COST DYNAMICS

Elements of Cost

The Elements of Cost are the three types

• Labour,
• Materials and
• Overhead

Materials

Materials costs are the tangible goods used in producing the product. These costs can be direct or indirect. Direct materials are the quantifiable and traceable costs of materials used in production.

Indirect materials either cannot be traced to products or it is not cost effective to do so. For example, a company producing artisan crafts may consider wood to be a direct material, as the company can easily quantify how much wood goes into each craft. However, glue and other fasteners may not be cost effective to track in this manner. In that case, these items would be considered indirect materials.

Labor

Wages and salaries paid to employees involved in manufacturing are known as labor costs. These costs can be broken down into direct and indirect labor. Direct labor costs include the wages that are paid to employees that physically handle the product. For this reason, direct labor is also referred to as touch labor.

Indirect labor costs are any other wages and salaries related to production, but are not traceable back to units of product. For example, wages for materials handlers and line workers are usually considered to be direct labor costs. However, factory maintenance workers, plant supervisors and quality control engineers would be considered indirect labor.

Overhead

Overhead costs are related to production, but are not classified as direct labor or direct materials. This includes all indirect labor and materials costs, as well as any other untraceable costs. Common overhead costs include depreciation on factory equipment, manufacturing rents, supplies costs, insurance costs and licensing fees.

For some small businesses, overhead costs make up the majority of production costs. In these cases, small-business owners should be careful to recognize that just because overhead costs are not easily traceable to products doesn’t mean that effective cost management is any less important.

Classification of costs

 

Cost Classification by Nature

The cost can be differentiated by its nature or the purpose for which it has occurred.

Example

• Materials
• Labour
• Other expenses

Cost Classification by Relation to Cost Centre

• Direct cost
• Indirect cost

Cost Classification by Functions

• Production
• Administration
• Selling
• Distribution
• Research and development

Cost Classification by Behaviour

• Fixed cost
• Variable cost
• Semi variable cost

Cost Classification by Management Decision Making

• Marginal Cost: Marginal cost is the cost of producing an additional unit and its impact on the total cost of production.
• Differential Cost: When there is an increment or decrement in the cost of bulk production, the change in the cost of a single unit is also determined which is known as differential cost.
• Opportunity Cost: The value of one or more products given up to acquire the desired product or service is known as opportunity cost. For instance; while choosing green tea, a person has to give up the value he must have derived from coffee or regular tea.
• Replacement Cost: When machinery or any other asset becomes obsolete or involve high maintenance cost, and simultaneously a better asset is available in the market which can replace it, then the cost involved in such substitution is known as replacement cost. For example; a transportation company needs to replace its trucks from time to time to avoid excessive repairing expenses.
• Sunk Cost: The cost which has been born by the organisation in the past and cannot be recovered at any stage of the business process is termed as a sunk cost. Freight inwards paid at the time of buying machinery has to be written off at the time of selling it.
• Normal Cost: The routine cost associated with the manufacturing of goods or services under usual circumstances is called a normal cost. It includes all direct expenses such as salary, material, rent, etc.
• Abnormal Cost: The cost that arises suddenly and unknowingly under unfavourable situations is known as abnormal cost.
• Avoidable Cost: Such costs are under the control of management and can be prevented as per the organisational need. For example; an enterprise upgrades its technology by installing self-operative machines to avoid the labour charges it pay
• Unavoidable Cost: The cost which is pre-determined and inevitable is called an unavoidable cost

 

Cost Classification by Production Process

• Batch Cost: The cost incurred while producing a whole lot comprising of identical products (batch) is known as batch cost. Each batch differs from the other, and the units lying under a batch are identified by their batch number. Pharmaceuticals, automobiles, electronic products are some of the examples.
• Process Cost: The cost incurred on performing different operations in a streamlined production process is termed as a process cost. By dividing the total cost of a process with the number of units produced, we can derive the process cost of a single unit or product.
• Operation Cost: The cost involved in a particular business function contributing to the production process is known as operation cost. It helps in regulating the mechanism of business activities by monitoring the cost incurred on each business operation.
• Operating Cost: Operating cost refers to the day to day expenses incurred by an organisation to ensure uninterrupted functioning of the business is known as an operating cost.
• Contract Cost: The cost of entering into a contract with a buyer or seller by mutually agreeing to the terms and conditions so mentioned is called a contract cost. It includes a bidding contract, price escalation contract, tenders, etc.
• Joint Cost: The combined cost involved in the production of two or more useful products simultaneously is known as the joint cost. For example; the cost of processing milk to get cottage cheese and buttermilk.

Cost Classification by Time

• Historical Cost: Any actual cost ascertained and evaluated after it has been incurred, is termed a historical cost. It can be committed either on the production of goods and services or asset acquisition.
• Pre-determined Cost: The cost which can be identified and calculated before the production of goods and services based on the cost factors and data is called a pre-determined cost. It can be either a standard cost or an estimated cost.
• Standard Cost: An actual cost which is pre-determined as per certain norms and guidelines to provide as a base for cost control, is termed as a standard cost.
• Estimated Cost: The cost of business operation presumed on the grounds of experience is known as an estimated cost. It is merely based on assumptions and therefore considered to be less accurate to determine the actual cost.

 

SALES CONCEPTS

 

Sales Concept

It is a concept or an idea which lays emphasis on the sale of goods and services and not the underlying need or want, and it does not really matter whether the products are actually needed by the customer or not. The focus is on sales (profit) first and then on marketing.  This is also called the selling concept where the sole aim is sales, and not whether the product is actually required

Various Sales Concept

1. Monetary sales

This sales os basically expressed in rupees form for the value of goods or service and only on basic cost is given.tips are not included in the bills. Government taxes are from state generally added in the bills.

2. Unit sales

This denotes the number of unit sold. generally the number is stated in this sales.

3. Average rupees sales

It is the average sale that is the average check per guests.the average check price is normally calculated the meal of the day.to get the total value of all sales of day is divided by number of customer.it helps to take the corrective correction over observing for a long period of time. From preparation ,service or pricing.

4. Sales per waiter.

It is of two ways

1. The nymber of guests served per waiter.this helps to get the indication of efficiency of service personal and provide a bisi for better trainingneedsof individual staff.
2. Sales per waiter is in terms of rupees.the total sale is for a period of time per waiter is divided by the number of guest he serves. It helps the management to judge better sales person.
3. Sales per time period
4. Sales per time period

Total rupees sales and total number of sales per hour, per day per per week and per monthare most important to scheduling personal and opening and closing hoursas well as better service to the guest. It it has been established that one waiter can serve ten guest per hour with optimal effiency and high standards of service,,the manager is interested in the total number of customer served per hour in the order that the standard of service can be better judged,

 

Uses of Sales Concept

INVENTORY CONTROL

 

Importance

Restaurants manage their inventory of raw materials that they convert into a final menu item that is sold to customers. it is the process of monitoring your restaurant’s food and beverage ingredients in real time. Tracking your inventory enables you to see what is coming into your restaurant, what is leaving your kitchen as sales, and what is left over on your shelf and refrigerator.

Objective

• Reducing Excess Inventory Costs

A company’s optimized inventory level walks a fine line between too much and too little. Many companies strive to avoid holding excess inventory while simultaneously trying to meet customer demand

• Methods for Tracking Inventory Systems

As an objective of inventory control and part of a company’s goal to record inventory costs correctly, various methods exist for tracking inventory units to help with properly accounting for them and for determining how to store them as well.

• Maximize Overall Profit Margin

Well-managed inventory can become an important key in meeting a company’s overall profit margin objectives. A firm’s gross profit margin is the difference between revenue earned from sales and the cost of goods sold. From there, deduct fixed costs including buildings, utilities and labor and you get to operating margin.

• Avoiding Stock-Outs and Lost Sales

Making sure that your customers can buy your products when they need or want to underlies one of the greatest reasons for inventory control. An effective inventory-control system typically includes a well-planned replenishment system.

For example, when the software detects pre-determined low-inventory levels at a store location, it can trigger shipments from your distribution center or from a vendor to your store to replenish the stock.

• Keep Goods Moving Efficiently

Efficiency in inventory means the ability to quickly receive and store products as they come in and retrieve and ship when they go out. Every extra second spent in these processes adds to the costs of inventory management. Tracking inventory and moving it efficiently also means that units don’t end up lost, hidden or stolen without the company’s knowledge.

 Method

• Set up your POS to track restaurant inventory
• Use an inventory management system that integrates with your POS system for recipe costing and menu engineering
• Leverage smart forecasting tools to purchase food, beverage, and supply orders at the right level
• Analyze reports based on inventory and accounting data
• Conduct daily and weekly reports of food inventory
• Track usage and yield on each food item
• Collect sales mix polling from your integrated POS and combine it with recipe costing to price menu items properly
• Track variances between actual vs. theoretical food costs
• Ensure transparency and accuracy in vendor contract price
• Record waste, including time and date, amount or weight, cause of waste and employee
• Train all staff on the importance of restaurant inventory

 

 

 

Level and technique

Incoming Inventory

The primary reason for establishing a consistent method for accepting ordered goods is to ensure that the establishment receives exactly what has been ordered.

Invoices

The most important document in determining if the goods received are the goods ordered is the invoice. An invoice is an itemized list of the goods or products delivered to a food preparation premise.

Outgoing Inventory

When a supply leaves the storeroom or cooler, a record must be kept to track where it has gone. In most small operations, the supplies go directly to the kitchen where they are used to produce the menu items. In an ideal world, accurate records of incoming and outgoing supplies are kept, so knowing what is on hand is a simple matter of subtraction

Requisitions

To control inventory and to determine daily menu costs in a larger operation, it is necessary to set up a requisition procedure where anything transferred from storage to the kitchen is done by a request in writing

Perpetual Inventory

Perpetual inventory is a method of accounting for inventory that records the sale or purchase of inventory immediately through the use of computerized point-of-sale systems and enterprise asset management software. Perpetual inventory provides a highly detailed view of changes in inventory with immediate reporting of the amount of inventory in stock, and accurately reflects the level of goods on hand

Monthly Inventory

A periodic inventory system only updates the ending inventory balance in the general ledger when a physical inventory count is conducted. Since physical inventory counts are time-consuming, few companies do them more than once a quarter or year. In the meantime, the inventory account in the accounting system continues to show the cost of the inventory that was recorded as of the last physical inventory count.

 

 

 

Pricing of Commodities

A commodity price index is a fixed-weight index or weighted average of selected commodity (wheat, eggs, etc.) prices, which may be based on current or future prices. The value of these indexes fluctuates based on their underlying commodities, and this value can be traded on an exchange in a similar fashion as stock index futures.

Tracking food commodity trends can allow restaurant operators to anticipate cost increases and, if possible, make menu changes accordingly. Still, even with so much data at their fingertips, many restaurant companies – even the most well-established and successful multi-national restaurant chains – have pains with costs, consistency, profitability, and broken links throughout their supply chain. Commodities are one of many avenues that can lead to food cost reduction, and offer clues and insights into what might be burning through a restaurant company’s profits.

Commodities are affected by a number of factors, including weather, global demand, disease, declining reserves, geopolitical conflicts, and energy costs. Oil and food prices show a high correlation: over the last 27 years, the correlation between Brent Crude Oil Price and the FAO Food Price Index has been 91% (100% being perfect association and zero meaning no linear relation between the variables).

 

Comparison of Physical and Perpetual Inventory

The periodic inventory system uses an occasional physical count to measure the level of inventory and the cost of goods sold (COGS).

The perpetual system keeps track of inventory balances continuously, with updates made automatically whenever a product is received or sold.

Periodic inventory accounting systems are normally better suited to small businesses, while businesses with high sales volume and multiple retail outlets (like grocery stores or pharmacies) need perpetual inventory systems.

The following are the major differences between perpetual and periodic inventory system:

1. The inventory system in which there is real time recording of the receipts and issues of inventory is known as Perpetual Inventory System. Periodic Inventory System tracks the details of inventory movement at periodic intervals.
2. The Perpetual Inventory System is based on book records while Periodic Inventory System, takes physical verification as its base.
3. In Perpetual Inventory System the records are updated continuously, i.e. as the stock transaction takes place. Conversely, in Periodic Inventory System the records are updated after a short duration.
4. In Perpetual Inventory System, real-time information about Inventory and Cost of sales is provided whereas the Periodic Inventory System provides information about Inventory and Cost of goods sold.
5. In Perpetual Inventory System, the loss of goods is included in closing inventory. Conversely, in Periodic Inventory System the same is included in Cost of Goods Sold.
6. In Perpetual Inventory System, there is no interference in the regular workflow at the time of stock taking and verification while in Periodic Inventory System, the regular business operations may have to be stopped.

BEVERAGE CONTROL

 

 BEVERAGE CONTROL can be defined as a process used by managers to direct, regulate, and restrain the actions of people so that the established goals of an enterprise may be achieved.

 PURCHASE RECEIVING STORING ISSUING PRODUCTION

• Establishing standards and standard procedures,
• Training staff to follow those standards and standard procedures,
• Monitoring staff performance and comparing it with established standards, and
• Taking remedial actions as needed

PURCHASE CONTROL

The primary purposes of beverage purchasing controls are:

1. To maintain an appropriate supply of ingredients for producing beverage products
2. To ensure that the quality of ingredients purchased is appropriate for their intended use.
3. To ensure that ingredients are purchased at optimum prices
4. For successful control is to establish suitable standards and standard procedures.

Establishing standards for beverage purchasing

For beverage purchasing, standards must be developed for:

1. Quality- call brands and pouring brands
2. Quantity- perishability is not a critical factor in establishing quantity standards for beverages.
3. Price

 

Quantity standards

The principal factors used to establish quantity standards for beverage purchasing are:

1. Frequency with which management chooses to place orders
2. Storage space available 3. Funds available for inventory purchases
3. Delivery schedules set by purveyors
4. Minimum order requirements set by purveyors
5. Price discounts for volume orders
6. Price specials available
7. Limited availability of some items

 

Standards for price–

• Control states and
• License states

Establishing standard procedure for Beverage purchasing 1. Determining order quantities

• Periodic order method
• Perpetual order method

2. Processing orders

• Purchase request form
• Purchase orders

 Purchase request form

Purchase order form

 

PURCHASE ORDER MOVEMENT

 PURCHASE ORDER ORIGINAL – FIRM STEWARD- TO CONFIRM ORDER RECEIVING CLERK PURCHASING AGENT

RECEIVING

The primary goal of receiving control is to ensure that deliveries received conform exactly to orders placed. In practice, this means that beverage deliveries must be compared with beverage orders in regard to quantity, quality, and price.

 The standards established for receiving are quite simple.

1. The quantity of an item delivered must equal the quantity ordered.
2. The quality of an item delivered must the same as the quality ordered.
3. The price on the invoice for each item delivered should be the same as the price quoted or listed when the order was placed.

 

Establishing Standard Procedures

1. Maintain an up-to-date file of all beverage orders placed.
2. Remove the record of the order from the file when a delivery arrives and compare it with the invoice presented by the delivery driver to verify that quantities, qualities, and prices on the invoice conform to the order. the picture illustrates a typical beverage invoice

 INVOICE

• Complete the following before the delivery driver leaves the premises.
• Check brands, dates, or both, as appropriate, to verify that the quality of

    beverages delivered conforms to the invoice.

• Count or weigh goods delivered to verify that the quantity received also

   conforms to the invoice.

• Compare the invoice with the order to verify that goods received conform to the order

            placed.

• Call to the attention of both management and the delivery driver:
• Any broken or leaking containers
• Any bottles with broken seals or missing labels
• Note all discrepancies between delivered goods and the invoice on the invoice itself.
• Sign the original invoice to acknowledge receipt of the goods, and return the signed

            copy to the driver. Retain the duplicate copy for internal record keeping.

• Record the invoice on the beverage receiving report.
• Notify the person responsible for storing beverages that a delivery has been received.

BEVERAGE RECEIVING REPORT

THE CYCLE CONTINUES

• STORING
• ISSUING
• PRODUCTION

STORING CONTROL

 Establishing Standards

Storing control is established in beverage operations to achieve three important objectives:

1. To prevent pilferage
2. To ensure accessibility when needed
3. To preserve quality

 

The following standards are critical to effective storing control:

1. To prevent pilferage, it is clearly necessary to make all beverage storage areas secure.
2. To ensure accessibility of products when needed, the storage facility must be organized so that each individual brand and product can be found quickly.
3. To maintain product quality, each item in the beverage inventory must be stored appropriately,

 

Establishing Standard Procedures –

PROCEDURE TO MAKE BEVERAGE AREAS SECURE

• Because beverage products are prone to theft,
• There are two ways to maintain the necessary degree of security. -assign responsibility -keep the beverage storage facility locked and to issue a single key to one person, NOTE- SOLUTION TO PROBLEM to place a second key in a safe or a similar secure location and require that anyone using it sign for it and write a short explanation of why it is needed
• Installing closed-circuit television cameras
• A security guard
• To install special locks that print on paper tape the times at which the doors on which they are installed are unlocked and relocked.

 

Procedures to Organize the Beverage Storage Facility

• Ensuring accessibility means storing beverage products in an organized manner, so that each stored item is always kept in the same place and thus can be found quickly when needed • BIN CARDS- When properly used, bin cards include essential information (type of beverage, brand name, and bottle size, for example). They may also include an identification number for beverages. Some establishments assign a code number from a master list to each item in the beverage inventory and record that code number on the bin card.

BIN CARD

Procedures to Maximize Shelf Life of Stored Beverages Procedures for maximizing the shelf life of stored beverages may be divided into two categories:

1. Those dealing with temperature, humidity, and light in the storage facilities
2. Those dealing with the manner in which bottles and other containers are handled and shelved

• Shelving and Handling Bottles and Other Containers
• There are special racks designed to store wines in the proper position.

 

 ISSUING CONTROL

Establishing Standards

Issuing control is established in hotel and restaurant beverage operations to achieve two important objectives:

1. To ensure the timely release of beverages from inventory in the needed quantities
2. To prevent the misuse of alcoholic beverages between release from inventory and delivery to the bar

 

 Establishing Standard Procedures

To ensure that the essential issuing standards identified previously will be met, it is necessary to establish appropriate standard procedures for issuing beverages:

1. Establishing par stocks for bars
2. Setting up a requisition system
3. Setting Up a Requisition System

 PRODUCTION CONTROL

 

Objectives of beverage production control

Control over beverage production is established to achieve two primary objectives:

1. To ensure that all drinks are prepared according to management’s specifications
2. To guard against excessive costs that can develop in the production process

 

Establishing Standards and Standard Procedures for Production

• Standards for quantities of equipment
• For proportion of ingredients
• Drink size must be standardized
• Employees must be trained with these standards

 

Establishing Quantity Standards and Standard Procedures

• Devices for Measuring Standard Quantities
• A plain shot glass
• A lined shot glass
• The jigger
• The pourer
• Automatic dispenser
• Free pour glassware

 Establishing Quality Standards and Standard Procedures

Standard recipe

 It should be clear that to control costs, one must establish control over the ingredients that go into each drink, as well as over the proportions of the ingredients to one another. In other words, standard drink recipes must be established so that bar personnel will know the exact quantity of each ingredient to use in order to produce any given drink.

 Establishing Standard Portion Costs Straight Drinks

The cost of straight drinks, served with or without mixers, can be determined by first dividing the standard portion size in ounces into the number of ounces in the bottle to find the number of standard drinks contained in each bottle. This number is then divided into the cost of the bottle to find the standard cost of the drink.

Mixed Drinks and Cocktails

It is particularly important to determine the standard costs of cocktails and other mixed drinks. These drinks, typically prepared from standard recipes, normally have several ingredients and may require two or more alcoholic beverages. Consequently, mixed drinks are usually more expensive to make than straight drinks. Knowledge of the cost per drink is important for making intelligent pricing decisions.

Standard recipe detail cost card picture

Standard cost and sales price

 BAR FRAUDS

• Frauds by customer
• Customer walking without paying
• Bringing foreign article
• Customer making unnecessary complaints
• Using false credit card Counterfeit currency

 

• Thefts by waiter and waitress-
• Intentional omission of items
• Reusing of checks
• Over charging
• Incorrect addition
• Substitution
• Falsification of tips or other charges
• Incorrect change
• Split rings
• Bar tenders fraud or errors
• Cashier theft or error
• Cashier keeps the money and pockets or destroys a check.
• Cashier changes the total of check after collection.
• Cashier bunches sales, split-rings, or under rings.
• gives uncorrected change.
• Cashier performs incorrect addition.
• Cashier falsifies payout or adds items to complimentary checks and removes them from other checks.

BUDGETARY CONTROL

 

Define Budget

A budget is an estimation of revenue and expenses over a specified future period of time and is usually compiled and re-evaluated on a periodic basis. Budgets can be made for a person, a group of people, a business, a government, or just about anything else that makes and spends money.

Budgetary Control

Budgetary control is the process by which budgets are prepared for the future period and are compared with the actual performance for finding out variances, if any. The comparison of budgeted figures with actual figures will help the management to find out variances and take corrective actions without any delay.

Budegetary Control Objectives

1. Defining the objectives of the enterprise.
2. Providing plans for achieving the objectives so defined.
3. Coordinating the activities of various departments.
4. Operating various departments and cost centres economically and efficiently.
5. Increasing the profitability by eliminating waste.
6. Centralizing the control system.
7. Correcting variances from sit standards.
8. Fixing the responsibility of various individuals in the enterprise.

 

Frame Work

There are four dimensions to consider when translating high-level strategy, such as mission, vision, and goals, into budgets.

 

Objectives are basically your goals, e.g., increasing the amount each customer spends at your retail store.

Then, you develop one or more strategies to achieve your goals. The company can increase customer spending by expanding product offerings, sourcing new suppliers, promotion, etc.

You need to track and evaluate the effectiveness of the strategies, using relevant measures. For example, you can measure the average weekly spending per customer and average price changes as inputs.

Finally, you should set targets that you would like to reach by the end of a certain period. The targets should be quantifiable and time-based, such as an increase in the volume of sales or an increase in the number of products sold by a certain time.

Budgetary Key Factors

Income

The first important factor in preparing a budget is your income. When preparing a budget you need to focus on your net income, not gross. The amount of money you take home each month is what you use to pay your obligations. You could still choose to list amounts that get deducted from your income on a pretax basis, such as retirement contributions, in a separate area of your budget worksheet.

Costs

Think of your personal finances as a business, and with any business you have costs required to stay in operation. When preparing your budget you must take every expense into account. Anything that you spend over the course of the month must get recorded in your budget, and that can prove difficult in some cases. You must include even the small purchases you make at the neighborhood convenience store to get an accurate total for your budget.

 

Balance

The next important factor in preparing a budget is achieving balance. The side of your budget worksheet that lists income must equal the side for expenses. More income than expenses is a nice problem to have — just assign the excess to a savings account or other initiative. If after you record your budget details you have more expenses than income, that’s a more serious problem that requires you to reduce expenses and possibly identify new ways of making money.

 

Goals

Another key component you need to address when preparing a budget is how to reach certain financial goals. Take time to mull over the short- (less than a year) and long-term (one or more years into the future) goals you want to achieve with your money. Record this information in your budget worksheet and monitor your progress toward those goals regularly.

Types of Budgets

A robust budget framework is built around a master budget consisting of operating budgets, capital expenditure budgets, and cash budgets. The combined budgets generate a budgeted income statement, balance sheet, and cash flow statement.

1. Operating budget

Revenues and associated expenses in day-to-day operations are budgeted in detail and are divided into major categories such as revenues, salaries, benefits, and non-salary expenses.

2. Capital budget

Capital budgets are typically requests for purchases of large assets such as property, equipment, or IT systems that create major demands on an organization’s cash flow. The purposes of capital budgets are to allocate funds, control risks in decision-making, and set priorities

3. Cash budget

Cash budgets tie the other two budgets together and take into account the timing of payments and the timing of receipt of cash from revenues. Cash budgets help management track and manage the company’s cash flow effectively by assessing whether additional capital is required, whether the company needs to raise money, or if there is excess capital.

Budgetary Process

The budgeting process for most large companies usually begins four to six months before the start of the financial year, while some may take an entire fiscal year to complete. Most organizations set budgets and undertake variance analysis on a monthly basis. Starting from the initial planning stage, the company goes through a series of stages to finally implement the budget. Common processes include communication within executive management, establishing objectives and targets, developing a detailed budget, compilation and revision of budget model, budget committee review, and approval.

Budgetary Control

• Failing To Budget for marketing.

Marketing is responsible for generating buzz, your brand identity, and filling seats. Your marketing budget is an investment in the growth of your business – so don’t skip out on this line item just because it’s not directly related to your operations.

• Over-forecasting sales.

 Management want to see huge sales growth. But over-forecasting sales only leads to disappointment and disaster. When you overestimate your revenue, your cost percentages won’t be realistic – which may result in overspending. And when you fall short on your sales goals, you risk causing panic in the workplace and disappointing investors

• Failing to engage management.

If  management staff are unaware of financial status and processes, they won’t know how to effectively order inventory or schedule staff. 

• Ignoring external factors.

Street closures, neighborhood block parties, festivals, bad weather, minimum wage increases, food cost increases: each affects your sales and costs.

• Not using software.

Manual, spreadsheet-based tactics are about as useful today as a columnar pad. Use POS software that seamlessly integrates with your accounting software, so that you’re not vulnerable to errors.

 

VARIANCE ANALYSIS

 

Variance analysis is the quantitative investigation of the difference between actual and planned behaviour. This analysis is used to maintain control over a business. For example, if you budget for sales to be Rs 10,000 and actual sales are Rs 8,000, variance analysis yields a difference of Rs 2,000.

 Standard Cost

 Standard Costing

 Cost Variances

 Material Variances

It is the difference between actual cost of materials used and the standard cost for the actual output.

Labour Variances

It is the difference between the actual direct wages paid and the direct labour cost allowed for the actual output to be achieved.

Overhead Variance

Overhead variance is the difference between the standard cost of overhead allowed for actual output (in terms of production units or labour hours) and the actual overhead cost incurred.

Fixed Overhead Variance

The difference between standard overheads recovered (or absorbed for actual output) and the actual fixed overheads is the Fixed Overhead Cost Variance.

Sales Variance

Sales Variance is also an important variance to analyze the difference between the actual profit and the standard profit i.e., the profit variance. Management also favors sales variance to get full advantage of budgetary control and standard costing system

The sales are affected by two factors – (i) the selling price and (ii) the quantum of sales. The variations in the standards set in, and actuals for the purpose, may be mainly due to change in market trends. Normally, if the selling price goes high, the volume of sales will be lower than the standard.

Profit Variance

It is on account of the difference in actual selling price and the standard selling price, for actual quantity of sales.

BREAKEVEN ANALYSIS

 

In accounting, the breakeven point is calculated by dividing the fixed costs of production by the price per unit minus the variable costs of production.

The breakeven point is the level of production at which the costs of production equal the revenues for a product.

In investing, the breakeven point is said to be achieved when the market price of an asset is the same as its original cost

Breakeven Chart

 

A break even chart is a chart that shows the sales volume level at which total costs equal sales.  Losses will be incurred below this point, and profits will be earned above this point. The chart plots revenue, fixed costs, and variable costs on the vertical axis, and volume on the horizontal axis. The chart is useful for portraying the ability of a business to earn a profit with its existing cost structure. The reader can see the unit volume sales level needed to achieve break even, and then needs to decide whether it is possible to reach this sales level.

P V Ratio

A profit-volume (PV) chart is a graphic that shows the earnings (or losses) of a company in relation to its volume of sales. Companies can use profit-volume (PV) charts to establish sales goals, analyze whether new products are likely to be profitable, or estimate breakeven points

Contribution

The contribution margin is calculated by subtracting an item’s variable costs from the selling price. So if you’re selling a product for $100 and the cost of materials and labor is $40, then the contribution margin is $60. This $60 is then used to cover the fixed costs, and if there is any money left after that, it’s your net profit.

 Marginal Cost

Marginal cost is the additional cost incurred in the production of one more unit of a good or service. It is derived from the variable cost of production, given that fixed costs do not change as output changes, hence no additional fixed cost is incurred in producing another unit of a good or service once production has already started.

 

 Graphs

 

MENU MERCHANDISING

 

Once a fairly humble piece of paper, the menu has evolved to become one of the most complex components of one of the most complex businesses in the world. Restaurant menus are a convergence of nearly every other facet of the business: marketing, supply chain, interaction, design, fulfillment production, copywriting, merchandising, etc. When combined effectively, they form the single most important piece of marketing collateral a restaurant can have. But as menus have changed over the years, so has their design — and menu merchandising is now a bigger challenge (and greater opportunity) than ever before

Menu Control

 

Menu Structure

 

Planning

It helps in for managerial activity which is between the food and service department from cost of preparing dishes, time for preparing a dish, and the guests.

It includes

• Competition : when planning a menu the management should consider the location with emphasis on cuisine,pricing and the portion size.
• Nutrition: well balanced nutrients which includes fat, carbohydrate protein, minerals and vitamins .
• Operation: A dish may require some special equipment ingredients and requisite skill of staff.
• The number of covers the outlet would have and availability of space for pre-preparation must also be considered.
• Organizational policy: the organization profit should be considered while planning the menu.
• Guest choice: the like and disliking of guest should be keep in mind.

Pricing of Menus

 Pricing a menu is an art , management analysis and other overhead guest`s ability to pay for the menu, competitors menu pricing before fixing the menu and its prices. Generally all the department heads sits and finalized the menu pricing. Some of the factors which should be considered while fixing the menu

• Elasticity Of Demand-It means that demand can fluctuate to other factors example pricing and environment
• Perception of value, it is actually the gate believe whether the menu is worth
• Competition: organisation should be aware of what prices others are offering
• Relationship between menu prices and volume : profit in Rupees not percentage
• Total cost consideration: not only food cost of the raw material but other cost should be considered.
• Long term implication of pricing.

 

 

Types of Menus

• Table d`hotel: a fixed menu with fixed selling price.
• A la carte: a free choice from menu card with different prices.

 

Menu as Marketing Tool

Layout

Constraints of Menu Planning

• Health and eating habits of different guests.
• Different cultural and religion background
• Any special diets
• Vegetarian
• Balancing colour, texture, aroma portion sizes etc.

MENU ENGINEERING

 

Definition and Objectives

Menu engineering is the systematic process of studying restaurant sales and inventory data to understand the popularity and profitability of the items in a restaurant menu over a period. By engineering menu carefully, restaurants can understand how it performs over time and effect changes so every item stays popular and profitable.

Learn how the profit contribution of each menu item affects the bottom-line

Discover the power of classifying your menu items into one of 4 specific categories – stars, dogs, challenges and workhorses

Eliminate across-the-board price increases while learning how to strategically increase prices with little or no customer resistance

Find out how menu placement and layout can dramatically affect your profits

This system helps to immediately identify “dead weight” on your menu and improve production line service times

Methods

 Choose a Timeframe to Analyze Your Menu

The goal of menu engineering analysis is to redesign your menu and shuffle around different items on the page to help push your most profitable items, so figure out when you’ll realistically be able to do it.

Measure Profitability & Popularity

Categorize Your Menu Items

Once you know how much of each item has sold in your specific time frame, and how much profit is driven by each menu item, you can plot popularity and profitability together in a menu engineering matrix.

 

That’s where the Menu Engineering Spreadsheet comes in. It’ll categorize the menu items into one of four menu engineering categories:

• Stars,
• Puzzles,
• Plowhorses, and

 

• Stars: High Profitability and High Popularity
• Puzzles: High Profitability and Low Popularity
• Plowhorses: Low Profitability and High Popularity
• Dogs: Low Profitability and Low Popularity

 

• Design with Your Menu Engineering Findings in Mind
• Craft beautiful menu descriptions.
• Analyze Your New Menu’s Success
• Involve Your Staff in the Menu Engineering Process

Advantages

• Menu engineering helps for reducing the portion size. As this helps the size of each portion of the hotel services to be summarized.
• Menu engineering helps for revising the purchase specifications. As this helps the customer to find the right food or beverage items for them in systematic way.
• Menu engineering helps for reducing the complementary items of food. Sometimes, complementary food items do not liked by the customers, so the menu engineering creates a fresh menu of the food items without any complementary food items.
• Menu engineering helps for providing the la carte pricing as the alternative.
• Menu engineering helps for increasing the productivity of staffs. As the employees of the hospitality industry helps to create some innovating ideas for the menu of food and beverage items by using the menu engineering.
• Menu engineering helps for improving the operational control. Food and beverage operations of the hotel can be easily establish the control of each operation in the management through men engineering.
• Limited menu items helps to reduce an inventory, space requirements and expenditure for the equipments.

MIS

Reports

Ø  Restaurant Sales Report

Sales report should consist of the comprehensive data of the total sales that happened at your restaurant on a particular day. It should tell you the total number of bills generated and the discounts conferred.

• Inventory Report

Since it is the raw materials that help you run your restaurant and since it is the inventory where internal thefts are rampant, it becomes necessary for you to keep a check on your inventory rather closely ,

• Menu Performance Reports

Analyzing menu performance reports would not just give you deep insights about your business, but also help you understand what your customers are liking about your restaurant. You can identify the items that are contributing the most to the sales, and the items that are not popular with the customers. Based on these reports, you can eliminate and add new items on the menu to boost sales

• Expense Reports

Unexpensed expenses crop up, every day, and this makes it all the more important to keep track of all the expenses keeping in mind the fixed cost, that will help you maintain some budget at the standby. Hence, an expense report must include, the rents, the electricity, phone, wifi, water bills, the salaries of your staff, costs of the inventory, the maintenance of the equipment, the budget required for hosting different events, and the miscellaneous expenses include the replacement for the broken crockery, the spoilt tablecloth and the like

• CRM Reports

 

Keeping a comprehensive CRM database will help you have all your customer reports at one central place. Since the retention of customers is more important than increasing the customer trial base, CRM reports will come in handy

The CRM reports will tell you about the customer orders, the date and time of visits, and the bill generated at the table.

• Outlet Performance Reports

If you are running multiple restaurant brands and outlets, monitoring operations and keeping track of the sales can be very difficult. Consolidating reports from different sources, and relying on the restaurant manager for updates hampers decision-making. Thus, you need a centralized restaurant management system, that gives you a comprehensive view of all the brands and outlets at one place

• Staff Performance Reports

Analyzing the performance of your staff is also critical if you want to run a successful restaurant business. You can set individual goals and Key Performance Indicators (KPI) for each staff member and measure their productivity on a weekly and monthly basis. You can create these KPIs basis the restaurant reports generated from the POS software. For instance, you can set a goal for the kitchen staff to keep the Food Cost under a certain percentage. Similarly, you can measure the productivity of your wait staff by analyzing the number of tables served, total sales in a week, etc.

• Calculation of actual cost
• Daily Food Cost
• Monthly Food Cost
• Statistical Revenue Reports
• Cumulative and non-cumulative reports