Chapter 9: Controlling and other costs

Another Factor Directly Affecting Labor Costs continued

- Employee turnover ex: 300 hired/100 needed = 3 - 3 x 100 = 300% - The answer to the first equation means that for every employee in the restaurant, three people were hired in the past year.

Steps to controlling lobor costs

- forcast volume - determine labor budget - calculate labor dollars - schedule employees - variable forcasted costs

Crew Schedule

A chart that shows employees' names and the days and times that they are to work.

Productivity Standard

A level set by managers to measure the amount of work performed by an employee.

5. A manager promised the owner to reduce the turnover rate from 200% to 150% per year. If the restaurant has 160 employees on average per year and a new hire costs an average of $500 to recruit, hire and train, how much money will the manager save the restaurant owner with the lower turnover? a) $4,000 b) $40,000 c) $80,000 d) Not enough information is given

Answer: B. 160 employees by 50% savings: 160 x 50% = 80 employees 80 employees x $500 savings = $40,000

Overtime

Any hours worked by nonmanagement employees beyond 40 hours in a workweek, by law compensated at a rate of at least 1.5 times the employee's regular rate of pay.

Fringe Benefits

Benefits provided by an employer that have monetary value but do not affect an employee's basic wage rate, such as paid holidays or paid vacation.

Medicare

Contributions from payroll set aside for health benefits for people age 65 or older and for individuals with certain disabilities.

labor usage forcasts continued

Determine Labor Budget Standard labor cost percentage should be based on many factors to include: Menu items Preparation and expertise required Type of service Location - 1. The standard labor cost percentage is established by management or the restaurant's owners.

Master Schedules identifying the number of required employees continued

Forcasting other portions - Subtract servers' cost from the dollars available for variable-cost employees. Formula: Dollars avalible for other positions= dollars avalible for variable employees - server cost - divide the result of the average wage per hour formula: Number of hours avalible for other psoitions= dollars avalible for other positions/ average wage per hour

Labor usage forecasts

Forecasting Volume Perform historic sales analysis with Yearly and monthly data from past income statements Hourly, daily, and weekly point-of-sale (POS) data If no POS is available, undertake a guest check analysis. - Historical sales records are important because, in most cases, the best predictor of future restaurant sales is found in an analysis of the restaurant's previous sales.

Additional Labor productivity measures

Labor Cost Per cover example: - time period= 7 days - total number of covers served: 2,297 - total labor dollars for the week: $12,176 - formula: Total labor dollars for the week/to number of covers served= labor cost per cover

Payroll taxes and assets continued

Medicare: Federal health-care program Paid through payroll taxes Includes contributions from employees and employers Currently set at a 1.45% match - A 1.5 percent match means that the employee and employer must each pay 1.5 percent of the employee's gross pay into the program. The employer's share of contributions for FICA and Medicare equals 7.7 percent (6.2 percent +1.5 percent = 7.7 percent) of a restaurant's wages and salaries costs.

Labor usuage forcasts continued

Sales Projections An estimate of future sales Include increases or decreases to historical sales patterns Consider national and local economic trends - Where would you look for information about national sales trends experienced by different restaurant industry segments.

Payroll Dollars

The amount of money available for payroll for a scheduling period.

Covers Per Server

The number of customer meals that a waitstaff member can serve in an hour.

Master schedule ex:

example 9.13 : shows the service standards for the Tiki Hut from 10am - 2pm for servers.

Labor standard (budget)

exibit 9.11

Management Control

Tracking and monitoring daily and weekly labor costs Calling off staff when volumes do not meet projections Cross utilization of staff Other ideas?

Sustainabilty

- "Green" Initiatives Equipment -Project: add one suggestion Farm-to-Fork Sustainability Definition Advantages - Farm-to-Fork is a term that describes the flow of food through the stages of growing, harvesting, storage, processing, packaging and preparation. The path that food follows from those that grow to those that prepare and serve the food. Ideally that path is environmentally friendly, safe and short so that freshness is maximized and health risks minimized. The source of this food is of great concern to many customers. Quality ingredients locally grown is a trend that is upon us in the industry. Advantages: Fresher and higher quality foods More cost effective due to transportation costs, packaging and pollution Support of family farming and local economy Appreciated by guests

Another Factor Directly Affecting Labor Costs

- Employee turnover The number of employees hired to fill one position in a year's time - formula: turnover= persons hored per year/averge number of employees - formula: turnover rate %= turnover x 100 - A skilled employee will always be more productive than an unskilled worker. For this reason, managers should train their staff well and reduce or eliminate employee turnover.

Payrol taxes and Assests

- Federal Insurance Contribution Act (FICA): Federal retirement and medical benefit program Paid through payroll taxes Includes contributions from employees and employers Currently set at a 6.2% employee/employer match - A 6.2 percent match means that the employee and the employer must each pay 6.2% of the employee's gross pay into the program.

Payroll Taxes and Assets Continued

- Federal and state programs: May be related to worker's injury or compensation and/or unemployment insurance programs - City or local programs: May be related to taxes on gross payroll or other special assessments - Managers must be aware of the applicable taxes to be collected in the specific area in which the restaurant is located.

Types of Costs

- Fixed costs Stay the same regardless of increases or decreases in volume - Variable costs Increase or decrease with increases or decreases in volume - Semivariable costs Part fixed and part variable; also increase or decrease (but at a slower rate) with increases or decreases in volume

Other Expenses

- Operating Expenses - Non-Controllable Expenses - Corporate Overhead, Interest and Other - Other expenses we have in the industry fall into the final 3 overall categories of: Operating Expenses Non-Controllable Expenses Corporate Overhead, other - Other expenses we have in the industry fall into the final 3 overall categories of: Operating Expenses Non-Controllable Expenses Corporate Overhead, Interst and Other - These categories are standardized across the industry in The Uniform System of Accounts for Restaurants. The total "other expenses" can range from 5-15% or more of the operations gross sales. Measures of control over these expenses vary and we will explore.

"Other" Costs, continued

- Operating Expenses (these are costs related to Food & Beverage Operations) Direct Operating Expenses Music & Entertainment Marketing Utilities General and Administrative Expenses Repairs and Maintenance - Examples under each of these categories (guidelines found in Uniform System of Accounts): Direct Operating Expenses Uniforms, Linens (rental), China, Glassware, Silverware, etc. Music & Entertainment Bands, musicians, music licensing fees, television broadcast services Marketing Advertising, direct response marketing, public relations, research, comp. meals/discounts/gift cards/website, etc. Utilities Electricity, gas, water, trash removal, etc. General & Administrative Expenses Accounting, payroll, bank charges, cash over/short, dues and subscriptions, postage, travel Repairs and Maintenance Building, Equipment, Furniture, Grounds, Parking lot

Total Labor Cost Consists of:

- Payroll includes employees average wages inncludes management salaries - Other Payroll Costs include payroll taxes and assets includes benefit costs - A restaurant's total labor cost includes much more than the wages and salaries paid to its employees. - In many cases, employee benefits and payroll-related taxes can boost a restaurant's labor cost 20% or more above its actual wages and salary costs. If the restaurant is unionized, these additional costs may be even higher. -Identify some benefits you have received as part of your own employment packages. Examples could include paid holidays, paid sick leave, and employee meals. Estimate the cost to the restaurant of providing these benefits.

Labor Cost %

- Restaurant managers must relate the dollars spent for labor to the sales generated by those labor dollars. - Formula: labor cost/sales - Labor cost percentage expresses the relationship between the dollars spent on labor in a specific time period and the sales generated by the restaurant in the same time period.

Additional Labor Productivity Measure

- Sales Per Cover= total sales per server/sales per cover - example: time period: 7 days total number of covers served: 2,297 total labor dollars for the week: $12,176 - Fromula to solve ex: Total number of covers served/total labor dollars for the week= covers per labor dollar - Sales per cover can also be used to compare the sales effectiveness of one server to another. Identify other reasons why there could be variation in this productivity measure. Answers are likely to include specific sections of a dining room to which servers are assigned (i.e., smoking vs. nonsmoking), the size of tables in the employees' assigned sections, and the skill and experience of the server.

Fixed and Variable Payroll Costs

- Variable Cost Change in Direct Propotion to sales, while fixed payroll costs do not - Labor costs are semivariable. For example, the number of servers and cooks needed will vary as volume increases or decreases. In most cases, however, management staff will remain the same unless there are large changes in volume. Therefore, these variable and fixed costs, taken together, result in a semivariable cost that managers must control. Industry standards recommend management salaries should not exceed 10% of revenue.

Validating the Master Schedule

- totall payroll= fixed payroll + variable payroll - total labor cost= total payroll + taxes and benefits - total labor cost percent= total labor/ sales - The labor percent forecasted by the master schedule must match company standards (budget). - Both fixed and variable payroll components will have taxes and benefits associated with them. These costs must be added to wages and salaries (payroll) to arrive at total labor costs. -Identify some reasons why a master schedule might generate an estimated labor cost percentage higherthan the company's standard. Typical answers will include low sales forecasts, high fixed labor costs, or excessive scheduling of variable labor staff.

1. Effective managers seek to closely monitor and thus regulate their restaurant's (labor cost/labor cost percent). 2. Labor costs include only the wages and salaries paid directly to the employees. (True/False) 3. A master schedule includes all of the following except a. Employee names b. Days of the week c. Employee shifts d. Employee positions 4. Employee turnover rates cannot be influenced by managers. (True/False)

1. Labor cost percent 2. False 3. A 4. False

Sales Per Labor Hour

A number calculated by adding all the sales for a specific period (hour, day, week, etc.) and then dividing the total by the total number of labor hours used during the same time period.

Federal Insurance Contributions Act (FICA)

A program that sets aside money for Social Security payments, which is paid for by employers and employees through payroll deductions.

Quality Standard

A standard that refers to weight, count, or volume measure, such as portion sizes for menu foods and beverages, and employee production standards such as one cook per 50 covers.

Mater Schedule

A template, usually a spreadsheet, showing the number of people needed in each position to run the restaurant or foodservice operation.

Factors Directly Affecting Labor Costs

Adherence to Standards: - Standards of employee performance are similar to standards of food quality. - Just as food standards can be quantified, so can worker productivity be quantified. - What standards other than productivity standards are commonly applied to servers? These could include issues related to the wearing of uniforms, punctuality, and attitude.

Labor Contract

An agreement between management and a union that represents the employees and that deals with wages, employee benefits, hours, and working conditions.

Example of Actual Labor Cost Ex: 9.3

Exhibit 9.3 illustrates the difference in the wage rate per hour and the actual labor cost per hour with some benefits added. The benefit cost percentage in Exhibit 9.3 = 18.66% for all three positions Exhibit 9.4 shows the impact of adding health insurance as a benefit. The benefit cost percentage in Exhibit 9.4 adding health insurance = 39.24%

Other Costs Continued

Corporate Overhead, Interest and Other (these are costs dependent on your type of business structure) Corporate Overhead Management Fee Interest Expense Other (Income) Expense - Examples under each of these categories (guidelines found in Uniform System of Accounts): Corporate Overhead Officers salaries, Legal and Accounting, Corporate office expenses Management Fee Base and Incentive Interest Expense Notes Payable, Long term debt Other (Income) Expense Grease or Waste Sales, Gain/Loss on Asset Sales

6. What is the primary tool managers have to control labor costs? a) employee turnover b) overtime c) labor cost percentage d) the schedule

D

7. Labor costs are the sum of which two categories of costs? a) Insurance & taxes b) Wages & salaries c) Fixed & semivariable costs d) Payroll & employee benefits

D

Learning Objectives

Explain how payroll cost, FICA, Medicare, and employee benefits make up labor cost. Explain the methods used to measure labor productivity. Outline the steps involved in controlling labor costs. Describe the components and factors to consider in the development of a master schedule. Describe methods used for managing payroll records. Explain how managers can optimize labor productivity. Identify "other" costs and control measures.

Master Schedules Identify the Number of Required Employees

Forecasting servers: - Divide estimated number of covers by the number of service hours to assess the covers per hour. Formulas: - covers per hours= estimated # of covers/number of service hours - number of servers= covers per hour/ covers per server - Lower cost employees allow managers to have more "people" on the schedule, but will likely reduce the amount of skill available to the operation. - Why do most managers want their "best," but also their most expensive, staff members working when the restaurant is busiest.

Creating the Crew Schedule continued

Goals of the crew schedule: - Build flexibility. - Use accurate sales projections to ensure the right number of staff are assigned at the right times. - Consider legal restraints and company policies. - Teenagers, school attendees, and others may have legal constraints on their work availability, and these requirements must be followed. - Company policies may, for example, prohibit the scheduling of overtime or the scheduling of too many consecutive days of work without a day off.

Creating the Crew Schedule

Include specific employee names and reporting times Should be distributed well in advance Must ensure balance and equity for all employees

"Other" Costs, continued

Non-Controllable Expenses (these are costs related to the Facility) Occupancy Cost Equipment Rental Depreciation & Amortization - Examples under each of these categories (guidelines found in Uniform System of Accounts): Occupancy Costs Rent, Insurance, Common Area Maintenance, Personal Property Tax, Real Estate Tax Equipment Rental Kitchen, POS, Other Depreciation & Amortization Amortization of Leasehold, Amortization of Leasehold Improvement, Depreciation on Building, Depreciation on Equipment

Controlling Operating expenses

Operating Expense % Operating Expense = Operating Expense Cost % Total Sales Operating Expense per guest Operating Expense = Operating Expense Cost per guest # of Guests Served Example: Linen cost%, Linen cost per guest Paper cost%, Paper cost per guest, etc. - You first must understand what your costs are on a cost% and cost per guest basis for each expense category. Each type of operation is unique so understanding your costs and how they relate to your concept and other like concepts (benchmarking) helps an operator to develop strategies.

Company Employee Benefits

Paid vacations Paid sick or personal days Health insurance Paid holidays Life insurance Disability insurance Dental insurance Vision insurance Company-funded retirement programs - Not all restaurants offer all of the above employee benefits. - Most restaurants also offer free or reduced-priced employee meals.

Productive

Producing or capable of producing an effect or result.

Some Productivty Standards

Sales Per Labor Hour Ex1: - time period: 7 days - Total Sales: 39,542 - Formula to solve example: total sales/total labor hours worked for the week= Covers Per Labor Hour Ex2: - Time Period: 7 days - Total Numbers of covers served: 2,297 - total labor hours worked for the week: 1,098 - Formula to solve example: total number of covers served/total labor hours worked for the week - The number of employees working multiplied by the number of hours each works equals the total number of labor-hours used. Sales per labor-hour can be calculated for any time period, such as for a single meal period, a day, a week, or a month. It can be used to measure the productivity of a cook's line, as well as a team of servers. Explain that comparisons should be made to the same shifts (i.e., breakfast to breakfast and lunch to lunch). The covers per labor-hour productivity standard is frequently used in settings such as college cafeterias, business dining, hospitals, and other large volume settings.

Factors Directly Affecting Labor Cost

Sales levels Time tracking Time sheets Timecards Advanced electronic methods Schedules and schedule modifications Overtime Benefits offered Labor contracts - Benefit costs (especially those related to health insurance) have risen rapidly in the past decade and are predicted to continue to increase at a rate faster than that of employee's wages.

Estimated Daily Payroll Cost Percent

Step 1 - Divide weekly management cost by the number of days open per week to determine the daily management cost. Step 2 - Add the variable (hourly) labor used per day to the daily fixed labor calculated in Step 1 above. Step 3 - Divide the daily payroll costs by the estimated daily sales to determine the estimated daily payroll cost percent. - In Step 1, management includes the cost of all fixed salary employees (i.e., bookkeepers, account clerks) and kitchen and dining room managers. - In Step 2, note that the estimate of labor usage must be based upon an estimated level of food sales. The operation's actual payroll percentage will include all taxes and benefit costs as well as the amount of wages and salaries paid to employees

Forecasting Labor Costs—Calculating Labor Hours and Schedule

Step 1 : determine total avalaible dollars - formula: dollars avaliable for labor= standard labor cost % x projected sales step 2: sutract costs of employee benefits and taxes. - Formula: Remaning Payroll avalaible= Dollars avaliable- benefits and taxes 1. Payroll costs include the amount of wages and salaries paid, AND the cost of employee benefits and applicable taxes. So.....if my Proforma calls for a 63% prime cost and my Food Cost is 35%..... 63 - 35 = 28% for my Labor Cost If I forecast $17000 in sales: 17,000 x .28 = $4,760 for Labor dollars Then I must subtract for benefits & taxes (avg. of 36.72%): $4,760 x .3672= $1,748......... $4,760 - $1,748 = $3,012 for PAYROLL

Forecasting Labor Costs—Calculating Labor Hours and Schedule

Step 3: Subtract fixed labor costs - formula: dollars avalible for variable- cost employees= payroll dollars avalaible-fixed cost salaries - Employee schedules are planned with this dollar amount to help ensure targeted labor costs are met! - Managers must be aware of how much they are actually spending when they create employee schedules. It is of utmost importance to maintain control of fixed labor costs (salaries) and variable labor costs (wages). IF management salary is $1,350 per day that means $3,012 - $1,350= $1,662 remains for variable payroll

Standard Man Hours (SMH)

The number of employee work hours necessary in each job category to perform a given volume of forecasted production.

Employee Turnover

The number of employees hired to fill one position in a year's time.

master schedule, totals for resutrant

exibit 9.14

Forecasting Labor Costs—Calculating Labor Hours and Schedule

step 4: convert budget costs into labor hours formulas: - average daily wages= wage budget for week/work days in a week - budgeted labor hours per day= average daily wages/ average hourly reates - budgeted labor hours per week= average budgeted labors per day x days in the week - If my Wage Budget for the week is $6,678 and I am open 6 days a week I have $1,113 for Daily Wages That figure divided by my Average Hourly Rate of $14 = 80 Labor Hours per Day Times the 6 days a week = 480 Labor Hours per week I can schedule.