Introduction to Cost Control – Review

Task 1. Aurora Palace has three sales revenue divisions with direct costs and average monthly
figures given in the following information:

Departments Dining Banquets Bar

Sales revenue $102,000 $50,000 $45,000
Cost of sales $40,100 $20,800 $14,440
Labor $31,000 $17,100 $6,880
Other direct costs $9,500 $4,200 $1,200

Aurora Palace also has the following indirect, undistributed costs:

Administrative expenses $6,200

Advertising $3,800
Training and personnel $1,100
Utilities expenses $2,600
Property operation and maintenance $5,100
Depreciation expenses $6,800
Insurance expenses $2,200
Accounting department costs $1,800

Require:

i. Allocate the indirect costs to the divisions and prepare a departmental income statement
showing each of the three divisions side by side for comparison. Administrative
expenses, marketing costs, and training expenses are allocated based on sales revenue.
The remaining indirect costs are allocated based on square footage used by each division:
Round all percentage calculations to a whole percentage: Dining 900 sq. ft.; Banquet
1,800, sq. ft.; Beverage 300 sq. ft.
ii. Calculate income (after indirect cost allocation) for each department.
iii. After allocating the indirect costs, would you consider to recommend closing any of the
divisions?
iv. Under which circumstances, should we consider to close a division?
Task 2.

You were given an analysis of the restaurant operations and then asked to help enhance the
existing high labor cost problems. The owner hoped the organization’s labor percentage before
payroll benefits and related expenses could be reduced without damaging the service quality. The
daily standing schedule for the previous year is shown in the table below:

Previous Year’s Scheduled

Employee Time at work Number of employees

Server 6 am – 2 pm 2
Server 7 am – 11:30 am 4
Server 11 am – 4 pm 2
Server 2 pm – 10 pm 2
Server 5 pm – 10 pm 3
Server 4 pm – 12 am 2
Cook 6 am – 2 pm 3
Cook 7 am – 11:30 am 1
Cook 11 am – 3 pm 2
Cook 2 pm – 10 pm 2
Cook 5 pm – 10 pm 3
Cook 4 pm – 12 am 2
Other staffs 11 am – 4 pm 2
Other staffs 2 pm – 10 pm 2
Other staffs 7 am – 11:30 am 1
Other staffs 11 am – 3 pm 3

Restaurant revenue for the previous year was $1.8 million and management salary was $180,000.
The average hourly wage is $5.5 for servers, $8.95 for cooks, and $6.2 for other operating staffs.
You worked out the next fiscal year’s labor for the restaurant, keeping the projected revenue and
the management salary the same as last year’s. To enhance the labor costs, you modified the
standing schedule for the next fiscal year as shown in the table below:
 Next Fiscal Year’s Scheduled

Employee Time at work No of employees

Server 6 am – 2 pm 1
Server 8 am – 2 pm 1
Server 7 am – 3 pm 2
Server 11 am – 3 pm 3
Server 2 pm – 10 pm 1
Server 2 pm – 8 pm 1
Server 5 pm – 10 pm 2
Server 4 pm – 12 am 1
Server 4 pm – 10 pm 1
Cook 6 am – 2 pm 2
Cook 8 am – 2 pm 1
Cook 11 am – 3 pm 2
Cook 2 pm – 10 pm 1
Cook 2 pm – 8 pm 1
Cook 5 pm – 10 pm 2
Cook 4 pm – 12 am 2
Other staffs 6 am – 2 pm 1
Other staffs 11 am – 3 pm 2
Other staffs 2 pm – 8 pm 1
Other staffs 11 am – 3 pm 2
Other staffs 2 pm – 10 pm 3
Other staffs 6 am – 2 pm 1

Require:
Calculate the annual cost labor cost percentage and related expenses for the two schedules based
on the year revenue of $2.1 million, and management salary was $200,000, and the same average
hourly wage. What is the difference between the previous and the next fiscal year’s labor cost
percentage points before payroll benefits and related expenses?

The following formulas are provided:

 Cost per year = No of hours (per day) * No of employees * average hourly wage
  Total labor cost = Management salary + Hourly Employees' Labor Cost
 Labor cost percentage = Total labor cost / Revenue

Task 3.

i. Artisan Bakery & Coffee uses the periodic order method, ordering once per six weeks.
Determine the proper quantity of apple juice bottle to order today, given the following:
Normal usage is one case of 24 bottles per week. Quantity on hand is 12 bottles. Desired
ending inventory is 36 bottles. The coming month is expected to be very busy, requiring
30 more bottles than normal.

ii. Muffin House uses the perpetual inventory method. One of the items to be ordered is
canned pineapple. Determine reorder point and reorder quantity (number of cases), given
the following information: normal usage is 28 cans per week; It takes six days to get
delivery of the item; Par stock is set at 52 cans; Cans come packed 10 to a case.

iii. Which kind of foods are more likely to be ordered by periodic order method and
perpetual inventory method? And Why?