FOOD AND BEVERAGE

COST CONTROL
ANALYSIS
The two primary ways of maximizing profits is first to maximize revenues and second to control and
minimize expenses. Understanding the policies, procedures, and tools that are available to maximize
revenues and being able to use them effectively are valuable skills for any hospitality manager,
particularly in the rooms department. A hotel that is meeting or exceeding revenue budgets is a much
more enjoyable place to work and provides managers a better opportunity to maximize profits because
revenues are helping rather than hurting profitability. t is challenging for hospitality managers to
maximize profits when a hotel is under-performing based on its revenue budgets and forecasts.
Revenue management relies on historical room revenue information contained in a computerized
program called Yield Management or Demand Tracking. Yield management programs contain historical
information organized by day of arrival (DOA) and compare the current year's booking pace to the
historical average. The booking pace determines appropriate selling strategies that a hotel can put in
place to maximize room revenues for a specific day of arrival.
Revenue per Available Room (REVPAR) is total room revenue divided by total rooms
available. t combines room occupancy and room rate information to measure a
hotel's ability to maximize total room revenue. t is the best measurement of
maximizing total room revenue because it identifies the hotel's ability to manage both
occupancy (rooms sold) and average rate in maximizing room revenues. A hotel must
effectively manage both to maximize total room revenue. There are two formulas for
calculating REVPAR. The REVPAR calculated each way might be slightly different as
a result of rounding. Typically, the occupancy percentage is rounded to one decimal
point87.3%, for example. Average room rates are rounded to two decimals
points$76.23, for example.
< REVPAR = Occupancy Percentage * Average Room Rate
or Total Room Revenue / Total Available Rooms
< REVPAR = Total Room Revenue / Total Available Rooms
< Applying the first formula to our example results in a $66.55
REVPAR:
< $66.55 REVPAR = 87.3% Occupancy Percentage * $76.23
Average Room Rate
< . REVPAR is measured in dollars and cents or any monetary currencies.
< 2. REVPAR will always be lower than the average room rate. The only exception
is if the hotel is running at % occupancy. Then REVPAR and average room
rate will be the same. REVPAR can never be higher than the average room rate.
< 3. You need to know both the hotel occupancy percentage and the hotel
average room rate to calculate REVPAR, or
< 4. You need to know the total room revenue and the total available rooms in the
hotel to calculate REVPAR.
< REVPAR = Total Room Revenue / Total Available
Rooms
< To calculate REVPAR using this formula, we need
to know the total room revenue (a variable) for the
day and the total number of rooms in the hotel (a
constant). To continue our example, let's use a
4-room hotel.
< . Calculate rooms sold. We need this number to calculate total room revenues. We can calculate rooms sold by applying
our 87.3% occupancy percentage to our 4-room hotel:
4 Total Rooms *.873 Occupancy Percentage = 349.2 Rooms Sold
Because we cannot sell .2 of a room, we round to 349 rooms sold.
< 2. Calculate total room revenue. The formula is
Rooms Sold * Average Room Rate or 349 Rooms Sold * $76.23 Average Room Rate = $26,64 Total Room Revenue
< 3. REVPAR = Total room revenue divided by total available rooms. Make sure to use the
4 total available rooms in the hotel and not the 349 rooms sold. Our REVPAR is
$66.5 REVPAR = $26,64 Total Room Revenue / 4 Total Available Rooms
Let's compare our two REVPARs:
$66.55 REVPAR = 87.3% Occupancy Percentage * $76.23 Average Room Rate and
$66.5 REVPAR = $26,64 Total Room Revenue / 4 Total Available Rooms
< There is a difference of 4 cents. Which one is right?
The difference is the result of rounding, so technically
the $66.5 is the best answer because it is calculated
using total room revenues and total available rooms in
the hotel. However a 4 cent difference on a $66.5
< REVPAR is insignificant, so either formula can be
used. t is important to use the same REVPAR formula
to be consistent and ensure that all REVPAR
calculations are reliable and useful.
< Room occupancy rate indicates the ratio between occupied rooms and
available rooms. Two variables of room occupancy are used in tourism
statistics: net occupancy rate and gross occupancy rate. Net occupancy
rate is obtained by dividing the number of rooms occupied by the
number of rooms actually available in a given month, net of seasonal or
other temporary closures. Gross occupancy rate is calculated by
dividing the number of rooms occupied in a given month by the total
number of rooms, irrespective whether the rooms are actually available
or not.
< Average Daily Rate (commonly referred to as ADR) is a statistical unit that is often used in the lodging
industry. The number represents the average rental income per occupied room in a given time period.
ADR along with the property's occupancy are the foundations for the property's financial performance.
The ADR can be calculated by dividing the room revenue by the number of rooms sold.
< ADR is one of the commonly used financial indicators in hotel industry to measure how well a hotel
performs compared to its competitors and itself (year over year). t is common in the hotel industry for
the ADR to gradually increase year over year bringing in more revenue. However, ADR itself is not
enough to measure the performance of the hotel. One should combine ADR, occupancy and RevPAR
(revenue per available room) to make a sound judgment on hotel performance. Recently, some hotels
have adopted a new concept called BAR (best available rate) in addition to ADR.
< Average Daily Rate formula is rooms' revenue earned divided by number of rooms that earned
revenue. House use and complimentary rooms are excluded from the denominators.
< However, many hotels calculate ADR or ARR (Average Room Rate) using the formula: Room
ncome/(No. of rooms sold + Complimentary rooms) i.e. 'House Use' rooms are excluded. The
logic for including complimentary rooms is that they are given for business reasons e.g. x rooms
complimentary over y paid rooms as part of a business deal. This implies that the inclusion of this
free unit is actually an inclusion in the revenue deal. 'House Use' rooms or those occupied by
hotel employees or management are excluded as they are not available for sale and not
generating income.
< Hotel revenue divided by the number of rooms sold. Hotels use this measure to calculate the
average price at which they are booking hotels each night. So, if a hotel made $5, and sold
2 rooms, its ADR would be 5 / 2 = $25.
< The relationship among foodservice revenue, expense, and profit. As a professional foodservice
manager, you must understand the relationship that exists between controlling the areas of food
and beverage and the resulting overall success of your operation; 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.
< 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
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 itall under the same roof.
< A foodservice manager is one of the few types of
managers who actually have contact with the
ultimate customer. 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.
< This figure shows just some of the areas in which foodservice, manufacturing, and retailing
managers vary in responsibilities. n 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 provided 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. n most areas of foodservice,
excellence in operation is measured in terms of producing and delivering quality products
in a way that assures an appropriate operating profit for the owners of the business.
< 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.
< There are four major foodservice expense
categories that you must learn to control. They
are:
. Food costs
2. Beverage costs
3. Labor costs
4. Other expenses
< n the hospitality industry, we have many ways of counting or defining sales. n its
simplest case, sales are the dollar amount of revenue collected during some
predetermined time period. The time period may be an hour, shift, day, week, month, or
year. When used in this manner, sales and revenue are interchangeable terms. When
you predict the number of guests you will serve and the revenues they will generate in a
given future time period, you have created a sales forecast. You can determine your
actual sales for a current time period by using a computerized system called a point of
sales (POS) system that has been designed to provide specific sales information.
Alternatively, a standard cash register or even manually produced guest checks or head
counts will help you establish how many sales were completed.
< . Accurate revenue estimates
< 2. mproved ability to predict expenses
< 3. Greater efficiency in scheduling needed workers
< 4. Greater efficiency in scheduling menu item production schedules
< 5. Better accuracy in purchasing the correct amount of food for immediate use
< 6. mproved ability to maintain proper levels of nonperishable food inventories
< 7. mproved budgeting ability
< 8. Lower selling prices for guests because of increased operational efficiencies
< 9. ncreased dollars available for current facility maintenance and future growth
< . ncreased profit levels and stockholder value
< A sales history is the systematic recording of all
sales achieved during a predetermined time
period. A sale to date is the cumulative total of
sales reported in the unit. Sales to date is the
number we get when we add today's sales to the
sales of all prior days in the reporting period.
< An average is defined as the value arrived at by adding the quantities in a series and
dividing the sum of the quantities by the number of items in the series. Thus, the average
of 6 + 9 +8 =. The sum of the quantities in this case equals 33 (6 +9 + 8=33). The
number of items in the series is three, that is, 6, 9, and 8. Thus, 33/3=, the average of
the numbers. Sometimes, an average is referred to as the mean in a series of quantities.
The two major types of averages you are likely to encounter as a foodservice manager are
as follows:
. Fixed average
2. Rolling average
< A fixed average is an average in which you determine a
specific time period, for example, the first 4 days of a
given month, and then you compute the mean or average
amount of sales or guest activity for that period. Note that
this average is called fixed because the first 4 days of the
month will always consist of the same days and, thus, the
same revenue numbers, as shown in Figure 2.4, the sales
activity of Dan's Take-Out Coffee for the first 4 days of this
month.
< This average (total
revenue/number of days) is fixed
or constant because Dan's
management has identified 4
specific days that are used to
make up the average. The
number $427.4 may be very
useful because it might, if
management deems it so, be
used as a good predictor of the
revenue volume that should be
expected for the first 4 days of
next month.
< The rolling average is the average amount of
sales or volume over a changing time period.
Essentially, where a fixed average is computed
using a specific or constant set of data, the rolling
average is computed using data that will change
regularly.
< Note that each seven-day
period is made up of a group of
daily revenue numbers that
changes over time. The first
seven-day rolling average is
computed by summing the
seven days' revenue (revenue
on days 7=$2,828) and
dividing that number by seven
to arrive at a seven-day rolling
average of $44.
($2,828/7=$44.).
< some foodservice operations do not regularly record revenue as a measure of
their sales activity. For them, developing sales histories by recording the
number of individuals they serve each day makes the most sense. Thus, guest
counts, the term used in the hospitality industry to indicate the number of people
served is recorded on a regular basis. For many other foodservice operations,
sales are recorded in terms of sales revenue generated. Not surprisingly, you
may decide that your operation is best managed by tracking both revenue and
guest counts. n fact, if you do decide to record both revenue and guest counts,
you have the information you need to compute average sales per guest, a term
also known as check average.
< Menu Item Forecasting
The menu determines the success of most foodservice operations.
When selecting a restaurant, many guests start the process with the
question, "What do you feel like eating? For many Americans, the
answer to this question is the name of a restaurant, rather than a
menu item. n 2, the U.S. Bureau of Labor Statistics consumer
expenditure surveys reported that sales of food consumed away
from home grew an average of 5% per year in the 99s, with
annual expenditures for an average U.S. household exceeding
$2,. Projections for the decade from 2 to 2 call for
continued growth at these rates or higher. The hospitality industry is
the third largest retail industry in the United States, surpassed only
by automobiles and food stores.
< While it is the menu that determines what is to be sold
and at what price, the standardized recipe controls both
the quantity and the quality of what your kitchen will
produce. Simply put, a standardized recipe consists of
the procedures to be used in preparing and serving each
of your menu items. The standardized recipe ensures
that each time a guest orders an item from your menu,
he or she receives exactly what you intended the guest
to receive.
< Critical factors in a standardized recipe such as cooking
times and serving size have been tested and retested
and should remain constant.
< Standardized recipes must be appropriate for the
operation using them. f they are not, they will simply not
be used or followed. n general, standardized recipes
contain the following information:
< . tem name
< 2. Total yield (number of servings)
< 3. Portion size
< 4. ngredient list
< 5. Preparation/method section
< 6. Cooking time and temperature
< 7. Special instructions, if necessary
< 8. Recipe cost (optional)*
< f this standardized
recipe represents the
quality and quantity
management wishes
its guests to have
and if it is followed
carefully each time,
then guests will
indeed receive the
value management
intended.
< n fact, standardized recipes are so important that they
are the cornerstones of any serious effort to produce
consistent, high-quality food products at an established
cost. Without them, cost control efforts become nothing
more than raising selling prices, reducing portion sizes,
or lessening quality.
< When adjusting recipes for quantity (total yield), two
general methods may be employed. They are:
. Factor method
2. Percentage technique
< When using the factor method, you must use the following formula
to arrive at a recipe conversion factor:
< f, for example, our current recipe makes 5 portions, and the
number of portions we wish to make is 25, the formula would be as
follows:
< Thus, 2.5 would be the conversion factor. To produce 25 portions,
we would multiply each ingredient in the recipe by 2.5 to arrive at
the proper amount of that ingredient.
< The percentage method deals with recipe weight, rather than with a
conversion factor. n this regard, it is more accurate than using a
conversion factor alone.
< To compute the new recipe amount, we multiply the % of total figure
times the total amount required. For example, with ingredient A, the
process is:
< With knowledge of what is likely to be purchased by your
guests (sales forecast) and a firm idea of the ingredients
necessary to produce these items (standardized
recipes), you must make decisions about desired
inventory levels. A desired inventory level is simply the
answer to the question, "How much of each needed
ingredient should have on hand at anyone time?
< The ability to effectively manage the inventory process is
one of the best skills a foodservice manager can
acquire.
< . Storage capacity
< 2. tem perishability
< 3. Vendor delivery schedule
< 4. Potential savings from increased purchase size
< 5. Operating calendar
< 6. Relative importance of stock outages
< 7. Value of inventory monetary (dollars) to the
operator
< A purchase point, as it relates to inventory levels,
is simply that point in time when an item should be
reordered. This point is typically designated by
one of two methods:
. As needed (just in time)
2. Par level
< Regardless of the method used to determine inventory levels, once
the quantity needed on hand has been determined, you must then
turn your attention to the extremely important area of purchasing. f
the number of guests who will be coming is known from the sales
forecast, you know what they are likely to select from your menu,
and you have determined the proper product quantity to have on
hand, you must purchase the ingredients your staff will need to
service your guests. Purchasing is essentially a matter of
determining the following:
. What should be purchased?
2. What is the best price to pay?
3. How can a steady supply be assured?
< You, as a foodservice manager, will want to have
a detailed look at your inventory before you place
an order. A good way to make sure that you have
checked all your items in your storage areas is to
use a daily inventory sheet.
< n an ideal world, you would accept delivery of products
only during designated hours. These times would be
scheduled during your slow periods, when there would be
plenty of time for a thorough checking of the products
delivered. n fact, some operators are able to demand that
deliveries be made only at certain times; say between 9:
A.M. and :3 A.M. These are called acceptance hours. n
a case such as this, the operation may refuse to accept
delivery at any other time. Some large operations prefer to
establish times in which they will not accept deliveries, say
between : A.M. and : P.M. These are called refusal
hours.
< !roper Training
Receiving clerks should be properly trained to
verify the following product characteristics:
. Weight
2. Quantity
3. Quality
4. Price
< Some large operations use a receiving record when receiving food.
This method, while taking administrative time to both prepare and
monitor, does have some advantages.
< A receiving record generally contains the following information:
. Name of supplier
2. nvoice number
3. tem description
4. Unit price
5. Number of units delivered
6. Total cost
7. Storage area (unit distribution)
8. Date of activity
< The ideal situation for you and your operation would be
for you to store only the food you will use between the
time of a vendor's delivery and the time of that vendor's
next delivery. This is true because storage costs money,
both in terms of providing the storage space for
inventory items and in terms of money that is tied up in
inventory items and, thus, unavailable for use elsewhere.
t is always best, whenever possible, to order only the
products that are absolutely needed by the operation.
< Food products are highly perishable items. As such, they
must be moved quickly from your receiving area to the
area selected for storage. This is especially true for
refrigerated and frozen items. An item such as ice
cream, for example, can deteriorate substantially if it is
at room temperature for only a few minutes. Most often,
in foodservice, this high perishability dictates that the
same individual responsible for receiving the items is the
individual responsible for their storage.
< LIFO (Iast in, first out) or FIFO (first in, first out)
method of storage.
< The food and related products you buy will
generally be placed in one of the following three
major storage areas within your facility:
. Dry storage
2. Refrigerated storage
3. Frozen storage
< Dry Storage Dry-storage areas should generally be
maintained at a temperature ranging between 65F and
75F. Temperatures lower than those recommended can
be harmful to food products.
< Refrigerated Storage Refrigerator temperatures should
generally be maintained between 32F (C) and 36F
(2C).
< Freezer Storage Freezer temperatures should be
maintained betweenF and F (8C and 23C).
< Beginning Inventory
The monetary value of all food on hand at the beginning of the accounting
period.
< !urchases
Sum cost of all food purchased during the accounting period. t is determined by
adding all properly tabulated invoices for the accounting period.
< Goods AvaiIabIe for SaIe
Sum of the beginning inventory and purchases. t represents the value of all
food that was available for sale during the accounting period.
< Ending Inventory
Monetary value of all food on hand at the end of the accounting period. t also is
determined by completing a physical inventory.
< Cost of Food Consumed
Actual monetary value of all food used, or consumed, by the operation.
< EmpIoyee MeaIs
Labor-related, not food-related cost. Free or reduced- cost employee meals are
a benefit much in the same manner as medical insurance or paid vacation.
< The formula used to compute actual food cost percentage is as follows:
< Food cost % represents that portion of food sales that was spent on food
expenses. n the case of the ice cream store example discussed previously,
you know that cost of food sold equals $33,275. f the store experienced
$98, in food sales for the period of January to January 3, the food
cost percentage for the period would be
< Thus, 34% of the dollars in sales revenue taken in was needed to buy the
food used to generate that revenue. Put another way, 34 cents of each
dollar in sales were used to buy the products needed to make the ice
cream.