Hospitality – Food and Beverage Operations
This papers seek to provide advice to the financial manager using report about 6 major cost or income centers to be which may be worth investigating on a given case study (at least two centers discussed must be cost and two income based, the other two are discretionary of the researcher. The paper will explain why it is relevant to investigate these centers, what problems , if there are any, are most likely to be found and how can this affect overall profitability (Van Horne, 1992; Weston and Brigham,1993).
Part of the paper will also be to recommend logical solutions to the problems for the Financial Manager. 2. Questions and Answers: 2. 1 Why is it relevant to investigate these centers? It is relevant to investigate these centers because there could be frauds being committed or no body is keeping records correctly or there or mistakes or errors in the existing accounting system of the Nutmeg restaurant and bar that is preventing the company from measuring its correct performance.
A clear contradiction in the case facts which could be a sign of a big problem appears to be present in the following statements: “In many ways the venue is a great success: it has become very popular and the number of customer exceeds the original forecasts. Whilst a lot of theme evenings were used to help promote the opening of the venue, non-themed sessions are now proving just as popular as the fortnightly themed events. However the restaurant/bar is not achieving the profit levels as it was expected to, neither in terms of profit percentage nor in actual cash terms.
” But since the question focuses on the relevance to investigate these centers, which may be referring be referring to cost centers, income centers and other centers and their significance in bringing out the expected profit level and actual cash flows. It is therefore reasonable to infer the effect of nonworking cost , income and other centers in meeting the company’ financial objectives particularly profitability that will be address properly on the third question. 2. 2 What problems, if there are any, are most likely to be found?
Likely problems could vary as could be experience by a new food business. Case facts admit Nutmeg restaurant and bar is a fairly new venue in the Brewery Quarter of Cardiff, being the third restaurant/bar to be opened by the small Celtic Group Company about just six months ago. Being new it may not have proper accounting system or accounting control, or management structure or segregation and definition of responsibilities. Since the case facts are silent on many things it could be assumed that there are problems in those areas.
However trying to make so many assumptions would bring the resolution this case study into unintended directions. Thus concentration should be on what could fairly be implied based on given statements from the case facts. One statement that support the existence of the problem is when the Celtic Group management decide that they should send in their financial manager to investigate why this apparently successful venue is not making money as it should. It is clear that there is performance being not the same as expected; Hence the there could be still numerous possible problems that could be identified.
As stated in the preceding subsection, it is possible that frauds are being committed, or that nobody is keeping records correctly or there are mistakes or errors in the existing accounting systems of the Nutmeg restaurant bar that is preventing the company from measuring its correct performance. But since the requirement is to produce a report advising the financial manager about 6 major cost and / or income centers which may be worth investigating, the problems could be reasonably be inferred on why the company’s cost and income centers are not working as expected.
2. 3 How can this affect profitability? Before this paper could discuss the effect of working and non-working cost centers, income centers and other centers, there is need to discuss each of these centers in relation to purpose of each to the over-all financial objectives of the company. Since the question is to the effect of these centers on profitability, the questions assumes that in fact that the answers are relevant of the profitability of the company, which indeed is true. 2. 3. 1 The cost center
The cost center is a responsibility center in an organization where there is requirement to control the level of cost in a certain department or division, or geographical area under a responsible official. It is typically the smaller segment of activity or responsibility area for which costs are accumulated (Shim, et al. , 2007) The issue of awareness and concern for costs should be taken into consideration in any kind of cost center first by the company management creating the cost center and the manager that would be made responsible in controlling the cost.
The success of commercial or restaurant operators has to a great extent depends on their ability to determine and control cost. It is however a reality according to reality according to research that for many years, managers of foods service may not be very concerned with determining the actual costs of running their department or their business unit with the realistic allocation of those costs of running their department or in charging those centers properly (Sneed and Kresse, 1988). 2. 3. 1. 1 Controllable expense is one the critical issue in cost center.
The issue in cost center could be reduced simply into determining what is controllable and what is not. Sneed and Kresse (1988) cited that in food costs are controllable expense. Hence they argued that it is important to know actual food cost as compared with the desired or projected food cost. They added that food cost is routinely determined in most food service operations in order to monitor performance and allocate costs. On other hand, they admitted that the allocation of these costs to the appropriate cost centers may not always be done accurately (Sneed and Kresse, 1988).
To control the total food costs in the case of restaurant cost center or total cost of drinks in the case of bar operation may be recorded, maintained and updated on a daily, weekly, monthly or yearly basis, and these figures are later used for preparation of monthly and end-of –year financial statements. Sneed and Kresse, (1988), however, warns that a calculation food cost less often than monthly is good because of difficulty of corrective action cost are too high are already. The business of restaurant is sensitive to change in prices.