Financial & Accounting

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Efficiency ratios

In addition to understanding profitability the other key aspect of overall organizational performance is the efficient use of resources and assets. The asset turnover or asset utilization contributes to overall performance (measured by Return on capital employed (ROCE)) in combination with net profit/income ratio (see Profitability ratios). Asset turnover or asset utilization ratio is therefore a key measure of effectiveness, it relates the assets employed in the business to the income or sales revenues generated from the use of those assets.

Direct costs

Direct costs are expenses directly related to operations that result in menu item production. These costs may be controllable or non controllable in nature, but often direct costs are controllable. Direct costs in foodservice operations pertain to items such as food, labor, paper, linens, glassware, and essential contractual services. Costs for items such as payroll, marketing, depreciation, taxes and interest, legal fees paid, overhead, and building rent are not considered as direct costs.

Direct billing

Overall, direct billing allows less money to be taken out of the travelers’ pocket and less work for departmental secretaries. When an invoice is direct billed it is sent to the office of the controller where it is processed. The department will receive a photocopy of the invoice that was debited to their account, with a document number stamped at the bottom. Only certain businesses are typically set up for direct billing.

Cost–volume–profit analysis

Cost volume profit analysis describes the relationships between costs, revenues, profit (income), and volume. It is based on the definition of Profit = Total revenue Total cost. Since total revenue as well as total cost depends on volume, the definition of profit can be expressed as:

Profit = p x Q – v x Q - F

Where

p is price per unit;

Q is volume;

v is variable cost per unit; and

F is fixed cost.

C V P analysis can be used to solve equations with one unknown parameter and to answer questions such as:

Controllable costs in foodservice

Controllable costs are among the most commonly watched numbers in the foodservice industry. As the name suggests, controllable costs are those expenses that fall directly under the control of unit management. Common examples of items with controllable costs include food, beverages, labor, paper, linens, glassware; cleaning supplies, and services. Unit management often has direct control over the rate of usage of these products and services. Two of the most prominent controllable costs are food and beverage cost and labor costs.

Controllable and non-controllable costs

Conventional wisdom requires managers to be responsible only for costs and revenues over which they have control. Measuring financial responsibility requires a distinction to be made between costs that can be driven by a unit and costs that are not under the control of a unit. Most costs in an organization are controllable by someone. However, the term ‘controllable’ refers to a responsibility center and not to the organization as a whole. Cost are controllable for a responsibility center when are under the influence of the manager of the center.

Comparative statement analysis

Also known as horizontal analysis, comparative statement analysis provides for the comparison between budgeted and actual performance or performance between financial periods. It can also be used for comparisons with industry data. these comparisons are conducted using the following general formulas:

Current Period (or Actual) Performance - Prior Period (or Budgeted) Performance = Absolute Variance

Asolute Variance ÷ Prior Period (or Budgeted) Performance = Percentage Variance

Common-size statements

Also known as vertical analysis, common size financial statements allow for the comparison among businesses of different sizes or scales of operation as well as comparison within the same business between different financial periods. For example, assume a company that owns two similar restaurants, with seating capacities for 40 and 75 persons, wishes to compare the operating performance of each establishment, one against the other.