Cost Drivers And Management Strategies For Coastal Restaurant Pty Ltd Essay.

Coastal Restaurant Pty Ltd. is a restaurant established 1983 in Angelsea, Victoria? They are well known customer service, ambience and Rich premium continental dishes in their menu as they use only fresh catch from the sea daily. The owner Ricky Martin has successfully gained their BYO license from the local council on 1st July 2017 which his competitors don’t have. He is very concerned about his business after hearing this news, as he thinks that he might be getting a lot of customers dinning in his restaurant thus he wants to compare his budgeted income statement and see how they have performed in the basis of cost management.

He wants to be proactive and decide for any costs that might be arising because of this new license. As a Revenue manager you are approached to evaluate factors affecting value perceptions in food services. Ricky is sure that you can help him to point out the cost drivers and evaluate management cost drivers that measure performance of the cost control and he would like to know where his business is.

The extract Coastal Restaurant Pty Ltd. is below which you should use for your analysis.

NOTES:

• The bank charges depend on the number of transactions that takes place in the restaurant ?
• property insurance has increased as a case of inflation in price s ?
• casual employees are employed more than the full-time employees ?
• There are 9 permanent employees which include head chef and sous chef ?.

Factors Affecting Value Perceptions in Food Services

Management of the company should focus on inventory management to reduce cost. Majority of the direct cost in restaurant businesses goes towards supplies purchased for making food items. It is important to implement effective management strategies for inventory management to reduce the wastage of food and full utilization of all the resources available with the company. Management should also enter into annual contracts with vendors of the company and negotiation should be done by management in order to reduce the prices of raw material purchased. This could help in reducing the cost of sales and direct wastage of food (Noreen, Brewer & Garrison, 2014).

Credit Purchases-

A substantial part of the contract entered with the supplier should be based on the credit method rather than cash payments. Payment in advance reduces the opportunity cost that could have been earned by management if materials were taken on credit. For example, management of the company could have used this money for r daily operations. Payment to the supplier should be made after the revenue is generated from the supplies made by the vendor.

This will also help in better management and estimation of profit on a particular set of supplies purchased from a vendor. Bulk purchases should also be made as a discount or other rebates received in bulk orders is generally high as compared to cash orders (Dopson & Hayes, 2016). It will help in maintaining up appropriate business cycle i.e. supplies are purchased, revenue generated then payments are made to creditors. Due to the development of business cycle supplier management will become very efficient.

Human resource management-

Majority of the business operations are based on human resources in the restaurant business. Therefore it is important to maintain proper Human Resource Management strategies in order to control the cost of human resources. Human resources in a restaurant business should be skilled and experience in a particular area of operation. It is important for a business organization to reduce the employee turnover if they want to reduce the cost of labor.

If a particular experienced employee left the business organization then a new employee will be hired and time and effort will be invested in making search employee aware of the business operations and policies of the company. Training and development will require additional cost which could be higher if employee turnover ratio is very high (Langfield-Smith, Smith, Andon, Hilton & Thorne, 2017). It would be better for management to provide good facilities and income for their employees in order to reduce employee turnover. In long run, this strategy would be the most cost efficient for the company.

Management Strategies for Coastal Restaurant Pty Ltd

Yield management

This is one of the most common methods of cost controlling in restaurant and food business. Yield management is a business strategy that is used by managers in order to identify the raw material that the actual production of a particular food item. Therefore this management strategy will standardize the raw material and other products used for making all the food items (Marshall, 2016). It will also reduce the overall time used by the chef to prepare food which would ultimately increase the profitability of the company. The biggest advantage of this method is that it will help in maintaining a similar type of flavor that can become a brand for the company.

Cost Measurement Analysis

Cost driver can be defined as the underlying activity of business that has resulted in a particular expense. For example, distance traveled by a delivery boy can be considered as a cost driver for total transportation cost. It is important for management to identify these cost driver if they want to control the overall cost of production. The segment of the report will identify some of the cost drivers that can be used for ascertaining the performance of cost control methods used by management.

Inventory management can be identified as the cost driver for the total cost of sales incurred by the company. It can be said that inventory management of the company is very efficient in this financial year. Budgeted total expenses estimated by the management was $165000 on a sale of $604000. But at the end of the financial year, the company has incurred a total of $209000 as the cost of sale where is the total amount of revenue generated by the company is $906000. If budgeted figures are adjusted accounting to total revenue actually generated by the company budgeted cost of sales should have been $247000. It shows that the management of the company has effectively decreased the cost of sales with better inventory management (Demski, 2013).

Generally, employee cost is considered as a fixed cost because fixed payment is paid to an employee for their services. In this case, budgeted expense in relation to casual employees was $115000 but the actual expense goes up to $225000 which can be considered a very substantial increase. The increase of 10% can be assumed because there might be some employees that leave the organization and additional training course would have been incurred on the training of new employees. But an increase of 95% expense in relation to casual employees is very high (DRURY, 2013).

Cost Measurement Analysis

It is also provided in the information that there are more casual employees as compared to permanent employees definitely increase the overall cost of the company in long run. Casual employees will leave the organization more frequently if they get any permanent job in another restaurant. This would require an additional cost on training and development of the employee. It would also result in an efficiency in operations at an earlier stage of employment for new employees.   

Following amendments should be made by management with respect to employ strategies to reduce the overall cost of human resources-

1. A number of casual employees should be reduced and more experienced employees in the company should be made permanent.
2. A contract can be made with every casual employee for a limited period of time so that benefits of a particular resource is greater than cost implemented on the development of the resource (Collings, Wood & Szamosi, 2018).
3. Training should be provided by experienced staff to new employees so that training course can be reduced and the efficiency of the resource can be improved on the job.
4. Proper roles and responsibilities should be delegated by management to each and every employee so that every employee can be used to their full potential and the number of employees can be decreased.
5. Variance analysis

Majestic paper at the starting of the financial year where total revenue that will be generated by the company is based on Estimation. It is the general practice of business organization to a flexible budget so that all the financial particulars in a particular project can be adjusted according to the actual sales made by the company (Groot & Selto, 2013). Following statement has provided a description of the actual budget, the actual financial transaction at the end of the financial year, adjusted budgets according to actual sales made by the company and variances.

Variance analysis can be examined on the basis of four major factors i.e. revenue, cost of sales, indirect expenses and profit.

Revenue-

Total revenue estimation by management was very lower as compared to actual sales made by the company. Total revenue earned by the company was $604000 whereas total budget revenue was 604000, therefore it was favourable for the business but this wrong estimation on part of management shows that assumptions and capabilities of the company estimated by management were not very effective (Rhyner, Schwartz, Wenger & Kohrell, 2017). This could have resulted negatively in the business organization. There are various factors that are decided on the basis of total revenue expected to be generated by the company. For example, contacts with the supplier are generally made in advance on the basis of expected sales in coming months. Wrong estimation of revenue will affect the cost of the supplier.

Cost of sales

Similar to total revenue there has been an improvement in cost of sales maintained by the company. Total cost of sales has increases from budgeted cost of sales of $165000 to $209000 but if comparison is made with amount of total revenue then it can be said that there has been an improvement in cost of sales. It was estimated at the start of the financial year that total cost of sale would be around 27% of total revenue but due to cost-effective strategies of the company this ratio was reduced to 23%. Therefore it can be said that management was very effective in cost-cutting strategies.

Conclusion

Indirect expenses

Total indirect expenses has increased over the period of a month as total as total estimated indirect expenses were 424087.5 whereas actual total expense was 660697.5. It shows that total expenses are exceeding the budgeted expenses by $236610. After adjusting the budgeted figure with the amount of actual revenue, adjusted total expenses should be 636131.3.

This negative variance shows that management of the company has not been very effective in cost control on total indirect expenses. One of the major reason that has resulted in an increase in total expenses is expense related to casual employees. All the expenses has increased in as compared to standard expenses expect food delivery vehicle service costs, kitchen utensils hire and waste removal expenses.  Strategies have been suggested to management to reduce the cost of human resources.

Profitability

Gross profit of the company has been favourable as company has earned an extra gross profit of $258000 as compared to budgeted gross profit. Main reason behind this favourable condition is increase in overall sales.

Net profitability if the company are also improved over the year as expected net profit margin of the company was 2.46 % whereas actual net profitability of the company is around 4%. Over all net profits has also increased from expected profit of $14912 to actual profit of $36302.       

Recommendation

There are various methods that can be used by the business organization to increase sales without incurring any expenditure on total expenses. These methods are as follows-

Sales and marketing- One of the best method to boost sales of the company are through innovative sales and marketing strategies (Pirani & Arafat, 2014). One of the best methods that can be used in the current business environment is social media marketing. Cost of implementation this type of marketing is very low and it would not affect the structure of the company substantially.

Waste management strategies- effectiveness management strategies would definitely improve the total revenue generated by a company with the help of the same amount of raw material. This would not increase the overall direct expenditure by the company. Current waste management strategies are working positively, therefore more innovative methods should be adopted in this management (Baker, 2014).

Conclusion

It can be concluded that operations of Coastal hotels for the year ending 30th June 2018 have been more profitable as compared to Expectations of the company. Actual profit generated by the company has exceeded the budgeted profitability but there are some factors that should be considered in preparing a budget for the next year. For example estimation of total revenue was very inaccurate and it can affect overall operations. Better methods and procedures should be used for assumptions taken in relation to market demand. In addition to that, there is also a requirement to control indirect expenses especially cost associated with casual employees.

References

Baker, M.J., 2014. Marketing strategy and management. Macmillan International Higher Education.

Collings, D. G., Wood, G. T., & Szamosi, L. T. (2018). Human resource management: A critical approach. In Human Resource Management (pp. 1-23). Routledge.

Demski, J. (2013). Managerial uses of accounting information. Springer Science & Business Media.

Dopson, L. R., & Hayes, D. K. (2016). Managerial accounting for the hospitality industry. Wiley Global Education.

DRURY, C. M. (2013). Management and cost accounting. Springer.

Groot, T., & Selto, F. (2013). Advanced management accounting.

Langfield-Smith, K., Smith, D., Andon, P., Hilton, R., & Thorne, H. (2017). Management accounting: Information for creating and managing value. McGraw-Hill Education Australia.

Marshall, D. (2016). Accounting: what the numbers mean. McGraw-Hill Higher Education.

Matherly, M., & Burney, L. L. (2013). Active learning activities to revitalize managerial accounting principles. Issues in Accounting Education, 28(3), 653-680.

Needles, B. E., & Crosson, S. V. (2013). Managerial accounting. Nelson Education.

Noreen, E. W., Brewer, P. C., & Garrison, R. H. (2014). Managerial accounting for managers. New York: McGraw-Hill/Irwin.

Pirani, S. I., & Arafat, H. A. (2014). Solid waste management in the hospitality industry: A review. Journal of environmental management, 146, 320-336.

Rhyner, C. R., Schwartz, L. J., Wenger, R. B., & Kohrell, M. G. (2017). Waste management and resource recovery. CRC Press.

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Financial & managerial accounting. John Wiley & Sons.