Cost Control

Unit 1

1
 1.1 Cost and Sales Concepts
Cost Concepts

Definition of Cost
 
• Defined as the expense to a hotel or
restaurant for goods or services when the
goods are consumed or the services are
rendered.
2
 Cost Control
• May be expressed in
a variety of units:
– Weight
– Volume
– Total value
– Portion
– Per bottle
– Per drink
– Per hour
– Per week 3
4
 Fixed Costs
•  Normally unaffected by changes in
sales volume.
• Has little direct relationship to the
business volume because they do not
change when the number of sales
increases or decreases.
• Examples of fixed costs are:
– Insurance premiums
– Real estate taxes
– Depreciation on equipment
5
• All fixed costs change over time,
sometimes increasing and sometimes
decreasing.
• However, changes are not normally
related to short-term changes in business
volume.
• They are sometimes indirectly tied to long-
term volume changes.
6
 Variable Costs

• Costs that are clearly

related to business
volume.
• Some examples of
variable costs are:
– Food
– Beverages
– Labor

7
• Food and beverage costs are
considered directly variable costs.

• Directly variable costs are those

that are directly linked to volume of
business.

• Labor costs on the other hand are

considered semi-variable costs.

• Semivariable costs are those that

have elements of fixed and variable,
which in this case labor.

8
 Controllable and Non-controllable Costs

• Costs may also be labeled

controllable and
noncontrollable.

• Controllable costs are those that

can be changed in the short-term
i.e. variable cost.
• Noncontrollable costs are those
that cannot normally be changed
in the short term i.e. fixed costs.

9
 Unit and Total Costs

•  Unit costs may be food and

beverage portions i.e. one steak
or one martini, or units of work, as
in hourly rate for an employee.

• Total costs represent all the cost

of the food served in one period.
• Total costs and unit costs are
affected in different ways as
illustrated by the following
diagram. 

10
 Cost Behavior as Business Volume Changes

Type Unit Costs Total Costs

Fixed Costs Changes Does not

change
Variable Costs Does not Changes
change

11
 Prime Cost

•  Defined as the
sum of food costs,
beverage costs and
labor costs.
• It determines if
establishment will
meet its financial
goals.
12
 Overhead Cost
•  Refer to all costs
other than prime
cost.
• Normally consist of
all the fixed costs
associated with
operating the
business.

13
Sales Concepts

14
• Definition of Sales
•  Defined as revenue resulting from the
exchange of products and services for
value.
• Two basic groups of terms normally used
in food and beverage operations to
express sales concepts:
– Monetary
– Nonmonetary
15
 Monetary Terms

•  Total Sales
• Refers to the total volume of sales
expressed in dollar terms.
• This may be for any given time period
such as:
– Weekly
– Monthly
– Yearly

16
• Total Sales by Category
• Total sales by category are total food sales or
total beverage sales.
• It refers to the total dollar volume of sales for
all items in one category.

• Total Sales per Server

• Refers as the total dollar volume of sales for
which a given server has been responsible in
a given time period such as:
– A meal period
– A day
– A week
• Used to make judgments about the
comparative performance of two or more
employees.
17
• Total Sales per Seat
• Refers to the total dollar sales for a
given time period.
• The figure is obtained by:

Total Dollar Sales for a given

period of time
/
Number of seats

- The normal time period used is one year.

- Most frequently used by chain operations as a means
for comparing sales results of one unit with those of 18
another.
• Sales Price
• Refers to the amount charged
each customer purchasing one unit
of a particular item.
• The unit may be of single item (i.e.
an appetizer) or an entire meal
depending on how the restaurant
prices its product.

19
• Average Sale
• Determined by using the following formula:

Total Individual Sales / Total Number of

Individual Sales

• Total Individual Sales / Total Number of Individual Sales

• There are two such averages commonly calculated:

– Average sale per customer
– Average sale per server
20
• Average Sale per Customer
• Determined using the following formula:

Total Dollar Sales / Number of Sales or

Customer
• Also expressed as the average check or the average cover.
• Used by managers to perform the following tasks:
– Comparison of employee performance
– To identify sales trend
– To compare effectiveness of various menu, menu
listings, or sales promotions. 

21
• Average Sale per Server
• Can be obtained by using the following formula:

Total Dollar Sales of A Server

/
Number of Customers Served by A
Server
• Used for comparative purposes and it is usually
considered a better indicator of the sales ability
of a server.
22
 Nonmonetary Terms
•  Total Number Sold
• Refers to the total number of
menu items sold in a given time
period.
• Useful in a number of ways:
– To identify unpopular menu
items
– Used for forecasting sales.
– Total number of specific items
sold - To make judgments
about quantities in inventory
and about sales records 23
• Covers
• A term used to describe one diner,
regardless of the quantity of food he or
she consumes.

• Total Covers
• Refers to the total number of customer
served in a given period of time.
24
• Average Covers
• Determined by using the following formula:
Total Number of Covers for a given time period
/
 
1.Number of hours in a meal period
2.Number of days the establishment is open per week
3.Number of server on duty during the time period

• Able to help a manager attempting to make

judgments about common questions such as:
– Efficiency of service in the dining room
– Effectiveness of a promotional campaign
– Effectiveness of a particular server.
25
• Seat Turnover
• Refers to the number of seats occupied
during a given period.
• Derived using the following formula:

Number of seats occupied (Number

of customers served)
/
Number of seat available
• May be calculated for any period, but is
most often calculated for a given meal
period. 26
• Sales Mix
• A term used to describe the relative
quantity sold of any menu item as
compared with other items in the same
category.
• The relative quantities are normally
percentages of total unit sales and always
total 100%.
• An example of a sales mix distribution is
as follow:
27
 MENU ITEMS ENTRÉES SOLD SALES MIX
A 1,000 12.50%
B 1,200 15.00%
C 1,800 22.50%
D 2,400 30.00%
E 1,600 20.00%
TOTALS 8000 100.00%

•The formula used to obtain the percentages of each menu items is:

Entrées Sold (1,000) / Total Entrées Sold (8,000)

28
• The Cost-to-Sales Ratio: Cost Percent

• Foodservice managers calculate costs in

dollars and compare those costs with sales in
dollars.
• Sometimes described as:
– The cost per dollar sale
– The ratio of costs to sales
– Cost-to-sales ratio
29
• The industry uses the following basic formula for
calculating cost-to-sales ratio:

• Cost / Sales = Cost per dollar of sale x 100%

• To determine the sales price by using the available

information, cost and cost%:

• Cost / Cost% = Sales (Sales price)

30
• To determine the maximum permissible
cost per person using the available
information, spending budget and cost%:

• Sales x Cost % = Cost

31
 Industry-wide Variations in
Cost Percents
•  Cost percents vary considerably from
one foodservice operation to another.
• There are many possible reasons for
these variations.
– Type of service
– Location
– Price structure
– Type of menu
– Types of foodservice operations,
etc.
32
 tHaNk yOu fOr
YoUr AtTeNtIoN

AnY
qUeStIoNs??!
33