Chapter Outline: Show
Learning Objectives:
Key Terms:
Which line items are considered “Other Expenses”?The Uniform System of Accounts for Restaurants published by the National Restaurant Association provides a standardized account classification system that is used by most restaurant operators. Other Expenses are categorized as controllable or non-controllable. The Uniform System advocates the following presentation for the Statement of Profit and Loss or “Income Statement” (Other Expenses are highlighted): Revenue
The Other Expenses category regroups all expenses that do not directly relate to Cost of Goods Sold and Employee Payroll & Benefits. A detailed list of Other Expenses line items is presented in the list below. However, restaurants have customized lists that suit the nature of their operations. On-site foodservice operations, such as those in education, healthcare, etc. may not follow the Uniform System of Accounts for Restaurants, but all segments in the industry have some accounting system that separates food & beverage, labor and “other” expenses. Those foodservice operations in non-profit settings may not pay occupancy expenses and taxes, but they may have expenses considered “indirect” costs or other similar categories. No matter what the category of operation, other expenses are part of the picture and must be controlled to manage the “bottom line.” Controllable Expenses Controllable expenses adjust as a result of managerial decisions. These costs can be increased or decreased within a reasonably short period and include such categories as:
As an example “Flowers and Decorations”, which is a line item under Direct Operating Expenses, is a controllable expense insofar as the related cost is directly under the control of a manager who can modify the amount at will. Non-Controllable Expenses Non-controllable expenses tend to be fixed in nature and cannot usually be changed within the normal rhythm of business (or fiscal year) and include costs under the following categories:
Rent comes under “Occupancy Cost” and is an example of a non-controllable cost. While it is possible to renegotiate more favorable conditions, the outcome would take a long time and involve the decisions of multiple stakeholders. Other Expenses: Controllable:
Other Expenses: Non Controllable
The list is provided as an example, restaurants have their customized list that reflects their operation. Fixed versus Variable ExpensesFor management and control purposes, expenses are further categorized as fixed, variable or semi-variable depending on how they vary as the activity level of an operation fluctuates:
Managing and Controlling Other Expenses Other Expenses are expressed in either Percentage of Total Sales: Other Expenses ($) divided by Total Sales ($) equals Other Expenses % and/or Dollar Cost per Guest: Other Expenses ($) divided by Number of Guests equals $ Cost per Guest Individually, the “other expenses” line items represent a small percentage of total revenues and are often overlooked. According to a study by the National Restaurant Association, Direct Operating Expenses (c.f. previous definition) account for 3% to 5% of revenues. However, restaurant operations are low margin businesses and 3% to 5% of revenues could also represent the net income (or profit). Therefore, restaurant managers need to pay attention to each line of expense. According to the formula stated above, in order to reduce the other expenses percentage, either sales have to go up or expenses have to decrease. Controlling other expenses requires managers to monitor and reduce the variable portion of these other costs where appropriate. However, controllable expense items are mostly semi-variable. In an on-going operation, some costs will decrease but a fixed portion will continue to occur when the activity slows down or even closes. Maintenance and reduced cleaning schedules will still be enforced, advertising will be reduced but not eliminated, guest supplies will be stocked for re-opening, a person will need to keep on taking reservations, security lights and refrigeration will still be switched on. As previously mentioned, variable costs are influenced by managerial decisions and policy. Therefore, establishing and enforcing operating procedures is an essential part of controlling other expenses. Example: Utility Policies and Expenses14.1 Energy Consumption - Food Service
Utilities in restaurants represent 3.5% to 5.5% of revenues. Cooking-related activities (water heating, cooking, and refrigeration) account for approximately 70% of total energy expenses. Restaurants manage energy costs by combining proper management and maintenance policies with technology. Checklists are provided to employees responsible for turning off cooking equipment, exhaust fans, lights, computers, and office equipment. The following checklist is an example of an energy-saving program. Equipment and Energy Saving Program
Longer-Term Solutions
The above energy-saving program is an example of the type of program and decisions that foodservice managers need to consider in controlling costs. Procurement and buying decisions for direct operating expenses (see Table 14.1) need to be carefully researched and considered to be sure that other expenses that are controllable are being managed as carefully as possible. Contracting Food service operations farm out numerous services to suppliers. These may include maintenance (kitchen equipment, building mechanical, etc.), pest control, grounds services (landscaping, snow removal), uniform rental and cleaning, insurance, communication, printed material, and various guest supplies. To ensure that the operation benefits from the most competitive rates, contracts should be awarded through a request for proposal (RFP) or bid process and re-examined periodically. Technology Tools Restaurant operations are increasingly reliant on technology for the front of the house operations with the use of such systems as reservation management, kiosks and tabletop tablets, digital point of sales, and loyalty programs, or back of the house with inventory and ordering systems, energy management, maintenance records, and scheduling. While technology assists management decision processes optimizing revenues and expenses, it also generates significant costs (investment, equipment and software maintenance and upgrade, obsolescence, etc.) and a related investment should be the subject of a detailed cost/benefit analysis. Occupancy Costs & Interest Expense Occupancy and Interest expenses include such items as rent (ground, facility, parking), common area maintenance, insurance of building and contents, taxes (municipal, personal property, real-estate) and interest expenses on long-term debt (generally mortgages.) Occupancy and interest expense, therefore, depend on the ownership structure of the operation. Does the operator own or lease the facility? If owned, is the mortgage paid-off? This expense category is fixed and non-controllable. It can only be changed in the long run through lease renegotiations, loan refinancing or repayment, or an appeal for real estate tax revision. If the foodservice operation is part of a non-profit business or institution, indirect costs and budget categories that cover overhead costs may be beyond the control of the foodservice director, but they are still costs that need to be covered by revenue generated by the operation. A note of caution:
It’s a Constant Balancing Act Controlling expenses consist of aligning an operation’s expense level with the service standard and price point that is advertised (and hopefully delivered) to the guests. Therefore, proper control requires a manager to forecast the desirable expense level and benchmark the actual costs against forecasts that are materialized in a budget (c.f. Budgeting chapter). It’s a managerial skill that takes experience and practice to develop. Review Questions
Review ExercisesWhat is the manager of a profit center not responsible for quizlet?The manager of a profit center DOES NOT MAKE DECISIONS CONCERNING THE FIXED ASSETS INVESTED IN THE CENTER.
Which of the following is not one of the three primary types of responsibility centers multiple choice question?The correct answer is d.
There are three types of responsibility centers. These are the investment center, cost center, and profit center. Budget center is not a type of responsibility center.
Which of the following departments is most likely to be a profit Centre?Explanation for the correct answer: The W Grocery department or T Superstore can be termed as profit center as it can contribute the value addition as a whole new separate business and not just the unit.
Which of the following is considered a type of responsibility center?Before discussing those factors, let's explore the five types of responsibility centers: cost centers, discretionary cost centers, revenue centers, profit centers, and investment centers.
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