Chapter 31 — Teaching Notes

What this chapter is doing

Chapter 31 has two jobs and they pull in different directions.

The first is conventional: teach the restaurant profit-and-loss statement, the chart of accounts, COGS computed properly, and the weekly flash report. That material is well-trodden and students expect it.

The second is unusual and is the reason the chapter is the longest in Part VII. Thirty chapters have each contributed numbers to Bellwether's plan, and in six places they disagree with each other. This chapter resolves all six in public — the roster, the labor line, the two revenue bases, Year 3 occupancy, the fixed/variable split, and a dine-time definition. The reconciliation is not housekeeping; it is the lesson. Real plans accumulate exactly these contradictions, and the accounting chapter is where they either get resolved or get carried forward into a decision.

Teach it as the chapter where the book audits itself. Students find that far more interesting than a chart of accounts, and it is also true.

Timing

• Two 75-minute sessions, and it genuinely needs two.
• Session one — the statement. §31.1's structure, §31.3's COGS with the inventory adjustment, and §31.5's prime cost. Work Exercise 31.2 live; the adjusted-versus-unadjusted gap is the hook.
• Session two — the reconciliations and the flash report. §31.5's roster table, §31.6's ramped flash report, and the labor line's three columns. Close on Case Study 2.
• One session, if you must: §31.3, §31.5, §31.6 — COGS, prime cost, and the flash report. Assign the reconciliations as reading and pick them up in Chapter 32.
• Self-paced: 7–9 hours. This is the longest chapter in Part VII.

Common misconceptions

1. "Food cost is purchases divided by sales." Carried over from Chapter 11 and still not dead. Exercise 31.2 kills it with arithmetic: the same period reads 33.90% unadjusted and 32.06% adjusted, and 1.84 of those points are staff meals, comps, and a lime that went into a cocktail. Students who believe the shortcut will confidently diagnose a kitchen problem that is actually a bookkeeping one.

2. "A void is like a comp." It is not, and the difference is the most dangerous asymmetry in the chapter. A comp reduces revenue and appears on the statement. A void appears nowhere — no revenue account, no cost account, no line on the P&L. That is precisely why it is an audit item and why 41 voids worth \$128 in a single week belongs on the flash report.

3. "EBITDA is cash." Exercise 31.26 is built to break this. EBITDA adds back \$47,500 of depreciation (an expense consuming no cash) and never subtracts \$24,500 of principal (cash that is not an expense). The \$23,000 gap is the difference, and students who conflate the two will approve distributions the business cannot fund.

4. "March was better than February." Exercise 31.16. Five Fridays against four. Students reason from the reported number without checking the calendar, which is exactly what the composite owner in Case Study 2 did for a month.

5. Headcount, positions, and FTE as interchangeable. Exercise 31.15. Twenty-six people filling nineteen positions totalling 9.85 FTE are three true statements about one restaurant. Students pick whichever is largest for a hiring plan and whichever is smallest for a budget, which is how a plan ends up internally inconsistent.

6. "Moving comps to marketing is harmless because profit is identical." The most sophisticated misconception in the chapter, and the most instructive, because the student is right about profit and wrong about everything else. Exercise 31.21.

The hardest point to teach

That a plan can be internally contradictory and still look finished.

Students accept that a number can be wrong. They struggle with the idea that a plan can contain three different correct answers to the same question — 31 people, 24 positions, 9.85 FTE — none of which is an error, and that the absence of a stated mapping is itself the defect.

What works: put the labor line's three columns on the board — \$500,000 / \$570,461 / \$597,461 — and ask which one is true. Let the class argue. The productive answer is that all three are, under stated assumptions, and the plan's failure was never publishing which assumption it was using. Then ask what a lender does with a plan that says 32.3% when the roster says 36.8%.

A demonstration that works

The cancelling-errors demonstration. This is the best fifteen minutes in Part VII.

Put Chapter 4's labor split on the board: \$252,000 fixed + 16.0% variable. Have the class compute total labor at \$1,550,000 of revenue. They get \$500,000 — exactly the plan's figure. Ask whether the split is correct. They will say yes, because it reconciles.

Now have them compute total labor at \$1,200,000** using the same split: \$252,000 + \$192,000 = \$444,000, or **37.0%** of sales. Then using Chapter 19's honest split (\$191,895 fixed + 19.88% variable): \$191,895 + \$238,560 = \$430,455, or 35.9%**.

The two splits differ by \$13,545 at \$1.2M and by nothing at all at \$1.55M — because Chapter 4 was \$60,105 too high on the floor and 3.88 points too low on the slope, and the errors cancel at exactly one volume: the one the plan was written for.

Then the closing question: "When would you ever use a fixed/variable split at the volume you already know?" Never. You build it to ask what happens at other volumes — which is Chapter 32's entire subject, and which is the only situation in which this split fails.

Assessment notes

• Exercises 31.2, 31.5, 31.8, 31.10, and 31.24 are the computational core. A student who can do 31.2 and 31.8 can read a restaurant statement.
• 31.26 is the single best diagnostic in the chapter — the \$23,000 gap tests whether a student actually understands EBITDA or has memorized the acronym.
• 31.21 (the comps memo) is the best writing prompt: it requires holding two true things at once (profit is identical; the ratios are not) and choosing on operational grounds.
• 31.30 is the capstone exercise and should be graded hardest. Look for a fixed/variable split built from a schedule — positions, hours, rates — and not from a percentage. A student who writes "labor is 30% fixed" has not done the exercise.
• 31.34 is the professional-judgment item and has no arithmetic. Grade the sequence and, above all, the "what you do not do" list. The strongest answers refuse to revise the assumption to close the gap and explain why that would destroy their own ability to trust the model later.
• 31.28 (the café flash report) tests transfer rather than recall — whether the student understands why each field exists well enough to know which to drop. Look for covers→transactions, the added waste line, and larger packaging inside channel cost.

Connections

Backward: Ch. 1 (prime cost, the bands, Figure 1.4's occupancy caveat, the seven-week lag), Ch. 9 (the ramp — why the flash target is not flat), Ch. 11 and 13 (the usage formula and the physical count that make COGS real), Ch. 17–20 (the roster and the reclassification), Ch. 26 (processing and sales tax), Ch. 29–30 (channel cost). Forward: Ch. 32 (inherits the split and finds break-even \$49,361 above Chapter 4's estimate), Ch. 33 (profitable on paper, out of cash), Ch. 34 (the controls that make these numbers trustworthy), Ch. 37 (comp-store reporting), Ch. 39 (reading a statement in trouble).