[SOLVED] Cal Poly Pomona University Management Essay – Writing

Read chapter 5 and write down the summary. You will write a summary of minimum 300 words.ffirs.qxd
1/24/07
3:05 PM
Page iii
FOOD AND BEVERAGE
COST CONTROL
Fourth Edition
Lea R. Dopson
David K. Hayes
Jack E. Miller
John Wiley & Sons, Inc.
ffirs.qxd
1/24/07
3:05 PM
Page ii
ffirs.qxd
1/24/07
3:05 PM
Page i
FOOD AND BEVERAGE COST CONTROL
Fourth Edition
ffirs.qxd
1/24/07
3:05 PM
Page ii
ffirs.qxd
1/24/07
3:05 PM
Page iii
FOOD AND BEVERAGE
COST CONTROL
Fourth Edition
Lea R. Dopson
David K. Hayes
Jack E. Miller
John Wiley & Sons, Inc.
ffirs.qxd
1/24/07
3:05 PM
Page iv

This book is printed on acid-free paper.
Copyright © 2008 by John Wiley & Sons, Inc. All rights reserved
Published by John Wiley & Sons, Inc., Hoboken, New Jersey
Published simultaneously in Canada
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any
form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either
the prior written permission of the Publisher, or authorization through payment of the appropriate
per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923,
(978) 750-8400, fax (978) 750-4470, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc.,
111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, e-mail:
permcoordinator@wiley.com.
Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts
in preparing this book, they make no representations or warranties with respect to the accuracy or
completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales
representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but
not limited to special, incidental, consequential, or other damages.
Designations used by companies to distinguish their products are often claimed as trademarks. In all
instances where John Wiley & Sons, Inc. is aware of a claim, the product names appear in initial capital or all capital letters. Readers, however, should contact the appropriate companies for more complete information regarding trademarks and registration.
For general information on our other products and services or for technical support, please contact
our Customer Care Department within the United States at (800) 762-2974, outside the United States
at (317) 572-3993 or fax (317) 572-4002.
Wiley also publishes its books in a variety of electronic formats. Some content that appears in print
may not be available in electronic books. For more information about Wiley products, visit our web
site at www.wiley.com.
Library of Congress Cataloging-in-Publication Data:
Dopson, Lea R.
Food and beverage cost control / by Lea R. Dopson, David K. Hayes, Jack E. Miller.
— 4th ed.
p. cm.
“Published simultaneously in Canada.”
Includes bibliographical references and index.
Jack E. Miller appeared as the first author on 2nd and 3rd editions.
ISBN: 978-0-471-69417-5 (cloth/cd)
1. Food service — cost control. I. Hayes, David K. II. Miller, Jack E. III. Title.
TX911.3.C65 2008
647.95068 1—dc22
2006014655
Printed in the United States of America
10
9
8
7
6
5
4
3
2
1
ffirs.qxd
1/24/07
3:05 PM
Page v
This edition is dedicated to the memory
of Jack E. and Anita Miller.
ffirs.qxd
1/24/07
3:05 PM
Page vi
ftoc.qxd
1/24/07
2:54 PM
Page vii
Contents
Preface xvii
Acknowledgments xxvii
Before You Start: How to Use Spreadsheets
CHAPTER 1
xxix
MANAGING REVENUE AND EXPENSE
1
PROFESSIONAL FOODSERVICE MANAGER 2
PROFIT: THE REWARD FOR SERVICE 3
Revenue 5
Expenses 6
GETTING STARTED 8
Precent Review 9
Computing Percent 10
Using Percent 11
UNDERSTANDING THE INCOME (PROFIT AND LOSS) STATEMENT 13
UNDERSTANDING THE BUDGET 17
Technology Tools 21
Apply What You Have Learned
Key Terms and Concepts 22
Test Your Skills 22
CHAPTER 2
22
DETERMINING SALES FORECASTS
27
IMPORTANCE OF FORECASTING SALES 28
SALES HISTORY 29
Computing Averages for Sales Histories 32
Recording Revenue, Guest Counts, or Both 35
MAINTAINING SALES HISTORIES 37
SALES VARIANCES 38
vii
ftoc.qxd
1/24/07
viii
2:54 PM
Page viii
Contents
PREDICTING FUTURE SALES 40
Future Revenues 40
Future Guest Counts 42
Future Average Sales per Guests
Technology Tools 46
Apply What You Have Learned
Key Terms and Concepts 47
Test Your Skills 48
CHAPTER 3
44
47
MANAGING THE COST OF FOOD
MENU ITEM FORECASTING 54
STANDARDIZED RECIPES 57
Factor Method 60
Percentage Method 60
INVENTORY CONTROL 62
Determining Inventory Levels 62
Setting the Purchase Point 68
PURCHASING 69
What Should Be Purchased? 70
What Is the Best Price to Pay? 75
How Can a Steady Supply Be Assured? 79
One Vendor Versus Many Vendors 80
Purchasing Ethics 81
Daily Inventory Sheet 82
Preparing the Purchase Order 84
RECEIVING 88
Proper Location 88
Proper Tools and Equipment 89
Proper Delivery Schedules 90
Proper Training 91
Receiving Record or Daily Receiving Sheet 97
STORAGE 99
Placing Products in Storage 99
Storage Areas 102
Storage Basics 104
Maintaining Product Quality and Safety 104
Maintaining Product Security 105
Determining Inventory Value 106
53
ftoc.qxd
1/24/07
2:54 PM
Page ix
Contents
DETERMINING ACTUAL FOOD EXPENSE 109
Beginning Inventory 110
Purchases 110
Goods Available for Sale 110
Ending Inventory 111
Cost of Food Consumed 111
Employee Meals 111
Cost of Food Sold 111
Variations on the Basic Cost of Food Sold Formula
Food Cost Percentage 115
Estimating Daily Cost of Food Sold 115
Technology Tools 119
Apply What You Have Learned
Key Terms and Concepts 122
Test Your Skills 122
CHAPTER 4
ix
111
121
MANAGING THE COST OF BEVERAGES
SERVING ALCOHOLIC BEVERAGES 131
Beverage Only 131
Beverage and Food 132
Beverage and Entertainment/Activity 133
Classifications of Alcoholic Beverages 133
Responsible Alchoholic Beverage Service 134
FORECASTING BEVERAGE SALES 134
Forecasting Beer Sales 135
Forecasting Wine Sales 136
Forecasting Spirit Sales 138
STANDARDIZED DRINK RECIPES AND PORTIONS 139
PURCHASING BEVERAGE PRODUCTS 142
Determining Beer Products to Carry 143
Determining Wine Products to Carry 145
Determining Spirit Products to Carry 148
Beverage Purchase Orders 151
RECEIVING BEVERAGE PRODUCTS 151
STORING BEVERAGE PRODUCTS 152
Liquor Storage 153
130
ftoc.qxd
x
1/24/07
2:54 PM
Page x
Contents
Beer Storage 153
Wine Storage 154
BAR TRANSFERS 155
COMPUTING COST OF BEVERAGES 158
SPECIAL FEATURES OF LIQUOR INVENTORY 159
Liquor Inventory by Weight 159
Liquor Inventory by Count 160
Liquor Inventory by Measure 160
SALES MIX 161
Technology Tools 164
Apply What You Have Learned
Key Terms and Concepts 166
Test Your Skills 166
CHAPTER 5
165
MANAGING THE FOOD AND BEVERAGE
PRODUCTION PROCESS 172
MANAGING THE FOOD AND BEVERAGE PRODUCTION PROCESS 173
Production Schedules 173
PRODUCT ISSUING 176
Special Concerns for Issuing Beverages 178
Estimating Daily Costs Using the Issues System 180
INVENTORY CONTROL 184
Physical and Perpetual Inventory 185
ABC Inventory Control 187
MANAGING THE FOOD PRODUCTION AREA 192
Waste 192
Overcooking 192
Overserving 194
Improper Carryover Utilization 195
Improper Make or Buy Decisions 196
MANAGING THE BEVERAGE PRODUCTION AREA 197
Free-Pour 197
Jigger Pour 198
Metered Bottle/Dispenser 198
Beverage Gun 198
Total Bar System 198
Minibars 200
ftoc.qxd
1/24/07
2:54 PM
Page xi
Contents
Bottle Sales 200
Open Bar 201
Banquet Operations 201
EMPLOYEE THEFT 202
Reducing Bar-Related Theft 202
Reducing Kitchen-Related Theft 204
DETERMINING ACTUAL AND ATTAINABLE PRODUCT COSTS 205
Determining Actual Product Cost 206
Product Yield 209
Determining Attainable Product Cost 212
REDUCING OVERALL PRODUCT COST PERCENTAGE 215
Decrease Portion Size Relative to Price 217
Vary Recipe Composition 217
Adjust Product Quality 218
Achieve a More Favorable Sales Mix 219
Ensure That All Product Purchased Is Sold 219
Increase Price Relative to Portion Size 220
Technology Tools 221
Apply What You Have Learned
Key Terms and Concepts 222
Test Your Skills 223
CHAPTER 6
222
MANAGING FOOD AND
BEVERAGE PRICING 230
MENU FORMATS 231
Standard Menu 231
Daily Menu 233
Cycle Menu 233
Menu Specials 236
FACTORS AFFECTING MENU PRICING
Local Competition 238
Service Levels 238
Guest Type 238
Product Quality 239
Portion Size 239
Ambiance 240
Meal Period 240
236
xi
ftoc.qxd
xii
1/24/07
2:54 PM
Page xii
Contents
Location 241
Sales Mix 241
ASSIGNING MENU PRICES 245
Product Cost Percentage 245
Product Contribution Margin 247
Product Cost Percentage or Product Cost Margin 247
SPECIAL PRICING SITUATIONS 248
Coupons 248
Value Pricing 249
Bundling 249
Salad bars and Buffets 249
Bottled Wine 251
Beverages at Receptions and Parties 253
Technology Tools 256
Apply What You Have Learned
Key Terms and Concepts 257
Test Your Skills 257
CHAPTER 7
256
MANAGING THE COST OF LABOR
LABOR EXPENSE IN THE HOSPITALITY INDUSTRY 268
Labor Expense Defined 268
Payroll 269
Labor Expense 271
EVALUATING LABOR PRODUCTIVITY 271
MAINTAINING A PRODUCTIVE WORKFORCE 272
Employee Selection 273
Training 277
Supervision 281
Scheduling 282
Breaks 285
Morale 285
Menu 288
Convenience versus Scratch Preparation 289
Equipment 291
Service Level Desired 291
MEASURING CURRENT LABOR PRODUCTIVITY 292
Labor Cost Percentage 292
267
ftoc.qxd
1/24/07
2:54 PM
Page xiii
Contents
Sales per Labor Hour 295
Labor dollars per Guest Served 297
Guests Served per Labor Dollar 298
Guest Served per Labor Hour 298
Six-column Daily Productivity Report 301
Determining Costs by Labor Category 302
MANAGING PAYROLL COSTS 305
Step 1. Determine Productivity Standards 305
Step 2. Forecast Sales Volume 307
Step 3. Schedule Employees Using Productivity Standards and
Forecasted Sales Volume 308
Step 4. Analyze Results 313
REDUCING LABOR-RELATED COSTS 315
Employee Empowerment 316
Technology Tools 318
Apply What You Have Learned
Key Terms and Concepts 320
Test Your Skills 320
CHAPTER 8
319
CONTROLLING OTHER EXPENSES
MANAGING OTHER EXPENSES 329
Costs Related to Food and Beverage Operations 330
Costs Related to Labor 333
Costs Related to Facility Maintenance 333
Occupancy Costs 334
FIXED, VARIABLE, AND MIXED OTHER EXPENSES 335
CONTROLLABLE AND NONCONTROLLABLE OTHER EXPENSES 339
MONITORING OTHER EXPENSES 340
REDUCING OTHER EXPENSES 344
Reducing Costs Related to Food and Beverage Operations
Reducing Utilities Usage Costs 345
Reducing Costs Related to Labor 345
Reducing Costs Related to Equipment Maintenance 348
Reducing Occupancy Costs 349
Technology Tools 350
Apply What You Have Learned
Key Terms and Concepts 351
Test Your Skills 352
351
344
328
xiii
ftoc.qxd
1/24/07
xiv
2:54 PM
Page xiv
Contents
CHAPTER 9
ANALYZING RESULTS USING
THE INCOME STATEMENT 358
INTRODUCTION TO FINANCIAL ANALYSIS 359
UNIFORM SYSTEM OF ACCOUNTS 361
INCOME STATEMENT (USAR) 362
ANALYSIS OF SALES/VOLUME 366
Other Factors Influencing Sales Analysis 368
ANALYSIS OF FOOD EXPENSE 369
Food Inventory Turnover 371
ANALYSIS OF BEVERAGE EXPENSE 373
ANALYSIS OF LABOR EXPENSE 375
ANALYSIS OF OTHER EXPENSES 377
ANALYSIS OF PROFITS 378
Technology Tools 380
Apply What You Have Learned
Key Terms and Concepts 381
Test Your Skills 382
CHAPTER 10
381
PLANNING FOR PROFIT
FINANCIAL ANALYSIS AND PROFIT PLANNING 387
MENU ANALYSIS 387
Food Cost Percentage 389
Contribution Margin 391
Goal Value Analysis 396
COST/VOLUME/PROFIT ANALYSIS 402
Linking Cost/Volume/Profit Analysis with Goal Value Analysis
Minimum Sales Point 410
THE BUDGET 412
Long-Range Budget 413
Annual Budget 414
Achievement Budget 414
DEVELOPING THE BUDGET 414
Prior-Period Operating Results 415
Assumptions of Next-Period Operations 416
Establishing Operating Goals 416
MONITORING THE BUDGET 418
386
407
ftoc.qxd
1/24/07
2:54 PM
Page xv
Contents
Revenue Analysis 418
Expense Analysis 420
Profit Analysis 425
Technology Tools 426
Apply What You Have Learned
Key Terms and Concepts 427
Test Your Skills 428
CHAPTER 11
427
MAINTAINING AND
IMPROVING THE REVENUE
CONTROL SYSTEM 437
REVENUE SECURITY 438
EXTERNAL THREATS TO REVENUE SECURITY 439
Use of Cards as Bill Payment 441
INTERNAL THREATS TO REVENUE SECURITY 445
Cashier Theft 447
Bonding 449
DEVELOPING THE REVENUE SECURITY SYSTEM 450
Step 1. Verification of Product Issues 451
Step 2. Verification of Guest Charges 452
Step 3. Verification of Sales Receipts 455
Step 4. Verification of Sales Deposits 460
Step 5. Verification of Accounts Payable 461
THE COMPLETE REVENUE SECURITY SYSTEM 464
Technology Tools 465
Apply What You Have Learned
Key Terms and Concepts 467
Test Your Skills 467
CHAPTER 12
466
GLOBAL DIMENSIONS OF
MANAGEMENT AND THE
ROLE OF TECHNOLOGY 470
MULTINATIONAL FOODSERVICE OPERATIONS 471
MANAGEMENT CHALLENGES IN A GLOBAL ECONOMY 472
Operational Challenges 476
xv
ftoc.qxd
1/24/07
xvi
2:54 PM
Page xvi
Contents
Cultural Challenges 478
Financial Challenges 480
ADVANCES IN TECHNOLOGY AND INFORMATION MANAGEMENT 481
Internet-Based POS Systems 482
Handwriting Recognition Systems 485
Voice-Over Internet Protocol 486
Staff-Sharing Technology 486
Paperless Paycheck Systems 487
Motion Detection/Intelligent Systems Software 488
SELECTING ADVANCED TECHNOLOGY PRODUCTS 489
Cost 491
Complexity 491
System Warranty/Maintenance 492
Upgrading 492
Reliability 492
Location 493
Psychological Impact on Guests and Employees 494
MONITORING DEVELOPMENTS IN COST CONTROL TECHNOLOGY 494
Trade Shows/Professional Associations 495
Publications 495
Current Vendors 496
Competitive Vendors 496
Technology-Related Classes 496
Your Own Organization 497
Apply What You Have Learned
Key Terms and Concepts 498
Test Your Skills 498
497
APPENDIX A FREQUENTLY USED FORMULAS FOR MANAGING OPERATIONS 501
APPENDIX B MANAGEMENT CONTROL FORMS 509
APPENDIX C FUN ON THE WEB! SITES
GLOSSARY
565
BIBLIOGRAPHY
INDEX
583
579
563
fpref.qxd
1/24/07
2:31 PM
Page xvii
Preface
P
revious editions of this text have met with tremendous success in great part because the authors recognized that all foodservice managers, regardless of the type
of foodservice business with which they are involved, must understand and manage the costs associated with operating their businesses. This fourth edition reconfirms and expands on that recognition. Today’s professional foodservice manager
is faced daily with a variety of responsibilities, from accounting, marketing, human
relations, facilities maintenance, and legal issues to sanitation, production, and service methods, just to name a few. Controlling costs is one of the critical skills all
successful managers must master.
This fourth edition continues to focus, in a very straightforward way, on helping managers understand the logic and the systems involved with managing their
costs. While there is indeed “theory” relating to many aspects of cost control, students who read this book will find the practical aspects of cost control emphasized
much more than the theoretical aspects. As a result, it is a book to be held in a
professional manager’s personal library for reference throughout his or her entire
career. It is intended to be a primer, providing students with the first step in what
may well be a lifelong and rewarding study of how to better manage the important
area of cost control.
TECHNOLOGY IN HOSPITALITY
This edition, like the previous three editions, has been painstakingly designed to
present important information in a style that is easy to teach, read, and understand.
However, the hospitality industry continues to evolve and, as a result, become more
complex. This is especially true in the important area of technology. For example,
while once considered the stuff of science fiction, the possibility of customers paying for their food with a tap of a credit card or the wave of a key has become a
reality. In contactless payment applications, the cards and key fobs used by consumers contain “smart chips” imbued with radio frequency identification capabil-
xvii
fpref.qxd
1/24/07
xviii
2:31 PM
Page xviii
Preface
ity. Tapping or waving either an instrument on or in front of a specially enabled
point of sale (POS) device enables it to be read without actually having to be swiped
through a card reader. The world of hospitality technology certainly continues to
change! Because this is true, this edition of Food and Beverage Cost Control has
been carefully updated to ensure that readers are aware of the most advanced technological applications of cost control technology available today.
In the time between the publication of the third edition and this current edition, the advances in hospitality related to computer hardware, software, communication devices, and cost control systems integration have been nothing short of
breathtaking. Indeed, the change has been so great that the entire technology approach in this edition has been modified. Readers of previous editions will recall
that, in the third edition, Chapter 12, “Using Technology to Enhance Control Systems,” sought to summarize technological applications that could be used in each
of the 11 preceding chapters. In this edition, the new feature, “Technology Tools,”
demonstrates to readers, within the chapter, how technology can be applied to the
information they have learned in that particular chapter. This association between
content presentation and technology application (i.e., read and immediately apply)
is in keeping with this book’s original pedagogical philosophy and continues to be
one of the reasons previous editions have met with such great success.
In the future, staying current in the field of cost control will, in the authors’
opinions, require continual learning and relearning on the part of those who teach
and those who practice hospitality cost management. While historically, a text related to hospitality cost control might have enjoyed a life of five to seven years before an update was truly required, today, the pace of advancement in the global
hospitality industry prevents such a “slow” approach. This can readily be seen in
the new material contained in Chapter 12, “Global Dimensions of Management
and the Role of Technology.” This chapter, the first of its kind included in a hospitality cost control text, demonstrates to students the specific challenges associated
with utilizing advances in cost control technology in the international foodservice
operations arena.
Teachers using this text will find, as they discovered in previous editions, that
the book easily allows for the integration of technology and that the teaching tools
available to them have again been expanded. This includes the continued development of the very well received computer disk that comes with each copy of the text
(as well as with the Instructor’s Manual). Food and Beverage Cost Control was the
first text of its kind to include a floppy disk (in the second edition) for student use,
and it continues its leadership position by becoming the first to now include a
student CD-ROM to be utilized in completing its popular “Test Your Skills” endof-chapter exercises.
The decision to include computerized application tools has proved extremely
popular; and as was true in the third edition, the authors have again taken the opportunity to maximize their utilization by expanding student exercises (and providing answers in the Instructor’s Manual) as well as building greater diversity in
the difficult level of these popular exercises. As a result, students will quickly see
how the skills they have previously acquired while learning to use a computer can
be easily adapted to the study of cost control, and practicing managers will find
fpref.qxd
1/24/07
2:31 PM
Page xix
New in the Fourth Edition
xix
the book useful as a reference as well as a source for ready-to-use forms and formulas that can be easily applied to their own operations.
NEW IN THE FOURTH EDITION
One of the most significant changes to this edition is the elevation of Dr. Lea Dopson to the position of lead author. Dr. Dopson has been involved with the development of the text since its second edition, and she has truly become a champion
for the text’s content and approach to the exciting study of food and beverage cost
control. A popular teacher, able administrator, and proficient author, Dr. Dopson’s
leadership on this text is evident throughout.
Since the new lead author of the text is a full-time educator who teaches from
the book, and the co-author is a former associate dean who is now a full-service
hotel owner/consultant who uses its information on a daily basis, there has been
no shortage of ideas about how to continue the improvement of Jack Miller’s original vision of creating a truly outstanding cost control text. As always, input from
students and instructors, industry professionals, our colleagues at Wiley, and our
own experiences have provided ample material for the new edition, and we are extremely happy with the final result. In this fourth edition, readers will be pleased
to find the following significant text enhancements.
• New “Technology Tools” Feature
It is not enough, in most cases, to tell students “what must be done” to control
costs; it is equally important to let them know “how to do it.” Increasingly, this
requires students to apply
advanced technology tools
Technology Tools
to their managerial tasks.
In this chapter you learned about the menu formats you most often encounter as a hospitality
This new feature introduces
manager, as well as the factors affecting menu prices, and the procedures used to assign individstudents to the advancing
ual menu item prices based on cost and sales data. The mathematical computations required to
evaluate the effectiveness of individual menu items and to establish their prices can be complex,
technology that applies dibut there are a wide range of software products available that can help you:
rectly to the content found
1. Develop menus and cost recipes.
within each chapter. Thus,
2. Design and print menu “specials” for meal periods or happy hours.
for example, in Chapter 7,
3. Compute and analyze item contribution margin.
4. Compute and analyze item and overall food cost percentage.
Managing the Cost of La5. Price banquet menus and bars based on known product costs.
bor, students learn the ba6. Evaluate the profitability of individual menu items.
sics of controlling their la7. Estimate future item demand based on past purchase patterns.
bor costs. The Technology
8. Assign individual menu item prices based on management-supplied parameters.
Tools feature in this chapter
Menu analysis and pricing software is often packaged as part of a larger software program.
Its importance, however, is great. It is an area that will continue to see rapid development in the
also illustrates that they can
future as software makers seek additional ways to improve their products.
purchase computer software
which (1) will forecast their
operational sales volume based upon historic sales data and (2) utilize this forecasted volume data to develop future employee schedules. Each chapter in this edition concludes with a Technology Tools application segment.
fpref.qxd
xx
1/24/07
2:31 PM
Page xx
Preface
•
New Chapter 12: Global Dimensions of Management &
the Role of Technology
Serious students of food service management know that Ray Kroc opened the first
McDonald’s restaurant in Des Plaines, Illinois, on April 15, 1955. What students
may not know is that today McDonald’s restaurants are operated in over 115
countries worldwide and serve more than 50 million customers per day. McDonald’s operates or franchises more than 13,500 restaurants inside the United
States, but an even larger number of its stores now exist outside the United States!
Similarly, Coca Cola, founded in 1886, is the world’s leading manufacturer, marketer, and distributor of nonalcoholic beverage concentrates and syrups. In 1906,
Coca Cola opened its first international bottling plants in Canada, Cuba, and
Panama. Today, Coca Cola sells more than 400 brand-name products in over 200
countries. In fact, over 70% of the company’s income is now generated outside
of the United States. From these two examples, it is clear that if today’s students
and hospitality professionals are to spend their careers in the foodservice industry, they will increasingly find those careers will likely take them outside their native country.
To directly address this emerging reality, this new chapter focuses on foodservice cost control from a perspective of globalization and (in keeping with the text’s
continued emphasis,) the use of advanced technology when applied internationally.
Thus students reading this chapter will learn about multinational foodservice operations, management challenges in a global economy, advances in international
technology and information management, selecting advanced technology products,
monitoring developments in cost control technology, and more.
• New “Leaders Are Readers!” Feature There is perhaps no greater lesson for
a hospitality student to learn than this: There are always new lessons to be learned.
Because this is so, the authors truly believe that Leaders are Readers! In fact, one of
the greatest distinctions
between leaders and folLeaders Are Readers!
lowers in any endeavor is
Technology related to POS systems is one of the areas in foodservice management that has adthat true leaders convanced and continues to advance most rapidly. Part of the reason this is so is the tremendous numstantly seek to know more
ber of enhancements that have been made to the record keeping and forecasting ability of these
systems. To stay abreast of changes in the area of POS systems (as well as many other technoand understand better. For
logical areas in the restaurant and hotel fields), we recommend that you subscribe to Hospitality
the best of leaders, that
Technology (HT) magazine. As an industry professional, you are likely to qualify for a complimentary subscription. To learn more go to: www.htmagazine.com.
means reading vociferously. The reason for this
is simple. In business, knowledge is power. Knowledge can be learned in a classroom,
but lifelong learning demands that managers take responsibility for their own continuing education and thus create their own classrooms. One important way to do so
is to embrace the act of reading as an effective method of skill enhancement and
knowledge development. This new feature enables us, as the authors, to encourage
students to discover the power of the written word by recommending books we have
found especially helpful to our own professional understanding of cost control.
fpref.qxd
1/24/07
2:31 PM
Page xxi
New in the Fourth Edition
xxi
• Renewed Emphasis on Simplification of Presentation While the driving force
behind this revision was the continued commitment to fully utilize the computer
and the Internet as teaching tools, it was also important that we continually review each line of type, chart, graph, and figure to ensure that we did not lose
sight of one fact—that a text’s main function should be to enhance student learning. Students have always been our primary focus and we were delighted to find
that, again and again, creative graphics and simply written narrative help to enhance the book’s reader friendliness and, as a result, present complex ideas in
easily understandable ways. It is a process that we fully intend to employ in each
future edition.
• Expanded “Test Your Skills” Feature One of the book’s most popular features is the end-of-chapter Test Your Skills resource. These exercises have been extensively reviewed for accuracy
and clarity. For this edition, this
Test Your Skills
segment has again been expanded
1. Gil Bloom is planning for the wedding of the mayor’s daughter in his hotel.
by 20%. The emphasis of the new
The reception, to be held in the grand ballroom, will be attended by 1,000 peoexercises is on developing student
ple. From his sales histories of similar events, Gil knows that the average drinking habits of those attending receptions of this type are as follows:
spreadsheet skills in cost control
25 percent select champagne
problem solving. We believe stu50 percent select white wine
dents and instructors will find the
25 percent select spirits
new spreadsheets to be an excelAssuming three drinks per person and a portion size of 3 ounces for champagne, 4 ounces for wine, and 1 ounce for spirits, how much of each product,
lent enhancement to this already
in 750-ml bottles, should Gil order? (Multiply fluid ounces by 29.57 to constrong text feature.
vert to milliliters.) Spreadsheet hint: Use the ROUNDUP function in the Total
Bottles column to determine number of full bottles to order.
If you were Gil, would you order more than you think you would need?
Why or why not? If so, how much more would you order?
• Additional Content It is
clear that today’s foodservice
managers must know even more about cost control than their counterparts of the
past. Our challenge when writing about cost control continues to be the task of determining what specific “new” material is important enough to be included in a revised edition and, at the same time, avoiding the elimination of critical content in
the current edition. While this process is challenging, it is also one of the most exciting aspects of the text revision process. In this edition, critical new information
has been included about controlling utility costs (Chapter 8), the Sarbanes-Oxley
Act (Chapter 9), and credit card processing fees and bogus invoice scams (Chapter
12), to name just a few new considerations. In addition, where appropriate, the
content of the text has been reorganized to provide better clarity of concepts.
• Extensive revision and examination of formulas Perhaps no area is more important in a book on cost control than the accuracy of the formulas and mathematical solutions used to demonstrate concepts. In addition to the extensive analysis by text reviewers, the authors have conscientiously checked and rechecked to
ensure that the formulas, examples, and answers provided are indeed accurate and
clarified to the greatest possible degree.
fpref.qxd
1/24/07
xxii
2:31 PM
Page xxii
Preface
ESSENTIAL ELEMENTS OF THE TEXT
Overviews
Each chapter begins with a brief narrative overview. This is simply a quick and
easy guide to the chapter’s contents. Overviews make it easy for readers to see what
the chapter is about and what they will learn by reading it.
Chapter Outline
The chapter outline that follows the overview helps teachers as well as students to
see how each topic follows the next and provides a simple way to quickly find material within the chapter.
Chapter Highlights
Each chapter’s highlights tell the reader what to expect in that chapter. They are
worded in such a way that the reader knows what he or she will be able to do at
the conclusion of the chapter. These highlights are designed so that readers will be
prepared for and excited about what they will be able to achieve when the chapter’s material is successfully mastered.
Fun on the Web!
This important feature of the text adds to student learning by integrating the use
of technology—in this case, the Internet—to the study of cost control. Students will
quickly realize the power of the Web when gathering information related to cost
control. This feature also provides Web-based resources that help managers more
effectively do their jobs.
Leaders Are Readers!
This new element directs students to books and publications which can lend greater
understanding to a topic or which can provide the insight needed to better teach
others on their staffs the real “whys” and “hows” of professional food and beverage cost control.
Technology Tools
These real-life application examples demonstrate to students that they can utilize computer hardware, advanced applications software, sophisticated communication devices, and much more to help manage their costs and improve their operating efficiency. While not all managers will use all of the tools suggested, it is important for
students to understand the many technological resources available to them today.
Apply What You Have Learned
This pedagogical feature, placed near the end of each chapter, allows students to
draw on their own problem-solving skills and opinions using the concepts explored
in each chapter. Challenging and realistic, yet purposely brief, these minicases pro-
fpref.qxd
1/24/07
2:31 PM
Page xxiii
Managerial Tools
vide excellent starting points for class discussions or, if the instructor prefers, outstanding written homework assignments.
Key Terms and Concepts
Students often need help in identifying key concepts that should be mastered after
reading a section of a book. These are listed at the conclusion of each chapter and
are invaluable as study aids.
Test Your Skills Exercises
This popular feature has, of course, been retained and again expanded in size. As
was true in previous editions, predesigned Microsoft Excel spreadsheets are employed (via student CD) to allow students to “test” their answers, thus improving
the instructor’s ability to evaluate mastery of the actual cost control concepts as
well as spreadsheet building ability.
Test Your Skills exercises allow the reader to conclusively determine if he or
she has mastered the chapter’s content. Again, the intent is to allow the reader to
immediately practice the skills acquired in the chapter. Through these exercises, the
authors seek to reinforce the concepts presented in the chapters.
Student CD-ROM This CD-ROM, included with the purchase of each text, introduces students to the important skill of spreadsheet development. Using the supplied CD-ROM, students can immediately see how their answers to “Test Your
Skills” problems translate into cost control solutions via spreadsheet formula development and manipulation. This CD-ROM assists students in understanding the
how and why of building spreadsheet solutions for the cost control–related hospitality problems they will face in the classroom and in their careers. Instructors will
find that the grading of problem sets becomes much easier when, with the aid of
the CD-ROM, all students use a consistent approach to classroom assignments.
Study Guide A newly created study guide (0-470-14058-5) provides several additional resources to help students review the material and exercises to test their
knowledge of key concepts and topics.
MANAGERIAL TOOLS
It is the authors’ hope that readers find the book as helpful to use as we found it
exciting to develop. To that end, appendices are provided that we believe will be
of great value. Appendix A: Frequently Used Formulas for Managing Costs is included in the back of the text as an easy reference guide. This section allows the
reader to quickly look up mathematical formulas for any of the computations presented in the text. We have intentionally chosen the simplest formulas that have
the widest use.
Appendix B: Management Control Forms provides simplified cost control–
related forms. This popular appendix has been retained from the first edition of
xxiii
fpref.qxd
1/24/07
xxiv
2:31 PM
Page xxiv
Preface
this text. These forms can be used as guideposts in the development of property
specific forms. They may be implemented as-is or modified as the manager sees fit.
Appendix C: Fun on the Web! Sites is designed to give readers the Internet addresses of those sites identified in the text as being helpful in learning more about
cost control. In this appendix, the sites are listed as they appear in the chapters.
A Glossary of industry terms is provided to help the reader with the operational
vocabulary necessary to understand the language of hospitality cost control management. Finally, a Bibliography is provided for the reader who wishes to pursue
his or her study by referring to a variety of excellent books.
INSTRUCTOR’S MATERIALS
To help instructors effectively manage their time and to enhance student learning
opportunities, several significant educational tools have been developed specifically
for this text: An Instructor’s Manual and, on the companion Wiley Website, slides,
a test bank, and spreadsheet answer key.
Instructor’s Manual As an additional aid to instructors, an Instructor’s Manual
(ISBN: 0-470-04507-8) has been painstakingly developed and classroom tested for
this text. The manual includes:
•
•
•
•
Lecture outlines for each chapter
Answers to chapter-ending Test Your Skills problems
A Test Bank including exam questions developed for each chapter
An Instructor’s Manual disk with the answers to the Test Your Skills spreadsheet exercises at the end of each chapter
• Suggested answers for Apply What You Have Learned for each chapter
Companion Website The segment of Wiley’s Website devoted entirely to this book
(www.wiley.com/college) includes very important instructor aids that can immediately be used to enhance student learning. These are:
PowerPoint slides: These easy-to-read and graphically sophisticated teaching
aids are excellent tools for instructors presenting their lectures via computer or
for those who wish to download the graphics and present them as overhead
transparencies. These are available to students as well.
Test Bank: Instructors utilizing the Website will find a password-protected,
expanded bank of exam questions that includes each question’s correct and
classroom-tested answer.
Test Your Skills spreadsheet answers: Instructors will be able to access answers
to the “Test Your Skills” spreadsheet exercises at the end of each chapter
within the password-protected portion of the instructor’s page of the site.
fpref.qxd
1/24/07
2:31 PM
Page xxv
Instructor’s Materials
One thing that has not changed in this new edition is that the authors continue
to find the topic of cost management to be one of creativity, excitement, and, in
many cases, outright fun. In contrast to the prevalent perception of cost control as
drudgery, in this text cost management becomes an engaging challenge for the foodservice manager.
It has been said that there are three kinds of managers: those who know what
has happened in the past, those who know what is happening now, and those who
know what is about to happen. Clearly, the manager who possesses all three traits
is best prepared to manage effectively and efficiently. This text will give the reader
the tools required to maintain sales and cost histories (the past), develop systems
for monitoring current activities (the present), and learn the techniques required to
anticipate what is to come (the future).
As was true in previous editions, the authors hope that the study of cost management creates in the reader the same interest and excitement for the topic that
the authors experience. If that is the case, we will have been successful in our attempt to be true to Jack Miller’s original vision of creating an outstanding learning tool that prepares students to ultimately be successful managers in the hospitality industry.
xxv
fpref.qxd
1/24/07
2:31 PM
Page xxvi
flast.qxd
1/24/07
3:09 PM
Page xxvii
Acknowledgments
T
he first three editions of this text were very popular, for which we are deeply
grateful. The success stemmed in large part from the testing of its concepts and materials in classes at the University of North Texas, Purdue University, Texas Tech
University, the University of Houston, and California State Polytechnic University
at Pomona, as well as from those original St. Louis Community College students
who received their instruction under Jack Miller. Students today will indeed benefit from the insight and input of students in our past classes. In addition, the industry focus of this edition is exceptionally strong. This is due in large part to the
staff at the Lansing Clarion Hotel and Conference Center, especially David Berger,
Director of Operations, and Sam Van Sickel, Food and Beverage Director, as well
as Allisha Miller, of P.A.N.D.A. Professionals.
As with the first three editions, we appreciate all the assistance and comments
we have received in bringing this book to fruition. We are extremely grateful to
those who contributed to the original concept and idea for the book.
For comment, collaboration, and constructive criticism on the manuscript, we
thank our reviewers: Rick Florsheim of Orlando Culinary Academy, Roger Gerard
from Shasta College, and Alan Joynson of Lake Washington Technical College.
They continually improved the text by reminding us of our original goal: providing a text full of information that is easy to read, easy to understand, and easy
to retain.
We especially would like to thank our Wiley editors, Nigar Hale and JoAnna
Turtletaub, who have supported this text for so long and whose continual support
and constant attention helped encourage us to make this edition a reality. In addition, we would like to recognize Cindy Rhoads, Developmental Editor with Wiley,
for her special attention to detail in this edition.
We also want to thank those colleagues and family and friends who have been
so supportive of us throughout our careers: Loralei, Terry, Laurie, Tutti, and Thandi,
as well as Peggy, Scott, Trish, Joshua, Joe, Jack, Ray, Pauline, and M.D. We appreciate all of you!
Most important of all, we wish to thank our former colleague Jack Miller, who
conceived the text, and Anita Miller, his supportive wife and constant companion.
xxvii
flast.qxd
1/24/07
xxviii
3:09 PM
Page xxviii
Acknowledgments
We believe they would be proud of this extension of Jack’s original textbook
concept. It is the authors’ hope that this edition lives up to the high standards the
Millers exhibited in their personal and professional lives, as well as demonstrates
our love and admiration for them both.
Lea R. Dopson
David K. Hayes
flast.qxd
1/24/07
3:09 PM
Page xxix
Before You Start:
How to Use Spreadsheets
T
hroughout this book, all “Test Your Skills” exercises are available in Microsoft
Excel spreadsheets on your student CD-ROM. Although you will be able to calculate your answers by hand, the authors recommend that you use the spreadsheets
for two main reasons: (1) you will be able to practice using the spreadsheets that
you may use as a manager, and (2) you will be able to “play” with the numbers
and create your own scenarios. These applications can be used with a variety of
spreadsheet software packages; the authors chose Excel because it is widely available. It is assumed that you have basic knowledge of spreadsheets when using these
applications. The dark bold outlined spaces in all of the “Test Your Skills” exercises indicate that answers are required in those spaces.
This section of the book is designed to give you formulas that you will need to
complete the “Test Your Skills” exercises at the end of each chapter. These formulas will be used throughout the textbook. The authors have intentionally chosen the simplest formulas that have the widest use. More experienced spreadsheet
users may want to use more advanced functions or macros.
When you are using the Excel spreadsheets to complete the “Test Your Skills”
exercises, you may sometimes need to enter the raw data presented in the textbook.
To complete the exercises, you will have to enter formulas in the spreadsheets to
perform mathematical calculations just as you would when analyzing data as a manager in a foodservice operation.
BASICS OF USING SPREADSHEETS
Assume you are the manager of a fine dining restaurant, and you want to see how
many guests your waitstaff, Anne, Debra, and George, served on Monday and Tuesday nights. In order to quickly add up the daily totals, you decide to set up the
spreadsheet at the top of the next page.
xxix
flast.qxd
1/24/07
xxx
3:09 PM
Page xxx
Before You Start: How to Use Spreadsheets
A
1
B
C
D
E
Anne
Debra
George
Total Guests
2
Monday
25
16
23
3
Tuesday
18
24
21
4
5
In order to calculate the total guests served for Monday and Tuesday, you must
do the following:
1. Place the cursor in cell E2.
2. Type: sum(
3. Highlight the cells that you wish to add. (B2 through D2).
4. Excel will automatically add the cells to your formula so that it now looks
like this: sum(B2:D2
5. Complete the formula by closing the right parenthesis: sum(B2:D2)
6. Hit “Enter.”
7. The number 64 should appear in cell E2.
8. To copy the same formula for cell E3, use the Auto Fill function. Simply
click on the cell, E2, and then position your mouse directly over the bottom right-hand corner of the cell. The cursor will change to look like a
plus sign (see the following spreadsheet). Click on the plus and drag down
to cell, E3. This will copy the formula from E2 to E3. It will automatically
change the cells you are adding to B3:D3. The answer you should have in
E3 is 63. You can use the Auto Fill function to copy numbers or formulas
horizontally or vertically in as many cells as you wish.
A
1
B
C
D
E
Anne
Debra
George
Total Guests
2
Monday
25
16
23
sum(B2:D2)
3
Tuesday
18
24
21
sum(B3:D3)
4
5
flast.qxd
1/24/07
3:09 PM
Page xxxi
Basics of Using Spreadsheets
xxxi
Formulas Needed for Test Your Skills Exercises
Formula
Example
Explanation
cell
B1
Copies a number from another cell of the worksheet
$column$row
$B$1
“Anchors” a cell in a series of formulas. When using the
same cell in a variety of formulas in a spreadsheet, place
the “$” in front of the column reference and the row reference to indicate that each formula is using the same cell
in the calculation. This is especially helpful when dragging
the formula to copy it over a series of cells.
SUM(cell:cell)
SUM(B1:B5)
Adds numbers in a range of cells.
SUM(cell,cell)
SUM(B1,B5)
Adds two numbers in cells that are not adjacent to each
other.
(cell cell)
(B1 B2)
Adds two numbers
(cell-cell)
(B1-B2)
Subtracts one number from another
(cell*cell)
(B1*B2)
Multiplies two numbers
(cell/cell)
(B1/B2)
Divides one number into another
(cell/cell)*100
(B1/B2)*100
Divides one number into another and multiplies the
answer by 100 (changes answer to percentage)
MIN(cell:cell)
MIN(B1:B5)
Chooses minimum value out of cell range. (Good to use
when doing price comparisons.)
ROUNDUP(cell,0)
or
ROUNDUP(function,0)
or
ROUNDUP(equation,0)
ROUNDUP(B1,0)
or
ROUNDUP(SUM(B1:B4),0)
or
ROUNDUP(B1*1.05,0)
Rounds numbers up. The “0” denotes that the number of
decimal places will be 0. You can use 1, 2, 3, etc., to
indicate decimal places more than 0.
(Good to use when inventory indicates that you need 21/2
cases and you can only buy in full cases; this function will
round the cases up to 3.)
ROUND(cell,0)
or
ROUND(function,0)
or
ROUND(equation,0)
ROUND(B1,0)
or
ROUND(SUM(B1:B4),0)
or
ROUND(B1*1.05,0)
Rounds numbers up or down. The “0” denotes that the
number of decimal places will be 0. You can use 1, 2, 3,
etc., to indicate decimal places more than 0.
When the number in one cell has been calculated as a formula and is also being used in a formula of a second cell,
this will guarantee that no rounding errors will occur in
the second cell.
In the following formulas,
the word “cell” may be
replaced by an actual
number, e.g., (cell 25)
flast.qxd
1/24/07
xxxii
3:12 PM
Page xxxii
Before You Start: How to Use Spreadsheets
Note that, for percentages, you don’t necessarily have to type “*100” in the
formula. You could, instead, do the following:
1. Highlight the cell.
2. Go to the menu at the top of the page and click on “Format.”
3. Under “Format,” click on “Cells.”
4. Under “Cells,” click on “Number.”
5. Under “Number,” click on “Percentage.”
6. You will also find a box in “Number” that will allow you to choose the
number of decimal places.
HOW TO CREATE A PIE CHART
Although this looks like a long list of things to do to create a pie chart, it should
really only take you approximately two minutes to do (once you get the hang of
it). So please give it a try.
Below is an example of a P&L Statement set up in Excel. Your task is to illustrate expenses and profit as a percentage of revenues in a pie chart.
A
B
C
1
D
%
2
Revenue
$250,000
100.0
3
F&B Expense
130,000
52.0
4
Labor Expense
70,000
28.0
5
Other Expense
40,000
16.0
6
Total Expenses
240,000
96.0
7
Profit
10,000
4.0
1. Highlight “F&B Expense,” “Labor Expense,” and “Other Expense” in Column A, and highlight their respective dollar amounts in Column B (all at
the same time). Then, hold down the “Ctrl” key on your keyboard and
highlight “Profit” and its respective dollar amount. This will allow you to
skip the “Total Expenses” row.
2. Go to the menu at the top of the screen and click on “Insert,” then click
on “Chart.” A Chart Wizard will appear on your screen.
3. In the Chart Wizard, you have two choices—“Standard Types” and “Custom Types.” Usually, the Chart Wizard will open up automatically to “Standard Types,” which is the one you want to use.
flast.qxd
1/24/07
3:12 PM
Page xxxiii
How to Create a Pie Chart
4. Click on “Pie” and click on the “Chart sub-type” that you want to use.
Then, click on “Next” at the bottom of the Chart Wizard.
5. In the next screen, you have two choices: “Data Range” and “Series.” “Data
Range” is the one you want to use.
6. If you have already highlighted your columns in the spreadsheet as instructed in Step 1 above, you will not have to type in anything on this
screen. Just click on “Next” at the bottom of the page.
7. In the next screen, you have three choices: “Titles,” “Legend,” and “Data
Labels.” Click on “Titles” first.
8. Under “Titles,” you will see a space labeled “Chart Title.” Type in the title that you want for your chart in that space (or do nothing if you do not
want a title).
9. Now, click on “Legend.” This option is available for you if you want the
legend to show. If you want a legend, make sure the “Show legend” box
is checked, and then click on a “Placement” for the legend (where you want
it to appear on the chart). If you do not want a legend and it has a check
mark next to it, click on the check mark to remove it.
10. Now, click on “Data Labels.” You will see a list of options for labeling
the pieces of the pie. The authors of this text like to use “Category Name”
and “Percentage.” If you click on these, you will see that both the category
names (words) and percentages appear next to the corresponding piece of
the pie. This also makes a legend redundant; so, if you are using this option, you will not want to click on “Show Legend” in the “Legends” section (see Step 9 above). Click on “Next” at the bottom of the page.
11. In the next screen, you have two choices: Place chart “as new sheet” and
“as object in.” This is referring to where you want the pie chart to appear,
either in a new Excel spreadsheet or in an existing spreadsheet in your
workbook. In most cases, you will click on “as object in.” Next to “as object in” is a scroll down list. Choose the sheet in which you want the object to appear. The current sheet you are working in is the default sheet.
12. Click on “Finish” at the bottom of the page, and you should see your finished chart!
13. To move the pie chart to a specific location on the spreadsheet, click on
any white space within the chart, hold down the mouse button, and drag
the chart to the desired location.
14. To resize the pie chart, click on any of the 8 dots on the border of the
chart. The side middle dots make the chart larger or smaller horizontally,
and the top and bottom middle dots make the chart larger or smaller vertically. The dots in the corners of the chart will resize the entire chart (larger
or smaller) within the same proportions.
15. The Chart Wizard defaults percentages to “0” decimal places, e.g., 12%.
If you want percentages to have one or more decimal places, e.g., 12.3%
or 12.34%, double click on one of the percentages shown in your pie chart.
xxxiii
flast.qxd
1/24/07
xxxiv
3:28 PM
Page xxxiv
Before You Start: How to Use Spreadsheets
A window will pop up that is labeled “Format Data Labels.” Click on the
“Number” tab at the top of the window (this is the default). Then, click
on “Percentage” (this is the default). You will see “Decimal Places” on the
right and a box next to it. Type in the number of decimal places you want,
and then click “OK” at the bottom of the window. This will set all of the
percentages in your chart to the same number of decimal places.
16. Sit back and admire your work! Your chart should look like the chart
shown here.
P & L Percentages
Other
Expense
16.0%
Profit
4.0%
F&B
Expense
52.0%
Labor
Expense
28.0%
HOW TO SORT A TABLE
Following is an example of Goal Value Analysis set up in Excel. Your task is to
sort the menu items by Goal Value from highest to lowest.
Menu Item
A
B
C
D
Goal Value
Overall menu (Goal Value)
(1-.35)
100
$16.55
1-(.30 .35)
376.5
Lobster Stir-Fry
(1-.51)
51
21.95
1-(.30 .51)
104.2
Chicken Breast
(1-.22)
140
$13.95
1-(.30 .22)
731.2
Beef medallions
(1-.37)
125
15.95
1-(.30 .37)
414.5
Coconut Shrimp
(1-.30)
121
16.95
1-(.30 .30)
574.3
Grilled Tuna
(1-.40)
105
17.95
1-(.30 .40)
339.3
Scallops/Pasta
(1-.24)
85
14.95
1-(.30 .24)
444.3
Strip Steak
(1-.45)
73
17.95
1-(.30 .45)
180.2
flast.qxd
1/24/07
3:13 PM
Page xxxv
How to Sort a Table
1. Highlight the table to be sorted including the header row.
2. Go to the menu at the top of the screen and click on “Data,” then click
on “Sort.”
3. A “Sort” window will appear on your screen. At the bottom of the “Sort”
window you will see “The data range has.” Click on “Header row” to indicate that your table has a header row.
4. At the top of the “Sort” window, you will see “Sort by.” Use the drop
down menu to choose the appropriate column. In this example, you will
choose the “Goal Value” column.
5. To the right of the drop down menu, you need to choose “Ascending” or
“Descending.” For this example, choose “Descending” because you want
the menu items to be sorted from highest to lowest. Click “OK” at the bottom of the window to sort the table. Your table should look like the one
shown next.
Menu Item
A
B
C
D
Goal Value
Chicken Breast
(1-.22)
140
$13.95
1-(.30 .22)
731.2
Coconut Shrimp
(1-.30)
121
16.95
1-(.30 .30)
574.3
Scallops/Pasta
(1-.24)
85
14.95
1-(.30 .24)
444.3
Beef medallions
(1-.37)
125
15.95
1-(.30 .37)
414.5
Overall menu (Goal Value)
(1-.35)
100
$16.55
1-(.30 .35)
376.5
Grilled Tuna
(1-.40)
105
17.95
1-(.30 .40)
339.3
Strip Steak
(1-.45)
73
17.95
1-(.30 .45)
180.2
Lobster Stir-Fry
(1-.51)
51
21.95
1-(.30 .51)
104.2
xxxv
c01.qxd
1/24/07
2:56 PM
Page 1
Chapter 1
MANAGING REVENUE
AND EXPENSE
OVERVIEW
T
his chapter presents the relationship among foodservice revenue, expense, and profit. As a pro-
fessional foodservice manager, you must understand the relationship that exists between controlling these three areas and the resulting success of your operation. In addition, the chapter presents
the mathematical foundation you must know to express your operating results as a percentage of
your revenue or budget, a method that is the standard within the hospitality industry.
Chapter Outline

Professional Foodservice Manager
Profit: The Reward for Service
Getting Started
Understanding the Profit and Loss Statement
Understanding the Budget
Key Terms and Concepts
Apply What You Have Learned
Test Your Skills
HIGHLIGHTS
At
•
•
•
the conclusion of this chapter, you will be able to:
Apply the basic formula used to determine profit.
Express both expenses and profit as a percentage of revenue.
Compare actual operating results with budgeted operating results.
1
c01.qxd
2
1/24/07
2:56 PM
Chapter 1
Page 2
Managing Revenue and Expense
PROFESSIONAL FOODSERVICE MANAGER
T
here is no doubt that to be a successful foodservice manager you must be a talented individual. Consider, for a moment, your role in the operation of an ongoing profitable facility. As a foodservice manager, you are both a manufacturer and
a retailer. A professional foodservice manager is unique because all of the functions
of product sales, from item conceptualization to product delivery, are in the hands
of the same individual. As a manager, you are in charge of securing raw materials,
producing a product, and selling it—all under the same roof. Few other managers
are required to have the breadth of skills that effective foodservice operators must
have. Because foodservice operators are in the service sector of business, many aspects of management are more difficult for them than for their manufacturing or
retailing management counterparts.
A foodservice manager is one of the few types of managers who actually have
contact with the ultimate customer. This is not true of the manager of a tire factory or automobile production line. These individuals produce a product, but they
do not sell it to the person who will actually use their product. In a like manner,
grocery store or computer store managers will sell their product lines, but they have
had no role in actually producing their goods. The face-to-face guest contact in the
hospitality industry requires that you assume the responsibility of standing behind
your own work and that of your staff, in a one-on-one situation with the ultimate
consumer, or end user of your products and services.
The management task checklist in Figure 1.1 shows just some of the areas in
which foodservice, manufacturing, and retailing managers vary in responsibilities.
In addition to your role as a food factory supervisor, you must also serve as a
cost control manager, because, without performing this vital role, your business
might cease to exist. Foodservice management provides the opportunity for creativity in a variety of settings. The control of revenue and expense is just one more
area in which the effective foodservice operator can excel. In most areas of foodservice, excellence in operation is measured in terms of producing and delivering
FIGURE 1.1 Management Task Checklist
Task
Foodservice
Manager
Manufacturing
Manager
Retail
Manager
1. Secure raw materials
Yes
Yes
No
2. Manufacture product
Yes
Yes
No
3. Distribute to end-user
Yes
No
Yes
4. Market to end-user
Yes
No
Yes
5. Reconcile problems
with end-user
Yes
No
Yes
c01.qxd
1/24/07
2:56 PM
Page 3
Profit: The Reward for Service
quality products in a way that assures an appropriate operating profit for the owners of the business.
PROFIT: THE REWARD FOR SERVICE
T
here is an inherent problem in the study of cost control or, more accurately, cost
management. The simple fact is that management’s primary responsibility is to deliver a quality product or service to the guest, at a price mutually agreeable to both
parties. In addition, the quality must be such that the consumer, or end user of the
product or service, feels that excellent value was received for the money spent on
the transaction. When this level of service is achieved, the business will prosper. If
management focuses on controlling costs more than servicing guests, problems will
certainly surface.
It is important to remember that guests cause businesses to incur costs. You do
not want to get yourself in the mind-set of reducing costs to the point where it is
thought that “low” costs are good and “high” costs are bad. A restaurant with
$5 million in revenue per year will undoubtedly have higher costs than the same
size restaurant with $200,000 in revenue per year. The reason is quite clear. The
food products, labor, and equipment needed to sell $5 million worth of food is
likely to be greater than that required to produce a smaller amount of revenue. Remember, if there are fewer guests, there are likely to be fewer costs, but fewer profits as well! Because that is true, when management attempts to reduce costs, with
no regard for the impact on the balance between managing costs and guest satisfaction, the business will surely suffer. In addition, efforts to reduce costs that result in unsafe conditions for guests or employees are never wise. While some shortterm savings may result, the expense of a lawsuit resulting from a guest or employee
injury can be very high. Managers who, for example, neglect to spend the money
to salt and shovel a snowy restaurant entrance area may find that they spend thousands more dollars defending themselves in a lawsuit brought by an individual who
slipped and fell on the ice.
As an effective manager, the question to be considered is not whether costs are
high or low. The question is whether costs are too high or too low, given management’s view of the value it hopes to deliver to the guest and the goals of the
foodservice operation’s owners. Managers can eliminate nearly all costs by closing
the operation’s doors. Obviously, however, when you close the doors to expense,
you close the doors to profits. Expenses, then, must be incurred, and they must be
managed in a way that allows the operation to achieve its desired profit levels.
Some people assume that if a business purchases a product for $1.00 and sells
it for $3.00, the profit generated equals $2.00. In fact, this is not true. As a business operator, you must realize that the difference between what you have paid for
the goods you sell and the price at which you sell them does not represent your actual profit. Instead, all expenses, including advertising, the building housing your
operation, management salaries, and the labor required to generate the sale, to name
3
c01.qxd
4
1/24/07
2:56 PM
Chapter 1
Page 4
Managing Revenue and Expense
but a few, are expenses that must be subtracted before you can determine your
profits accurately.
Every foodservice operator is faced with the following profit-oriented formula:
Revenue Expenses Profit
Thus, when you manage your facility, you will receive revenue, the money you
take in, and you will incur expenses, the cost of the items required to operate the
business. The dollars that remain after all expenses have been paid represent your
profit. For the purposes of this book, the authors will use the following terms interchangeably: revenues and sales; expenses and costs.
This formula holds even in the “nonprofit” sector of foodservice management.
For example, consider the situation of Hector Bentevina. Hector is the foodservice
manager at the headquarters of a large corporation. Hector supplies the foodservice to a large group of office workers, each of whom is employed by the corporation that owns the facility Hector manages. In this situation, Hector’s employer
clearly does not have “profit” as its primary motive. In most business dining situations, food is provided as a service to the company’s employees either as a no-cost
(to the employee) benefit or at a greatly reduced price. In some cases, executive dining rooms may be operated for the convenience of management. In all cases, however, some provision for profit must be made. Figure 1.2 shows the flow of business for the typical foodservice operation. Note that profit must be taken out at
some point in the process, or management is in a position of simply trading cash
for cash.
In your own operation, if you find that revenue is less than or equal to real expense, with no reserve for the future, you will likely also find that there is no money
for new equipment; needed equipment maintenance may not be performed; employee raises (as well as your own) may be few and far between; and, in general,
the foodservice facility will become outdated due to a lack of funds needed to remodel and upgrade. The truth is, all foodservice operations need revenue in excess
of expenses if they are to thrive. If you manage a foodservice operation in a profit
FIGURE 1.2 Foodservice Business Flowchart
Cash
reserves
Profits
Purchases
Produces
Supplies
Accounts receivable
or cash
Raw materials
and labor
Generates
Finished
products
c01.qxd
1/24/07
2:56 PM
Page 5
Profit: The Reward for Service
or a nonprofit setting, it will be your responsibility to communicate this message
to your own staff.
Profit is the result of solid planning, sound management, and careful decision
making. The purpose of this text is to give you the information and tools you need
to make informed decisions with regard to managing your operation’s revenue and
expenses. If these tools are utilized properly, the potential for achieving profits you
desire is greatly enhanced.
Profit should not be viewed as what is left over after the bills are paid. In fact,
careful planning is necessary to earn a profit. In most cases, investors will not invest in businesses that do not generate enough profit to make their investment
worthwhile. The restaurant business can be very profitable; however, there is no
guarantee that an individual restaurant will in fact make a profit. Some restaurants
do, while others do not. Because that is true, a more appropriate formula, which
recognizes and rewards the business owner for the risk associated with business
ownership or investment, is as follows:
Revenue Desired Profit Ideal Expense
Ideal expense, in this case, is defined as management’s view of the correct or
appropriate amount of expense necessary to generate a given quantity of revenue.
Desired profit is defined as the profit that the owner wants to achieve on that predicted quantity of revenue. This formula clearly places profit as a reward for providing service, not a leftover. When foodservice managers deliver quality and value
to their guests, anticipated revenue levels can be achieved and desired profit is attainable. Desired profit and ideal expense levels are not, however, easily achieved.
It takes an astute foodservice operator to consistently make decisions that will maximize revenue while holding expenses to the ideal or appropriate amount. This book
will help you to do just that.

REVENUE
To some degree, you can manage your revenue levels. Revenue dollars are the result of units sold. These units may consist of individual menu items, lunches, dinners, drinks, or any other item produced by your operation. Revenue varies with
both the number of guests frequenting your business and the amount of money
spent by each guest. You can increase revenue by increasing the number of guests
you serve, by increasing the amount each guest spends, or by a combination of both
approaches. Adding seating or drive-through windows, extending operating hours,
and building additional foodservice units are all examples of management’s efforts
to increase the number of guests choosing to come to the restaurant or foodservice
operation. Suggestive selling by service staff, creative menu pricing techniques, as
well as discounts for very large purchases are all examples of efforts to increase the
amount of money each guest spends.
It is the opinion of the authors that management’s primary task is to take the
steps necessary to bring guests to the foodservice operation. This is true because
5
c01.qxd
1/24/07
6
2:56 PM
Chapter 1
Page 6
Managing Revenue and Expense
the profit formula begins with revenue. Experienced foodservice operators know
that increasing revenue through adding guests, suggestive selling, or possibly raising menu prices is an extremely effective way of increasing overall profitability, but
only if effective cost management systems are in place.
The focus of this text is on managing and controlling expenses, not generating
additional revenue. While the two topics are clearly related, they are different. Marketing efforts, restaurant design and site selection, employee training and food
preparation methods are all critical links in the revenue-producing chain. No amount
of effective expense control can solve the profit problems caused by inadequate revenue resulting from inferior food quality or service levels.
Leaders Are Readers!
One tool used by food service establishments to go beyond managing costs to increasing revenue
is the menu. Hospitality Marketing Management, Fourth Edition, by Robert D. Reid and David
C. Bojanic (ISBN: 0-471-47654-4) includes a thorough examination and discussion of how to increase food service revenue through the use of effective menu pricing strategy and creative menu
layout and design. Read the last two chapters of this book.
What’s an ISBN?
A book’s International Standard Book Number (ISBN) is the unique identification number assigned
to it upon its publication. Utilized worldwide, an ISBN is used (among other things) to look up
books on the Internet and to identify specific books at bookstores. Where possible, we will identify suggested reading materials by an ISBN.
Effective cost control, however, when coupled with management’s aggressive
attitude toward meeting and exceeding guests’ expectations, can result in outstanding revenue and profit performance.
Fun on the Web!
www.restaurant.org. Click on “Industry Research,” to see the National Restaurant Association’s
revenue projections for the over $500 billion dollar restaurant industry.

EXPENSES
There are four major foodservice expense categories that you must learn to control. They are:
1. Food costs
2. Beverage costs
c01.qxd
1/24/07
2:56 PM
Page 7
Profit: The Reward for Service
3. Labor costs
4. Other expenses
FOOD COSTS
Food costs are the costs associated with actually producing the menu items a
guest selects. They include the expense of meats, dairy, fruits, vegetables, and
other categories of food items produced by the foodservice operation. When computing food costs, many operators include the cost of minor paper and plastic
items, such as the paper wrappers used to wrap sandwiches. In most cases, food
costs will make up the largest or second largest expense category you must learn
to manage.
BEVERAGE COSTS
Beverage costs are those related to the sale of alcoholic beverages. It is interesting to note that it is common practice in the hospitality industry to consider beverage costs of a nonalcoholic nature as an expense in the food cost category.
Thus, milk, tea, coffee, carbonated beverages, and other nonalcoholic beverage
items are not generally considered a beverage cost. Alcoholic beverages accounted
for in the beverage cost category include beer, wine, and liquor. This category
may also include the costs of ingredients necessary to produce these drinks, such
as cherries, lemons, olives, limes, mixers like carbonated beverages and juices,
and other items commonly used in the production and service of alcoholic beverages.
LABOR COSTS
Labor costs include the cost of all employees necessary to run the business. This
expense category would also include the amount of any taxes you are required to
pay when you have employees on your payroll. Some operators find it helpful to
include the cost of management in this category. Others prefer to place the cost of
managers in the category of other expenses. In most operations labor costs are an
operator’s highest cost, or they are second only to food costs in total dollars spent.
If management is included as a labor cost, then this category will frequently be even
larger than the food cost category.
OTHER EXPENSES
Other expenses include all expenses that are neither food, nor beverage, nor labor. Examples include franchise fees, utilities, rent, linen, and such items as china,
glassware, kitchen knives, and pots and pans. While this expense category is
sometimes incorrectly referred to as “minor expenses,” your ability to successfully control this expense area is especially critical to the overall profitability of
your foodservice unit.
7
c01.qxd
8
1/24/07
2:56 PM
Chapter 1
Page 8
Managing Revenue and Expense
GETTING STARTED
Good managers learn to understand, control, and manage their expenses. Consider
the case of Tabreshia Larson, the food and beverage director of the 200-room
Renaud Hotel, located in a college town and built near an interstate highway.
Tabreshia has just received her end-of-the-year operating reports for the current
year. She is interested in comparing these results to those of the prior year. The
numbers she received are shown in Figure 1.3.
Tabreshia is concerned, but she is not sure if she should be. Revenue is higher
than last year, so she feels her guests must like the products and services they receive. In fact, repeat business from corporate meetings and special-events meals is
really beginning to develop. Profits are greater than last year also, but Tabreshia
has the uneasy feeling that things are not going as well as they could. The kitchen
appears to run smoothly. The staff, however, often runs out of needed items, and
there seems to be a large amount of leftover food thrown away on a regular basis.
Sometimes, there seem to be too many staff members on the property; at other
times, guests have to wait too long to get served. Tabreshia also feels that employee
theft may be occurring, but she certainly doesn’t have the time to watch every storage area within her operation. Tabreshia also senses that the hotel general manager, who is Tabreshia’s boss, may be less than pleased with her department’s performance. She would really like to get a handle on the problem (if there is one),
but how and where should she start?
The answer for Tabreshia, and for you, if you want to develop a serious expense control system, is very simple. You start with basic mathematics skills that
you must have to properly analyze your expenses. The mathematics required, and
used in this text, consist only of addition, subtraction, multiplication, and division.
These tools will be sufficient to build a cost control system that will help you professionally manage the expenses you incur.
What would it mean if a fellow foodservice manager told you that he spent
$500 on food yesterday? Obviously, it means little unless you know more about
his operation. Should he have spent $500 yesterday? Was that too much? Too little? Was it a “good” day? These questions raise a difficult problem. How can you
equitably compare your expenses today with those of yesterday, or your foodservice unit with another, so that you can see how well you are doing? We know that
FIGURE 1.3 Renaud Hotel Operating Results
This Year
Last Year
Revenue
$1,106,040
$850,100
Expense
1,017,557
773,591
88,483
76,509
Profits
c01.qxd
1/24/07
2:56 PM
Page 9
Getting Started
the value of dollars has changed over time. A restaurant with revenue of $1,000
per day in 1954 is very different from the same restaurant with daily revenue of
$1,000 today. The value of the dollar today is quite different from what it was in
1954. Generally, inflation causes the purchasing power of a dollar today to be less
than that of a dollar from a previous time period. While this concept of changing
value is useful in the area of finance, it is vexing when one wants to answer the
simple question, “Am I doing as well today as I was doing five years ago?”
Alternatively, consider the problem of a multiunit manager. Two units sell tacos
on either side of a large city. One uses $500 worth of food products each day; the
other unit uses $600 worth of food products each day. Does the second unit use
an additional $100 worth of food each day because it has more guests or because
it is less efficient in utilizing the food?
The answer to all of the preceding questions, and many more, can be determined if we use percentages to relate expenses incurred to revenue generated. Percentage calculations are important for at least two major reasons. First and foremost, percentages are the most common standard used for evaluating costs in the
foodservice industry. Therefore, knowledge of what a percent is and how it is calculated is vital. Second, as a manager in the foodservice industry, you will be evaluated primarily on your ability to compute, analyze, and control these percent figures. While it is true that many basic management tools such as Microsoft Excel,
Lotus, and other software programs will “compute” percentages for you, it is important that you understand what the percentages mean and how they should be
interpreted. Percent calculations are used extensively in this text and are a cornerstone of any effective cost control system.

PERCENT REVIEW
Understanding percents and how they are mathematically computed is important.
The following review may be helpful for some readers. If you thoroughly understand the percent concept, you may skip this section and the Computing Percent
section and proceed directly to the Using Percent section.
Percent (%) means “out of each hundred.” Thus, 10 percent would mean 10
out of each 100. If we asked how many guests would buy blueberry pie on a given
day, and the answer is 10 percent, then 10 people out of each 100 we serve will
select blueberry pie. If 52 percent of your employees are female, then 52 out of
each 100 employees are female. If 15 percent of your employees will receive a raise
this month, then 15 out of 100 employees will get their raise. Figure 1.4 shows
three ways to write a percent.
COMMON FORM
In its common form, the % sign is used to express the percentage. If we say 10 percent, then we mean “10 out of each 100” and no further explanation is necessary.
The common form, the percent, is equivalent to the same amount expressed in either the fraction or the decimal form.
9
c01.qxd
1/24/07
10
2:56 PM
Chapter 1
Page 10
Managing Revenue and Expense
FIGURE 1.4 Forms of Expressing Percent
Percent
Form
1%
10%
100%
Common
1%
10%
100%
Fraction
1/100
10/100
100/100
Decimal
0.01
0.10
1.00
FRACTION FORM
In fraction form, the percent is expressed as the part, or a portion of 100. Thus,
10 percent is written as 10 “over” 100 (10/100). This is simply another way of expressing the relationship between the part (10) and the whole (100).
DECIMAL FORM
A decimal is a number developed from the counting system we use. It is based on
the fact that we count to 10 then start over again. In other words, each of our major units, 10s, 100s, 1,000s, and so on, are based on the use of 10s, and each number can easily be divided by 10. Instead of using the % sign, the decimal form uses
the (.) or decimal point to express the percent relationship. Thus, 10 percent is expressed as 0.10 in decimal form. The numbers to the right of the decimal point express the percentage.
Each of these three methods of expressing percentages is used in the foodservice industry, and to be successful you must develop a clear understanding of how
a percentage is computed. Once that is known, you can express the percentage in
any form that is required or that is useful to you.

COMPUTING PERCENT
To determine what percent one number is of another number, divide the number
that is the part by the number that is the whole. Usually, but not always, this means
dividing the smaller number by the larger number. For example, assume that 840
guests were served during a banquet at your hotel; 420 of them asked for coffee
with their meal. To find what percent of your guests ordered coffee, divide the part
(420) by the whole (840).
The process looks as follows:
Part
Percent
Whole
or
420
0.50
840
c01.qxd
1/24/07
2:56 PM
Page 11
Getting Started
Thus, 50% (common form), 50/100 (fraction form), or 0.50 (decimal form) represents the proportion of people at the banquet who ordered coffee. A large number
of new foodservice managers have difficulty computing percent figures. It is easy to
forget which number goes “on the top” and which number goes “on the bottom.”
In general, if you attempt to compute a percentage and get a whole number (a number larger than 1), either a mistake has been made or costs are extremely high!
Many people also become confused when converting from one form of percent
to another. If that is a problem, remember the following conversion rules:
1. To convert from common form to decimal form, move the decimal two
places to the left, that is, 50.00% 0.50.
2. To convert from decimal form to common form, move the decimal two
places to the right, that is, 0.40 40.00%.
In a restaurant, the “whole” is usually a revenue figure. Expenses and profits
are the “parts,” which are usually expressed in terms of a percent. It is interesting
to note that, in the United States, the same system in use for our numbers is in use
for our money. Each dime contains 10 pennies, each dollar contains 10 dimes, and
so on. Thus when discussing money, it is true that a percent refers to “cents out of
each dollar” as well as “out of each 100 dollars.” When we say 10 percent of a
dollar, we mean 10 cents, or “10 cents out of each dollar.” Likewise, 25 percent
of a dollar represents 25 cents, 50 percent of a dollar represents 50 cents, and 100
percent of a dollar represents $1.00.
Sometimes, when using percent to express the relationship between portions of a
dollar and the whole, we find that the part is, indeed, larger than the whole.
Figure 1.5 demonstrates the three possibilities that exist when computing a percentage.
Great care must always be taken when computing percents, so that the percent arrived
at is of help to you in your work and does not represent an error in mathematics.

USING PERCENT
Consider a restaurant that you are operating. Imagine that your revenues for a week
are in the amount of $1,600. Expenses for the same week are $1,200. Given these
FIGURE 1.5 Percent Computation
Possibilities
Examples
Results
Part is smaller than the whole
61
61%
100
Always less than 100%
Part is equal to the whole
35
100%
35
Always equals 100%
Part is larger than the whole
125
250%
50
Always greater than 100%
11
c01.qxd
1/24/07
12
2:56 PM
Chapter 1
Page 12
Managing Revenue and Expense
facts and the information presented earlier in this chapter, your profit formula for
the week would look as follows:
Revenue Expense Profit
or
$1,600 $1,200 $400
If you had planned for a $500 profit for the week, you would have been “short.”
Using the alternative profit formula presented earlier, you would find:
Revenue Desired Profit Ideal Expense
or
$1,600 $500 $1,100
Note that expense in this example ($1,200) exceeds ideal expense ($1,100) and,
thus, too little profit was achieved.
These numbers can also be expressed in terms of percent. If we want to know
what percent of our revenue went to pay for our expenses, we would compute it
as follows:
Expense
Expense %
Revenue
or
$1,200
0.75, or 75%
$1,600
Another way to state this relationship is to say that each dollar of revenue costs
75 cents to produce. Also, each revenue dollar taken in results in 25 cents profit:
$1.00 Revenue $0.75 Expense $0.25 Profit
As long as expense is smaller than revenue, some profit will be generated, even
if it is not as much as you had planned. You can compute profit percent using the
following formula:
Profit
Profit %
Revenue
In our example:
$400 Profit
25% Profit
$1,600 Revenue
c01.qxd
1/24/07
2:56 PM
Page 13
Understanding the Income (Profit and Loss) Statement
We can compute what we had planned our profit percent to be by dividing desired profit ($500) by revenue ($1,600):
$500 Desired Profit
31.25% Desired Profit
$1,600 Revenue
In simple terms, we had hoped to make 31.25 percent profit, but instead made
only 25 percent profit. Excess costs could account for the difference. If these costs
could be identified and corrected, we could perhaps achieve the desired profit percentage. Most foodservice operators compute many cost percentages, not just one.
The major cost divisions used in foodservice are as follows:
1. Food and beverage cost
2. Labor cost
3. Other expense
A modified profit formula, therefore, looks as follows:
Revenue (Food and Beverage Cost Labor Cost Other Expenses) Profit
Put in another format, the equation looks as follows:
Revenue (100%)
Food and Beverage Cost %
Labor Cost %
Other Expense %
Profit %
Regardless of the approach used, foodservice managers must evaluate their expenses, and they use percents to do so.
UNDERSTANDING THE INCOME
(PROFIT AND LOSS) STATEMENT
Consider Figure 1.6, an example from Pat’s Steakhouse. All of Pat’s expenses and
profits can be computed as percents by using the revenue figure, $400,000, as the
whole, with expenses and profit representing the parts as on the following page:
13
c01.qxd
1/24/07
14
2:56 PM
Chapter 1
Page 14
Managing Revenue and Expense
Food and Beverage Cost
Food Beverage Cost %
Revenue
or
$150,000
37.50%
$400,000
Labor Cost
Labor Cost %
Revenue
or
$175,000
43.75%
$400,000
Other Expenses
Other Expense %
Revenue
or
$25,000
6.25%
$400,000
Total Expense
Total Expense %
Revenue
or
$350,000
87.50%
$400,000
Profit
Profit %
Revenue
or
$50,000
12.50%
$400,000
FIGURE 1.6 Pat’s Steakhouse
Revenue
Expenses
Food and Beverage Cost
Labor Cost
Other Expense
Total Expense
Profit
$400,000
$150,000
175,000
25,000

$350,000

$ 50,000
c01.qxd
1/24/07
2:56 PM
Page 15
Understanding the Income (Profit and Loss) Statement
FIGURE 1.7 Pat’s Steakhouse P&L
Revenue
$400,000
Food and Beverage Cost
100%
$150,000
37.50%
175,000
43.75%
25,000
6.25%
Labor Cost
Other Expense
Total Expense
$350,000

$ 50,000
Profit
87.50%

12.50%
An accounting tool that details revenue, expenses, and profit for a given period of time, is called the income statement, which is commonly called the profitand-loss statement (P&L). It lists revenue, food and beverage cost, labor cost, and
other expense. The P&L also identifies profits since, as you recall, profits are generated by the formula:
Revenue Expense Profit
Figure 1.7 is a simplified P&L statement for Pat’s Steakhouse. Note the similarity to Figure 1.6. This time, however, expenses and profit are expressed in terms
of both dollar amount and percent of revenue.
Another way of looking at Pat’s P&L is shown in Figure 1.8. The pieces of the
pie represent Pat’s cost and profit categories. Costs and profit total 100 percent,
which is equal to Pat’s total revenues. To put it in another way, out of every revenue dollar that Pat generates, 100 percent is designated as either costs or profit.
Pat knows from the P&L that revenues represent 100 percent of the total dollars available to cover expenses and provide for a profit. Food and beverage cost
FIGURE 1.8 Pat’s Steakhouse Costs and Profit as a Percentage of Revenues
Profit
12.50%
Other expenses
6.25%
Labor cost
43.75%
Food and
beverage cost
37.50%
15
c01.qxd
1/24/07
16
2:56 PM
Chapter 1
Page 16
Managing Revenue and Expense
is 37.50 percent, and labor cost percentage in the steakhouse equals 43.75 percent.
Other expense percentage equals 6.25 percent, and her total expense percent is
87.50 percent (37.50 43.75 6.25 87.50 percent). The steakhouse profit
equals 12.50 percent. Thus, for each dollar in revenue, Pat earns a profit of
12.50 cents. Pat’s revenue, expense, and profit information is contained in the
steakhouse’s P&L.
In restaurants that serve alcohol, food costs and beverage costs are most often
separated into two categories in the P&L. Likewise, food revenues and beverage
revenues are reported separately. This is done so that the food cost can be compared to food revenues, and the beverage cost can be compared to beverage revenues. Suppose, for example, that one manager is responsible for controlling food
cost percent in the restaurant and another manager is responsible for controlling
beverage cost percent in the bar. Separation of these two “departments,” then, is
especially helpful when evaluating the performance of these two managers. It also
helps these managers to quickly identify and anticipate problems associated with
their costs and identify ways to correct these problems.
The P&L is important because it indicates the efficiency and profitability of an
operation. Because so many individuals and groups are interested in a food facility’s performance, it is important that the P&L and other financial statements are
prepared in a manner that is consistent with other facilities. If, for example, you
own two Italian restaurants, it would be very confusing if one of your managers
used a particular method for preparing his or her unit’s P&L, while the other manager used an entirely different method. You, your investors, your accountant, governmental taxing entities, and your creditors may all be interested in your operational results, and unless you report and account for these in a manner they can
easily understand, confusion may result.
To avoid such a set of circumstances, the Uniform System of Accounts is used
to report financial results in most foodservice units. This system was created to ensure uniform reporting of financial results. A Uniform System of Accounts exists
for restaurants, another for hotels, and another for clubs. The Uniform System of
Accounts will be discussed in greater detail later in this text.
The primary purpose of preparing a P&L is to identify revenue, expenses,
and profits for a given time period. As a manager, your efforts, more than any
other factor, will influence your operation’s profitability. Good managers provide excellent value to their guests, which cause guests to return, and thus increases revenue. In addition, good managers know how to analyze, manage, and
control their costs. For these managers, expenses are held to the amount that
was preplanned. The result is the desired profit level. Good managers influence
the success of their units and their own employees. The results for them personally are promotions, added responsibilities, and salary increases. If you wish
to succeed in the hospitality industry, it is important to remember that your performance will be evaluated primarily on your ability to achieve the profit levels
your operation has planned for.
In addition to your own efforts, many factors influence profit dollars and profit
percent, and you must be aware, and in control, of all of them. All of the factors
that impact profit percent are discussed in later chapters of this text.
c01.qxd
1/24/07
2:56 PM
Page 17
Understanding the Budget
17
Fun on the Web!
www.restaurant.org. Link to “Industry Research,” then “Reports” to see how you can get
industry averages for P&Ls.
UNDERSTANDING THE BUDGET
Some foodservice managers do not generate revenue on a daily basis. Consider,
for a moment, the foodservice manager at a summer camp run for children. In this
case, parents pay a fixed fee to cover housing, activities, and meals for a set period
of time. The foodservice director, in this situation, is just one of several managers
who must share this revenue. If too many dollars are spent on providing housing
or play activities, too few dollars may be available to provide an adequate quantity or quality of meals. On the other hand, if too many dollars are spent on providing foodservice, there may not be enough left to cover other needed expense areas. In a case like this, foodservice operators should prepare a budget. A budget is
simply an estimate of projected revenue, expense, and profit. In some hospitality
companies, the budget is known as the plan, referring to the fact that the budget
details the operation’s estimated, or “planned for,” revenue and expense for a given
accounting period. An accounting period is an hour, day, week, or month in which
an operator wishes to analyze revenue and expenses.
All effective managers, whether in the commercial (for profit) or nonprofit sector, use budgets. Budgeting is simply planning for revenue, expense, and profit. If
these items are planned for, you can determine how close your actual performance
is to your plan or budget. In the summer camp example, the following information
is known:
1. Number of campers: 180
2. Number of meals served to each camper per day: 3
3. Length of campers’ stay: 7 days
With 180 campers eating 3 meals each day for 7 days, 3,780 meals will be
served (180 campers 3 meals per day 7 days 3,780 meals).
Generally, in a case such as the summer camp, the foodservice director is given
a dollar amount that represents the allowed expense for each meal to be served.
For example, if $1.85 per meal is the amount budgeted for this director, the total
revenue budget would equal $6,993 ($1.85 per meal 3,780 meals $6,993).
From this figure, an expense budget can begin to be developed. In this case, we
are interested in the amount of expenses budgeted and the amount actually spent
on expenses. Equally important, we would be interested in the percent of the budget
actually used, a concept known as performance to budget.
c01.qxd
1/24/07
18
2:56 PM
Chapter 1
Page 18
Managing Revenue and Expense
A simple example may help to firmly establish the idea of budget and performance to budget. Assume that a child has $1.00 per day to spend on candy. On
Monday morning, the child’s parents give the child $1.00 for each day of the week,
or $7.00 total ($1.00 7 days $7.00). If the child spends only $ 1.00 per day,
he or she will be able to buy candy all week. If, however, too much is spent in any
one day, there may not be any money left at the end of the week. Too ensure a
week of candy eating, a good “candy purchasing” pattern could be created, such
as the one in Figure 1.9. The “% of Total” column is computed by dividing $1.00
(the part) by $7.00 (the whole). Notice that we can determine the percent of total
that should have been spent by any given day; that is, each day equals 14.28 percent, or 1/7 of the total.
This same logic applies to the foodservice operation. Figure 1.10 represents
commonly used budget periods and their accompanying proportion amount.
Many foodservice operations are changing from “one month” budget periods
to periods of 28 days. The 28-day-period approach divides a year into 13 equal periods of 28 days each. Therefore, each period has four Mondays, four Tuesdays,
four Wednesdays, and so on. This helps the manager compare performance from
one period to the next without having to compensate for “extra days” in any one
period. The downside of this approach is that you can no longer talk about the
month of March, for example, because “period 3” would occur during part of February and part of March. Although using the 28-day-period approach takes a while
to get used to, it is an effective way to measure performance and plan from period
to period.
For example, in Camp Eureka, after one week’s camping was completed, we
found the results shown in Figure 1.11.
We can use the expense records from the previous summer as well as our solid
industry knowledge and experience to develop expense budget figures for this summer. In this case, we are interested in both our plan (budget) and our actual performance. Figure 1.12 shows a performance-to-budget summary with revenue and
FIGURE 1.9 Candy Purchases
Weekday
Budgeted Amount
% of Total
Monday
$1.00
14.28%
Tuesday
$1.00
14.28%
Wednesday
$1.00
14.28%
Thursday
$1.00
14.28%
Friday
$1.00
14.28%
Saturday
$1.00
14.28%
Sunday
$1.00
14.28%
Total
$7.00
100.00%
c01.qxd
1/24/07
2:56 PM
Page 19
Understanding the Budget
FIGURE 1.10
Common Foodservice Budget Periods
Budget Period
Portion
% of Total
One week
One day
1/7 or 14.3%
Two-week period
One day
One week
1/14 or 7.1%
1/2 or 50.0%
One month
28 days
30 days
One week
One day
One day
1/4 or 25.0%
1/28 or 3.6%
1/30 or 3.3%
One day
1/31 or 3.2%
Six months
One month
1/6 or 16.7%
One year
One day
One week
One month
1/365 or 0.3%
1/52 or 1.9%
1/12 or 8.3%
31 days
FIGURE 1.11
Camp Eureka One-Week Budget
Item
Budget
Actual
3,780
3,700
Revenue
Food Expense
Labor Expense
$6,993
$2,600
$2,800
$6,993
$2,400
$2,900
Other Expense
$ 700
$ 965
$ 893
$ 728
Meals Served
Profit
FIGURE 1.12
Camp Eureka Performance to Budget Summary
Item
Budget
Actual
3,780
3,700
97.9%
Revenue
Food Expense
Labor Expense
Other Expense
$6,993
$2,600
$2,800
$ 700
$6,993
$2,400
$2,900
$ 965
100.0%
92.3%
103.6%
137.9%
Total Expense
$6,100
$6,265
102.7%
Profit
$ 893
$ 728
81.5%
Meals Served
% of Budget
19
c01.qxd
1/24/07
20
2:56 PM
Chapter 1
Page 20
Managing Revenue and Expense
expenses presented in terms of both the budget amount and the actual amount. In
all cases, percentages are used to compare actual expense with the budgeted amount,
using the formula:
Actual
% of Budget
Budget
In this example, revenue remained the same although some campers skipped (or
slept through!) some of their meals. This is often the case when one fee or price buys
a number of meals, whether they are eaten or not. In some other cases, managers will
only receive revenue for meals actually served. This, of course, is true in a traditional
restaurant setting. In either case, budgeted amount, actual expense, and the concept
of percent of budget, or performance to budget, are important management tools. In
looking at the Camp Eureka performance-to-budget summary, we can see that the
manager served fewer meals than planned and, thus, spent less on food than estimated,
but spent more on labor than originally thought necessary. In addition, much more
was spent than estimated for other expenses (137.9 percent of the budgeted amount).
As a result, the profit dollars were lower than planned. This manager has some problems, but they are not everywhere in the operation.
How do we know that? If our budget was accurate and we are within reasonable limits of our budget, we are said to be “in line,” or in compliance, with our
budget, because it is difficult to budget exact revenue and expenses. If, as management, we decided that plus (more than) or minus (less than) 10 percent of budget
in each category would be considered in line, or acceptable, then an examination
of Figure 1.12 shows we are in line with regard to meals served, food expense, labor expense, and total expense. We are not in line with other expenses because they
were 137.9 percent of the amount originally planned. Thus, they far exceed the
10 percent variation that was reasonably allowed. Profit also was outside the acceptable boundary we established because it was only 81.5 percent of the amount
budgeted. Note that figures over 100 percent mean too much (other expense), while
figures below 100 percent mean too little (profit).
Many operators use the concept of “significant” variation to determine whether
a cost control problem exists. In this case, a significant variation is any variation
in expected costs that management feels is an area of concern. This variation can
be caused by costs that were either higher or lower than the amount originally budgeted or planned for.
When you manage …
Purchase answer to see full
attachment

---

Why Choose Us

• 100% non-plagiarized Papers
• 24/7 /365 Service Available
• Affordable Prices
• Any Paper, Urgency, and Subject
• Will complete your papers in 6 hours
• On-time Delivery
• Money-back and Privacy guarantees
• Unlimited Amendments upon request
• Satisfaction guarantee

How it Works

• Click on the “Place Order” tab at the top menu or “Order Now” icon at the bottom and a new page will appear with an order form to be filled.
• Fill in your paper’s requirements in the "PAPER DETAILS" section.
• Fill in your paper’s academic level, deadline, and the required number of pages from the drop-down menus.
• Click “CREATE ACCOUNT & SIGN IN” to enter your registration details and get an account with us for record-keeping and then, click on “PROCEED TO CHECKOUT” at the bottom of the page.
• From there, the payment sections will show, follow the guided payment process and your order will be available for our writing team to work on it.