Controlling Labor and Other Costs

1. Controlling Labor and Other Costs 9 OH 9-1

2. Learning Objectives After 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 the development of a master schedule. • Describe the methods used for managing payroll records. • Explain how managers can optimize labor productivity.

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

4. Fixed and Variable Payroll Costs

5. Payroll Includes employee’s hourly wages Includes management salaries Other Payroll Costs Includes payroll taxes and assessments Includes benefits costs Total Labor Cost Consists Of

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

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

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

9. Paid holidays Paid vacations Paid sick or personal days Health insurance Life insurance Disability insurance Dental insurance Vision insurance Company-funded retirement programs Common Employee Benefits

11. Labor Cost Percentage • Restaurant managers must relate the dollars spent for labor to the sales generated by those labor dollars.

12. Estimated Daily Payroll Cost Percent • Step 1 –Divide weekly management cost by the number of days open per week to determine 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 the estimated daily sales to determine the estimated daily payroll cost percent.

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.

14. Some Productivity Standards

15. Additional Labor Productivity measures

16. Additional Labor Productivity measures

17. Steps to Controlling Labor Costs

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.

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

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

21. Labor Standard (budget)

22. Forecasting Labor Costs—Calculating Labor Hours and Schedule • Step 1 – Determine total available labor dollars. • Step 2 – Subtract costs of employee benefits and taxes.

23. Forecasting Labor Costs—Calculating Labor Hours and Schedule • Step 3 – Subtract fixed labor costs. Employee schedules are planned with this dollar amount to help ensure targeted labor costs are met!

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.

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.

26. Master Schedule

27. Master Schedules

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

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.

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

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

32. Another Factor Directly Affecting Labor Costs • Employee turnover • The number of employees hired to fill one position in a year’s time

33. Another Factor Directly Affecting Labor Costs continued • Employee turnover example

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

35. How Would You Answer the Following Questions? • Effective managers seek to closely monitor and thus regulate their restaurant’s (labor cost/labor cost percent). • Labor costs include only the wages and salaries paid directly to the employees. (True/False) • A master schedule includes all of the following except • Employee names • Days of the week • Employee shifts • Employee positions • Employee turnover rates cannot be influenced by managers. (True/False)

36. How Would You Answer the Following Questions? • 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

37. How Would You Answer the Following Questions? • What is the primary tool managers have to control labor costs? a) employee turnover b) overtime c) labor cost percentage d) the schedule

38. How Would You Answer the Following Questions? • What is the primary tool managers have to control labor costs? a) employee turnover b) overtime c) labor cost percentage d) the schedule

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

40. 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 and employees 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.

41. 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. Payroll dollars The amount of money available for payroll for a scheduling period. Productive Producing or capable of producing an effect or result. Productivity standard A level set by managers to measure the amount of work performed by an employee.

42. 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.