Labor Cost

chapter 11
and Control
Class Name
Instructor Name
Date, Semester
Foundations of Cost Control
Daniel Traster
Opening Questions
• For current workers, how do you know how much
gross (pre-tax) income you should earn each week?
• How much money would you earn if you worked 40
hours this week? 45 hours?
• Are you ever scheduled for a certain number of hours
only to find that by week’s end you’ve worked more
or fewer hours?
Calculating Labor Costs
Using a work schedule and a list of each
employee’s hourly wages or annual salary, a
manager can calculate a department’s weekly
standard labor cost.
Standard = budgeted
Actual = the cost based on the real hours actually
Labor Cost for Hourly Workers
Preliminary Labor Cost =
Hours Scheduled (or worked) X Hourly Rate
• Preliminary means before benefits
• Using scheduled hours yields standard cost
• Using worked hours yields actual cost
Example 11a
Employee earns $11.75/hour and is scheduled for
45 hours this week. What is preliminary standard
labor cost?
Note: Overtime earns 1.5 times the regular rate
Preliminary Labor Cost
=(40 hours X $11.75) + (5 hours X $11.75 X 1.5)
= $470 + $88.13
= $558.13
Salaried Workers
• Get the same size paycheck each week no matter
how many hours or days they work
• Annual salaries can be divided into daily salaries by
dividing by 365 days per year.
Labor Cost for Salaried Workers
Preliminary Daily Labor Cost =
Annual Salary ÷ 365 days
• Preliminary Labor Cost for any period of time is the
daily cost X the number of days in the period
Preliminary Weekly Labor Cost =
Preliminary Daily Labor Cost X 7
Example 11b
Salaried worker earns $40,000 per year. What is
the weekly labor cost before benefits?
Pre. Daily Labor Cost =
$40,000 ÷ 365
= $109.59
Pre. Weekly Labor Cost =
$109.59 X 7
= $767.12
Accounting for Benefits
All workers have some benefits cost, even if just for
social security and workers’ comp. Benefits and
costs may differ between employees. Benefits cost
typically calculated as a percent of wages or
Standard (or Actual) Labor Cost =
Preliminary Labor Cost X (1 + benefits percent)
Example 11c
Employee is scheduled for 39.5 hours at
$9.50/hour. Benefits cost is 13.8%. What is the
employee’s standard labor cost?
Pre. Labor Cost =
39.5 h X $9.50/h =
Standard Labor Cost =
$375.25 X (1 + 0.138) =
Example 11d
Manager earns $45,000 annually with benefits
package worth 28.3% of salary. What is the
manager’s weekly labor cost?
Pre. Daily Labor Cost = $45,000 ÷ 365 = $123.29
Pre. Weekly Labor Cost = $123.29 X 7 = $863.03
Weekly Labor Cost = $863.03 X (1 + 0.283) = $1,107.27
Department Labor Cost
• Computerized labor cost spreadsheet includes (for
each employee):
―hourly or daily pay rate
―benefits percent
―hours (either scheduled or worked)
• Enter formulas in advance and the manager only
needs to enter each employee’s hours each week.
• For department or company labor cost, add the labor
costs for all of the employees
Department Labor Cost (cont.)
Standard Labor Cost
• can be forecast for days, weeks, months, or
• Longer time period forecasts are often less
Actual Labor Cost
• can be done by similar time frames, but
because it is based on real numbers, it is
always accurate.
Standard vs. Actual Labor Costs
• Actual and Standard are rarely identical
• Salaried workers earn the same amount, but hourly
workers may have schedules adjusted
• Big variances between standard and actual labor
costs may be sign of poor management
Labor Cost Percent
• Actual and standard costs in dollars may vary greatly
as business volume changes, but labor cost percents
should be close
• Labor cost percents compare labor cost to total sales
Labor Cost Percent Formula
Labor Cost %
Labor Cost ($)
Sales ($)
• Labor Cost and Sales must cover same time period
• Standard labor cost % uses standard labor cost and
sales dollars
• Actual labor cost % uses actual labor cost and sales
Example 11e
Calculate weekly standard labor cost percent if
standard weekly labor cost is $14,200 and forecast
sales for that week are $48,500.
Labor Cost %
= $14,200 ÷ $48,500
= 0.293 or 29.3%
Example 11f
Restaurant budgets $12,100 in weekly labor cost
and $38,000 in weekly sales. Actual figures for that
week are $12,850 in labor and $39,400 in sales.
Compare standard and actual weekly labor costs
for the restaurant.
Standard = $12,100 ÷ $38,000 = 31.8%
Actual = $12,850 ÷ $39,400 = 32.6%
• Labor cost went up despite stronger sales
• Poor performance by management
How Labor Cost relates to Profit
Fixed costs do not change with business volume, so
higher sales beyond budget should generate
greater profits if management controls variable
Profit (not labor cost) is the ultimate measure of
management performance, so reduced labor
cost only helps profit if other costs are not equally
Measuring and Improving Performance
• Some measures evaluate each employee’s
• Other measures evaluate a team of workers when a
productivity value cannot be assigned to each
worker separately
Person-Hours are
the sum of work hours completed
by all the people in a group or team
for a given period of time
Sales per Person or Person-Hour
Sales per person compares dollars in sales
generated by each server and comes from POS.
Total Sales for a Period
Sale per Person-Hour =
Person-Hours for a Period
Example 11g
During 4-hour dinner service, restaurant earns
$8,425 in sales. 3 cooks and 2 dishwashers all work
the full 4-hour shift. Calculate sales per personhour for this team.
Person-hours = 5 workers X 4 hours = 20
Sales per person-hour = $8,425 ÷ 20 person-hours
= $421.25/person-hour
Covers per Person
Covers per person measures the number of
customers served by each server; comes from
POS. Servers who handle more customers are
more valuable
Covers for a Period
Covers per Person-Hour
Person-Hours in a Period
Example 11h
Team of 3 cooks and 1 dishwasher work from
11:00 – 2:00 for lunch service and serve 295 covers.
What is this team’s covers per person-hour?
= 4 workers X 3 hours
= 12
Covers per person-hour
= 295 covers ÷ 12 person-hours
= 24.6 covers/person-hour
Sales and Covers per Person-Hour
• Sales per person-hour and covers per person-hour are
meaningless in an absolute sense. Measure to set a
baseline and then improve efficiency from there.
• They help interpret labor cost numbers, which are
impacted somewhat by varying wage rates of the
employees scheduled
Errors per Cover
Errors per cover measure quality of worker
Error or Void is
a mistake that results in an unsellable dish (dropped,
burned, customer-rejected, etc.)
Errors per Cover (cont.)
Errors in a Period
Errors per Cover
Covers in Same Period
• Errors per cover should always be a decimal well
below 1.
• Errors per cover should not change with business
volume, or management must act to improve
employee work quality
Example 11i
Restaurant served 417 guests during dinner but had
13 food “errors.” What is this restaurant’s errors per
cover rate?
Errors per cover
= 13 errors ÷ 417 covers
= 0.031 errors/cover
Factors that Impact Performance
and Labor Cost
Motivating and
Managing Employees
Facility Layout
Forecasting Accurately
Reducing Injuries and
Prime Cost
Labor Cost and Food Cost sometimes work
together. Cutting labor by buying pre-fab
ingredients can increase food cost and leave
profit stagnant.
Cost of
Example 11j
Weekly cost of goods sold is $1,730; labor cost for
same week is $1,589. What is prime cost for that
Prime Cost = cost of goods sold + labor
= $1,730 + $1,589
= $3,319
Prime Cost Percent
Prime Cost
Prime Cost %
Example 11k
Café has prime cost of $3,319 during same week it
has sales of $5,720. What is café’s prime cost
Prime Cost % = prime cost÷ sales
= $3,319 ÷ $5,720
= 58.0%
Prime Cost (cont.)
• Reducing prime cost % (by reducing food, beverage,
or labor cost without increasing the others) usually
leads to higher profits
• Prime cost % must not be cut at the expense of the
business’s quality standards or long-term revenue and
profit may suffer.
Example 11l
• Restaurant budgets $18,430 for cost of goods sold and
$21,070 in labor cost for January.
• Sales are forecast to be $70,000.
• At month’s end, actual figures are
―$16,590 for cost of goods sold
―$19,962 for labor cost
―$64,800 in sales.
Compare restaurant’s standard and
actual prime costs and prime cost
Example 11l (cont.)
Standard prime cost = $18,430 + $21,070 = $39,500
Actual prime cost = $16,590 + $19,962 = $36,552
Standard PC% = $39,500 ÷ $70,000 = 56.4%
Actual PC% = $36,552 ÷ $64,800 = 56.4%
Costs were controlled very well in a month that fell
below sales targets

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