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labor cost %

post #1 of 7
Thread Starter 
How exactly are kitchen management saleries worked into labor cost? is there more than one way to calculate labor cost %'s ?
post #2 of 7
"Depends" and "yes."

Those are your two answers.

Cost accounting is more art than science and the "proper" method entirely depends upon what question the cost data is intended to answer. (BTW, I'm a former CPA, with a B.S. degree in Accounting & Finance.)

All agree that to compute the cost of a product you need to value the inputs into making that particular product. In other words, the direct cost of making that product, such as the hourly rate of the pastry cook that mixed the batter and baked the cakes.

There's a difference of technique as to whether one would then add in indirect labor and other overhead. Sometimes, one adds a percentage of the overhead (including rent, supervisory salaries, etc.) to each product. With that technique, one should be able to add up the "cost" of all the products and arrive at the total expenses of the enterprise. This makes some overall sense and provides balance and symmetry.

However, it doesn't help you figure out how to increase profits by altering product mix or volume. After all, the overhead doesn't change much as you make more or less food.

The main other way of looking at it, is to compute only the direct cost of making the products. The sales price, less the direct cost, gives you the "contribution margin." In other words, the amount of money that product contributes to the enterprise that is then used first to cover overhead and then, if any is left, to make up the profit. The higher the individual margin and the higher the volume, the more money available to cover overhead and profit.

The second method lends itself to answering "what if" questions.

I hope that the above makes some sense.
post #3 of 7
Your labor cost percentage is a percentage of sales, if you increase your sales you can increase the amount of money you have to spend on labor. I am not an accountant but this is how I work with my labor cost numbers.

I work off a monthly budget where I have an expected sales goal, budgeted purchase allowance, and labor allowance. Say that labor allowance is $11,000 for January and I know that my fixed salaries are $3000 a month, so that leaves me with $8,000 of money to pay my hourly employees. Then lets say that I have 2 employees that make $7 an hour and 3 employees that make $10 an hour. With everyone working 40 hours a week or 160 hours a month that gives me $7040 with $960 left over to spend on overtime as I see fit. Now if we meet or exceed or expected sales, everything is peachy and no hair gets pulled out, but it's Jan 8th and to date we have not made 25% of our sales goal. (If my sales goal is $100,000 for Jan. I should "expect" to have made $25,000 in sales during the first week.) So to balance the books I need to either reduce my food purchases and labor expenses by 25% or increase my sales. I have multiple ways I go about doing this. I take the initiative and make a sales run to local business and talk people into coming to lunch, or as a last resort I have to cut hours. Since it is obviously slow in the restaurant because my sales numbers are down, and more than likely my hourly employees are standing around, I am going to move my hourlies to 4 days a week and myself and the other salaried employees will work 6 days.

There are other factors to consider too, one being to look at previous January sales, and see how you are comparing to date from last year, the other factor is that you may know that you have a big party at the end of the month that is going to boost your sales over the top.

My experience is that if I am able to explain the problems to the higher ups and offer solutions at the same time everybody gets along.

I hope I didn't ramble too much and that this helps
post #4 of 7
Thread Starter 
thanks, very helpful.
post #5 of 7
Thread Starter 
"The fixed costs including your and managers salary are not figured into variable costs because they have to be paid. Just like rent and other costs. The costs you have control over is food cost and labor. "

........... but is this an industry standard?
post #6 of 7
Thread Starter 
if, indeed, it is possible to reassign a large figure chef's salary under fixed expenses, why don't more facilities do this? please explain what reasons they would have NOT to do so and/or how can I persuade the suits that this would be a more realistic approach to a truer labor cost %? is it worth the fight?
post #7 of 7
Labor is Labor rather it is an hourly employee or a salaried manager. A labor cost % is determined by dividing your total dollars spent on labor for a time period (a) by your total sales for that same time period (b). a/b*100=labor cost %. By reassigning your salaried labor dollars under fixed costs you are just treating the symptom not the disease. I think you would be better off explaining to your suits that you are going to either eliminate employee's hours or increase sales (usually the better option).

Additionally I suspect if you were to recalculate your labor cost without your salaried personal in it, next quarter you are going to get yelled at for your fixed costs being too high.
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