5.2: The Basic Calculation of Operating Costs
Fixed Costs
A fixed cost does not vary in relation to sales. A typical fixed cost is rent. In most cases, the cost of rent does not vary from month to month in response to how many meals you serve. Rent tends to be a constant cost for the length of the lease agreement signed by the restaurant and the landlord of the building. Property taxes, insurance premiums, and equipment depreciation are all fixed costs.
Some labour costs are often considered to be fixed. Those staff who are paid regardless of the amount of business being generated have a predictable cost that remains constant during the life of the contract or understanding you have with the employees. Such staff often includes full-time cashiers, managers, the head chef, and bookkeeper. Janitorial services are considered a fixed cost. The cost of staff who are hired as a result of an increase in business, technically, should not be considered a fixed cost.
To a certain extent, basic energy costs such as heat and light are fixed in that it is possible to determine a minimum level of need for energy regardless of the number of sales. Costs above the minimum level should reflect an increase in business and so often are not considered fixed, but in these examples, energy costs will be considered fixed costs.
Fixed costs themselves can be categorized as controllable and non-controllable.
A controllable cost is one that can be changed in the short term. For example, even though janitorial cost has been budgeted as a constant cost, it may be possible (if there is no ironclad contract with a janitorial service) to reduce the service and the cost on short notice. Advertising and promotion are also controllable fixed costs as a decision to change the amount of money spent can be made very quickly.
Non-controllable fixed costs are those costs that cannot be changed quickly by management. The most common non-controllable fixed cost is rent or lease payments and depreciation.
In most basic calculations, the only truly fixed costs are overhead costs, those ongoing expenses required to operate the business that are not direct costs of producing the food or presenting the service.
Variable Costs
Variable costs are directly related to sales. For example, the use of napkins or linen often varies due to an increase or decrease in sales. Other variable costs include food, beverages, and some labour costs. Usually, the major variable cost is food and most of the labour.
Variable costs are controllable. Less expensive ingredients can be purchased, portion sizes can be changed, and some workers can have their hours reduced usually on short notice.
In most basic calculations, the only variable cost used is food cost.
Semi-variable Costs
Labour costs are sometimes categorized as semi-variable because some are fixed but many are variable. In most situations labour cost is fully controllable. That is, you are in control of how many people work how many hours per day through proper scheduling. For basic calculations, labour is often given a category all on its own. In this context, labour costs will be considered semi-variable.
Breakeven Point
The only way costs can be recovered is through sales. When the sales income equals the cost for labour, overhead, and food, the breakeven point has been reached. That is, the breakeven point occurs when
sales = labour + overhead + food costs
Example 37
Labour for a week is $3000, overhead is $2000, and food cost is $4000. Therefore, the breakeven point for sales occurs at $9000, which means in order to stay in business, this operation must have sales of at least $9000 each week. Any amount above $9000 is profit,
The profit is determined by subtracting the total costs from the sales. That is,
profit = sales − (labour + overhead + food costs)
Cost Percentages
The breakeven point determined above is in raw dollar figures. Of more importance in the industry are cost percentages in general and food cost percentage in particular. In a well-run operation, cost percentages will remain relatively constant even though the dollar figures can vary widely week to week or month to month. However, if volume increases, so will efficiency which will, in turn, lower the production costs and increase the profits.
A cost percentage is derived by dividing a cost by the sales and expressing the answer as a percentage. That is, in general,
cost percentage = cost ÷ total sales
and, in particular,
food cost percentage = cost of food ÷ total sales
labour cost percentage = cost of labour ÷ total sales
overhead cost percentage = cost of overhead ÷ total sales
To illustrate the use of these formulas, consider the example below.
Example 38
A restaurant has total sales of $2500. The food cost was $1000, labour cost was $850, and overhead was $650.
Determine the cost percentages. Remember that percentages are always expressed as a portion of 100, and therefore the decimal figure resulting from the cost divided by total sales should be multiplied by 100.
food cost percentage = cost of food ÷ total sales
= $1000 ÷ $2500
= 0.4
= 40% (0.4 × 100)
labour cost percentage = cost of labour ÷ total sales
= $850 ÷ $2500
= 0.34
= 34% (0.34 × 100)
overhead cost percentage = cost of overhead ÷ total sales
= $650 ÷ $2500
= 0.26
= 26% (0.26 × 100)
In this example, the sales figure used is actually the breakeven point. In most instances, the total sales will be more than the breakeven point and the excess represents the before-tax profits of the business.
Example 39
A restaurant has sales of $3500, food costs of $1250, labour costs of $800, and overhead costs of $700. Determine the cost and profit percentages.
food cost percentage = $1250 ÷ $3500
= 0.357
= 35.7%
labour cost percentage = $800 ÷ $3500
= 0.2285
= 22.9%
overhead cost percentage = $700 ÷ $3500
= 0.2
= 20%
profit in dollars = total sales – (food cost + labour cost + overhead cost)
= $3500 – ($1250 + $800 + $700)
= $3500 – ($2750)
= $750
profit percentage based on total sales = $750 ÷ $3500
= 0.214
= 21.4%
The before-tax profit percentage is over 20% in this example. Most restaurant operations probably do not reach this high a profit figure.
Another way to determine the percentage profit is to add the cost percentages and subtract the answer from 100%. Using the example above,
profit percentage = 100% – cost percentages
= 100% – (35.7% + 22.9% + 20%)
= 100% – 78.6%
= 21.4%
Note: All of the prices/costs used are examples and not intended to reflect the current costs of ingredients, labour, or menu items.
Interpreting Cost Percentages
Cost percentages are useful because they allow you to compare the performance of an operation at separate times during the year or to compare two similar restaurants. They also allow you to make generalizations about types of restaurant operations. For example, fast-food restaurants often rely on convenience foods that are expensive to purchase. In these restaurants, food percentage costs can be slightly higher, but the labour cost tends to be lower than in full-service restaurants. The profit is derived by having a high turnover of products and keeping labour costs low.
Fine-dining, high-margin restaurants tend to rely less on convenience foods and more on quality ingredients and a high level of service. Although food costs in raw dollars are high for such restaurants, the food cost percentage may be lower than in fast-food restaurants because menu prices are much higher. Labour cost percentages also tend to be higher because higher trained personnel is needed. The profit in these operations often is derived from serving relatively few customers but collecting more dollars per sale compared to more casual places that operate based on high volume.
Using Cost Percentages
The basic equation for cost percentages can be written several ways:
cost % = cost ÷ total sales
sales = cost ÷ cost %
cost = total sales × cost %
These formulas are useful when restaurant management decides on a cost percentage value and then has to see what that percentage means in terms of menu prices.
Example 40
Management has decided that a minimum food percentage of 30% must apply to all menu items. You wish to introduce an item that costs $4.50 in actual food costs. To find the menu price (selling price) you would do the following:
selling price = cost ÷ cost %
= $4.50 ÷ 30%
= $4.50 ÷ 0.3
= $15.00
Example 41
A group of people wish to have a Christmas banquet meal at a cost to them of no more than $18.50 per person excluding tax and gratuity. If the food percentage is 30%, you can determine the actual food cost by doing the following:
cost = selling price × cost %
= $18.50 × 30%
= $18.50 × 0.30
= $5.55
The cost figure is used to determine the banquet items that could be produced by the restaurant using no more than $5.55 in raw materials per serving.
For additional information on cost percentages and establishing menu prices, refer to the chapter on food costing.
Sales Ratios and Other Statistics
Very often, restaurant managers generate statistics to determine the efficiency of their operation. Some of these statistics are based on dollar sales while others are based on non-monetary items such as the number of customers in the restaurant during a busy or slow time period. These statistics are used to determine trends in sales, identify menu items that are not moving, calculate staffing requirements, and so forth.
The statistical data tends to be quite straightforward. For example, total dollar sales is simply the amount of money that has gone through the cash register over a designated period of time (a day, a week, a month, or a year). Sometimes the total dollar sales figure is divided by the number of customers served to produce an average dollar sale ( average cover ). The average dollar sale is useful if the impact of a new menu or a special sales promotion has to be evaluated.
Sales per server and average sales per server are often used to determine the effectiveness of individual waiters and waitresses. The statistics are compiled by either just noting the total number of sales of each server over a period of time (sales per server) or by dividing the total number of sales by the number of servers (producing the average sales per server). In many restaurant operations, these statistics are automatically produced by a point-of-sales terminal.
Some chain restaurant managers compute a sales-per-seat statistic by dividing the total sales by the number of seats in their restaurant. The statistic is useful in comparing the activity among members of a chain of restaurants.
Rational menu changes can be made only after data has been collected that can be used to analyze the popularity of the dishes offered. In older operations, current statistics are often compared to historical statistics so trends can be predicted. The most common menu statistic is simply the number of times each item on the menu is ordered over a given period.
Closely related to the number of times a menu item is ordered is the sales mix of the restaurant. Sales mix is determined by comparing the relative popularity of, for example, all entrées by expressing the number sold of each entrée as a percentage of all the entrées sold.
Example 42
Over a one-month period a total of 1200 entrées are sold of which 450 are steak sandwiches, 300 are fish and chips, 350 are hot roast beef sandwiches, and 100 are grilled cheese sandwiches. The sales mix percentages are:
sale percentage = entrée types sold ÷ total entrées sold
steak sandwich percentage = 450 ÷ 1200
= 0.375
= 38%
fish and chips percentage = 300 ÷ 1200
= 0.25
= 25%
roast beef sandwich percentage = 350 ÷ 1200
= 0.29
= 29%
grilled cheese sandwiches = 100 ÷ 1200
= 0.083
= 8%
The sales mix is about 38% steak sandwiches, 25% fish and chips, 29% hot roast beef sandwiches, and 8% grilled cheese sandwiches.
Seat turnover might be used to determine staffing. This statistic is simply the number of customers in a restaurant over a period of time (usually a busy period or a slow period) divided by the number of seats in the restaurant. For example, if a 50-seat restaurant serves 165 meals at lunch time, the seat turnover is 3.3, which means that the average seat was used over three times during that period. This can be valuable information for staffing arrangements.
Almost all of the statistics in the restaurant trade are now automatically collected by computers built into electronic cash registers or ordering equipment. Small operations may have to collect this data by observation.