Managing Labor Costs
STAFFING GUIDE
Staying within Budgeted Labor Cost
A comparison of actual to budgeted labor costs can be used to plan future expenses. If your labor costs are higher than desired, you need to find ways to reduce them. One method of analyzing labor costs is to look at the actual and budgeted labor cost percentage. The projected labor cost percentage is calculated by dividing labor dollars by the projected volume of sales. The actual labor cost percentage is the actual labor dollars spent for a given time period divided by the actual volume of sales.
Example
A small restaurant has the standard labor hours and rates of pay shown in Table 13.2
| Position | Labor Hours for 50 Meals | Labor Hours for 75 Meals | Labor Hours for 100 Meals | Hourly Rate (including benefits) |
|---|---|---|---|---|
| Food Server | 8.5 | 12.5 | 16 | $9.85 |
| Bus Person | 6.5 | 6.5 | 9 | $10.95 |
| Cook | 7 | 10 | 14 | $16.50 |
| Steward | 6.5 | 6.5 | 9 | $12.00 |
| Host | 0 | 0 | 4 | $10.25 |
Table 13.2: Labor Planning and Cost Sheet
Based on previous sales figures for a Tuesday night, the manager expected 77 customers on a particular Tuesday evening. The projected revenue for this evening was $1500.25. The manager developed a staff schedule based on the labor hours for 75 meals. The labor dollars were computed by multiplying the scheduled hours for each position by the hourly rate. The total labor cost for the evening was $437.30. The projected labor cost percentage was:
$437.30 ÷ $1500.25 x 100 = 29.1%
On this evening, the sales were down. Although 76 customers were served, very close to the number expected, the average cheque size was lower. Only $1425.95 worth of menu items were sold. The actual labor cost percentage was:
$437.30 ÷ $1425.95 x 100 = 30.7%
One of the best ways to improve productivity is to continually review and revise performance standards. Use the problem-solving process to identify the problem, generate alternatives, evaluate the alternatives, choose the best ideas, and implement them. Some questions you might ask yourself are:
- Can a particular task be eliminated?
- Is training or cross-training needed to improve the skills of staff?
- Can a task be reassigned to a person who is not as busy (e.g., could the dishwasher assist with some pre-preparation of items early in the shift)?
- Can slow periods be utilized more effectively to prepare for high-volume times?
- Does the menu need to be simplified?
- Is there standardization or simplification that can be done for systems of the operation?
- Do menu or volume changes require changes in facility layout?
- Would convenience items reduce costs without reducing the required quality?
- Should more part-time workers or temporary workers be used? Or is there a need for more flexible schedules or split shifts?
- Is overtime being used carefully or not at all?
- Is there an opportunity to introduce self-service or vending somewhere in the operation?
- Are the activities of another part of the operation affecting the performance of this department (e.g., the catering department has opened a new conference room some distance from the kitchen which requires food service)?
- Have there been changes in volume and peak times that need to be considered? Is the time open for service being maximized or does it need to be adjusted?
- Has paperwork been reduced as much as possible through computerization?
After considering all of these factors, you may still not be able to reduce your labor costs. You may have to raise your menu prices to improve the profitability of your operation. Of course, you need to consider the price the market will bear and the prices charged by your competitors before taking such an action.
It is often useful to look at both your food costs and labor costs when deciding whether a price increase is needed. If your labor costs are a little higher than anticipated and your food costs are lower, there may not be a problem. Some companies use a figure of 70% to 80% as a target for the sum of labor and food costs. Another strategy is to have lower contribution margins but increase your volume. This makes sense because the more volume you have, the more money is contributed toward meeting your fixed costs of doing business.