9 Operations

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The Basic Calculation of Operating Costs

Fixed Costs

A fixed cost does not vary in relation to sales. A typical fixed cost is a rent. In most cases, the cost of rent does not vary from month to month in response to how many baked goods you sell. Rent tends to be a constant cost for the length of the lease agreement signed by the bakery and the landlord of the building. Property taxes, insurance premiums, and equipment depreciation are all fixed costs.

Some labor 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 packaged goods often varies due to an increase or decrease in sales. Other variable costs include food, beverages, and some labor costs. Usually, the major variable cost is food and most of the labor.

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

Labor costs are sometimes categorized as semi-variable because some are fixed but many are variable. In most situations, labor 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, labor is often given a category all on its own. In this context, labor 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:

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,

Budget and Business Planning food cost percentage = cost of food ÷ total sales

labor cost percentage = cost of labor ÷ total sales

overhead cost percentage = cost of overhead ÷ total sales

Example

A bakery-cafe has total sales of $2500. The food cost was $1000, the labor cost was $850, and the 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

A bakery cafe has sales of $3500, food costs of $1250, labor 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%

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 labor cost tends to be lower than in full-service restaurants. The profit is derived by having a high turnover of products and keeping labor 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. Labor 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 

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

A group of people wishes to have a Sweets table 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 sweets table items that could be produced by the restaurant using no more than $5.55 in raw materials per serving.

Sales Ratios and Other Statistics

Very often,  managers generate statistics to determine the efficiency of their operations. Some of these statistics are based on dollar sales while others are based on non-monetary items such as the number of customers served during a busy or slow time period. These statistics are used to The Basic Calculation of Operating Costs 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 are 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.

Formulas for production 

When working in commercial bakeries, it is essential to create predictable formulas that are proven and reliable. Baker’s Percentage is the preferred method of communicating and organizing formulas and pairing a formula with procedures that rely upon critical success points. These will accommodate a much more seamless approach to training and will set your employees up for success.

Baker’s Percentage will allow you to manage volume changes in production. If your formulas are on a spreadsheet software program and are based on Baker’s Percentage you can quickly change the formulas to accommodate the increase or decrease in orders. The updated formula can then be communicated to the employees responsible for production.