Chapter 31 — Exercises

Work these with a calculator and a piece of paper, not in your head. This is the accounting chapter; the whole point is that the arithmetic resolves. Items marked † have worked solutions in the answers appendix.

Unless a problem says otherwise, use these standing conventions from the chapter: employer payroll taxes at 9.25% of wages, workers' compensation at 2.90% of wages, and a total wage burden (taxes + workers' comp + benefits) of 20.5%.

Recall and definitions

31.1 List the lines of a restaurant profit-and-loss statement in order, from total revenue down to net income. State which two lines combine to produce prime cost, and explain why a restaurant P&L puts them at the top rather than wherever generic accounting software happens to place them.

31.2 † Beginning food inventory is \$14,200. Food purchases for the period are \$8,650. Ending food inventory is \$13,900. Food sales are \$26,400.

    (a) Compute gross usage and the unadjusted food cost percentage.     (b) Now adjust: transfers out to the bar \$240, transfers in from the bar \$110, employee meals at cost \$260, comped food at cost \$95. Compute food cost of sales and the adjusted percentage.     (c) Which of the two percentages is comparable to a recipe cost card, and why?

31.3 Define comp, void, and discount. State precisely which of the three does not appear anywhere on the profit-and-loss statement, and explain in two sentences why that makes it the most dangerous of the three.

31.4 Explain why the "purchases ÷ sales" shortcut converges toward the correct food cost figure over a year and misleads badly over a week. Then explain what specific operational behavior the shortcut rewards, and why that behavior is destructive.

31.5 † A restaurant's week: food sales \$18,600, beverage sales \$7,400, food cost of sales \$5,580, beverage cost of sales \$1,702, hourly wages \$5,900, salaried wages \$1,950, and payroll taxes plus workers' comp plus benefits \$1,410. Compute total sales, food cost percentage, pour cost, total cost of sales percentage, labor percentage, and prime cost in dollars and percent.

31.6 The restaurant in 31.5 has a prime cost target of 60.0%. State the weekly dollar variance and what that rate of variance would cost over a full year. Then say what you would look at first, and why.

31.7 What is EBITDA, and what four items does it deliberately exclude? Explain why excluding depreciation is correct and why excluding the principal portion of debt service is the omission that gets operators into trouble.

Reading a statement

31.8 † Here is a full-year statement for a 96-seat independent full-service restaurant (constructed teaching example).

    (a) Compute food cost %, pour cost, total cost of sales %, labor %, prime cost % and operating profit in dollars and percent.     (b) Identify the two lines furthest outside the full-service ranges given in Chapter 1.     (c) Compute the dollar recovery if food cost were brought to 30.0% of food sales, and restate operating profit.

31.9 In exercise 31.8, one of the two out-of-range lines cannot be fixed this year and the other can. Say which is which, explain why, and state what that asymmetry implies about how demanding the prime-cost target has to be in a building with high occupancy cost.

31.10 † Cost this plate (constructed teaching example): 7 oz of beef striploin purchased at \$14.80 per pound as-purchased with an 82% yield; 4 oz of potato purée at \$1.10 per pound; 3 oz of seasonal vegetable at \$2.40 per pound; sauce and butter \$0.65; garnish \$0.20. Add a 2% waste and spillage allowance. Compute the plate cost to the cent.

31.11 Price the plate from 31.10 to a 30% food cost target and then to a 32% target, rounding to a whole dollar you would actually print on a menu. State the contribution margin at each price and say which price you would charge and why. Then say what would change your answer.

Labor and the schedule

31.12 † A Friday dinner is forecast at 120 covers with a \$46 average check. The salaried allocation for the night is \$455, all-in. The total labor target is 30.0% of sales. The blended hourly rate is \$14.70 and the wage burden is 20.5%. How many hourly hours can you schedule?

31.13 The manager in 31.12 schedules 74 hours instead, because the grill cook is new and the schedule was written with an overlap. Compute the resulting labor percentage and the dollar cost of the decision. Then argue both sides of whether it was the right call.

31.14 Name the seven inputs to a weekly prime cost calculation and say where each one comes from. Which two require somebody to physically count something, and roughly how long should that take in a 68-seat restaurant?

31.15 † A staffing plan says 26 people. The labor model says 19 scheduled positions. The payroll register shows 394 hourly hours a week.

    (a) Compute the hours-based full-time-equivalent figure for the hourly staff.     (b) Explain in two sentences why none of these three numbers can be substituted for either of the others.     (c) Which one do you publish in a financial document, and which one do you publish in a hiring plan?

Periods, comps, and distortion

31.16 A restaurant's March contains five Fridays and five Saturdays; February contained four of each. Friday sales average \$6,100 and Saturday sales average \$7,400. Compute the calendar-driven revenue difference and express it as a percentage of a \$132,000 average month. Then say what happens to the reported occupancy percentage in each month, and why a March-over-February comparison is worthless.

31.17 † A restaurant reports net sales of \$41,300, cost of sales of \$11,564, and labor of \$14,455 for a week, after comps of \$720 and promotional discounts of \$385.

    (a) Compute cost of sales %, labor %, and prime cost % as reported.     (b) Compute what prime cost % would have been if nothing had been comped or discounted.     (c) State the annualized revenue given away at this rate.

31.18 In exercise 31.17, how much of the annualized figure is actual product cost at a 28% cost of sales? Explain why the product cost is the smaller problem, and what that implies about where an operator should look when comps run high.

Write it

31.19 † Write a one-page account-definitions memo for a bookkeeper who has never worked in a restaurant. Cover, at minimum: what belongs in cost of sales versus other operating; where property insurance goes and where general liability goes; how comps and discounts are recorded; how employee meals are recorded and where the cost lands; and what happens to transfers between the kitchen and the bar. Keep it under 400 words and make every rule testable.

31.20 Write the comp, void, and discount policy for a 68-seat full-service restaurant. Specify who may authorize each, what reason codes exist, what the weekly review looks like, who runs it, and what target you set as a percentage of gross sales. Include the sentence you would say to a bartender who has just been told about the policy for the first time.

31.21 † Your bookkeeper proposes moving comps out of contra-revenue and into the marketing expense line, "so the cost percentages look better." Operating profit is identical either way. Write your response in under 250 words. Be specific about what is and is not wrong with the suggestion, and what you would say if they pushed back that "everybody does it."

Judgment

31.22 February is slow. The sales-tax remittance is due on the 20th, and there is enough cash for either the remittance or the week's produce and protein invoices, but not both. Rank your options, state your reasoning, and describe exactly what you do the following week so that this decision never presents itself again.

31.23 Distinguish controllable from non-controllable cost. Give one example of a cost that is variable but non-controllable, one that is fixed but controllable, and one that is genuinely semi-variable — and explain why Chapter 32 needs a different cut of the same costs than this chapter does.

31.24 † A restaurant has revenue of \$1,340,000, cost of sales of \$388,600, labor of \$442,200, other controllable expense of \$97,500, occupancy of \$93,800, non-controllable operating expense of \$89,000, and general and administrative expense of \$40,200. Compute controllable income and EBITDA in dollars, and state each as a percentage of revenue.

31.25 In exercise 31.24, compute prime cost as a percentage. Say whether the restaurant sits in the healthy band for full service, and state exactly what else you would need to know before answering with any confidence. Compute that thing from the numbers given.

31.26 † A restaurant's annual debt service is \$58,400, of which \$33,900 is interest. EBITDA is \$204,000 and depreciation and amortization total \$47,500. Compute pre-tax income, cash after debt service, and debt service coverage. Then explain the gap between the two profit figures in one sentence, using the two components that produce it.

31.27 A restaurant pays a \$24,600 annual insurance premium in January and runs cash accounting. Assume \$118,000 of revenue and \$103,000 of all other expense in both January and February. Show January and February operating profit under cash accounting and under accrual accounting, in dollars and percent. Then say which set of numbers you would want on your desk and which set your tax preparer needs.

31.28 † Design a weekly flash report for a 40-seat lunch-and-dinner café with no bar and no table service. Start from Figure 31.8. Which fields do you keep unchanged, which do you drop, which do you redefine, and what do you add that a full-service restaurant does not need? Draw the page.

Business Plan extensions

31.29 Explain why an average check computed by dividing total revenue by total covers is meaningless in a restaurant running two dayparts at different price points. Then construct a numeric example — your own numbers, showing your work — in which the computed "average check" is a figure no guest in the building ever paid.

31.30 † Take your own concept. Build a Year-1 profit-and-loss statement in the format of Figure 31.2, with your own revenue and cost assumptions, and make every line foot. Then build the fixed/variable split of your labor line from a schedule rather than from a percentage, and state the two numbers — fixed dollars and variable rate — that Chapter 32 will inherit from you.

31.31 Write the chart of accounts for your concept, in the structure of Figure 31.4. Then write the three account definitions most likely to be misapplied by a bookkeeper who has never worked in foodservice, and say what each misapplication would do to a percentage you care about.

31.32 † You inherit a plan in which the sales forecast implies 31,200 annual covers at a \$52 average check, while the pro forma top line reads \$1,745,000. Compute the revenue bridge in dollars and as a percentage of the top line. Then write the three questions you would ask the plan's author before accepting the top line — and say what you would do if the answers do not add up to the bridge.

31.33 Your plan holds occupancy flat for three years. Go find out whether that is true: read the escalation, percentage-rent, and NNN-reconciliation terms in your own lease or LOI, and restate year three. Then design the standing process that will prevent a signed contract from ever again failing to reach the forecast.

31.34 † Your bottom-up labor model produces a number 4.5 points above the labor target in a plan you have already shown to three people. Describe exactly what you do, in what order, and to whom. Then state explicitly what you do not do, and why each of those alternatives is worse than it looks.