Matakuliah
Tahun
: V0282 - Manajemen Akuntansi Hotel
: 2009 - 2010
Managerial Accounting
for Costs Chapter 9
Chapter Outline
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The Concept of Cost
Types of Costs
Cost/Volume/Profit Analysis
Learning Outcomes
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Identify the concept of a business cost.
Differentiate between the different types of business
costs.
Perform (when costs are known) a cost/volume/profit
analysis.
The Concept of Cost
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Given all the possible approaches to examining costs,
perhaps the easiest way to understand them is to
consider their impact on a businesses’ profit.
At any specific level of revenue, the lower a business’s
costs, the greater are its profits.
There are a variety of useful ways in which hospitality
managers and managerial accountants can view costs
and thus can better understand and operate their own
businesses.
Types of Costs
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Useful ways to classify business costs are:
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Fixed and variable costs
Mixed costs
Step costs
Direct and indirect (overhead) costs
Controllable and non-controllable costs
Joint costs
Incremental costs
Standard costs
Sunk costs
Opportunity costs
Types of Costs
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Not all business costs can be objectively measured.
In fact, in some cases, costs can be a somewhat
subjective matter such as “talking with customers
regarding invoices”.
Cost accountants facing such issues can assign each
hospitality employee’s time to different activities
performed inside a company.
An accountant can then determine the total cost spent
on each activity by summing up the percentage of each
worker's time and pay that is spent on that activity.
Types of Costs
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This process is called activity based costing and it
seeks to assign objective costs to somewhat subjective
items such as the payment for various types of labor as
well as the even more subjective management tasks
involved with planning, organizing, directing and
controlling a hospitality business.
Using activity based costing to examine expenses and
thus better manage a business is called activity based
management and it is just one example of how fully
understanding costs can help you make better
decisions and operate a more successful business.
Fixed and Variable Costs
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As a manager, some of the costs you incur will stay the
same each month.
For that reason they are called fixed costs.
A fixed cost is one that remains constant despite
increases or decreases in sales volume (number of
guest or number of rooms).
Typical examples of fixed costs include payments for
insurance policies, property taxes, and management
salaries.
Fixed and Variable Costs
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A variable cost is one that increases as sales volume
increases and decreases as sales volume decreases.
Good managers seek to decrease their fixed costs to
their lowest practical levels while still satisfying the
needs of the business and its customers.
Those same good managers, however, know that
increases in variable costs are usually very good!
You would prefer, for example, to have to purchase
extra steaks and incur extra variable costs because that
would mean you sold more steaks and increased sales!
go figure!
To illustrate, consider Maureen’s Bountiful Burgers, a midsize, freestanding restaurant
outside a shopping mall, where Maureen features upscale gourmet burgers. If it costs
$2.00 of ingredients to make a gourmet burger and 50 guests order burgers, then the
total variable food cost is as follows:
Variable Cost per Guest (VC/Guest) x Number of Guests = Total Variable Cost
or
$2.00 x 50 = $100
If the total variable cost and the number of guests are known, VC/Guest can be
determined. Using basic algebra, a variation of the total variable cost formula can be
computed as follows:
Total Variable Cost
Number of Guests
or
$100
50
= $2.00
= VC/Guest
Mixed Costs
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It is clear that some business costs are fixed and that
some vary with sales volume (variable costs).
Still other types of cost contain a mixture of both fixed
and variable characteristics.
Costs of this type are known as semi-fixed, semivariable, or mixed costs.
In a hotel, the cost associated with a telephone system
is an excellent example of a mixed cost.
Mixed Costs
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The hotel will pay a monthly fee for the purchase price
repayment, or lease, of the actual phone system.
This represents a fixed cost because it will be the same
amount whether the occupancy percentage in the hotel
is very low or very high.
Increased occupancy, however, is likely to result in
increased telephone usage by guests.
A hotel’s local and long distance bill will increase as
additional hotel guests result in additional telephone
calls made.
go figure!
The best way to understand a mixed cost is to understand the mixed cost formula. To
illustrate, assume a hotel pays $4,000 per month to lease its telephone system. Assume
also that you know (from historical records) that the average guest staying at the hotel
makes one local and one long-distance telephone call. The cost, to the hotel, of each
call averages $0.50 in access fees, or a total of $1.00 per guest. Assume also that, in a
specific month, the hotel anticipates 7,500 guests. Using the following formula for mixed
costs, the hotel’s telephone bill for the month could be estimated as:
Fixed Cost + Variable Cost = Total Mixed Cost
or
Fixed Cost + (Variable Cost per Guest x Number of Guests) = Total Mixed Cost
or
$4,000 + ($1.00 x 7,500) = $11,500
Separating Mixed Costs into Variable and
Fixed Components
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A mixed cost can be divided into its fixed and variable
components in order for management to effectively
control the variable cost portion.
It is this variable cost that is the most controllable in the
short-term.
Several methods can be used to split mixed costs into
their fixed and variable components.
The most common methods are high/low, scatter
diagrams, and regression analysis.
Separating Mixed Costs into Variable and
Fixed Components
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Although regression analysis and scatter diagrams
provide more precise results, the high/low method is
easier to calculate and gives you a good estimate of the
variable and fixed components of a mixed cost.
Figure 9.4 shows costs for Joshua’s Restaurant.
In order to determine his variable costs and fixed costs
components for his restaurant, see Go Figure! following
Figure 9.4.
Figure 9.5 shows Joshua’s variable costs per guest and
fixed costs separated for his restaurant.
Figure 9.4 Joshua’s Restaurant Costs for October, November, and December
NUMBER OF GUESTS
Food Cost
Beverage Cost
Salaries and Wages
Employee Benefits
Direct Operating Expenses
Music and Entertainment
Marketing
Utility Services
Repairs and Maintenance
Administrative and General
Occupancy
Depreciation
Interest
Total Costs
October
November
December
10,000
17,000
21,000
35,000
4,000
23,960
5,125
6,056
1,070
2,912
4,077
1,630
5,570
10,000
3,400
7,200
110,000
59,500
6,800
27,460
5,265
8,156
1,070
3,262
5,477
1,840
5,570
10,000
3,400
7,200
145,000
73,500
8,400
29,460
5,345
9,356
1,070
3,462
6,277
1,960
5,570
10,000
3,400
7,200
165,000
go figure!
To demonstrate how the high/low method separates a mixed cost into its variable and
fixed components, we will use Joshua’s marketing expense from Figure 9.4. The
high/low method uses the three following steps:
1. Determine variable cost per guest for the mixed cost.
Choose a high volume month (December) and a low volume month (October) that
represents normal operations. Then, use the following formula to separate out
variable cost per guest for the mixed cost:
High Cost – Low Cost
High # of Guests – Low # of Guests
= Variable Cost per Guest (VC/Guest)
or
$3,462 - $2,912
21,000 – 10,000
= $0.05
2. Determine total variable costs for the mixed cost.
Multiply variable cost per guest by either the high or low volume (number of guests)
as follows:
VC/Guest x Number of Guests = Total Variable Cost
or
$0.05 x 10,000 = $500
(go figure! continued)
3. Determine the fixed costs portion of the mixed cost.
Subtract total variable cost from the mixed cost (at the high volume or low volume
you chose in step 2 – low volume at 10,000 guests was chosen in this example) to
determine the fixed cost portion as follows.
Mixed Cost – Total Variable Cost = Fixed Cost
or
$2,912 - $500 = $2,412
Thus, Joshua’s mixed marketing expense can be shown with its variable and fixed
components as follows:
Fixed Cost + Variable Cost = Total Mixed Cost
or
Fixed Cost + (Variable Cost per Guest x Number of Guests) = Total Mixed Cost
or
At 10,000 guests served:
$2,412 + ($0.05 x 10,000) = $2,912
Figure 9.5 Joshua’s Restaurant Variable Costs per Guest and Fixed Costs
NUMBER OF GUESTS
Food Cost
Beverage Cost
Salaries and Wages
Employee Benefits
Direct Operating
Expenses
Music and Entertainment
Marketing
Utility Services
Repairs and
Maintenance
Administrative and
General
Occupancy
Depreciation
Interest
Total Costs
October November December
10,000
17,000
21,000
Variable
Cost per
Guest
Fixed
Costs
35,000
4,000
23,960
5,125
59,500
6,800
27,460
5,265
73,500
8,400
29,460
5,345
3.50
0.40
0.50
0.02
0
0
18,960
4,925
6,056
1,070
2,912
4,077
8,156
1,070
3,262
5,477
9,356
1,070
3,462
6,277
0.30
0
0.05
0.20
3,056
1,070
2,412
2,077
1,630
1,840
1,960
0.03
1,330
5,570
10,000
3,400
7,200
110,000
5,570
10,000
3,400
7,200
145,000
5,570
10,000
3,400
7,200
165,000
0
0
0
0
$5.00
5,570
10,000
3,400
7,200
$60,000
Total Costs
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As you can see in Figure 9.5, total fixed costs and total
variable costs per guest are the same for all levels of
number of guests served.
Total costs are mixed costs, and thus can be treated as
such.
The total cost equation represents a straight line as
shown in Figure 9.6.
See the Go Figure! exercise following Figure 9.6 for
application of the Total Cost Equation.
Figure 9.6 Total Cost Graph
y axis
Total Cost
VC/Guest
Dollars
Fixed Cost
0
Low
Sales (volume)
High
x axis
go figure!
As you may remember from high school algebra, the equation for a line is y = a + bx.
The equation for a line applies to the Total Cost line, where “a” is the y intercept (fixed
costs), “b” is the slope of the line (VC/Guest), “x” is the independent variable (Number of
Guests or Sales Volume), and “y” is the dependent variable (Total Cost). The total cost
equation can be summarized as follows for Joshua’s Restaurant:
Total Cost Equation
y = a + bx
or
Total Costs = Fixed Costs + (Variable Cost per Guest x Number of Guests)
or
At any number of guests served at Joshua’s Restaurant:
Total Costs = $60,000 + ($5.00 x Number of Guests)
Thus, assuming that in a normal month variable costs per guest and fixed costs remain
the same for Joshua’s restaurant, total costs in any month can be estimated by using the
Total Cost Equation. All Joshua must do is insert the anticipated number of guests into
the equation to estimate total costs for any month. For example, if Joshua expects the
month of June to have 18,000 guests, he can estimate his total costs as follows:
Total Costs = Fixed Costs + (Variable Cost per Guest x Number of Guests)
or
At 18,000 guests served:
$150,000 = $60,000 + ($5.00 x 18,000)
Total Costs
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Total fixed costs and total variable costs per guest are
the same for all levels of number of guests served.
Therefore, managers can predict total costs at varying
levels of guests based on the total cost equation.
Effective managers know they should not categorize
fixed, variable, or mixed costs in terms of being either
"good" or "bad".
Some costs are, by their very nature, related to sales
volume. Others are not.
The goal of management is not to reduce, but to
increase total variable costs in direct relation to
increases in total sales volume.
Step Costs
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A step cost is a cost that increases as a range of activity
increases or as a capacity limit is reached.
That is, instead of increasing in a linear fashion like
variable costs, step cost increases look more like a
staircase (hence the name “step” costs).
For example, if one well-trained server can effectively
provide service for a range of 1 to 30 of a restaurant’s
guests, and 40 guests are anticipated, a second server
must be scheduled.
Each additional server added increases the restaurants
costs in a non-liner (step-like) fashion.
Figure 9.7 Step Costs
Server 3
Cost
Server 2
Server 1
1-30
31-60
Volume
61-90
Direct and Indirect (Overhead) Costs
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When a cost can be directly attributed to a specific area
or profit center within a business, it is known as a direct
cost.
Direct costs usually (but not always) increase with
increases in sales volume.
An indirect cost is one that is not easily assigned to a
specific operating unit or department.
In the hotel industry, indirect costs are more often
known as undistributed expenses and non-operating
expenses.
Direct and Indirect (Overhead) Costs
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Indirect costs in a restaurant or hotel include expenses
such as rent and other facility occupation costs,
property taxes, insurance, depreciation, amortization,
interest, and income taxes.
Indirect costs are also known as overhead costs.
Direct and Indirect (Overhead) Costs
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When there is more than one profit center, management
typically will use a cost allocation system to assign
portions of the overhead costs among the various
centers.
Another approach would be to assign overhead costs
on the basis of the size of each profit center.
Yet another approach is based on sales revenue
achieved by the profit center.
For each different allocation approach utilized, the
resulting charges to the individual profit centers are also
different.
Figure 9.8 Harley Hotels Operations Administration
Position
Salary
Related Expense
Total
Director of Operations
$ 125,000
$ 75,000
$ 200,000
Corporate Sales Director
$ 90,000
$ 60,000
$ 150,000
Total
$ 215,000
$ 135,000
$ 350,000
The five hotels operated by the Harley company, their location, their number of
rooms, and their annual revenues are found in Figure 9.9.
Figure 9.9 Harley Hotels Managed Properties
Hotel
Location
Rooms
Annual Revenues
Bitmore
Denver
300
$ 15,250,000
Los Cobo
Santa Fe
200
$ 8,500,000
The Drake
Dallas
225
$ 11,750,000
Greenwood
Miami
250
$ 10,500,000
Sandstone
Las Vegas
525
$ 22,000,000
1,500
$ 68,000,000
Total
go figure!
Assume that you are the individual responsible for making cost allocation
decisions for the Harley Hotel company. How would you assign the costs related
to your company employing the director of operations and the corporate sales
director?
Certainly, one approach would be to assign each hotel an equal amount of this
corporate overhead. If such an approach were used, the allocation to each hotel
would be computed as:
Total Overhead
Number of Profit Centers = Overhead Allocation per Profit Center
or
$ 350,000
5
= $70,000 per hotel
Figure 9.10 Overhead Allocation Based on Number of Rooms
Hotel
Rooms
% of Total Rooms
$ of Overhead Charge
Bitmore
300
20.0
$ 70,000
Los Cobo
200
13.3
46,550
The Drake
225
15.0
52,500
Greenwood
250
16.7
58,450
Sandstone
525
35.0
$ 122,500
1,500
100.0
$ 350,000
Total
Figure 9.11 Overhead Allocation Based on Annual Revenues
Annual
% of Total
$ of Overhead
Hotel
Revenues
Revenues
Charges
Bitmore
$ 15,250,000
22.4
$ 78,400
Los Cobo
$ 8,500,000
12.5
43,750
The Drake
$ 11,750,000
17.3
60,550
Greenwood
$ 10,500,000
15.4
53,900
Sandstone
$ 22,000,000
32.4
113,400
Total
$ 68,000,000
100.0
$ 350,000
Controllable and Non-Controllable Costs
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Controllable costs are those costs over which a manger
has primary control, and non-controllable costs are those
costs which a manager cannot control in the short-term.
In most businesses, managers will only be held
responsible for the profits remaining after subtracting the
expenses they can directly control.
Examples of controllable costs are operating department
expenses and examples of non-controllable costs are
nonoperating expenses.
Experienced managers focus their attention on managing
controllable rather than non-controllable costs.
Joint Costs
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Closely related to overhead and cost allocation issues
is the concept of a joint cost.
A joint cost is one that should be allocated to two (or
more) departments or profit centers.
Most direct costs are not joint costs, while many indirect
costs are considered joint costs.
An example would be an Executive Chef who is
responsible for the food production for several
departments in a hotel. Each department might share
the Chef’s salary as a joint cost.
Incremental Costs
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Incremental costs can best be understood as the
increased cost of “each additional unit”, or even more
simply, the cost of “one more”.
Consider the costs incurred by a hotel to sell a single
sleeping room to a single traveler.
Assume that the managers of a hotel knew that the cost
of providing this single sleeping room to a single
traveler was $40.00.
The direct question related to incremental costs is this,
“How much more does it cost to sell the same sleeping
room if it is occupied by two guests, rather than one?”
Standard Costs
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The best hospitality managers want to know what their
costs should be.
Bear in mind that management’s primary responsibility
is to incur costs appropriate for the quality of products
and services delivered to guests.
Standard costs are defined as the costs that should be
incurred given a specific level of volume.
Standard costs can be established for nearly all
business expenses.
If the variation from the standard cost is significant, it
should be of concern to management.
Sunk Costs
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A sunk cost is one that has already been incurred and
whose amount cannot now be altered.
Because it relates to a past decision, information about
a sunk cost must actually be disregarded when
considering a future decision.
Sunk costs are most often identified and considered
when making decisions about the replacement or
acquisition of assets.
Opportunity Costs
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An opportunity cost is the cost of foregoing the next
best alternative when making a decision.
For example, suppose you have two choices, A and B,
both having potential benefits or returns for you.
If you choose A, then you lose the potential benefits
from choosing B (opportunity cost).
Opportunity costs are often computed when
organizations must choose between several similar, but
not completely equal, courses of action.
Cost/Volume/Profit Analysis
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Experienced managerial accountants know that, for
most hospitality businesses, some accounting periods
are simply more profitable than others.
This is so because most businesses experience “busy”
periods and “slow” periods.
For most hospitality businesses, costs as a percentage
of sales are reduced when sales are high, and increase
when sales volume is lower.
The result, in most cases, is greater profits during high
volume periods and lesser profits in lower volume
periods.
Cost/Volume/Profit Analysis
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This relationship between volume, costs, and profits is
shown graphically in Figure 9.12, where the x
(horizontal) axis represents sales volume.
In a restaurant, this is the number of covers (guests)
served; in a hotel, it is the number of rooms sold.
The y (vertical) axis represents the revenues and costs
associated with generating the sales.
The Total Revenues line starts at 0 because if no
guests are served or no rooms are sold, no revenue
dollars are generated.
The Total Costs line starts farther up the y axis because
fixed costs are incurred even if no covers are sold.
Figure 9.12 Cost/Volume/Profit Relationship
Total Revenues
y axis
Profits
Dollars
Total Costs
Breakeven point
Losses
0
Low
Sales Volume
High
x axis
Cost/Volume/Profit Analysis
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The point at which the two lines cross is called the
breakeven point.
At the breakeven point, operational expenses are
exactly equal to sales revenue.
Stated in another way, when sales volume in a business
equals the sum of its total fixed and variable costs, its
breakeven point has been reached.
Below the breakeven point, costs are higher than
revenues, so losses occur.
Above the breakeven point, revenues exceed the sum
of the fixed and variable costs required to make the
sales, so profits are generated.
Computation of Cost/Volume/Profit Analysis
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By determining the breakeven point, the manager is
answering the question, “How much sales volume must
I generate before I begin to make a profit?”
Beyond the breakeven point, the manager will want to
answer another question, “How much sales dollars and
volume must I generate to make my target profit level?”
A cost/volume/profit (CVP) analysis predicts the sales
dollars and volume required to achieve a breakeven
point or desired profit based on known costs.
Computation of Cost/Volume/Profit Analysis
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Before a CVP analysis can be conducted, a contribution
margin income statement must be developed.
A contribution margin income statement shows P&L
items in terms of sales, variable costs, contribution
margin, fixed costs, and profit.
For an illustration of a contribution margin income
statement, see Figure 9.13.
The contribution margin for the overall operation is
defined as the dollar amount, after subtracting variable
costs from total sales, that contributes to covering fixed
costs and providing for a profit (see Go Figure!).
Figure 9.13 Joshua’s Contribution Margin Income Statement for October
Total Sales
$125,000 Sales Per Guest
$12.50
Variable Costs
50,000 Guests Served
10,000
Contribution Margin
75,000
Fixed Costs
60,000
Before Tax Profit
15,000
Taxes (40 %)
6,000
After-tax Profit
$9,000
go figure!
As you can see in Figure 9.13, the contribution margin calculation for Joshua’s is
as follows:
Total Sales – Variable Costs = Contribution Margin
or
$125,000 – $50,000 = $75,000
Computation of Cost/Volume/Profit Analysis
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The contribution margin income statement can also be
viewed in terms of per guest and percentage sales,
variable costs, and contribution margin as shown in
Figure 9.14.
Notice the boxed information in Figure 9.14 includes per
guest and percent calculations.
These include selling price, (SP), variable costs (VC),
and contribution margin (CM).
See Go Figure! for the steps to follow in CVP
calculations.
Figure 9.14 Joshua’s Contribution Margin Income Statement With Per
Guest and Percent Calculations
Per Guest
Total Sales
$125,000
SP
Variable Costs
50,000
Contribution Margin
75,000
Fixed Costs
60,000
Before-Tax Profit
15,000
Taxes (40%)
6,000
After-Tax Profit
9,000
Percent
$12.50
100%
- VC
5.00
40
CM
7.50
60
Guests served = 10,000
go figure!
To calculate these numbers, the following steps apply:
Step 1. Divide total sales, variable costs, and contribution margin by the number
of guests to get per guest values. Then, calculate CM/guest.
SP/guest = $125,000/10,000 guests = $12.50
VC/guest = $ 50,000/10,000 guests = $ 5.00
CM/guest = $ 75,000/10,000 guests = $ 7.50
SP/guest – VC/guest = CM/guest
or
$12.50 – $5.00 = $7.50
Step 2. Divide VC/guest by SP/guest, and CM/guest by SP/guest to get
percentage values. Then, calculate CM%.
SP% =
100%
VC% = $5.00/$12.50 =
40%
CM% = $7.50/$12.50 =
60%
SP% – VC% = CM%
or
100% – 40% = 60%
go figure!
To determine the dollar sales required to break even, Joshua uses the following formula:
Fixed Costs
Contribution Margin %
= Breakeven Point in Sales Dollars
or
$60,000 = $100,000
0.60
Thus, Joshua must generate $100,000 in sales per month before he begins to make a profit. At a
sales volume of less than $100,000, he would be operating at a loss.
In terms of the number of guests that must be served in order to break even, Joshua uses the
following formula:
Fixed Costs
Contribution Margin per Guest
= Breakeven Point in Guests Served
or
$60,000 = 8,000 Guests
$7.50
Now, assume that Joshua has decided that in July he will plan for $12,000 in after-tax profits. To
determine sales dollars and covers needed to achieve his after-tax profit goal, Joshua uses the
following formula:
Fixed Costs + Before-Tax Profit = Sales Dollars to Achieve Desired After-Tax Profit
Contribution Margin %
(go figure! continued)
Joshua knows that his after-tax-profit goal is $12,000, but the preceding formula calls for beforetax profit. To convert his after-tax profit to before-tax profit, Joshua must compute the following:
After-Tax Profit = Before-Tax Profit
1 – Tax Rate
or
$12,000 = $20,000
1 – 0.40
Now that Joshua knows his before-tax profit goal is $20,000, he can calculate his sales dollars to
achieve his desired after-tax profit as follows:
Fixed Costs + Before-Tax Profit = Sales Dollars to Achieve Desired After-Tax Profit
Contribution Margin %
or
$60,000 + $20,000 = $133,333.33
0.60
Thus, Joshua must generate $133,333.33 in sales in July to achieve his desired after-tax profit of
$12,000. In terms of calculating the number of guests that must be served in order to make his
profit, Joshua uses the following formula:
Fixed Costs + Before-Tax Profit
Contribution Margin per Guest
= Number of Guests to Achieve Desired After-Tax Profit
or
$60,000 + $20,000 = 10,666.67 Guests, Round up to 10,667 Guests
$7.50
Computation of Cost/Volume/Profit Analysis
•
You must always round the number of guests up
because
1. A guest (person) does not exist as a fraction.
2. It is better to slightly overstate the number of guests to
achieve breakeven or desired profits than to understate the
number and risk a loss or reduce profit. It is better to be safe
than sorry!
•
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Once you round the number of guests up, you should
adjust the total sales dollars to reflect this.
This difference is minimal and may not warrant
adjustment unless an exact sales dollar amount is
required based on number of guests.
Computation of Cost/Volume/Profit Analysis
•
When calculating sales and guests (or rooms) to
achieve breakeven and desired after-tax profits, you
can easily remember which formulas to use if you know
the following:
– Contribution margin % is used to calculate sales dollars.
– Contribution margin per guest (or room) is used to calculate
sales volume in guests (or rooms).
Computation of Cost/Volume/Profit Analysis
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You can predict any sales level for breakeven or aftertax profits based on your selling price, fixed costs,
variable costs, and contribution margin.
You can also make changes in your selling prices and
costs to improve your ability to breakeven and achieve
desired profit levels.
Margin of Safety
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Margin of safety shows how close a projected amount
of sales will be to breakeven, and thus, how close an
operation will be to incurring a loss.
Margin of safety calculates the difference between
projected sales and breakeven sales.
Once the margin of safety for the month is calculated, it
can be divided by the number of days in the month to
show the margin of safety per day.
These calculations are illustrated in Figure 9.15.
Figure 9.15 Joshua’s Margin of Safety for August
Sales $
Guests
112,500
9,000
Breakeven Sales
- 100,000
- 8,000
Margin of Safety
12,500
1,000
Margin of Safety per Day (31 days)
403.23
32.26 ~ 32
Projected Sales
Margin of Safety
•
You must always round the number of guests for margin
of safety down because
1. A guest (person) does not exist as a fraction.
2. It is better to slightly understate the number of guests as a
safety margin than to overstate the number and thus, your
safety net. It is better to be safe than sorry!
•
•
Once you round the number of guests down, you should
adjust the margin of safety dollars to reflect this.
This difference is minimal and may not warrant
adjustment unless an exact sales dollar amount is
required based on number of guests.
Minimum Sales Point
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A minimum sales point (MSP) is defined as the dollar
sales volume required to justify staying open for a given
period of time.
The information necessary to compute a MSP is as
follows:
– Food cost %
– Minimum payroll cost for the time period
– Variable cost %
•
Fixed costs are eliminated from the calculation
because, even if the volume of sales equals zero, fixed
costs still exist and must be paid.
go figure!
Consider the situation of Adrian, who is trying to determine whether he should close his
steakhouse at 10:00 p.m. or 11:00 p.m. Adrian wants to compute the sales volume
necessary to justify staying open the additional hour. He can make this calculation
because he knows that his food cost equals 40%, his minimum labor cost to stay open
for the extra hour equals $150, and his other variable costs (taken from his P&L
statement) equal 30%. In calculating MSP, his food cost % + variable cost % is called
his minimum operating cost. Adrian applies the MSP formula as follows:
Minimum Labor Cost
1 – Minimum Operating Cost = MSP
or
Minimum Labor Cost
1 – (Food Cost % + Variable Cost %) = MSP
or
$150
1 – (0.40 + 0.30) = $500
If Adrian can achieve a sales volume of $500 in the 10:00 p.m. to 11:00 p.m. time period,
he should stay open. If this level of sales is not feasible, he should consider closing the
operation at 10:00 p.m.
Review of Learning Outcomes
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•
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Identify the concept of a business cost.
Differentiate between the different types of business
costs.
Perform (when costs are known) a cost/volume/profit
analysis.