OH 9-1

Controlling Labor and Other Costs

9OH 9-1

OH 9-2

Learning ObjectivesAfter completing this chapter, you should be able to:

• Explain how payroll cost, FICA, Medicare, and employee benefits make up labor cost.• Explain the methods used to measure labor productivity.• Outline the steps involved in controlling labor costs.• Describe the components and factors to consider in thedevelopment of a master schedule.• Describe the methods used for managing payroll records.• Explain how managers can optimize labor productivity.

OH 9-3

Types of Costs

Fixed costs Stay the same regardless of increases or decreases

in volume

Variable costs Increase or decrease with increases or decreases in

volume

Semivariable costs Part fixed and part variable; also increase or

decrease (but at a slower rate) with increases or decreases in volume

OH 9-4

Fixed and Variable Payroll Costs

OH 9-5

Total Labor Cost Consists Of

Payroll Includes employee’s

hourly wages

Includes management salaries

Other Payroll Costs Includes payroll

taxes and assessments

Includes benefits costs

OH 9-6

Payroll Taxes and Assessments

Federal Insurance Contribution Act (FICA) Federal retirement and medical benefit program

Paid through payroll taxes

Includes contributions from employees and employers

Currently set at a 6.2% employee/employer match

OH 9-7

Payroll Taxes and Assessments continued

Medicare Federal health-care program

Paid through payroll taxes

Includes contributions from employees and employers

Currently set at a 1.5% match

OH 9-8

Payroll Taxes and Assessments continued

Federal and state programs May be related to worker’s injury or compensation

and/or unemployment insurance programs

City or local programs May be related to taxes on gross payroll or other

special assessments

OH 9-9

Common Employee Benefits

Paid holidays

Paid vacations

Paid sick or personal days

Health insurance

Life insurance

Disability insurance

Dental insurance

Vision insurance

Company-funded retirement programs

OH 9-10

OH 9-11

Labor Cost Percentage

Restaurant managers must relate the dollars spent for labor to the sales generated by those labor dollars.

Labor cost ÷ Sales = Labor cost

percent

OH 9-12

Estimated Daily Payroll Cost Percent

Step 1 – Divide weekly management cost by thenumber of days open per week todetermine the daily management cost.

Step 2 – Add the variable (hourly) labor used per day to the daily fixed labor calculated in Step 1 above.

Step 3 – Divide the daily payroll costs by theestimated daily sales to determine the estimated daily payroll cost percent.

OH 9-13

Factors Indirectly Affecting Labor Costs

Adherence to Standards Standards of employee performance are similar to

standards of food quality.

Just as food standards can be quantified, so can worker productivity be quantified.

OH 9-14

Some Productivity Standards

OH 9-15

Additional Labor Productivity measures

OH 9-16

Additional Labor Productivity measures

OH 9-17

Steps to Controlling Labor Costs

OH 9-18

Labor Usage Forecasts

Forecasting Volume

Perform historic sales analysis with Yearly and monthly data from past income

statements

Hourly, daily, and weekly point-of-sale (POS) data

If no POS is available, undertake a guest check analysis.

OH 9-19

Labor Usage Forecasts continued

Sales Projections An estimate of future sales

Include increases or decreases to historical sales patterns

Consider national and local economic trends

OH 9-20

Labor Usage Forecasts continued

Determine Labor Budget

Standard labor cost percentage should be based on many factors to include:

Menu items

Preparation and expertise required

Type of service

Location

OH 9-21

Labor Standard (budget)

OH 9-22

Forecasting Labor Costs—Calculating Labor Hours and Schedule

Step 1 – Determine total available labor dollars.

Step 2 – Subtract costs of employee benefitsand taxes.

Standard labor cost percent x Projected

sales = Dollars available for labor

Dollars available for labor

–

Benefits and taxes = Remaining payroll

available

OH 9-23

Forecasting Labor Costs—Calculating Labor Hours and Schedule

Step 3 – Subtract fixed labor costs.

Payroll dollars available – Fixed cost

salaries = Dollars available for variable-cost employees

Employee schedules are planned with this dollar amount to help ensure targeted labor costs are met!

OH 9-24

Master Schedules Identify the Number of Required Employees

Forecasting servers Divide estimated number of covers by the number of

service hours to assess the covers per hour.

Divide covers per hour by the number of covers for each server.

Adjust, based on the employees’ skill.

Est. number of covers

÷

Number of service hours = Covers per hour

Covers per hour

÷

Covers per server = Number of servers

OH 9-25

Master Schedules Identify the Number of Required Employees continued

Forecasting other positions Subtract servers’ cost from the dollars available for

variable-cost employees.

Divide the result by the average wage per hour.

Dollars available for variable-cost employees

– Server cost = Dollars available

for other positions

Dollars available for other positions

÷Average wage per hour

= Number of hours available for other positions

OH 9-26

Master Schedule

OH 9-27

Master Schedules

OH 9-28

Creating the Crew Schedule

Include specific employee names and reporting times

Should be distributed well in advance

Must ensure balance and equity for all employees

OH 9-29

Creating the Crew Schedule continued

Goals of the crew schedule

Build flexibility.

Use accurate sales projections to ensure the right number of staff are assigned at the right times.

Consider legal restraints and company policies.

OH 9-30

Validating the Master Schedule

The labor percent forecasted by the master schedule must match company standards (budget).

Fixed payroll + Variable

payroll = Total payroll

Total payroll + Taxes and

benefits = Total labor cost

Total labor ÷ Sales = Total labor cost percent

OH 9-31

Factors Directly Affecting Labor Cost Control Sales levels

Time tracking Time sheets Timecards Advanced electronic methods

Schedules and schedule modifications

Overtime

Benefits offered

Labor contracts

OH 9-32

Another Factor Directly Affecting Labor Costs

Employee turnover The number of employees hired to fill one position in

a year’s time

Persons hired per year ÷ Average number

of employees = Turnover

Turnover x 100 = Turnover rate percent

OH 9-33

Another Factor Directly Affecting Labor Costs continued

Employee turnover example

300 hired ÷ 100 needed = 3

3 x 100 = 300%

OH 9-34

Reasons for Employee Turnover Lack of recognition

Lack of teamwork

Lack of control

Quality of life issues

Stress

Poor communication

Poor recruiting

Lack of leadership

Lack of training

No opportunities for advancement

Lack of benefits

Lack of standards

Working conditions

OH 9-35

How Would You Answer the Following Questions?

1. Effective managers seek to closely monitor and thus regulate their restaurant’s (labor cost/labor cost percent).

2. Labor costs include only the wages and salaries paid directly to the employees. (True/False)

3. A master schedule includes all of the following exceptA. Employee namesB. Days of the weekC. Employee shiftsD. Employee positions

4. Employee turnover rates cannot be influenced by managers. (True/False)

OH 9-36

How Would You Answer the Following Questions?

5. A manager promised the owner to reduce the turnover rate from 200% to 150% per year. If the restaurant has 160 employees on average per year and a new hire costs an average of $500 to recruit, hire and train, how much money will the manager save the restaurant owner with the lower turnover?

a) $4,000

b) $40,000

c) $80,000

d) Not enough information is given

OH 9-37

How Would You Answer the Following Questions?

6. What is the primary tool managers have to control labor costs?

a) employee turnover

b) overtime

c) labor cost percentage

d) the schedule

OH 9-38

How Would You Answer the Following Questions?

6. What is the primary tool managers have to control labor costs?

a) employee turnover

b) overtime

c) labor cost percentage

d) the schedule

OH 9-39

How Would You Answer the Following Questions?

7. Labor costs are the sum of which two categories of costs?

a) Insurance & taxes

b) Wages & salaries

c) Fixed and semivariable costs

d) Payroll & employee benefits

OH 9-40

Chapter 9 Controlling Labor and Other CostsChapter 9 Controlling Labor and Other Costs

Key Terms:Covers per server The number of customer meals that a waitstaff member can serve in an hour.Crew schedule A chart that shows employees’ names and the days and times that they are to work.Employee turnover The number of employees hired to fill one position in a year’s time.Federal Insurance Contributions Act (FICA) A program that sets aside money for Social Security payments, which is paid for by employers andemployees through payroll deductions.Fringe benefits Benefits provided by an employer that have monetary value but do not affect an employee’s basic wage rate, such as paid holidays or paid vacation.Labor contract An agreement between management and a union that represents the employees and that deals with wages, employee benefits, hours, and working conditions.

OH 9-41

Chapter 9 Controlling Labor and Other CostsChapter 9 Controlling Labor and Other Costs

Key Terms continued:Master schedule A template, usually a spreadsheet, showing the

number of people needed in each position to run the restaurant or foodservice operation.Medicare Contributions from payroll set aside for health benefits for people age 65 or older and for individuals with certain disabilities.Overtime Any hours worked by nonmanagement employees beyond 40 hours in a workweek, by law compensated at a rate of at least 1.5 times the employee’s regular rate of pay.

Productive Producing or capable of producing an effect or result.

Payroll dollars The amount of money available for payroll for a scheduling period.

Productivity standard A level set by managers to measure the amount of work performed by an employee.

OH 9-42

Chapter 9 Controlling Labor and Other CostsChapter 9 Controlling Labor and Other Costs

Key Terms continued:Quality standard A standard that refers to weight, count, or volume

measure, such as portion sizes for menu foods and beverages, and employee production standards such as one cook per 50 covers.Sales per labor hour A number calculated by adding all the sales for a specific period (hour, day, week, etc.) and then dividing the total by the total number of labor hours used during the same time period.Standard man-hours (SMH) The number of employee work hours necessary in each job category to perform a given volume of forecasted production.