Chapter 34 — Exercises

Items marked † have worked solutions in the answers appendix. Everything else is yours to defend.

Unless a problem says otherwise, use Bellwether's figures from the chapter: plan sales \$1,550,000, operating profit \$261,020** before **\$69,500 of debt service, food sales \$86,400 a period across thirteen periods, Period 8 ideal usage \$25,488** against actual **\$27,202, total leak exposure \$53,122**, control program **\$4,849, cash tolerance ±\$5.00 or 0.5% of cash sales, whichever is greater, comp target ≤1.0% of gross, and Chapter 32's contribution margin of \$19.37 per dinner cover across 260 dinner services a year.

Show your arithmetic. And hold the chapter's discipline while you work: every one of these problems has six ordinary explanations before it has an extraordinary one, and an answer that reaches for rung seven first is wrong even when it happens to be right.

A. Recall and definitions (1–8)

1. Define internal control in one sentence without using the word "theft." Then name the four functions every control performs and give a Bellwether example of each.

2. † State the principle of separation of duties, then explain in two sentences why it is genuinely impossible in a 31-person restaurant with four salaried managers. Name three of the seven practical substitutes and say, for each, which of the four functions it is standing in for.

3. Define void, comp, and promotional discount. For each, state (a) whether it reduces sales, (b) whether the product cost stays in cost of goods sold, and (c) where it appears on the profit and loss statement.

4. Define bank, cash drop, over/short, and the two-person rule, and give Bellwether's figure or rule for each.

5. † Define inventory variance. Name the two independent records it compares, name the one loss it is uniquely able to see, and name the one loss it cannot see at all.

6. What is a POS audit trail, and how does it differ from a sales report? List five events it logs.

7. Define sweethearting. Then explain why every exception report in §34.3 — voids, comps, discounts, reopened checks, no-sales — comes back clean when it is happening.

8. Define a surprise count. State the one rule about it that operators skip most often, and say in one sentence why skipping that rule converts a control into something else.

B. Walk the investigation ladder (9–14)

9. † Name the seven rungs of the investigation ladder in order. Then give the two reasons the chapter offers for theft being seventh rather than first, and state which of the two is the argument you would use on an operator who thinks fairness is a luxury.

10. A 74-seat restaurant's food variance runs +1.8 points for two consecutive periods, concentrated in seafood and produce. A prep cook started six weeks ago. The general manager wants to "keep an eye on him."

Walk all seven rungs in order. For each rung, name the specific document or observation you would pull, roughly how long it takes, and what result would settle it. Then state what you would say to the general manager, in two sentences.

11. Look at the last two columns of Figure 34.7 — evidence required and harm if you are wrong. Explain in a paragraph why a competent investigator spends cheap, reversible, high-quality evidence before expensive, irreversible, low-quality evidence, and give one example from outside the restaurant industry where the same sequencing rule applies.

12. † Unpack the chapter's sentence: "If you punish the waste log, you convert waste into theft — not in reality, but in your numbers." Explain the mechanism in three steps, then describe the feedback loop it starts and why the loop makes the operator's suspicion feel increasingly justified while the underlying information gets worse.

13. An operator opens an investigation at rung seven, terminates an employee, and finds the variance unchanged in the following period. Name three distinct categories of cost they have incurred, and identify which one is unpriceable and why that makes it the most dangerous of the three.

14. Your business partner reads Figure 34.8, sees \$53,122, and wants to install cameras over the bar and the walk-in on Monday. Write the six-sentence reply you would actually send. It must name what the cameras would and would not see, name what \$53,122 is actually made of, and end with a specific alternative first step.

C. Compute the variance (15–21)

15. † A 90-seat restaurant's period food sales are \$104,000. Its ideal-versus-actual usage report by category:

(a) Compute the variance in dollars and as a percentage of ideal usage for every category, and foot the table. (b) Express ideal and actual usage as percentages of food sales and state the variance in points. (c) Apply the category threshold from §34.5 — greater of 5% of that category's ideal usage or \$250 — and say which categories fire. (d) Apply the negative-variance rule. (e) Name the one category you would work first and say why.

16. Run all six of Bellwether's Period 8 categories through the same category threshold, showing the test figure for each. Then answer the question the chapter poses but does not spell out: why does bakery and desserts, at +4.2%, stay silent while seafood, at +8.4%, fires?

17. † Bellwether's Business Plan checkpoint sets the whole-book policy: investigate at ±1.0 point of food cost or ±\$400 in a period, whichever is smaller; escalate at ±2.0 points sustained across two periods.

(a) Compute both tests at Bellwether's period food sales of \$86,400 and say which one governs. (b) State whether Period 8 trips the investigate threshold, and by how much. (c) State whether Period 8 trips the escalate threshold, and defend your answer precisely. (d) At what level of period food sales do the two investigate tests cross over?

18. Dry goods and pantry came in \$46 under theoretical in Period 8 — a negative variance of 1.2%. Explain what a negative variance almost always means, list the four things you would check before doing anything else, and explain the chapter's line that "a gift is a mistake you have not found yet."

19. † Figure 34.5 states that a hand count of a 40-SKU walk-in carries roughly half a point of honest error, which on \$25,488 of ideal usage is about \$127.

(a) Verify the \$127. (b) The meat-and-poultry ladder left a **\$65** residual on \$9,850 of ideal usage — express it as a percentage and say what it means. (c) The category floor is \$250 and the whole-book noise figure is \$127. Explain why the category floor is roughly twice the whole-book noise figure rather than half of it.

20. Classify each of these three categories, using the rule in Figure 34.6, and say what you would do about each:

  CATEGORY X    P6  +3.1%     P7  +5.9%     P8  +8.8%
  CATEGORY Y    P6  -4.2%     P7  +9.1%     P8  +2.6%
  CATEGORY Z    P6  +5.4%     P7  +5.1%     P8  +5.6%

21. Period 8's \$1,714 of variance becomes **\$22,282 a year. Express that number four ways: as points of food cost, as points of total sales, as a percentage of the plan's operating profit, and as dinner covers a night using Chapter 32's \$19.37 of contribution margin per dinner cover across 260 dinner services. Then do the same for the full \$53,122** and state which of the four expressions you would put in front of a floor manager, and why.

D. Read this DSR and find the break (22–26)

22. † Here is a Saturday daily sales report from a restaurant that is not Bellwether. Something on it does not tie, and something else on it is wrong in a way that ties perfectly.

  SATURDAY DINNER — DAILY SALES REPORT           [constructed teaching example]

  SALES
    Gross sales                     7,440.00
    less comps                       (128.00)
    less promotional discounts        (22.00)
    ─────────────────────────────────────────
    NET SALES                       7,290.00
    Sales tax @ 7%                    510.30
    Gift certificates sold             50.00
    Charged tips                    1,268.00
    ─────────────────────────────────────────
    TOTAL TO ACCOUNT FOR            9,118.30

  TENDERS
    Cash                              705.00
    Cards (131 transactions)        8,196.30
    Gift certificates redeemed        100.00
    House account, billed monthly      75.00
    ─────────────────────────────────────────
    TOTAL TENDERED                  9,076.30

  CASH RECONCILIATION
    Opening banks (2 x $250)          500.00
    + cash tenders per POS            705.00
    - cash tips to the pool            96.00
    - petty-cash paid-outs             40.00   no receipt attached
    ─────────────────────────────────────────
    EXPECTED IN DRAWER              1,069.00
    COUNTED, two people             1,087.75
    OVER / (SHORT)

  CARD SETTLEMENT EXPECTED
    Gross card tenders              8,196.30
    less processing, 2.6% + $0.10 x 131
    ─────────────────────────────────────────
    EXPECTED IN BANK, 1-2 DAYS

  EXCEPTIONS TONIGHT
    Voids                           9 items / $31.00
    Comps                           9 items / $128.00
    Comps with NO reason code       4 items / $57.00
    Reopened checks                 3 — two tip corrections with a manager ID;
                                        one at 1:12 a.m. that changed a tender
                                        type from card to cash
    No-sale drawer opens            9 — six of them after 10 p.m.

(a) Fill in the three blank lines. (b) State which of the three ties fails, by exactly how much, and give four ordinary explanations for a failure of that shape — in order of likelihood. (c) Is the over/short inside tolerance? Show the test. What do you do about it tonight, and what would have to be true for you to do more? (d) Identify the item on this page that is an arithmetic problem and the item that is a control problem, and say which one costs more over three years. (e) The 1:12 a.m. reopen: write the sentence you would use to ask about it.

23. A check for \$96.00 is closed to cards at 9:20 p.m. At 1:12 a.m. it is reopened and re-closed to cash. State what happens to each of the three ties on that night's DSR, name the exception report on which this surfaces first, and describe an entirely ordinary explanation for it.

24. † Bellwether's Friday DSR shows \$7,442.00 of card tenders across 118 transactions, with processing at 2.6% + \$0.10 per transaction.

(a) Verify the \$205.29 fee and the 2.76% effective rate. (b) A second processor offers a flat 2.95% with no per-transaction fee. Compute Friday's fee and effective rate under that offer. (c) At what average transaction size are the two offers identical? Where does Friday sit relative to that figure? (d) Assume annual card volume of \$1,505,000 across 33,900 transactions. Compute the annual cost of each offer and the difference, then state which line of the profit and loss statement the difference lands on — and why it is not prime cost.

25. An operator looks at the bank feed for the week, sees a little over \$38,000 of money in, looks at the flash report's net sales of \$30,400, and concludes the restaurant is doing better than it thought. Build the bridge between the two numbers, layer by layer, naming every item that rides on top of net sales and every item that comes off. Then state, in one sentence, the specific disastrous decision this confusion most often produces.

26. Six of Bellwether's seven weekly services are below. The week's totals are gross \$31,196, comps \$486**, discounts **\$310. Reconstruct the missing service in full — gross, comps, comp percentage, discounts, net sales, tax at 7%, and total collected — and verify that the week foots to Chapter 31's \$32,528.

E. Price this control (27–31)

27. † Rebuild the control program from the chapter and price its return.

(a) Verify the \$4,849** total from its components: jiggers and a pour-cost review \$233, the portion scale at \$0, the weekly count at 2 people × 1.5 hours × \$22 blended for 52 weeks, and the second pair of eyes on the nightly count at \$1,184. (b) Compute the return at 25%, 50%, and 75% recovery of the \$53,122. (c) Compute the break-even recovery rate** — the share of the exposure the program must recover to pay for itself. (d) Express both \$4,849 and \$53,122 in dinner covers a night. (e) State the single most persuasive of these five figures for a partner who does not like spreadsheets.

28. Price the second pair of eyes on the nightly cash count three ways: 10 minutes a night at the \$22 blended rate; 15 minutes a night at the \$22 rate; and 10 minutes a night at a \$16 closing-server rate. Bellwether is open 312 nights a year. Put all three against the \$1,395 of measured annual cash loss, then answer the real question: this is the worst dollar-for-dollar control on the entire program, so why does the chapter refuse to cut it?

29. † Price the named receiver. Twenty minutes a day, 312 days a year, at Chapter 19's \$14.70 blended hourly rate.

(a) Compute the unburdened annual cost and confirm the chapter's \$1,530. (b) Recompute it at the 13.0% payroll burden Chapter 32 uses. (c) Put the burdened figure against the \$3,348 of receiving exposure and compute the return at 50% and at 75% capture. (d) The 50% case is uncomfortable. Name the two joint products of that same twenty minutes that the arithmetic does not credit, and say whether they change your answer.

30. Bellwether counts weekly at \$3,432 a year. A period-end-only count — thirteen times a year — would cost \$858.

(a) Compute the saving. (b) Express the measured \$22,282 food variance as a cost per week. (c) Compute how many days of shortened detection the weekly count has to buy to pay for itself. (d) Write the two sentences you would say to an owner who wants to move to period-end counting to save the difference.

31. You must cut exactly one line from the control program. Rank all four priced controls by dollars returned per dollar spent, name the one that comes last, and then argue — in a paragraph — why the correct answer to "which do you cut" is nonetheless not the bottom of that ranking. Name at least one cost that does not appear in the ranking at all.

F. Receiving reconciliation (32–34)

32. † A Tuesday delivery lands at 9:40 a.m., mid-prep. Here is the invoice against the order guide, the spec, and the scale.

A \$14.00 credit issued last week for a soft case of potatoes does not appear on this invoice or on the statement.

(a) Compute the invoice total as presented. (b) Compute the corrected total. (c) State the recoverable amount and express it as a percentage of the delivery. (d) One of the four lines is not a billing problem at all. Identify it, explain what kind of problem it is instead, and compute what it costs per plate and per period at 432 plates. (e) Which rung of the investigation ladder does each of the four findings sit on? (f) Write the three sentences you would send the sales representative.

33. A restaurant tracks credit memos for three periods:

Compute the total issued, the total posted, the unreconciled balance, and the closure rate by both count and value. Annualize the unreconciled balance across thirteen periods, and express it as a share of Bellwether's \$3,348 receiving-error assumption. What does the result tell you about where receiving control should start?

34. §34.7 notes that many supply agreements carry a short dispute window — sometimes seven days — after which a billing error is deemed accepted. Explain what monthly invoice reconciliation does to a seven-day window, in specific terms. Then state the two things weekly reconciliation buys you that have nothing to do with catching anyone.

G. Judgment and response (35–37)

35. † A pattern has held for four periods. Liquor variance runs 6–8% of ideal usage. The void report, the comp report, and every per-bartender check average are unremarkable. The pour spec, the cocktail cards, the mix report, the invoices, the waste log, and a week of measured pours have all been worked and have explained less than a fifth of it. You believe something is genuinely wrong.

Write the plan for the next seven days. It must: (a) put the steps in order, with the first three named precisely; (b) state what you preserve and how; (c) state who is told and who is not; (d) name three specific things you will not do, with the reason for each; and (e) name the moment at which you would stop and conclude you were wrong. Do not name a role as the likely cause — that is the point of the exercise.

36. §34.9 says a suspected loss produces several decisions and that operators fuse them into one. Name and separate four of those decisions. For each, state who the decision-maker is, what information it needs, and what happens if it is made in the first hour instead of the first week. Then name a fifth decision that is commonly and wrongly fused with the first.

37. A shift manager asks for permission to pull one employee's punch history, no one else's, because of "a feeling." Write your answer. It must address the control question (what a report on one person can and cannot establish), the compliance question raised in §34.1's Code and Compliance callout, and the culture question from §34.8 — and it must end with something you will do rather than only something you will not.

H. Business Plan extension (38–40)

38. † For your own restaurant concept, write the cash-handling card — the one laminated page by the office door. Use the eight-row structure from §34.2: step, who, what, and the record it creates. Set your own bank, your own drop trigger, and your own over/short tolerance, and justify each of the three against your own expected cash mix rather than against Bellwether's 9%. Then name the two rows on your own card that you are most likely to skip in month nine, and say what would make you not skip them.

39. Set the variance thresholds for your own concept, at three levels: category, whole book, and cash. Then defend the asymmetry the chapter builds in — greater-of at the category level and smaller-of at the whole-book level — in your own words, in a paragraph a business partner would accept. If you disagree with the asymmetry, say so and defend the alternative.

40. Write the one-page Controls section of your business plan. It must contain: an exposure table with at least five quantified lines and a total; a control program with an annual cost for each line and a total; the return at 50% recovery; the six adopted policies, each stated in a single sentence a manager could follow; the written investigation order; and an honest paragraph naming what the section does not settle. No line may contain a number you cannot reproduce, and no line may assume a dishonest employee to justify itself.