Controlling Labor and Other Costs
9
OH 9-1
9-1
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.
OH 9-2
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
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Fixed and Variable Payroll Costs
OH 9-4
Total Labor Cost Consists Of
Payroll
 Includes employee’s
hourly wages
 Includes
management
salaries
OH 9-5
Other Payroll Costs
 Includes payroll
taxes and
assessments
 Includes benefits
costs
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 9-6
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 9-7
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 9-8
Common Employee Benefits
 Paid holidays
 Life insurance
 Paid vacations
 Disability insurance
 Paid sick or personal
 Dental insurance
days
 Health insurance
 Vision insurance
 Company-funded
retirement programs
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OH 9-10
Labor Cost Percentage
 Restaurant managers must relate the dollars
spent for labor to the sales generated by those
labor dollars.
Labor cost
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÷ Sales =
Labor cost percent
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.
OH 9-12
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 9-13
Some Productivity Standards
OH 9-14
Additional Labor Productivity measures
OH 9-15
Additional Labor Productivity measures
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Steps to Controlling Labor Costs
OH 9-17
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 9-18
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 9-19
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 9-20
Labor Standard (budget)
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Forecasting Labor Costs—
Calculating Labor Hours and Schedule
 Step 1 – Determine total available labor dollars.
Standard labor
cost percent
x
Projected
sales
=
Dollars available
for labor
 Step 2 – Subtract costs of employee benefits
and taxes.
Dollars available
for labor
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–
Benefits
and taxes
=
Remaining payroll
available
Forecasting Labor Costs—
Calculating Labor Hours and Schedule
 Step 3 – Subtract fixed labor costs.
Payroll dollars
Fixed cost
Dollars available for
–
=
available
salaries
variable-cost employees
Employee schedules are planned with this dollar
amount to help ensure targeted labor costs
are met!
OH 9-23
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.
Est. number
Number of
÷
= Covers per hour
of covers
service hours
 Divide covers per hour by the number of covers for
each server.
Covers per
Covers
÷
= Number of servers
hour
per server
 Adjust, based on the employees’ skill.
OH 9-24
Master Schedules Identify the Number of
Required Employees continued
 Forecasting other positions
 Subtract servers’ cost from the dollars available for
variable-cost employees.
Dollars available
for variable-cost
employees
–
Server
cost
=
Dollars available
for other positions
 Divide the result by the average wage per hour.
Dollars
available for
÷
other positions
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Average
wage per
hour
=
Number of hours
available for other
positions
Master Schedule
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Master Schedules
OH 9-27
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 9-28
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 9-29
Validating the Master Schedule
Fixed
payroll
+
Variable
payroll
= Total payroll
Total
payroll
+
Taxes and
benefits
= Total labor cost
Total
labor
÷ Sales
= Total labor cost percent
The labor percent forecasted by the master
schedule must match company standards (budget).
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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 9-31
Another Factor Directly Affecting Labor Costs
 Employee turnover
 The number of employees hired to fill one position in
a year’s time
Persons hired
Average number
÷
= Turnover
per year
of employees
Turnover x 100 =
OH 9-32
Turnover rate
percent
Another Factor Directly Affecting Labor Costs
continued
 Employee turnover example
300 hired
÷ 100 needed
=
3 x 100 =
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3
300%
Reasons for Employee Turnover
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
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
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 except
A.
B.
C.
D.
4.
OH 9-35
Employee names
Days of the week
Employee shifts
Employee positions
Employee turnover rates cannot be influenced by
managers. (True/False)
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 9-36
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
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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
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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 9-39
Chapter 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 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.
OH 9-40
Chapter 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.
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.
OH 9-41
Chapter 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.
OH 9-42