00 + % Increase Estimate) = Guest Count
Forecast

7. 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 item’s individual
sales history, is as follows:
Number of Guests Expected x Item Popularity Index
= Predicted Number of That Item to Be Sold

8. Standardized Recipes
The 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)

9. Converting Recipes – Factor or Percentage
Yield Desired
Current Yield = Conversion Factor
Ingredient Weight / Total Recipe Weight = % of Total
then
% of Total x Total Amount Required
= New Recipe Amount

10. Waste, Yield AP & EP
Yield % = 1.00 - Waste %
AP – Waste (EP)
AP = Yield %
EP Required
Yield % = AP Required
EP Required =AP Required x Yield %

11. Calculating Food Cost
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

12. Six Column Reporting
Six Column Food Cost % Estimate
1. Purchases Today
Sales Today = Cost % Today
2. Purchases to Date
Sales to Date = Cost % to Date
Sales Purchases Cost &
Weekday Today To Date Today To Date Today To Date
Monday $850.40 $850.40 $1,106.20 $1,106.20 130.08% 130.08%
Tuesday $920.63 $1,771.03 $841.40 $1,947.60 91.39% 109.97%
Wednesday $1,185.00 $2,956.03 $519.60 $2,467.20 43.85% 83.46%
Thursday $971.20 $3,927.23 $488.50 $2,955.70 50.30% 75.26%
Friday $1,947.58 $5,874.81 $792.30 $3,748.00 40.68% 63.80%
Saturday $2,006.41 $7,881.22 $286.20 $4,034.20 14.26% 51.19%
Sunday $2,404.20 $10,285.42 $0.00 $4,034.20 0.00% 39.22%

13. Calculating Beverage Cost
Beginning Inventory
PLUS
Purchases
= Goods Available for Sale
Less
Ending Inventory
Less
Transfers from Bar
Plus
Transfers to Bar
= Cost of Beverage Sold

14. Calculating Sales Mix & Terms
Item Dollar Sales
Total Beverage Sales = Item % of Total Beverage
Sales
Two-key system
Oxidation
Broken case
Empty for full system of managment

15. F&B Production
Necessary Components of F&B Production Planning:
1) Maintain Sales Histories
2) Forecast Future Sales Histories
3) Purchase and store needed F&B supplies
4) Plan daily production schedules
5) Issue needed products to production areas
6) Manage the food and beverage production process

16. Controlling Product Issues
Issues Today
Sales Today = Beverage/Food Cost Estimate Today
The six-column form requires only that the manager divide today‟s issues by
today‟s sales to arrive at the today estimate as follows
Beverage Cost
Issues Sales Estimate
Date Today To Date Today To Date Today To Date
1-Jan 945 945 1450.22 1450.22 65.16% 65.16%
2-Jan 785 1730 1688.4 3138.62 46.49% 55.12%
3-Jan 816.5 2546.5 2003.45 5142.07 40.75% 49.52%
4-Jan 975.4 3521.9 1920.41 7062.48 50.79% 49.87%
5-Jan 1595 5116.9 5546.5 12608.98 28.76% 40.58%
6-Jan 1100.2 6217.1 5921.27 18530.25 18.58% 33.55%
7-Jan 18.4 6235.5 495.2 19025.45 3.72% 32.77%
Total 6235.5 19025.45 32.77%

17. Methods of Inventory Control
 A physical inventory is one in which an actual, physical
count and valuation of all inventory on hand is taken at
the beginning and close of each accounting period.
 A perpetual inventory system is one in which additions
to and deletions from total inventory are recorded as
they occur.
 The ABC system attempts to combine both the physical
and perpetual inventory systems. It separates inventory
items into three main categories

18. ABC Inventory System
o Category A items are those that require tight control and
the most accurate record keeping. Those are typically
high-value items, which can make up 70% to 80% of the
total inventory value.
o Category B items are those that make up 10% to 15% of
the inventory value and require only routine control and
record keeping.
o Category C items make up only 5% to 10% of the
inventory value. These items require only the simplest
of inventory control systems

19. Inventory Control Formulas
Cost in Product Category
Total Cost in All Categories = Proportion of Total Product Cost
Cost as per Standardized Recipes
Total Sales =Attainable Product Cost %
Actual Product Cost
Attainable Product Cost = Operational Efficiency Ratio

20. Principles of Cost Percentages
 The food cost percentage equation is extremely
interesting. In its simplest form, it can be represented
as:
where
A = Cost of Goods Sold
B = Sales
C = Cost Percentage
A
B =C

21. If costs can be kept constant but sales increase, the cost
percentage goes down.
If costs remain constant but sales decline, cost percentage
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.

22. Managing F&B Pricing
 Standard Menu
 Daily Menu
 Cycle Menu
 Value Pricing
 Bundling

23. Factors Influencing Menu Pricing
1. Local competition
2. Service levels
3. Guest type
4. Product quality
5. Portion size
6. Ambience
7. Meal period
8. Location
9. Sales mix

24. Selling Price Determination
Cost of a Specific Food Item Sold
Desired Food Cost % of That Item
= Selling Price of That Item

25. Multiplier Method
1.00
Desired Product Cost % = Pricing Factor
Pricing Factor x Product Cost = Menu Price

26. Contribution Margin Method
Selling Price – Product Cost = Contribution Margin
Product Cost + Contribution Margin Desired = Selling Price

27. Pricing Buffets
Total Buffet Product Cost
Guests Served = Buffet Product Cost per
Guest
The secret to keeping selling price low for a
salad bar or buffet is to apply the ABC method.
A items should comprise no more than 20% of
the total product available; B items, no more
than 30%; and C items, 50%.

28. Labor Cost
 Labor Expense includes salaries and wages, but it consists
of other labor-related costs as well.
 Payroll refers to the gross pay received by an employee in
exchange for his or her work.
 A salaried employee receives the same income per week or
month regardless of the number of hours worked.
 Minimum staff is used to designate the least number of
employees, or payroll dollars, required to operate a facility or
department within the facility.
 Fixed Payroll refers to the amount an operation pays in
salaries.
 Variable Payroll consists of those dollars paid to hourly
employees. Sometimes employees have both a fixed and
variable element to their pay.

29. Productivity Standards
Output
Input =Productivity Ratio
Cost of Labor
Total Sales =Labor Cost %
Total Sales
Labor Hours Used = Sales per Labor Hour
Cost of Labor
Guests Served = Labor Dollars per Guest Served

30. Productivity and Scheduling
hour 7.5
Productivity = covers = 60 = 0.125
Productivity X Forecast Cover = Scheduled Hours
0.125 x 3000 Covers = 375 hours

31. Factors Influencing Productivity
10 Key Factors Affecting
Employee Productivity
1. Employee Selection
2. Training
3. Supervision
4. Scheduling
5. Breaks
6. Morale
7. Menu
8. Convenience vs. Scratch Preparation
9. Equipment
10. Service Level Desired

32.  A job specification is a listing of the personal
characteristics needed to perform the tasks
contained in a particular job description.
 A job description is a listing of the tasks that must
be accomplished by the employee hired to fill a
particular position.
 Task training is the training undertaken to ensure
an employee has the skills to meet productivity
goals.

33. Employee Turnover
Employee Turnover Rate = # of Employees Separated
# of Employees in Workforce
A voluntary separation is one in which the employee made the decision
to leave the organization.
An involuntary separation is one in which management has caused the
employee to separate from the organization.
Employee Turnover Rate =
Number of Employees Separated
Number of Employees in Workforce

34. Managing Other Expenses
 Other expenses are those items that are neither food,
beverage, nor labor.
 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:
1.Fixed, variable, or mixed
2.Controllable or non-controllable

35.  The following shows how fixed, variable,
and mixed expenses behave as sales volume
increases:
Expense As a Percentage of Total Dollars
Sales
Fixed Decreases Remains the
Expense Same
Variable Remains the Same Increases
Expense
Mixed Decreases Increases
Expense

36. Financial Analysis
 To ensure that this financial information is presented in a way that
is both useful and consistent, the uniform systems of accounts
have been established for many areas of the hospitality industry.
 The USAR can better be understood by dividing it into three
sections: gross profit, operating expenses, and non-operating
expenses.
 These three sections are arranged on the income statement from
most controllable to least controllable by the foodservice manager.

37. The gross profit section consists of food and beverage sales and costs that
can and should be controlled by the manager on a daily basis.
The operating expenses section is also under the control of the manager but
more so on a weekly or monthly basis (with the exception of wages which you
can control daily).
Nonoperating expenses section is the least controllable by the foodservice
manager. For example, interest paid to creditors for short-term or long-term
debt is due regardless of the ability of the manager to control operations.
The income statement is an aggregate statement. This means that
all details associated with the sales, cost, and profits of the foodservice
establishment are summarized on the P&L statement. Although this
summary gives the manager a one-shot look at the performance of the
operation, the details are not included directly on the statement.

38. Analysis of Sales/Volume
Overall sales increases or decreases can be
computed using the following steps:
1.Determine sales for this accounting period.
2.Determine the difference between this period‟s
sales minus last period‟s sales.
3.Divide the difference in #2 by last period's sales
to determine percentage variance.

39.  There are several ways a foodservice
operation experiences total sales (dollar)
volume increases. These are:
1. Serve the same number of guests at a
higher check average.
2. Serve more guests at the same check
average.
3. Serve more guests at a higher check
average.

40. The procedure to adjust sales variance for known menu
price increases is as follows:
Step 1. Increase prior period sales (last year) by amount of
the price increase. Ex: if prices were increased 5% on all
menu items, increase the prior period sales by 5%.
Step 2. Subtract the result in Step 1 from this period's sales.
Step 3. Divide the difference in Step 2 by the value of Step
1.

41. Analysis of Food Cost & Inventory
 A food cost percentage can be computed for each food
sub-category. For instance, the cost percentage for the
category Meats and Seafood would be computed as
follows:
Meats and Seafood Cost
Total Food Sales = Meats and Seafood Cost
%

42. Inventory turnover refers to the number of times the
total value of inventory has been purchased and replaced
in an accounting period.
Cost of Food Consumed
Average Inventory Value= Food Inventory Turnover
The higher the Food Inventory Turnover number, the
greater the frequency of orders and typically the
smaller the inventory size.

43. Analysis of Profit
Net Income This Period – Net Income Last Period
Net Income Last Period
= Profit Variance %

44. Profit Planning Strategies

45. Three of the most popular systems of menu
analysis are:
Variables Considered Analysis Method Overall Goal
Food Cost % Food Cost % Matrix Minimize overall FC%
Popularity
Contribution Margin Contribution Margin Matrix Maximize CM
Popularity
Goal Value Analysis Contribution Margin % Algebraic Equation Achieving certain
Popularity Profit Percentage Goals
Selling Price
Variable Cost %
Food Cost %
A matrix allows menu items to be placed into categories based on whether they
are above or below menu item averages such as food cost %, popularity, and
contribution margin.

46. When analyzing a menu using the Food Cost Percentage
Method, you are seeking menu items that have the effect of
minimizing your overall food cost percentage.
The characteristics of the menu items that fall into each of the four
matrix squares are unique and thus should be marketed differently
1 – High FC%, Low Popularity %
2 – High FC%, High Popularity %
1 2 3 – Low FC%, Low Popularity %
FC% 4 – Low FC%, High Popularity %
3 4
Popularity %

47. Each of the menu items that fall in the squares
requires a special marketing strategy, depending on
its square location.
1 – High CM, Low Popularity %
2 – High CM, High Popularity %
1 2 3 – Low CM, Low Popularity %
CM$ 4 – Low CM, High Popularity %
3 4
Popularity %

48. The selection of either food cost percentage or
contribution margin as a menu analysis technique
is really an attempt by the foodservice operator to
answer the following questions:
1. Are my menu items priced correctly?
2. Are the individual menu items
selling well enough to warrant keeping
them on the menu?
3. Is the overall profit margin on my menu
items satisfactory?

49. The goal value formula is as follows:
A x B x C x D = Goal Value
A = 1.00 - Food Cost % (Contribution Margin %)
B = Item Popularity
C = Selling Price
D = 1.00 - (Variable Cost % + Food Cost %)
Food Cost % Number Selling Variable Cost %
Item (in decimal form) Sold Price (in decimal form)
Fajita Plate 0.38 147 $12.95 0.28
Enchilada Dinner 0.35 200 9.95 0.28
Menudo 0.25 82 6.95 0.28
Mexican Salad 0.30 117 7.95 0.28
Chalupa Dinner 0.28 125 8.95 0.28
Burrito Dinner 0.33 168 9.95 0.28
Taco Dinner 0.26 225 5.95 0.28
Overall Menu
(Goal Value) 0.32 152 8.95 0.28
Average Goal Value = 0.68 x 152 x 8.95 x 0.40 = 370

50. The computed goal value carries no unit
designation; that is, it is neither a percent nor a
dollar figure because it is really a numerical target
or score. Anything scoring above the average would
be considered a good item, anything below would
be considered an item that needs some re-thinking.
Food Cost % Number Selling Variable Cost %
Item (in decimal form) Sold Price (in decimal form) Goal Value
Fajita Plate 0.62 147 $12.95 0.40 472.1
Enchilada Dinner 0.65 200 $9.95 0.40 517.4
Menudo 0.75 82 $6.95 0.40 171.0
Mexican Salad 0.70 117 $7.95 0.40 260.4
Chalupa Dinner 0.72 125 $8.95 0.40 322.2
Burrito Dinner 0.67 168 $9.95 0.40 448.0
Taco Dinner 0.74 225 $5.95 0.40 396.3
Average 0.68 152 $ 8.95 0.4 370.0

51. Contribution margin for the overall operation
is defined as the dollar amount that contributes to
covering fixed costs and providings for a profit.
This is different than the C.M. for a menu item in
that it takes into account both important variable
costs – food and labor.
Total Sales - Variable Costs = Contribution Margin
C.M. % = Contribution Margin $/ Total Sales $
C.M. per Guest = Contribution Margin $ / Guests

52. To determine the dollar sales required to break
even, use the following formula:
Fixed Costs
Contribution Margin % = Break-Even Point in Sales
In terms of the number of guests that must be
served in order to break even, use the following
formula:
Fixed Costs
Contribution Margin per Unit (Guest)
= Break-Even Point in Guests Served

53.  Minimum Sales Point (MSP) is the dollar sales volume
required to justify staying open for a given period of time.
 The information necessary to compute MSP is as follows:
1. Food cost %
2. Minimum payroll cost for the time period
3. Variable cost %
 Fixed costs are eliminated from the calculation because
even if volume of sales equals zero, fixed costs still exist
and must be paid.

54. Minimum Operating Cost = FC% +VC%
MSP = Minimum Labor Cost
1 – Minimum Operating Cost
Or it could be written as:
MSP = Minimum Labor Cost
1 – (FC% + VC%)

55. Budgeting
Developing the Budget
 To establish any type of budget, you need to have the following
information available:
1. Prior period operating results
2. Assumptions of next period operations
3. Goals
4. Monitoring policies
 annual budget
 achievement budget

56. To determine a food budget, compute the
estimated food cost as follows:
1. Last Year’s Average Food Cost per Meal = Last
Year’s Cost of Food / Total Meals Served
2. Last Year’s Food Cost per Meal
+ % Estimated Increase in Food Costs
= This Year’s Food Cost per Meal
3. This Year’s Food Cost Per Meal x
Number of Meals to Be Served This Year =
Estimated Cost of Food This Year

57.  Todetermine a labor budget, compute the
estimated labor cost as follows:
1. Last Year‟s Labor Cost per Meal =
Last Year‟s Cost of Labor / Total Meals Served
2. Last Year‟s Labor Cost per Meal +
% Estimated Increase in Labor Cost = This
Year‟s Labor Cost per Meal
3. This Year’s Labor Cost per Meal x
Number of Meals to Be Served This Year =
Estimated Cost of Labor This Year

58. Yardstick Method
 Some operators elect to utilize the yardstick method
of calculating expense standards so determinations
can be made as to whether variations in expenses are
due to changes in sales volume, or other reasons such
as waste or theft. The yardstick method helps you
identify specific problems quickly and accurately.

59. Break-Even Analysis

60. Defined:
Break-even analysis examines the cost tradeoffs
associated with demand volume.

61. Overview:
Break-Even Analysis
 Benefits
 Defining Page
 Getting Started
 Break-even Analysis
 Break-even point
 Comparing variables
 Algebraic Approach
 Graphical Approach

62. Benefits and Uses:
 The evaluation to determine necessary levels of
service or production to avoid loss.
 Comparing different variables to determine best
case scenario.

63. Defining Page:
 USP = Unit Selling Price
 UVC = Unit Variable costs
 FC = Fixed Costs
Q = Quantity of output units
sold (and manufactured)

64. Defining Page:
Cont.
 OI = Operating Income
 TR = Total Revenue
 TC = Total Cost
 USP = Unit Selling Price

65. Getting Started:
 Determination of which equation method to use:
 Basic equation
 Contribution margin equation
 Graphical display

66. Break-even analysis:
Break-even point
 John sells a product for $10 and it cost $5 to
produce (UVC) and has fixed cost (FC) of $25,000
per year
 How much will he need to sell to break-even?
 How much will he need to sell to make $1000?

67. Algebraic approach:
Basic equation
Revenues – Variable cost – Fixed cost = OI
(USP x Q) – (UVC x Q) – FC = OI
$10Q - $5Q – $25,000 = $ 0.00
$5Q = $25,000
Q = 5,000
What quantity demand will earn $1,000? $10Q - $5Q -
$25,000 = $ 1,000
$5Q = $26,000
Q = 5,200

68. Algebraic approach:
Contribution Margin equation
(USP – UVC) x Q = FC + OI
Q = FC + OI
UMC
Q = $25,000 + 0
$5
Q = 5,000
What quantity needs sold to make $1,000?
Q = $25,000 + $1,000
$5
Q = 5,200

69. Graphical analysis:
Dollars
70,000
60,000 Total Cost Line
50,000
40,000
30,000
20,000
Total Revenue Line
10,000 Break-even point
0
1000 2000 3000 4000 5000 6000
Quantity

70. Graphical analysis:
Cont.
Dollars
70,000
60,000 Total Cost Line
50,000
40,000
30,000
20,000
Total Revenue Line
10,000 Break-even point
0
1000 2000 3000 4000 5000 6000
Quantity

71. Scenario 1:
Break-even Analysis Simplified
 When total revenue is equal to total cost the process
is at the break-even point.
TC = TR

72. Break-even Analysis:
Comparing different variables
 Company XYZ has to choose between two
machines to purchase. The selling price is $10 per
unit.
 Machine A: annual cost of $3000 with per unit cost
(VC) of $5.
 Machine B: annual cost of $8000 with per unit cost
(VC) of $2.

73. Break-even analysis:
Comparative analysis Part 1
 Determine break-even point for Machine A and
Machine B.
 Where: V = FC
SP - VC

74. Break-even analysis:
Part 1, Cont.
Machine A:
v = $3,000
$10 - $5
= 600 units
Machine B:
v = $8,000
$10 - $2
= 1000 units

75. Part 1: Comparison
 Compare the two results to determine minimum
quantity sold.
 Part 1 shows:
 600 units are the minimum.
 Demand of 600 you would choose Machine A.

76. Part 2: Comparison
Finding point of indifference between Machine A and Machine
B will give the quantity demand required to select Machine B
over Machine A.
Machine A = Machine B
FC + VC = FC + VC
$3,000 + $5 Q = $8,000 + $2Q
$3Q= $5,000
Q= 1667

77. Part 2: Comparison
Cont.
 Knowing the point of indifference we will choose:
 Machine A when quantity demanded is between
600 and 1667.
 Machine B when quantity demanded exceeds 1667.

78. Part 2: Comparison
Graphically displayed
Dollars
21,000
18,000 Machine A
15,000
12,000
9,000 Machine B
6,000
3,000
0
500 1000 1500 2000 2500 3000
Quantity

79. Part 2: Comparison
Graphically displayed Cont.
Dollars
21,000
18,000 Machine A
15,000
12,000
9,000 Machine B
6,000
3,000 Point of indifference
0
500 1000 1500 2000 2500 3000
Quantity

80. Exercise 1:
 Company ABC sell widgets for $30 a unit.
 Their fixed cost is$100,000
 Their variable cost is $10 per unit.
 What is the break-even point using the basic
algebraic approach?

81. Exercise 1:
Answer
Revenues – Variable cost - Fixed cost = OI
(USP x Q) – (UVC x Q) – FC = OI
$30Q - $10Q – $100,00 = $ 0.00
$20Q = $100,000
Q = 5,000

82. Exercise 2:
 Company DEF has a choice of two machines to
purchase. They both make the same product which
sells for $10.
 Machine A has FC of $5,000 and a per unit cost of
$5.
 Machine B has FC of $15,000 and a per unit cost of
$1.
 Under what conditions would you select Machine A?

83. Exercise 2:
Answer
Step 1: Break-even analysis on both options.
Machine A:
v = $5,000
$10 - $5
= 1000 units
Machine B:
v = $15,000
$10 - $1
= 1667 units

84. Exercise 2:
Answer Cont.
Machine A = Machine B
FC + VC = FC + VC
$5,000 + $5 Q = $15,000 + $1Q
$4Q= $10,000
Q= 2500
 Machine A should be purchased if expected demand
is between 1000 and 2500 units per year.

85. Summary:
 Break-even analysis can be an effective tool in
determining the cost effectiveness of a product.
 Required quantities to avoid loss.
 Use as a comparison tool for making a decision.

86. Break-even & Leverage Analysis

87. Types of Costs
 Essentially, there are two types of costs that a business
faces:
 Variable costs which vary proportionally with sales
 hourly wages
 utility costs
 raw materials
 etc.
 Fixed costs which are constant over a relevant range of
sales
 executive salaries
 lease payments
 depreciation
 etc.

88. Types of Costs Grapically
T o ta l
T o t a l V a r ia b le C o s t
U n it S a le s U n it S a le s
V a r ia b le C o s t p e r U n it
F ix e d C o s t p e r U n it
P e r U n it
U n it S a le s U n it S a le s

89. Operating (Accounting) Break-even
 The operating break-even point is defined as that level
of sales (either units or dollars) at which EBIT is equal to
zero:
S a le s VC FC 0
Or
Q P v FC 0
 Where VC is total variable costs, FC is total fixed costs, Q is the
quantity, p is the price per unit, and v is the variable cost per unit

90. The Operating Break-even in Units
 We can find the operating break-even point in units by
simply solving for Q:
* FC FC
Q
p v C M $ / u n it
 Where CM$/unit is the contribution margin per unit sold (i.e.,
CM$/unit = p - v)
 The contribution margin per unit is the amount that each unit sold
contributes to paying off the fixed costs

91. The Operating Break-even in Dollars
 We can calculate the operating break-even point in
sales dollars by simply multiplying the break-even point
in units by the price per unit:
*
BE$ Q p
 Note that we can substitute the previous definition of Q* into this
equation:
FC FC FC
BE$ p
p v p v CM %
p
 Where CM% is the contribution margin as a % of the selling price

92. Operating Break-even: an Example
 Suppose that a company has fixed costs of $100,000
and variable costs of $5 per unit. What is the break-
even point if the selling price is $10 per unit?
* 1 0 0 ,0 0 0
Q 2 0 , 0 0 0 u n its
10 5
Or
BE$ 2 0 ,0 0 0 10 $ 2 0 0 ,0 0 0
Or
1 0 0 ,0 0 0
BE$ $ 2 0 0, 0 0 0
10 5
10

93. Targeting EBIT
 We can use break-even analysis to find the sales
required to reach a target level of EBIT
*
FC E B ITT arg et
Q T arg et
p v
 Note that the only difference is that we have defined the break-
even point as EBIT being equal to something other than zero

94. Targeting EBIT: an Example
 Suppose that we wish to know how many units the
company (from the previous example) needs to sell
such that EBIT is equal to $500,000:
* 1 0 0 ,0 0 0 5 0 0 ,0 0 0
Q 1 2 0 , 0 0 0 u n its
10 5
Or
BE$ 1 2 0 ,0 0 0 10 $ 1, 2 0 0 , 0 0 0
Or
1 0 0 ,0 0 0 5 0 0 ,0 0 0
BE$ $ 1, 2 0 0 , 0 0 0
10 5
10

95. Cash Break-even Points
 Note that if we subtract the depreciation expense (a
non-cash expense) from fixed cost, we can calculate the
break-even point on a cash flow basis:
* FC D ep reciatio n
Q T arg et
p v

96. Leverage Analysis
 In physics, leverage refers to a multiplcation of a force
into even larger forces
 In finance, it is similar, but we are refering to a
multiplication of %changes in sales into even larger
changes in profitability measures
Lev erage in phy s ic s Lev erage in financ e
F orc e In % S ales
F orc e O ut % P rofits

97. Types of Risk
 There are two main types of risk that a company faces:
 Business risk - the variability in a firm‟s EBIT. This type of
risk is a function of the firm‟s regulatory environment, labor
relations, competitive position, etc. Note that business risk
is, to a large degree, outside of the control of managers
 Financial risk - the variability of the firm‟s earnings before
taxes (or earnings per share). This type of risk is a direct
result of management decisions regarding the relative
amounts of debt and equity in the capital structure

98. The Degree of Operating Leverage (DOL)
 The degree of operating leverage is directly proportional
to a firm‟s level of business risk, and therefore it serves
as a proxy for business risk
 Operating leverage refers to a multiplication of changes
in sales into even larger changes in EBIT
 Note that operating leverage results from the presence
of fixed costs in the firm‟s cost structure

99. Calculating the DOL
 The degree of operating leverage can be calculated as:
% E B IT
DOL
% S ales
 This approach is intuitive, but it requires two income statements to
calculate
 We can also calculate DOL with one income statement:
Q p v S ales VC
DOL
Q p v FC E B IT

100. The Degree of Financial Leverage (DFL)
 The degree of financial leverage is a measure of the %
changes in EBT that result from changes in EBIT, it is
calculated as:
% EBT
D FL
% E B IT
 This approach is intuitive, but it requires two income statements to
calculate
 We can also calculate DFL with one income statement:
E B IT
D FL
EBT

101. The Degree of Combined Leverage (DCL)
 The degree of combined leverage is a measure of the
total leverage (both operating and financial leverage)
that a company is using:
% EBT % E B IT % EBT
DCL DOL D FL
% S ales % S ales % E B IT
 It is important to note that DCL is the product (not the sum) of
both DOL and DFL

102. Calculating Leverage Measures
B a se C a se S a les D o w n 1 0 % S a les u p 1 0 %
S ales 1000 900 1100
V ariab le C o sts 450 405 495
F ix ed C o sts 300 300 300
D ep reciatio n 100 100 100
E B IT 150 95 205
In terest E x p en se 30 30 30
EBT 120 65 175
P ercen ta g e C h a n g es R ela tiv e to th e B a se C a se
S ales -1 0 .0 0 0 % 1 0 .0 0 0 %
E B IT -3 6 .6 6 7 % 3 6 .6 6 7 %
EBT -4 5 .8 3 3 % 4 5 .8 3 3 %
L ev era g e M ea su res
U sin g a sin g le in co m e sta tem en t:
DOL 3 .6 7 5 .2 1 2 .9 5
DFL 1 .2 5 1 .4 6 1 .1 7
DCL 4 .5 8 7 .6 2 3 .4 6
U sin g tw o in co m e sta tem en ts:
DOL 3 .6 7
DFL 1 .2 5
DCL 4 .5 8

103. Budgets

104. Budgets
 Estimates of the income and expenditure of a
business or a part of a business over a time
period
 Used extensively in planning
 Helps establish efficient use
of resources
 Help monitor cash flow and identify departures from
plans
 Maintains a focus and discipline
for those involved

105. Budgets
 Flexible Budgets – budgets that take account of
changing business conditions
 Operating Budgets – based on
the daily operations of a business
 Objectives Based Budgets - Budgets driven by
objectives set by the firm
 Capital Budgets – Plans of the relationship
between capital spending and liquidity (cash) in the
business

106. Budgets
 Variance – the difference between planned values and
actual values
 Positive variance – actual figures less than planned
 Negative variance – actual figures above planned

107. Food Storing and Issuing Control

108. Five Principle Concerns
 Conditions of facilities and equipment
 Arrangement of foods
 Location of facilities
 Security of storage areas
 Dating and pricing of stored foods

109. Condition of Facilities and Equipment
 Conditions include:
 Temperature
 Storage Containers
 Shelving
 Cleanliness
 Problems can lead to:
 Spoilage and waste
 Health codes specify:
 Storage temperatures
 Storage containers
 Storage procedures

110. Temperatures
 Key factor in storage
 Fresh meats – 34 to 36 degrees F.
 Fresh produce – 34 to 36 degrees F.
 Fresh dairy – 34 to 36 degrees F.
 Fresh fish – 30 to 34 degrees F.
 Frozen foods – minus 10 to 0 degrees F.
 Temperatures above recommended:
 Shorten shelf life
 Raise the risk of spoilage
 Storage temperatures for non-perishables
 60 to 70 degrees F.

111. Storage Containers
 Foods should be stored in appropriate containers.
 Tight, insect proof containers
 Some may be fine as purchased
 Fresh fish and poultry packed in ice
 Cooked foods in SS and covered

112. Cleanliness
 Should be enforced
 Prevents accumulation and odor
 Discourages infestation of insects and rodents
 Professional exterminator should be used on a regular
basis

113. Arrangement of Foods
 Most used item readily available
 Fixed definite locations
 Rotation of stock

114. Location and Storage Facilities
 Located between receiving and preparation areas
 Proper location:
 Speeds the storing and issuing of foods
 Maximizes security
 Reduces labor requirements

115. Security
 Storage should limit pilferage
 Storerooms should not be unlocked and unattended
 Procedures should be in place to track removal of items
 When not open, storage areas should be locked
 Establish separate procedures for “A” items

116. Dating and Pricing
 Items should be dated as they are stored
 Items should be priced as they are put away
 Computer tracking eliminates the need

117. Physical Movement of Foods from
Storage
 Practices vary in operations
 Requisitions
 Honor system
 Wide open
 Greater control leads to:
 Increased cost
 More time and delay
 Large operations tend to be more formal
 Smaller operations tend to be less formal
 Cost/Benefit considerations needed before
establishment of standards and procedures

118. Record Keeping
 Directs:
 Charged to food cost as received
 No further records kept
 Stores:
 Considered part of inventory
 Not used in cost figures until issued
 For control purposes a system for issuing must be
established

119. The Requisition
 Form filled out by kitchen staff
 Lists items needed for production
 Quantities deducted from inventory
 Requisitions should be submitted in advance
 Definite times established for issue
 Pricing the requisition
 Extended to determine total value of food issued
 Cost derived from item, file card, perpetual inventory
record or memory

120. Importance of Training
 Inappropriate containers or temperature
 Improper or multiple locations
 Lack of rotation
 Pilferage from lack of security
 Poor record keeping

121. Monitoring
 Management should:
 Inspect facilities on a regular basis
 Cleanliness
 Organization
 Temperatures
 Location
 Rotation
 Examine paperwork
 Verify requisitions

122. Food and Beverage Transfers
 Intra-unit transfers:
 Food to beverage
 Beverage to food
 Inter-unit transfers:
 Unit to unit

123. Developing a safety culture
Figure 3.1

124. The process of food hygiene
management for food production
Figure 3.3

125. Elements of food production
Blend
Figure 3.4

126. A generic model of the
food production system
Figure 3.5

127. Methods of food production (1)
1. Conventional
 Production using fresh foods and traditional cooking
methods
2. Convenience
 Production using mainly convenience foods
3. Call order
 Food is cooked to order either from customer
(cafeterias) or from waiter
 Production area often open to customer area

128. Methods of food production (2)
4. Continuous flow
 Production line approach
 Different parts of the process may be separated (e.g. fast
food)
5. Centralised
 Production not directly linked to service
 Foods are „held‟ and distributed to separate service areas
6. Cook-chill
 Food production storage and regeneration using low
temperature control to preserve processed food.

129. Methods of food production (3)
7. Cook-freeze
 Production, storage and regeneration using freezing to
control and preserve qualities of processed food
 Requires special processes to assist freezing
8. Sous-vide
 Production, storage and regeneration using sealed
vacuum to control and preserve qualities of processed
food
9. Assembly kitchen
 System based on using latest technological
developments in manufacturing and conservation of food
products

130. The control cycle of daily operation
Figure 3.6

131. Standard Operating Procedures: Cycle of F&B Product
Control
Step 1: Purchasing
Step 2: Receiving
Step 3: Storing
Step 4: Issuing
Step 5: Pre-Preparation
Step 6: Preparation
Step 7: Serving
Step 8: Service

132. Cycle of F&B Product Control (continued…)
Develop purchase specification
Step 1: Supplier selection
Purchasing correct quantities
Purchasing No collusion between property and supplier
Evaluation of purchasing process
Development of receiving procedures
Step 2:
Completion of necessary receiving reports (e.g.,
Receiving addressing financial and security concerns)
Effective use of perpetual & physical inventory systems
Step 3: Control of product quality
Storing Securing products from theft
Location of products within storage areas
Product rotation concerns
Step 4: Matching issues (issue & usage)
Issuing Purchasing as inventory is depleted

133. Cycle of F&B Product Control (continued…)
Step 5: Mise-en-place
Minimizing food waste / maximizing nutrient retention
Pre-Preparation
Use of standardized recipes
Step 6: Use of portion control
Preparation Requirements for food and employee safety
Timing of incoming F&B orders
Step 7: Portion control
Serving Revenue management concerns
Revenue control concerns
Step 8: Serving alcoholic beverage responsibly
Service Sanitation and cleanliness
F&B server productivity

134. STOCK CONTROL
Inventory is often referred to as the
graveyard of business because over
investment in stock is a frequent cause
of business failure.

135. STOCK CONTROL
Many business costs, such as:
A storeman‟s wages
Storage costs
Insurance of the stock
Interest on borrowed money,
are directly related to investment in inventory.

136. STOCK CONTROL
it is important to control stock and inventory so that there is:
enough to keep work flowing efficiently
not too much so that money spent on the stock lies idle while it is
not used.

137. STOCK CONTROL
An inventory is simply a list of all the goods purchased
and used in the manufacturing process.
For example
raw materials
work in progress
finished goods

138. STOCK CONTROL
Stock control is used to:
Reduce the costs of running the businesses
Reduce excess stock and wastage
Make sure there are enough goods to meet the demand
Speed up deliveries to customers.

139. WHAT ITEMS ARE RECORDED?
Equipment, such as static machines
Tools, such as hammers and spanners
Packaging, such as bubble wrap or boxes
Spare parts, such as extra cutterblades for machines
Accessories, such as door handles
Other consumables, such as nails and screws.

140. A TYPICAL PRODUCTION PROCESS.

141. HOW IS STOCK CONTROLLED?
Systems can be:
Paper based, such as hand written stock cards or sheets
Computer generated.
Stock control records should contain:
a description of the goods
details of where the goods are stored or located
the amount of goods currently held
details about the movement of the stock

142. DOCUMENTS AND FORMS
Used to control stock include
Purchase requisitions
Purchase orders
Delivery dockets
Invoices

143. PAPER BASED SYSTEMS
Some of the typical ways of keeping a paper based system up to
date involve the use of:
Job cards - Job cards are used as a means of keeping account of
the amount of goods you have produced.

144. STOCK CARDS
Stock cards – use minimum/maximum stock levels.
Stock cards are used to monitor the amount of raw materials that are
used.
When using this system, you need to consider:
The time taken for delivery
Reliability of suppliers
Importance of the stock item.

145. STOCK CONTROL SHEET

146. REQUISITION BOOKS
Requisition books are used to request an order to be raised for
materials. A duplicate of the requisition is then forwarded to the
purchasing department.
This system works well if the employees are vigilant toward
maintaining stock.
A requisition is NOT an order for product.

147. DELIVERY DOCKETS
Delivery dockets are used to account for and record:
inward goods – materials coming in
outward goods.- product going out

148. CUSTOMER ORDERS
Orders from customers are received, - lists of raw materials needed is raised
When using this method, consumables are not indicated.
Disadvantage -work cannot start on the customer order until the stock arrives.
Advantage - you don’t spend a lot of money on stock with the risk that you
may not use it. You can use customer deposits to fund materials.
WHICH SYSTEM DO YOU USE?

149. COMPUTER GENERATED RECORDS
Computers help to:
•eliminate extra paperwork
•centralise stock control
•generate orders automatically
•save time.
Computers can
•enter stock data manually
•entering data with bar code readers
•scanning documents, such as invoices

150. COMPUTER GENERATED RECORDS
All of the following information can be produced by computer.
Invoices.
Orders.
Supplier lists.

151. DATA ENTRY
The computer application can then:
Check to see if the stock is on hand
Produce an order for more stock
Place an interim hold on the stock
Produce a job card
Produce working drawings
Produce delivery dockets and invoices

152. BARCODE SYSTEMS
This system can be used for all sorts of stock
items, such as:
Boxes of nails
Loads of timber
Containers of adhesives
Paint
Boxes of fittings and accessories.

153. BARCODE SYSTEMS
Barcodes are attached to all goods or
groups of goods and can contain a whole
range of information, such as:
Quantity
Price
Size
Type
Supplier name
Date of expiry, if applicable.

154. SCANNING
A scanner is a piece of equipment that acts
like a photocopier and can:
 be used to copy a paper invoice or
order.
 transfer this copy to the computer for
storage and easy access.
 have text recognition, so the
information can be interpreted and
processed by the computer automatically

155. STOCK CONTROL WITHOUT
RECORDS
Detailed records of stock movements and levels may not always be
necessary:
 in small businesses – owner/operator looks after all stock control
issues
 in businesses such as prefabricated or made-to-order products.

156. BIN SYSTEMS
 Bin systems can replace formal stock control records.
Single bin, two bin and three bin systems

157. IMPREST SYSTEMS
 In an imprest system, an upper limit is set for inventory items in stock
and orders are placed to bring the inventory back up to this level. This
level equals the quantity necessary to:
 provide supplies to cover delivery time
 maintain supplies to cover the review period.

158. STOCKTAKING
Stocktaking is the process of counting the amount of materials and
goods the company has on hand.
Physical stocktakes are important so you can identify:
 discrepancies between what is ordered and what is received
 discrepancies between prices paid and value received
 patterns of usage.

159. STOCKTAKING
 Stocktakes are usually held at least twice a year,
 Important points to remember when stock taking:
 Count everything
 Use stock recording sheets and stickers so things aren’t counted
twice.
 3. Electronic recording devices make it much faster

160. SUMMARY
The more efficient the control of stock is, the less will be wasted or stored
unnecessarily.
Good stock control:
Saves time
Saves money
Makes sure the workplace is more efficient.
You can use paper based and computer based stock control methods to:
Record the movement of stock items
Maintain stock lists
Adjust levels to meet demand.

161. Your companies name
Order No:
Supplier: Delivery address:
Date of order: COD/30 Days
Quantity Courier ?
Litre / sheets Order
maker
C grade
12mm 7 ply
2400x 1200
Special
Instructions
Costs and
charges
Authorising
signature and date