Cost Control

Chapter 8

Controlling Other Expenses

Main Ideas

Managing Other Expenses Fixed, Variable, and Mixed Other Expenses Controllable and Noncontrollable Other Expenses Monitoring Other Expenses Reducing Other Expenses Technology Tools

Managing Other Expenses

Other expenses are those items that are neither food, beverage, nor labor.

Other expenses can account for a significant financial expenditure.

You must look for ways to control all of your expenses, but sometimes the environment in which you operate will act upon your facility to influence some of your costs in positive or negative ways.

Managing Other Expenses

In the past, serving water to each guest upon arrival in a restaurant was simply SOP (standard operating procedure) for many foodservice operations. The rising cost of energy has caused many foodservice operations to implement a policy of serving water on request rather than with each order.

Energy conservation and waste reduction are two examples of attempts to control and reduce other expenses.

Source reduction is working with food manufactures and wholesalers to reduce product packaging waste.

Managing Other Expenses

Each operation will have its own unique list of required other expenses.

Other expenses can constitute almost anything in the foodservice business.

Groupings, if used, should make sense to the operator and should be specific enough to let the operator know what is in each category.

1. Operators can use their own categories (names or numbers), or follow those used in the Uniform System of Accounts for Restaurants (USAR) recommended for use by the National Restaurant Association.

2. The lists are on pages 330-334

Managing Other Expenses

While there are many ways in which to consider other expenses, two views of these costs are particularly useful for the foodservice manager.

They are:

1. Fixed, variable, or mixed

2. Controllable or noncontrollable

Fixed, Variable, and Mixed Other Expenses

A fixed expense is one that remains constant despite increases or decreases in sales volume.

A variable expense is one that generally increases as sales volume increases, and decreases as sales volume decreases.

A mixed expense is one that has properties of both fixed and variable expenses.

Question #1 – Variable vs. Fixed expenses

Fixed, Variable, and Mixed Other Expenses

The following shows how fixed, variable, and mixed expenses behave as sales volume increases.

Expense As a Percentage of Sales

Total Dollars

Fixed Expense

Decreases Remains the Same

Variable Expense

Remains the Same Increases

Mixed Expense

Decreases Increases

Fixed, Variable, and Mixed Other Expenses

Percents can be computed for other expenses as follows:

If an operator feels that a fixed expense percentage is too high, he or she must either increase sales or negotiate better rates.

When a fixed expense is too high or a variable expense is out of control, that management should act. This is called management by exception.

Question #2 – Example of Cost % for other expenses

Other Expense

Total Sales = Other Expense Cost %

Rent Expense

Total Sales = Rent Cost %

Controllable and Noncontrollable Other Expenses

A noncontrollable expense is one that the manager can neither increase nor decrease

A controllable expense is one in which decisions made by the manager can have an effect of either increasing or reducing the expense.

Management should focus its attention on controllable rather than noncontrollable expenses.

Question #3 – Controllable vs. Noncontrollable expenses

Monitoring Other Expenses

When managing other expenses, two control and monitoring alternatives are available. They are:

1. Other expense cost %

2. Other expense cost per guest

The cost per guest formula is of value when management believes it can be helpful, or the lack of sales figure makes the computation of other expense percentage impossible.

 Other Expenses

Total Sales = Other Expense Cost %

 Other Expense

Number of Guests Served = Other Expense Cost Per Guest

Reducing Other Expenses

It is useful to break down other expenses into four categories: food and beverage, labor, facility maintenance, and occupancy when devising strategies to lower costs.

In general, fixed costs related to food and beverage operations can only be reduced when measuring them as a percent of total sales. This can be done only by increasing the total sales figure.

Labor related expenses can also be considered partially fixed and partially variable.

To reduce costs related to labor, it is necessary to eliminate wasteful labor-related expenses.

However, if an operator attempts to reduce costs too much he or she may find the best workers employed elsewhere.

Reducing employee benefits while attempting to retain a well-qualified workforce is simply management at its worst.

Reducing Other Expenses

A properly designed and implemented preventative maintenance program can go a long way toward reducing equipment failure and thus decreasing equipment and facility-related costs.

Proper care of mechanical equipment prolongs its life and reduces operational costs.

One way to help ensure that costs are as low as possible is to use a competitive bid process before awarding contracts for serviced you require.

In the area of maintenance contracts, for areas such as kitchen or mechanical equipment, elevators, or grounds, it is recommended that these contracts be bid at least once per year.

Air-conditioning, plumbing, heating and refrigerated units should be inspected at least yearly, and kitchen equipment should be inspected at least monthly for purposes of preventative maintenance.

Reducing Other Expenses

Occupancy costs refer to those expenses incurred by the foodservice unit that are related to the occupancy of and payment for the physical facility it occupies.

For the foodservice manager who is not the owner, the majority of occupancy costs will be noncontrollable.

The owner should find ways to control occupancy costs such as rent and interest on debt, if possible.

If occupancy costs are unrealistically high, no amount of effective cost control can help “save” the operation’s profitability.

Technology Tools Depending upon the specific food service operation, these costs can

represent a significant portion of the operation’s total expense requirements. As a result, controlling these costs is just as important as controlling food and labor-related costs.

Software and hardware that can be purchased to assist in this area include applications that relate to:

1. Assessing and monitoring utilities cost2. Minimizing energy costs via the use of motion-activated sensors3. Managing equipment maintenance records4. Tracking marketing costs/benefits5. Menu and promotional materials printing - hardware and software6. Analysis of communications costs (telephone tolls)7. Analysis of all other expense costs on a per-guest basis8. Analysis of all other expense costs on a “cost per dollar sale” basis

Technology Tools

9. Comparing building/contents insurance costs across alternative insurance providers

10. Software designed to assist in the preparation of the income statement, balance sheet, and the statement of cash flows.

11. Income tax management

12. Income tax filing

At the minimum, most independent operators should computerize their records related to taxes at all levels to ensure accuracy, safekeeping, and timeliness of required filings.