COST CONTROL
This can be defined as a practice implied in order to maintain compliance with the unit's pre-established objectives, catering establishments like restaurants, hotels, cafes, and food chains engage in the practice of food cost control. In essence, the goal is to reduce costs while maximizing profit.
Budgeting is the first step in cost control, which is the activity of identifying and reducing business expenses to boost profitability. When a business owner compares the company's actual financial outcomes to its budgeted expectations, management is equipped with the knowledge it needs to take appropriate action if actual expenditures are higher than anticipated.
It differs from other businesses in that it focuses more on material costs rather than labor and administrative costs, which are more or less fixed and regarded as uncontrollable in comparison to materials (food) costs.
Finance professionals also develop, maintain, and organize a project's budget from start to finish to make sure the budget is being followed closely by employees. The goal of using cost control methods is to enhance a project's financial performance while decreasing the project's costs.
IMPORTANCE OF COST CONTROL
Cost management enables companies to stick to a precise budget, which stabilizes their finances and can increase the profitability of their initiatives. Here are some explanations for why organizations must employ cost control techniques:
❖ Budgets aid in project management: Cost control techniques frequently involve assigning a team a fixed budget that they must adhere to, which aids in project management. Employees could feel additional pressure to finish the project by the deadline if the budget specifies a deadline for completion.
❖ Prevents project costs from rising: Using cost control techniques can assist in preventing project costs from rising quickly as work on the project moves forward. If the project's participants believe the budget doesn't cover all of the expenditures involved, they can consult a financial expert.
❖ Maintains high profitability: Through the use of cost control techniques, projects can generate more money than they cost and keeps high profitability, and increases the company’s finance.
COST CONTROL METHODS:
1. Developing a sound budget includes: When beginning a new project, most organisations employ budget management as one means of cost control. Setting aside adequate time to create a precise budget for new projects is crucial since budgeting aids in cost estimation, financial organisation, and assurance that the cost variance is minimal. Businesses factor in all aspects of the project when creating their budgets, including the number of workers they will need, the potential length of the project, and the amount of materials required.
2. Monitoring all expenditures with checkpoints: Businesses frequently use this cost control technique to make sure the budget is being adhered to: monitoring all project-related spending. Businesses frequently use checkpoints that are periodically examined throughout a project to ensure that team members are staying within the budget and to determine whether any modifications, such as requests for more time or materials to finish the project, are necessary. These checkpoints can be examined weekly to monthly by experts. Using these checkpoints, financial experts may examine the necessary adjustments and adjust the budget as necessary. Changes that have a minimal impact on the budget can be made by employing this cost control technique.
3. Change control system: Systems for cost control called "change control systems" take into consideration any changes that could significantly affect the budget. These adjustments may be brought on by any problems that develop throughout the project or by severe delays that result in the project not finishing by the deadline, which may result in an increase in labor and material costs. To ensure that experts modify the budget, change control systems keep track of all modifications made to the project. Additionally, they guarantee that all modifications are essential to the project and document any changes.
4. Time management: By keeping project costs low and achieving deadlines, time management is a cost control strategy. When a project is delayed, the cost of the entire project expenses may increase because more resources are needed, including labor and supplies, which reduces the project's profitability.
5. Monitoring earned value: Accounting professionals frequently employ earned value as a cost control strategy. It entails dividing the budget at the time of project completion by the percentage of work accomplished on the project. Professionals can estimate the financial outcome of a project based on its time to completion, total expenses, and overall cost with the help of earned value.
TYPES OF COSTS:
Food cost: Food cost is a percentage of sales that determines how much money we make (or lose) on what we sell as operators. To be more accurate, an equation represents the cost of actual food. Add your initial purchases and inventory, then deduct them from your final inventory. Divide your total food sales by your real food expenditure, often known as "use," once you have it. Your percentage of food cost is the result.
Food cost is equal to ((Beginning Inventory + Purchases - Ending Inventory) / Food Sales.
Labor cost: It is the total of wages, benefits, and payroll taxes paid to and for all employees. Restaurant labor cost is one of the primary expenses in running a restaurant, along with overhead expenses. The amount a restaurant spends on labor affects many things. One of the most important is their prime cost, which is metric ownership and investors look at to gauge a restaurant’s financial health.
Overhead cost: Overhead costs refer to ongoing expenses that come with running a restaurant such as advertising, utilities, rent, and salaries. The important thing to remember is that this concept applies only to expenses that are not related to the costs of raw materials, food, and other components related to producing goods. Challenges of cost control: Mistaking cost analysis with accounting Consistently analyzing budget and predictions Aligning data from multiple sources Accommodating project changes Aligning time and money
Challenges of cost control:
- Mistaking cost analysis with accounting
- Consistently analyzing budget and predictions
- Aligning data from multiple sources
- Accommodating project changes
- Aligning time and money
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