Fixed Costs

Fixed costs are required regular payments made during the accounting period not contingent on production of product or the sale of product. Examples include rent, insurance, salaries and interest.  In general, fixed costs remain the same from one period to the next.

Bookkeeping – Cost Accounting (Lesson 77)

Cost Accounting

The science of calculating the actual costs of manufacturing is known as cost accounting, a.k.a managerial accounting.  Unlike traditional accounting which records economic transactions after they occur, cost accounting identifies all underlying costs associated with the production of a single unit.

Break-Even Analysis – Fundamentals

Break-Even Analysis - Fundamentals

Breakeven analysis is a managerial (cost) accounting tool used to examine the relationship of price to cost of a product.   It also considers various sales volumes and the effect on profit given the different relationships of price to cost.   The breakeven analysis is an essential tool in maximizing profit with the least amount of resources.

Leverage in Business

Financial Leverage

In the simple lever and fulcrum machine the force is magnified onto a load.  The machine creates a mechanical advantage, a form of force amplification.  In business the principle is exactly the same.  Except here we are not moving a physical object but the objective is to amplify the profitability or financial gain by using some form of a lever and applying this lever to a fulcrum and generating financial advantage.

Fixed and Variable Costs in a Restaurant

Fixed and Variable Costs in a Restaurant

Many restaurant owners and managers do not understand the difference between their fixed and variable costs.  The problem with defining fixed and variable costs in a restaurant relate to their connection with sales.  In addition, reasonable assumptions have to be made in order to delineate between fixed and variable costs in the food service industry. 

This article will explain the difference between fixed and variable costs in a restaurant, provide examples of both and educate the reader on proper analysis procedures to create baselines for improvement.  I am a big believer in the feedback loop method of business operations in order to maximize profit and reduce overall stress for the owners and management team. 

Mixed Costs

Mixed Costs

Mixed costs are a more advanced business concept.  Mixed costs refer to a combination of both a fixed and variable component.  A common error made by most small business entrepreneurs is the misapplication of the formula.  Many small business owners understand the textbook definition but rarely exercise the concept in reality.

Heads on Beds – Hotel Management

Heads on Beds

The hotel business has one tenet that stands above all other hospitality based business standards.  Get heads on beds.  Why does this one business standard have so much more value than any other?  Well, it is simple, the fixed cost of operations for hotels are over 70% of all costs.  Therefore any additional guest sleeping in one of the rooms adds significantly to the potential profit of the hotel.

Variable Costs

Variable Costs

Variable costs are those business related expenditures that vary in proportion to production.  The most common examples of variable costs include raw materials, labor, packaging and distribution expenses related to producing and delivering the product or service.

Absolute Dollars

Absolute Dollars

In the hospitality industry, there is one financial tenet that takes precedence over any other business perspective.  In this industry, it is about putting the maximum number of dollars (ABSOLUTE DOLLARS) in the register after each day.  One of the most misunderstood business dynamics of this industry is the higher than average fixed cost to run the company.

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