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Friday, October 31, 2014

Should We Include Labor In Our Standard Recipes?

A frequent reader question topic involves the addition of direct labor in all standard recipes.  Before giving a firm recommendation, I'm going to explore the pros and cons of this approach.

On the plus side, recipes which include a labor component will make side-by-side gross profit comparisons between daily specials menu options more informative.    Many restaurants enjoy a major profit contribution from their specials.  Knowing the expected gross profit is a big plus.  By their nature, specials are designed to provide a spark and they should be priced to deliver a decent profit margin.

If we feed the recipe model a week or month of actual menu item sales counts, the recipes with a direct labor component will show the number of expected hours (and dollars) of direct labor .  This figure may be compared to actual labor cost data.  This is one of the benefits desired by operators who adopt this approach.

Switching to the minus side, the addition of a direct labor component to standard recipes makes variance reporting more complex.  Recipe costing software is designed to quickly calculate the impact of price changes for major ingredients.  This impact may be muted by any pay changes. 

The payroll rate increase issue also impacts ongoing use of the recipe model.  While the software is designed to enter food purchase orders, invoices, stock issues, etc., it does not have a robust payroll data link. 

In fact, operators need to "purchase" hours of direct labor with the most recent rate per hour.  The hourly rate is a single figure and it needs to include burden (vacation pay allowance, worker's compensation insurance, unemployment insurance, disability insurance, etc.).  The explanation on how the model handles labor can be confusing to anyone without a degree in accounting or management.

 Some operators use central production (i.e. commissary) for a group of restaurants.  They may have a dedicated team producing food which is packaged in standard containers and shipped by tray or case.  If the commissary team produces a similar volume of finished product each week, the addition of labor (and possibly an overhead factor) may be useful in billing the units.

I would recommend operators examine their true reporting needs carefully before adding a direct labor component to their standard recipes.  The extra work involved in the setup and ongoing maintenance needs to be justified by the benefit derived from the reports.  Most companies control labor with time clocks, schedules, productivity software and employee incentives.  The addition to the recipe model may not offer a good return for the time invested.

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