CHAPTER 3: 留學生財務會計dissertationFINDINGS AND ANALYSIS

3.1 Overview of cost management and sample restaurant chain business

3.1.1 Background
China Hotel Association (CHA, 2009) reported that the tourism consumption and high-end business consumption had reduced significantly recently. The severe environment of the hotel industry leads the competition among hotels, of which the most direct presence is the price competition; in other words, behind price, the essential factor is the competitive cost (CHA, 2009).
According to Hilton et al. (2008, p.882):
‘…cost is the sacrifice made, usually measured by the resources given up, to achieve a particular purpose…’; and ‘…cost management is a series of activities including forecasting, planning, checking, control and analysis…’.
Michael E. Porter (1980 &1986) suggested three competitive strategies, of which the “overall cost leadership” is most easily understood. Low-cost strategy which means, reducing cost through the special methods, urges managers to create competitive advantages according to different circumstances in order to achieve a cost reduction strategy (Poter, M.E., 1980). Cost management aims to excavate internal potential constantly to reduce cost and improve cost efficiency in order to realize the profit maximization. Then, every activity of cost control should consider about their impact on profit, whatever the pros or cons, otherwise they would lose their meaning (Huang, Y.C., 2006, p.157-158). If only focusing cost management on saving and reducing monetary spending, to control spending blindly and cataloguing without analysis, would lead to lower costs, but benefit source also is cut off, which would trap into a vicious circle:

3.1.2 Overview of Chain Q business
(For simplicity and security needs, the restaurant chain would be named ‘Chain Q’ in the context below.)
3.1.2.1 Introduction
The sample restaurant chain was founded in Zhejiang province in China in September 2003; it is headquartered in Shaoxing. After nearly 7 years’ development, Chain Q has become a medium-scale chain of Chinese restaurants which own sixteen branches mainly located in six major cities and regions in the Yangtze River delta economic circle. The chain Q owns an area of 38,000 square meters, nearly 4,200 employees, and a total of more than 2200 tables. The firm’s deep commitment to innovation and development, style and health started with the first restaurant 7 years ago.
Chain Q are running traditional Chinese food in principal, especially doing well is the eastern Chinese food because of the location of its branches and marketing positioning. Chain Q takes “the classics, the traditional, the authentic” as the management ideas, devoting itself to becoming a global food and beverage brand.

3.1.2.2. Cost structure
Chain Q program the similar operation structure in all its branches in order to manage business simply and directly, as shown in Figure 3-1-1, which is the structure of Chain Q. Cost structure of Chain Q can be divided into two categories: direct （Production） and indirect (non-production) cost. Direct costs refer to the costs of materials of finished food products, including specific food costs and beverage cost, which is the main expense. On the other hand, indirect cost is the cost created in the processing, such as labor cost and other overhead expenses of which, the labor costs include the salary, bonus, training and welfare and so on; while the overhead expenses are rent and rate, energy support, depreciation, interest, tax, insurance and so on.#p#分頁標題#e#
Figure 3-1-1, Operation Structure of Chain Q
 

Due to each branch of Chain Q providing the same facilities, similar catering service, then the cost structure involved in each branch is similar. For case analyzing, the costs can be simply calculated in the following parts:

① Raw material
Raw material costs of food and beverage are the main expenditure in Chain Q, accounting for the largest proportion of income (Table 3-1-2, 3-1-3, 3-1-4). Reviewing the information from the CEO of Chain Q, he stated that ‘international food and beverage cost rate ( ) is around 30%-35%’. In Chain Q, according to Chain Q’s cost report sheet (Table 3-1-2, -3, -4) from 2006 to 2008, it’s is around 47%, while range from 159.46% to 213.09% and is located from 36.37% to 39.33%. As shown below (Table 3-1-1):

② Operating expenses
Operating expenses include all the costs in the process of catering management, such as labor cost, operation cost, energy supplies, maintenance, depreciation and other expenses.
Predictably，the range of cost management of the catering business consists of direct and indirect cost control. Each step in the process from menu engineering to raw materials procurement, processing and serving, all closely relate to cost. Meanwhile, other indirect costs also should be listed into the whole process of cost management such as administration and maintaining, in order to achieve the target objectives. Remarkably, to manage cost dose not mean simply to reduce expenses or purchase low price materials, but to analyze the reasonability of cost and budget previously to monitor whether the cost goes along with the budget, followed by modifying budgeting through appraisals and self-criticism to perfect the cost management system. Below is Chain Q’s cost structure (Table 3-1-2, -3, -4):



Cost structure of Catering sampled by Chain Q has the following features:
① Variable costs take large scale
There are other variable costs of material consumption except the cost of raw material, costs which would increase proportionally with the increase of the sales volume. This means the food price discount fluctuation cannot be as big as room prices. As shown in Table 3-1-2, just raw material cost accounts for almost half of total cost (47.12%).
② Controllable cost account for large proportion
Except costs of depreciation, repairing, and maintaining, most expenses and food and beverage raw material costs are controllable costs. This kind of controllable cost is directly relative to whether managers have the ability to control costs well, and also account for larger proportion (82.21%) of operating revenue.
③ Great number of weaknesses in cost management process
Cost management has huge influences on the cost of the catering industry. There are numerous steps existing in the process：Menu engineering → procurement → acceptance → keeping and storage → store issue → processing → serving → sales → promotion → cost accounting, of which any phase could create cost expansion. Investigating the causes of cost increase, lack of efficiency and responsibility give rise to the loss and waste of raw material, for example, food storage temperature is not low enough; not covering the cap tightly enough; which would make raw materials deteriorate thus increase cost of processing.#p#分頁標題#e#
3.1.2.3 Strategy
As to the market positioning of Chain Q at its foundational, the major target customers of Chain Q have been positioned as High-end business banquets, company’s annual meeting, press conferences and other important activities, important family feast consumption (e.g. wedding, birthday ), and white-collar’s personal consumption.
In the process of operation, there are several innovative and useful methods and strategies for managing cost and improving profitability of the chain.
① Establishment of Standard Costing and Variance Analysis
So-called standard cost, is used to decide the appropriate proportion of each expense. Through comparing actual cost with standard cost, I try to analyze the variances between them to figure out what the problem is; furthermore, to perfect the management schedule.
② Establishment of Target Costing
Target costing is profit planning to satisfy the customer and the profit generation to the company given the market requirements (Yoshikawa et al., 1994, p.53-64). Combined with other techniques such as Kaizen and value-engineering, target costing would be used to evaluate and monitor the whole business process and apply relative implements to achieve targets.
③ Establishment of Balanced Scorecard
As a service industry, and combined with the fact that non-financial measures have attracted increased attention from customer-driven firms, Chain Q has to pay more attention on non-financial performance to satisfy the customer and reduce process cost.

④ Throughput accounting application
As a kind of manufacturing industry,China Hotel Association (CHA, 2009) reported that the tourism consumption and high-end business consumption had reduced significantly recently  the catering industry also has its own bottlenecks in its process. Chain Q applies throughput accounting in the production process to figure out its own limiting factors and bottlenecks, to maximize the capacity of bottlenecks to perfect the whole process most efficiently, and maximize the throughput to gain the profit maximization.
⑤ Just-In-Time (JIT) Implementation
JIT aims to minimize http://www.400190.com/dissertation_writing/Accounting/2012/0223/1062.html waste involving production, delivery, storage, and acquisition. In Chain Q, JIT has been used in raw material procurement, acceptance and storage widely and gained most effect on those stages.