Class NameInstructor NameDate, Semester

Foundations of Cost ControlDaniel Traster

Labor Management and Control

chapter 11

Opening Questions

• For current workers, how do you know how much gross (pre-tax) income you should earn each week?

• How much money would you earn if you worked 40 hours this week? 45 hours?

• Are you ever scheduled for a certain number of hours only to find that by week’s end you’ve worked more or fewer hours?

2

Calculating Labor Costs

Standard = budgeted

Actual = the cost based on the real hours actually worked

3

Using a work schedule and a list of each employee’s hourly wages or annual salary, a manager can calculate a department’s weekly standard labor cost.

Labor Cost for Hourly Workers

Preliminary Labor Cost =

Hours Scheduled (or worked) X Hourly Rate

• Preliminary means before benefits

• Using scheduled hours yields standard cost

• Using worked hours yields actual cost

4

Example 11a

Note: Overtime earns 1.5 times the regular rate

Preliminary Labor Cost

=(40 hours X $11.75) + (5 hours X $11.75 X 1.5)

= $470 + $88.13

= $558.135

Employee earns $11.75/hour and is scheduled for 45 hours this week. What is preliminary standard labor cost?

Salaried Workers

• Get the same size paycheck each week no matter how many hours or days they work

• Annual salaries can be divided into daily salaries by dividing by 365 days per year.

6

Labor Cost for Salaried Workers

Preliminary Daily Labor Cost =

Annual Salary ÷ 365 days

• Preliminary Labor Cost for any period of time is the daily cost X the number of days in the period

EXAMPLE:

Preliminary Weekly Labor Cost =

Preliminary Daily Labor Cost X 7

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Example 11b

Pre. Daily Labor Cost =

$40,000 ÷ 365

= $109.59

Pre. Weekly Labor Cost =

$109.59 X 7

= $767.12 8

Salaried worker earns $40,000 per year. What is the weekly labor cost before benefits?

Accounting for Benefits

Standard (or Actual) Labor Cost =

Preliminary Labor Cost X (1 + benefits percent)

9

All workers have some benefits cost, even if just for social security and workers’ comp. Benefits and costs may differ between employees. Benefits cost typically calculated as a percent of wages or salary

Example 11c

Pre. Labor Cost =

39.5 h X $9.50/h =

$375.25

Standard Labor Cost =

$375.25 X (1 + 0.138) =

$427.0310

Employee is scheduled for 39.5 hours at $9.50/hour. Benefits cost is 13.8%. What is the employee’s standard labor cost?

Example 11d

Pre. Daily Labor Cost = $45,000 ÷ 365 = $123.29

Pre. Weekly Labor Cost = $123.29 X 7 = $863.03

Weekly Labor Cost = $863.03 X (1 + 0.283) = $1,107.27

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Manager earns $45,000 annually with benefits package worth 28.3% of salary. What is the manager’s weekly labor cost?

Department Labor Cost

• Computerized labor cost spreadsheet includes (for each employee):

―name―title―hourly or daily pay rate ―benefits percent―hours (either scheduled or worked)

• Enter formulas in advance and the manager only needs to enter each employee’s hours each week.

• For department or company labor cost, add the labor costs for all of the employees

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Department Labor Cost (cont.)

13

Standard Labor Cost

• can be forecast for days, weeks, months, or years.• Longer time period forecasts are often less accurate

Actual Labor Cost

• can be done by similar time frames, but because it is based on real numbers, it is always accurate.

Standard vs. Actual Labor Costs

• Actual and Standard are rarely identical

• Salaried workers earn the same amount, but hourly workers may have schedules adjusted

• Big variances between standard and actual labor costs may be sign of poor management

14

Labor Cost Percent

• Actual and standard costs in dollars may vary greatly as business volume changes, but labor cost percents should be close

• Labor cost percents compare labor cost to total sales

15

Labor Cost Percent Formula

• Labor Cost and Sales must cover same time period

• Standard labor cost % uses standard labor cost and sales dollars

• Actual labor cost % uses actual labor cost and sales dollars

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Labor Cost %Labor Cost ($)

Sales ($)

=

Example 11e

Labor Cost %

= $14,200 ÷ $48,500

= 0.293 or 29.3%

17

Calculate weekly standard labor cost percent if standard weekly labor cost is $14,200 and forecast sales for that week are $48,500.

Example 11f

Standard = $12,100 ÷ $38,000 = 31.8%

Actual = $12,850 ÷ $39,400 = 32.6%

• Labor cost went up despite stronger sales

• Poor performance by management

18

Restaurant budgets $12,100 in weekly labor cost and $38,000 in weekly sales. Actual figures for that week are $12,850 in labor and $39,400 in sales. Compare standard and actual weekly labor costs for the restaurant.

How Labor Cost relates to Profit

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Fixed costs do not change with business volume, so higher sales beyond budget should generate greater profits if management controls variable costs.

Profit (not labor cost) is the ultimate measure of management performance, so reduced labor cost only helps profit if other costs are not equally increased

Measuring and Improving Performance

• Some measures evaluate each employee’s performance

• Other measures evaluate a team of workers when a productivity value cannot be assigned to each worker separately

Person-Hours are the sum of work hours completed

by all the people in a group or team for a given period of time

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Sales per Person or Person-Hour

21

Sales per person compares dollars in sales generated by each server and comes from POS.

Sale per Person-Hour

Total Sales for a Period

Person-Hours for a Period

=

Example 11g

Person-hours = 5 workers X 4 hours = 20

Sales per person-hour = $8,425 ÷ 20 person-hours

= $421.25/person-hour

22

During 4-hour dinner service, restaurant earns $8,425 in sales. 3 cooks and 2 dishwashers all work the full 4-hour shift. Calculate sales per person-hour for this team.

Covers per Person

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Covers per person measures the number of customers served by each server; comes from POS. Servers who handle more customers are more valuable

Covers per Person-Hour

Covers for a Period

Person-Hours in a Period

=

Example 11h

Person-hours

= 4 workers X 3 hours

= 12

Covers per person-hour

= 295 covers ÷ 12 person-hours

= 24.6 covers/person-hour24

Team of 3 cooks and 1 dishwasher work from 11:00 – 2:00 for lunch service and serve 295 covers. What is this team’s covers per person-hour?

Sales and Covers per Person-Hour

• Sales per person-hour and covers per person-hour are meaningless in an absolute sense. Measure to set a baseline and then improve efficiency from there.

• They help interpret labor cost numbers, which are impacted somewhat by varying wage rates of the employees scheduled

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Errors per Cover

Error or Void is

a mistake that results in an unsellable dish (dropped, burned, customer-rejected, etc.)

26

Errors per cover measure quality of worker performance.

Errors per Cover (cont.)

• Errors per cover should always be a decimal well below 1.

• Errors per cover should not change with business volume, or management must act to improve employee work quality

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Errors per Cover

Errors in a Period

Covers in Same Period

=

Example 11i

Errors per cover

= 13 errors ÷ 417 covers

= 0.031 errors/cover

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Restaurant served 417 guests during dinner but had 13 food “errors.” What is this restaurant’s errors per cover rate?

Factors that Impact Performance and Labor Cost

Turnover

Scheduling

Facility Layout

Equipment

Menu

Outsourcing

Training

Motivating and Managing Employees Effectively

Forecasting Accurately

Reducing Injuries and Illness

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Prime Cost

30

Labor Cost and Food Cost sometimes work together. Cutting labor by buying pre-fab ingredients can increase food cost and leave profit stagnant.

Prime Cost

Cost of

Goods

Sold

Labor Cost

Example 11j

Prime Cost = cost of goods sold + labor

= $1,730 + $1,589

= $3,319

31

Weekly cost of goods sold is $1,730; labor cost for same week is $1,589. What is prime cost for that week?

Prime Cost Percent

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Prime Cost %

Prime Cost

Sales

=

Example 11k

Prime Cost % = prime cost÷ sales

= $3,319 ÷ $5,720

= 58.0%

33

Café has prime cost of $3,319 during same week it has sales of $5,720. What is café’s prime cost percent?

Prime Cost (cont.)

• Reducing prime cost % (by reducing food, beverage, or labor cost without increasing the others) usually leads to higher profits

• Prime cost % must not be cut at the expense of the business’s quality standards or long-term revenue and profit may suffer.

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Example 11l

• Restaurant budgets $18,430 for cost of goods sold and $21,070 in labor cost for January.

• Sales are forecast to be $70,000.

• At month’s end, actual figures are ―$16,590 for cost of goods sold ―$19,962 for labor cost―$64,800 in sales.

35

Compare restaurant’s standard and actual prime costs and prime cost

percents.

Example 11l (cont.)

Standard prime cost = $18,430 + $21,070 = $39,500

Actual prime cost = $16,590 + $19,962 = $36,552

Standard PC% = $39,500 ÷ $70,000 = 56.4%

Actual PC% = $36,552 ÷ $64,800 = 56.4%

Costs were controlled very well in a month that fell below sales targets 36