control analysis, corrective action and evaluation
TRANSCRIPT
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Control Analysis, Corrective Action and Evaluation
Food & Beverage Management
III Year
Bhavin Parekh
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Contents Procedures for Comparison and Analysis The Comparison Process Questions to Consider during the Comparison Process Variance from Standards Analyzing Variances Potential Savings
Identifying the Problem Taking Corrective Action Assigning Responsibility
Evaluating Corrective Action
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Objectives Identify the types of Standards used to evaluate
the results of Operations. To know which Variances from Cost Standards
should be thoroughly analyzed. Identify factors to be considered when Analyzing
Variances between Cost Standards and Actual Costs
Identify factors to be taken into consideration when taking Corrective Action to Control Operations.
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Introduction
The Sequence of the Control Process begins with setting Standards – Goals or Expected Results.
The next step is measuring Actual operating Results. After the above, we Compare the Standards with the
Actual Results. The Comparison may reveal the need for Corrective
Action due to Variances. Once Corrective Action is taken, it’s effectiveness must
be Evaluated.
The Control Process
Establish StandardOperating
Results
ComputeActual
OperatingResults
CompareActual
OperatingResults withStandards
If EqualOperationRunning Perfectly
(Ideal Case)
≠
Identify &Analyze the Variances
Take AppropriateCorrective
Action
Evaluation
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Procedures for Comparison & Analysis
To compare expected results with Actual Results, Standards must be established and Actual Costs assessed.
After which a comparison can be made between the Standards and Actuals and we can determine how successful the Operation has been in meeting it’s Goals.
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What Standards & Actuals are we going to Consider? There are a wide number of Parameters to be
considered when we look at the Hotel Operation as a whole and several Standards of Performance can be established to compare with Actual Performance.
However, for the Purpose of Food & Beverage, we shall only benchmark Food & Beverage Cost and compare them with Actual F&B Costs.
Procedures for Comparison & Analysis Sources of
Standard Food & Beverage Costs and Information provided by each Source.
Source Information Provided
Averages Industry Averages. These are Statistics which serves a benchmark against which to compare Actual F&B Costs of an operation. They could be similar Costs incurred in your Competitive Set or figures established by the National / State Restaurant Associations.
Past Financial Statements
Previous Financial Statements of the Operation wherein the F&B Costs are expressed as a % of the Revenue.
Past or Current Operating Budgets
F&B Costs expressed as a % of Revenue in Previous Operating Budgets or Current Projections of Costs and Revenues expressed in the Budget for the Operation.
Procedures for Comparison & Analysis
Sources of Standard Food & Beverage Costs and Information provided by each Source.
Source Information Provided
In – House developed Standard Costs
F&B Costs developed specifically for the Operation after a careful study of the results when all Control Tools are set in place.
Procedures for Comparison & Analysis
Source of Information for Actual Costs
Source Information Provided
Current Income Statement
Cost of Food & Beverage as a % of Revenue
Internal RecordsDaily Food
Cost
Issues + Directs – Adjustments
Food Revenue
Daily Beverage Cost
Issues to all Bars
Total Beverage Revenue
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The Comparison Process Industry Averages It is the least reliable basis for developing
Cost Standards for a Food & Beverage operation.
This is because using the industry averages against which to compare an operation’s Actual F&B Costs does little to address the specific concerns of a property whose needs likely differ from the average property.
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The Comparison Process Industry Averages While the success of the individual property cannot
be measured by comparing the Actual Costs to the Industry Averages, yet many properties use this method of “Benchmarking”.
This is beneficial in case a Property has Multi – Unit Operations in similar Market Conditions. Example: McDonalds’ / Pizza Hut etc.
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The Comparison Process Industry Averages – Example
Consider that Papa Mario’s Diner compares it’s Actual Food Cost. There is a Variance of +5% over the Industry Average. Mario’s would then evaluate his Daily Food Cost Records to see where Costs can be cut. However, in this case Mario is assuming that the Industry Average applies to them, which might not be true; 43% to the Industry Average of 38%.
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The Comparison Process Past Financial Statements Financial Statements that have been prepared for
the property in the past provide Cost Information that may be used to define Standards for the Property’s Current Operations.
A major disadvantage of this is that Management lapses and Inefficiencies in the past may go unnoticed if Management strives to do only as well as it did in the past Financial Period.
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The Comparison Process Past Financial Statements Example Considering that Papa Mario’s Diner has
“Benchmarked” Food Costs from Past Financial Statements against which Current Actual Food Cost are to be compared.
If the Food Costs in the Past were higher then a Lower Current Actual Food Cost may be perceived as an indication of an efficient operation in compliance with all established Control Tools. However, if Current Costs are higher then a problem is perceived to exist.
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The Comparison Process Operating Budgets Operating Budgets must be developed such that the
Desired Profit Requirement is factored in. All other Figures in the budget must be uniformly expressed: such as % of Total Revenue to enable ideal comparisons.
If Budgeted Figures are not in accordance with the Specific Profit Requirements of the Operation, then comparison of Actuals holds no meaning.
(Refer example of Budgeted to Actual Comparison in the next slide)
The Comparison Process
ActualBudget
Total Revenue $ 20000 $ 15000
Food Cost $ 8000 $ 6000
Beverage Cost $ 5200 $ 4000
G.P. $ 4000 $ 3000
40%
26%
20%
40%
26%
20%
Does not reveal Management Inefficiency
The Comparison ProcessActual Budget
Total Revenue $ 20000 $ 15000 Food Cost $ 8000 $ 6000 Beverage Cost $ 5200 $ 4000 G.P. $ 4000 $ 3000
20%20%
C.M. = N.F.C. + Profit RequiredC.M. = S.P. – Cost
Profit = B.S.P. – Standard Cost – N.F.C.
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The Comparison Process Specific Property RequirementsThe best and most accurate information
about what costs should be is based on In – House Cost Standards developed specifically for an Operation. The Ideal Costs developed incorporate the fact that all Control Procedures are followed. These Standard Cost are then compared to the Actual Costs.
Variance from Standards Comparisons often reveal the Actual Costs
to be than Standard Costs. Standards, especially those developed
Specific to the Property’s requirements indicate the Ideal Cost if nothing goes wrong.
But even with the Best Management Systems:
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Variance from Standards Should the Manager take corrective action
for every variance?
No. The Manager allows for a certain % of Variance due to the Human Element involved. This degree of Variance is considered permissible.
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Variance from Standards Establishing the Degree of Variance
Permissible:It is the decision of the Management. They would ideally consider the following in determining the permissible Variance:
Profit Requirements from the Operation. Amount of freedom it has to reduce expense
levels in other areas like Employee Benefits. Management Priorities and Cost Justification.
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Variance from Standards Example:
Consider that the Standard Beverage Cost of Papa Mario’s = $ 27,000When Actual Cost were compared a Variance of +1% were recorded. In $$$ this means:
0.01 x $ 27000 = $ 270Variances are generally expressed in $$$ and Management’s Priority Decisions are based on where the $ are higher.
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Variance from Standards Example: Management Priorities
Variance in Std. and Actual Food Cost = 2%
Variance in Std. and Actual Beverage Cost = 5%
Where do you think is Management’s Priority to take Corrective Action???
Food Operation: $ 500000 x 0.02 = $ 10000
Beverage Operation: $ 100000 x 0.05 = $ 5000
Corrective Action will be implemented for Food Operations.
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Variance from Standards Example: Cost Justification for Corrective
ActionThe Cost incurred to take Corrective Measures must be justified by projecting Potential Savings.If it costs $ 500 monthly to save $ 250 in Beverage Costs Annually, then the Corrective Action is not justified.
Analyzing Variances A difference between Standard and Actual Costs does
not immediately warrant Corrective Action to be taken. The difference may be explainable – Change in the
Menu Sales Mix: Food Costs tend to be generally lower in Summers because Guests would generally order for Soup / Salads / Sandwiches etc. (Items with a Lower Food Cost and Higher C.M.) than in Winters wherein heavier Entrées are ordered with Higher F.C. Studying the Sales History records help clarify this situation.
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Analyzing Variances Significant increases F&B Purchase
Prices:
This calls for better Pre – Costing and revision of Menu Selling prices.
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Analyzing Variances If Variances cannot be explained even after
the study, then a Potential Problem exists which calls for a review of F&B Operations.
The Main Reasons could be: Failure to follow Cost Control Procedures Theft or failure to collect all Revenue. Both
of these raise the Cost %.
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Potential Savings Difference between Actual Costs and
Standard Cost represent Potential Savings for the F&B Operation.
Every $ saved is a $ EarnedIf the Variance is $ 250, then this would
represent a Potential Saving for the Operation. The Management could have upped the Profit Margin by $ 250.(Refer a Potential Savings Worksheet in the next slide)
November December
Food & Beverage Potential Savings Worksheet
Month
Food Cost Beverage Cost
Actual
Standard %
Variance
Potential
Savings
Actual
Standard %
Variance
Potential
SavingsCostRevenu
e% Cost
Revenue
%
January
118545 330209 36 33 3 9576 13875 51772 27 21 6 3003
February
March
April
May
June
July
August
September
October
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Identifying the Problem In order to ease understanding we first
define Cost of Sales:
F&B Cost % =
Cost of Food / Beverage Sold
Total F/B Revenue Generated
Identifying the Problem Variance can be defined as:
Variance =
- Actual Costs will increase over Standard Cost to
give you a Variance. The reasons for this is:
Increase of
Decrease of
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Identifying the Problem Increase of Cost of F&B: Are Gross Revenues decreasing? Is the Seat Turnover decreasing? Is there an increase in the Purchase Cost? Is there evidence of Employee theft? Are proper procedures in place during each
stage of the Control Point Cycle and are they being strictly adhered to?
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Identifying the Problem If Revenues are decreasing while the Cost of
Food remains the same, then the Variance from the standards will increase, resulting in lost Revenue $$$.
When Variances between Standards and Actuals are found, then it is time to review all Checklists and S.O.P.
(Refer Attached Checklists for Profitable Food & Beverage Operations)
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Taking Corrective Action Once the problems have been identified, Management
must determine the need for Corrective Action: The probability of Success – reduction of Variance –
must be weighed for all possible alternatives. All Costs of implementing the Corrective Action must be
known. There can be no surprises. Knowing what has or has not worked in the past can be
excellent clues to resolving current problems. The Plan to be implemented must be S.M.A.R.T.
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Taking Corrective Action In some instances, alternatives can be tried
on a limited basis rather than implemented throughout the operation.
For example: If issuing practices are judged to be at fault, a new control procedure for issuing selected high cost items – Meats / Liquor might be tried before applying to all items in the inventory.
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Assigning Responsibility Another concern when considering
strategies for corrective action is assigning responsibility for the Action.
As the Variance between the Standards and the Actual Costs increases, more $$$ become involved. As the problem increases in Monetary Value, so too does the need for Higher Levels of Management to be involved in resolving it.
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Assigning Responsibility How specialized is the problem?
If there is an issue with assessing the Value of Directs in the DRR, then it is always advisable to involve the Receiving Clerk & his immediate Supervisor.
In any case, the Management of the concerned area would be involved in resolving the problem.
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Assigning Responsibility Staff Involvement?
Staff must be involved as per some HR Specialists if Participative Management Style is to be encouraged in the Organization. Line Staff in the Operations may sometimes have a good idea about resolving a Problem. By involving Staff in Problem resolution, we gain their commitment and this also helps reduce resistance to new Policies and Practices which might have to be implemented as a part of the Solution.
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Levels of Assigning Responsibility Top Management: Accountable to the Owners,
Corporate Level Offices. Middle Level Managers: Those who have been
delegated the authority and responsibility for Operating Specific Segments of the Property.
Employees: Those who most frequently perform or come in contact with Control Procedures.
External Consultants: They have special knowledge and experience in specific areas of Operation.
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Before Assigning Responsibility Training: It is very essential before any new
procedure is implemented and an individual assigned to carry it out.It helps the Individual to understand ??? he is doing an additional task and it’s importance to the Operation. The Message must be clearly communicated to the assignee in terms of what is expected of him / her and What the end result should be in terms of Management Expectations. This may also include Consequences if results are not achieved.
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Before Assigning Responsibility Basic Infrastructure: All tools must be made
available before any new procedure is implemented. It leads to more frustration when Control Procedures are all on paper, but cannot be followed in practicality due to lack of the Tools / Equipment required.
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Evaluating Corrective Action Evaluating the effectiveness of Corrective Action is
another important step in the Control System. The main concern here is to evaluate if the Difference
between the Standard and the Actual has been reduced or not.
If yes, then Corrective action has been helpful If no, then Corrective Action has been unsuccessful and
must be checked for Implementation or completely Overhauled.
Implementation
Find the Best possible Solution
Identification of a Problem
Assign TaskOf
Implementation
Ensure Training&
Tools
EvaluationBy
Comparing with Standards
Ask Why?Identify the Reasons
Set asP&P
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Evaluating Corrective Action Evaluation must not be done too early. Sufficient time
must be given for the new procedure to be implemented and all teething problems must be resolved.
Note: During this period, Variances will continue to remain high.
Other problems might surface during Evaluation since all systems in the Hotel are closely related and changing one might negatively affect the other.
(Refined Schematic Representation of Previous Diagram)
Implementation
Find the Best possible Solution
Identification of a Problem
Assign TaskOf
Implementation
Ensure Training&
Tools
EvaluationBy
Comparing with Standards
Ask Why?Identify the Reasons
Set asP&P
Sufficient TimeMust be given
Other Problems might Surface
If Results are not asExpected?
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Reference Food & Beverage Controls –
By Jack Ninemeier
(American Hotel & Lodging Association)
Link to Next Lesson
Revenue Control