Financial Management, Budgeting, and Cost Control
This domain tests operating budgets, revenue and expense control, food and labor cost percentages, variance analysis, and break-even. Expect calculation questions and interpretation of unfavorable versus favorable variances.
Core rules and concepts
- Food cost percentage = cost of food sold ÷ food sales. Cost of food sold = beginning inventory + purchases − ending inventory, adjusted for transfers and employee meals.
- Labor cost percentage = labor cost ÷ revenue. Prime cost = food cost + labor cost.
- Contribution margin = selling price − variable cost per unit. Break-even units = fixed costs ÷ contribution margin per unit.
- A variance is favorable when revenue is above budget or expense is below budget; it is unfavorable when expense is above budget or revenue is below budget.
- Use the same sales base when comparing percentages. A percentage-point change is not the same as a percent change.
Worked example
Beginning inventory is $20,000, purchases are $80,000, and ending inventory is $22,000. Cost of food sold = $20,000 + $80,000 − $22,000 = $78,000. Food sales are $250,000, so food cost percentage = $78,000 ÷ $250,000 = 31.2%. If the budget is 30%, the operation is 1.2 percentage points over budget. In dollars, budgeted food cost at 30% of $250,000 is $75,000; actual is $78,000, so the variance is $3,000 unfavorable.
Traps that cost marks
- Dividing food cost by total revenue instead of food sales.
- Forgetting beginning or ending inventory.
- Calling a 1.2 percentage-point variance a 1.2% variance.
- Ignoring employee meals or transfers.
- Using break-even with a contribution margin that includes fixed costs.