Cost Control Essential for Business Existence
This proposal is on “Food and Beverage cost control”, within the Plaza Hotel Curacao. It provides an in-depth look into the systems surrounding food and beverage service of the hotel. The food and beverage industry stated a cost control percentage at 30% and depicts different systems of control in order to achieve this result. Having extreme high cost control percentage means; the cost of generating a dollar become more than the value. This will ultimately lead to failure.
The research that will be lead by this proposal is to get to the core of the problem presented by the Plaza Hotel Curacao which states: “Why the food and beverage cost control % is higher than the norm given by the industry”; by means of identifying the mean factors that contribute to the cost control percentage. It is critical to this research to be able to take apart the complete food and beverage chain and depict the current situation. By doing so the missing chain links will become clear; it will be an impossible task to change the current control system for this will mean changing the way the parties directly involved in the food and beverage think. This can be an impossible task therefore recommendations to improve the current system are the only liable, efficient and effective way to get to a solution which is vital to the continuation of existences of the food and beverage service.
In conclusion the research will depict the ideal situation the Plaza Hotel Curacao will be able to implement the methods, techniques and protocol with the tools already possessed.
Contents
1. Introduction 4
2. Background Information 6
Introduction to Food and Beverage control 7
2.1 Cost Concept 7
2.2 Sales Concept 11
2.3 Control 12
Definition of control 12
Control techniques 12
Control process 14
Planning 14
3. Problem statement and Research Questions 17
Theory 17
Research problem 17
Research questions 17
Hypothesis 18
4. Research Strategy and Methods 19
4.1 Participants 19
4.2 Instrument 20
4.3 Procedure 20
6. Budget and Schedule 24
7. Qualifications 25
26
1. Introduction
Months after months the financial controller was receiving extremely high food and beverage cost control %. He was unable to explain cause of the extreme numbers, so presented the problem to be researched in order to get a better perspective, understanding and answers to what seems unexplainable.
The cost control on food and beverage is an issue must businesses that render food and beverage service talk about. Business should be able to control cost and also be able to measure them effectively. When faced with food and beverage cost control problems businesses often go for quick-fixes for example rising the selling price to cover the high-cost yet this is not always the solution. Cost control is not a project instituted in response to hard times; it should place a premium on getting the greatest value for the least cost in every aspect of the food and beverage rendering business [1] .
The food and beverage service operation industry measure the cost control in percentages. Food, beverage and labor are given its own benchmarking percentage of what the industry considers being healthy. The cost control percentage give an indication of the total cost of all the food or beverage or labor should be given each florin generated. In order to make the table below useful some adaption needed to be made [2] .
The research will be limited to the food and beverage cost control for the payroll didn’t present a problem at the time. All the department that contributes to the food and beverage cost control are taken apart and analyzed. A ideal situation for both the food and beverage cost control will be presented for a complete overhaul will mean changing employees, supervisors and management way of thinking; however adapting and improving current cost control operations will lead to a more efficient business.
2. Background Information
The topic food, beverage and labor cost control has been researched in many different aspects over the years. In all food and/or beverage service operations cost control % is an everyday topic. The starting point no matter the type of business is that managers must understand and manage the costs associated with the running of a business. A well known fact within the food and/or beverage service industry is the difference between success and failure is in essence 3 percent of sales (Pavesic, 1998) [3] . After expenses and taxes are paid, operations showing profits have bottom lines ranging from 0.5 to 3 percent of sales. This small percentage is the difference going out of business and being a solvent operation. Food and/or beverage operations have a complex market to conquer, and the competition is far too great. It involves taking risk and having a 1 to 20 chance of getting the initiation investment back in five years, according to the United States government figures. It is not only important to plan but also to assess all possible scenarios in which failure is imminent and be able to minimize the loss. Some researchers state that one should be a bit of a psychic in order to run a successful business however the key to success is understanding numbers. “Cost control is a number game and understanding the number puts the managers in control” (Geneen, 1984) [4] Managers how understand the number do not see numbers but see words, signals and oppertunities. Cost control is the survival kit; it is not a one-time program or an exercise to be done only when opening an operation. It is an ongoing and present throughout the existents of the organization. The primary purpose of cost control is not to minimize losses; it is to maximize profits. It should not be used as a response to hard times but a culture embedded in the everyday practice of the organization. Any operations success does not and will not happen by chance, but as the result of some very careful advance planning.
Introduction to Food and Beverage control
2.1 Cost Concept [5]
The word cost in cost control is vital to a business. All businesses are interested in measuring their cost. Cost is often defined as the use of a recourse that has a financial consequence [6] . In terms of cost control in the food and beverage business, cost is defined as “the expense to a hotel or restaurant of goods or services when the goods are consumed or the services delivered” [7] .
Costs can have a direct relation to the product or service a business provides, while other costs that occur can appear not to have a direct relation to the product provided or service rendered. Other times a cost can be cost yet not an expense. Some costs have to be allocated or estimated. There are different ways of categorizing costs according to their relation to the output as well as according to the context in which they are used.
Cost categories and specific recognition of each category:
Fixed cost:
It is not influenced by the increase or decrease of sales volume;
Unchanged over short-term run.
Variable cost:
Fluctuate by the increase or decrease of sales revenue;
Constantly shifting.
Important to note that the term “fixed” should never be considered static or unchanging, for the reason that the term simply indicates any changes that can occur in such costs are related only indirectly or vaguely to changes in the volume.
The following cost categories are also important to know when dealing with the food and beverage cost control:
Controllable cost:
Can be influenced by the manager of the department/division;
Changed over short-term run.
Uncontrollable cost:
Cannot be influence the manager of the department/division;
Unchanged over short-term run.
Direct cost:
Can be both variable and controllable (in some cases);
Traceable in the service rendered;
Identifiable with a particular department or division.
Indirect cost:
Also referred to as undistributed costs;
It is untraceable in the service rendered;
Cannot be identifiable with a particular department or division.
Prime cost is a cost type; it represents the largest portion of total cost for almost all foodservice operations. Prime is therefore of great interest to managers and owners. Therefore it is important to be mentioned.
Prime cost:
Also referred to as costs of materials and labor: food, beverages and payroll;
Used to monitoring a restaurant;
Should run in the midst of 60% to 69% of sales.
The cost-to-sales ratio discusses the relation between the costs and sales and is also referred to as the cost per dollar of sale, or the ratio of cost to sales. The formula used to calculate the cost-to-sales ratio is:
Cost / Sales = Cost per Dollar of Sale
This formula can be extended to show the following relationships:
(Food Cost / Food Sales) * 100% = Food Cost %
(Beverage Cost / Beverage Sales) * 100% = Beverage Cost %
The cost information is used for several purposes in most food service businesses:
To evaluate the performance of an organizational units and managers.
To monitor the efficiency of individuals and departments.
To inform management of what expenses occurred, what incomes are being received, and whether they are within the standards or budgets.
To prevent fraud and/or pilfering by employee, guests, and suppliers.
To be the basis for knowing in which direction the business heading.
To emphasize prevention.
To maximize profit.
Figure 1Cost control functions
2.2 Sales Concept [8]
The term sales within the food and beverage industry are defined as “the exchange of the products and services of a restaurant, Bar, or related enterprise for value” [9] . Sales concepts in food and beverage operations can be expressed in two basic groups:
Monetary:
Total sales: Refers to the total volume of sales expressed in dollar terms.
By category
By server
By seat
Sales price: Refers to the amount charged to each customer purchasing one unit of a particular item.
Average sale: An average sale is determined by adding individual sales to determine a total and then dividing that total by the number of individual sales.
By customer
By server
Non-monetary
Total number sold: Refers to the total number of any menu-item sold in a given time period.
Covers: The term is used to describe one diner regardless of the quantity of food the customer consumes.
Total covers
Average covers
Seat turnover: Refers to the number of seats occupied during a given period divided by the number of seats available.
Sales mix: The term is used to describe the relative quantity sold of any menu item compared to other items in the same category.
2.3 Control
Definition of control
Control in cost control refers to the management attempts to influence the actions of individuals who are responsible for the performing activities, costs that come into existence, and generating revenues. Of key management responsibilities, planning and controlling play an important role in the overall cost control of a business.
Cost control is defined in the food and beverage industry as “the process used by managers to regulate costs and guard against excessive costs”. It is a process that is continuous and involves every step in the chain of purchasing, receiving, storing, issuing and preparing food and beverage for sale. In addition the process also involves the training and scheduling of personnel. Cost control methods are established depending upon the nature and span of the operation yet the principles behind the methods implied remain constant. Two of the main causes of excessive cost are inefficiency and waste [10] .
Control techniques
The following are control techniques available to a manager:
Establishing standard: are defined as rules or measures established for making comparisons and judging.
Quality standards: is a grading process.
Quantity standards: are defined as measures of weight, count, or volume used to make comparison and judgments.
Standard cost: is defined as the cost of good or services identified, approved, and accepted by management.
Establishing procedures: are the methods employed to prepare products or perform jobs.
Standards procedures: are procedures that have been established as the correct methods, routines and techniques for day-to-day operations.
Training: is a process by which employees are taught how work is to be done, given the standards and standard procedures established.
Setting examples: is when procedures are set informally and employees follow the examples set by managers.
Observing and correcting employee’s actions: is when a managers obverse the actions of all employees continually and takes the opportunity to improve the employee’s work habit and control.
Requiring records and reports: it a fact that managers/owners can be at all places all the time; their “observations” must be inferred from a variety of record and reports. It is however important to recognize that managers need timely information to determine whether or not long-range and short-range goals and sub-goals are achieved. If timely records and reports are not available to managers at the point of request, opportunity for corrective action may be missed.
Disciplining employees: is defined as action taken to give a warning, or reprimand an employee for work performance or personal behavior incompatible with established standards. Discipline is used as a control technique in many food and beverage operations.
Preparing and following budgets: is making use of historical information from the financial records of the business; in addition to the historical information managers must make an estimation of anticipated changes in costs and sales and in the business environment. A budget is defined as a financial plan and is also referred to as a realistic expression of management’s goals and objectives expressed in financial terms. [11]
Control process
In the controlling process there are two forms of control in which the management can identify the strengths it needs to maximize and the weaknesses it seeks to correct.
The management and supervision of behavior:
Deals with the attitudes and actions of the employees, for the reason that their behavior ultimately impacts the overall success of the business.
The evaluation of performance:
Evaluates the performance of the employee’s actions as the year progresses by comparing the actual result of business outcome to the predetermined standards of success.
The combination of both the cost and the control evaluation of the food and beverage are important to any foodservice business. By taking maximum advantage of the available opportunities they in turn will help in achieving the competitive edge the business desires.
Planning
“Planning is the process of setting goals, determining resource requirements and plans means of achieving goals” [12] ; it lays out a road map to guide its efforts. The management communicates plans in the form of budgets; this is important to the goal-setting function of a business for it expresses the wishes and objectives of management in specific tangible and quantitative terms. The budget also set standard to indicate the level of activity expected from each responsible person or decision unit, and the amount of resources that a responsible party should use in achieving that level of activity.
Within the planning process two types of control mechanism can be established:
Feed forward: Provides a future perspective of the direction where the business is going and by what means the business will get there, and to make clear decisions in the coordination and directing employee activities.
Feedback: Provides a basis for measuring the effectiveness of control after the implementation of business plans or budgets.
Figure 2 Feedback control Model [13]
With the information provided by the control reports managers especially those in the daily operation of the businesses can exercise more control over expenses, even if the management will not be able to foresee the timing and volume of the actual sales, the management can establish the operating rate of most of their recourses and influence the cost side [14] .
3. Problem statement and Research Questions
Theory
Food and beverage cost control are essential for they can either make or break a business. The success of a food and/or beverage service operation depends on their ability to determine and control cost. Controlling cost is essential for any food and/or beverage service operation’s overall strategic plan and it also makes it possible for the operation to effectively compete in the marketplace. Cost control is a number game however understanding the numbers put the operation in control.
Research problem
The financial controller believes that the food and beverage cost control % are higher than the norm indicated by the food and beverage industry. He wants to find out the main contribution to this problem, the allocation of food and beverage to all outlet and the revenue it generate, and the way the departments directly linked to the food and beverage cost control % are organized. He wants be able to present lower food and beverage cost control % by fixing the structural control problems within the different department. He expects an in-depth look in the problem, possible solutions and recommendations.
Research questions
Which departments are directly linked to the food and beverage cost control %?
How does each department work?
What is the current food and beverage cost control system?
How are all transactions administered?
Where is the management in the current situation?
Hypothesis
The store room and kitchen are the largest source of information on food and beverage (Q1)
Every department has a control system in place yet none are link or working properly (Q2)
Information is lost or not recorded (Q4)
Management does not know what is going on within the food and beverage operation (Q5).
4. Research Strategy and Methods
4.1 Participants
The Target Population
The target population is identified as all individuals belonging to a certain group who have a distinct set of qualities. The target population needed in this research is the departments that are directly contribute to the food and beverage cost control percentage. The departments that are food and beverage related and provide a service that leads to generating income.
The sampling Frame
The sampling frame is the full list of members of the population to be studied from which a sample can be drawn. The sampling frame is department heads of the involving departments. After identifying the target population; the actors can become known for they are the ones ultimately responsible for each department are known and contributes to the whole.
The sampling methods
For the purpose of this research a probability systematic sampling will be appropriate. The probability methods are based on the premise that each element of the target population has a known, but not necessarily equal, probability of being selected in a sample. The probability methods can be a way to minimize selection bias.
4.2 Instrument
The data collection methods
The personal semi-structured interview is the instrument used to gather relevant data in this research. It’s a form of direct communication in which an interviewer asks respondents questions in a face-to-face situation. A semi-structured interview has an overall structure and direction, but allows a lot of flexibility to include unstructured questing. The questions are a derived from the research questions to help provide a deeper insight into the research problem.
The some advantages of a personal interview are:
The opportunity for feedback
Questioning complex answers
Props and visual aids
High participation
4.3 Procedure
Data collection
Due to the exploratory nature of this research, the data required shall be collected by means of a personal interview with the department heads of the departments directly involved in the food and beverage cost control percentage. These employees have been operative at the Hotel for some years and have years of experience and knowledge on food and beverage. The interview will be semi-structured. The questions used in the interview will be only open questions. For procedures within the departments need to become known and analyzed. Following up on an interviewee’ answer to a question is will be part of this interview.
Data analysis
The hypothesis mentioned earlier in this proposal, will be known to be either rejected or accepted based upon the information gathered and analyzed. The
5. Final Report Outline
Introduction:
the company where the research as conducted will be be introducted.
Introduction to Food an Beverage control:
The fundaments of food and beverage control, control techniques, control process and planning.
Present situation of the food cost control:
The food cost control is taken apart and each aspect is analyzed to get a in-dept view of the current situation by means of an interview with important actors in the overall food and beverage cost control.
The entire process of food cost control:
Forecasting,
Menu pricing and control,
Food purchsing,
Receiving,
Food transfer,
Food storage
Food issuing
Food spoilage
Inventory control
Inventory turnover ratio
Inventory holding period
Food-cost accounting
Internal control
Food operation ratios:
The actualy findings of the food cost control % by means of calculations
Present situation of the beverage cost control:
The beverage cost control is taken apart and each aspect is analyzed to get a in-dept view of the current situation by means of an interview with important actors in the overall food and beverage cost control.
The entire process of beverage cost control:
Beverage purchase control
Beverage receiving
Beverage storage
Beverage issuing control
Beverage inventory and portion control
Beverage operation ratios:
The actualy findings of the beverage cost control % by means of calculations
Recommendation:
Ideal situation for both food and beverage cost control.
Conclusion:
Bringing all aspects together and the research to a close.
6. Budget and Schedule
7. Qualifications
Name: Luxsiaña M. Richardson
Education in Finance; currently specializing in Controlling.
Cost control is a subject in the auditing and control mayor. More emphases in being placed on the subject in the mayor of control for controllers are part of the financial process into the organization; they are dealing with the daily operation of the organization. Although food, beverage and labor cost control is part of the hospitality mayor the fundaments of cost control remains the same.
The research is extensive and different courses given in the mayor of control are helpful in conducting the research.
Courses:
Research for accounting,
Cost Management 1,
Cost Management 2,
Management control,
Accounting information system.
I consider myself qualified to a great extend by the knowledge I attained at the University in my mayor. I also consider my personal eagerness to learn more and read in order to back my thoughts on different topics, but also able to be proven wrong and gain more knowledge.
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