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Monday, April 13, 2015

Restaurant Cost Allocations

Most dinner houses with a full bar have a difficult time deciding how to allocate food, beverages, labor and other expenses.  Since the tight control of cost of sales and labor are critical to success, the allocations in these prime costs are a central focus.

Before you begin to drill down into the truly fine cost details, make sure you define all the individuals who support key activities:  management, financial and administration.  The costs associated with the top management staff should not be allocated to any operations departments.  These operations departments are tougher to control.  There may be several workers who move between the kitchen, bar and dining room.  These flexible employees fill in where they are needed.

Some examples of flexible workers include bartender/wait staff, wait staff/general kitchen helper and bar manager/hostess.  Sometimes, these employees move between departments in a single shift.

The cost of sales issues break down by food and beverage in most restaurants.  The biggest decision involves which department receives the revenue for sales of soft drinks.  If sales of soda, bottled water, coffee, tea, juices and milk are included in food sales, the allocation of cost of sales can be tricky.  The bar will use all of these beverages as mixers and in dessert course beverages.

Most bars use olives, onions, cherries, lemons, limes, celery, fruit and vegetable juices, and many sauces (tabasco, Worcestershire, soy, etc.).  Some bars serve drinks with bacon, bouillon, horseradish, and purees.  Back in the kitchen, many chefs cook with beer, wine, and liquors.

The employee meal decision is a common concern.  Many restaurants allow all employees to enjoy a meal for each shift worked.  A common question involves whether to treat employee meals expense as a labor cost or a cost of sales for the kitchen.

In general, the net cost associated with food used in the bar and alcoholic beverages used in the kitchen will be comparatively low.  A best practice I have seen in my client's operations is to use a different brand of alcoholic beverage for the kitchen.  Examples include wine purchased in a gallon container and an economy brand of vodka which differs from the well brand.

Tracking flexible employees and isolating management and administrative staff are important cost issues.  The treatment of soft drink revenue and expenses is very important.  Employee meals can be a major expense. (e.g. 100 employees consuming five $3 meals per week represent a monthly cost over $6,000).

If the kitchen does recognize the revenue and cost of sales for soft drinks, the gross profit will help offset the employee meals cost.

The best solution for handling all of these cost allocation issues is an excellent system for transferring costs between departments.  Flexible employees generally earn the same hourly pay.  Most payroll systems allow hours to be charged to more than one department.

It is important to see report distribution ahead of time.  Imagine the managers who will review the monthly department report.  If your company genuinely utilizes a strong segregation of duties with separate managers for each department, you will benefit from the investment in a robust cost management system. 

On the other hand, your company may use a flat structure with many key people reporting directly to a single owner or general manager.  My experience with less complex operations shows the time and expense involved with cost segregation won't be justified.

Before you start a project for tightly tracking these cost allocations, make sure the benefit will outweigh the cost.  You may be able to mitigate the impact of these secondary issues through a simple offset system.  Most vendors will allow a single location to have more than one account.  For example, the bartender could order lemons directly from the produce supplier.  By performing a cost/benefit analysis, you may save significant time and expense.

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