Pizza Business Family Owned Small

Pizza Business

Family owned small businesses are frequently left out of the loop when it comes to managerial and accounting science as frequently the owner and/or managers tend to believe that the limited level of operations is manageable via the use of traditional organizational means, or those employed historically. The result is frequently that the individual family business may be left unaware of the real situation with regard to cot accounting as well as overall broad health of the business at any given time.

Chua, Chrisman, and Sharma 19) Owners, and especially on site managers may and often are seriously over committed to day-to-day running of a business and may feel that added tools mean added tasks and responsibilities, and yet once they implement the use of certain cost accounting tools they may actually find that the time it takes to manage costs is actually cut down, as they are aware of the overall health of the business and the cost/profit per unit sold.

De Kok, Uhlaner, and Thurik 441)

Activities based accounting has become increasingly important in the competitive business market, and there is no exception made for small family owned businesses, as their work makes up a great percentage of business done in the U.S. But is in competition from nearly every other aspect of the market they maintain. (Hicks 41) One of the most effective examples of activities based accounting is of any such tools is a break even analysis or a cost volume profit analysis.

Mcmahon, and Holmes 19) This simple task allows the individual to clearly understand at what point during operations the business begins to make a profit in the fiscal year, or how many units must be sold to do so.

Guidry, Horrigan, and Craycraft 74)

Activities-Based Cost Accounting:

Total revenues of the restaurant for the year 2007 is $450,000, (400,000 pizza, 50,000 on up sales of toppings and beverages) inventory (cost of supplies like cheese, sausage, pizza sauce-tomato puree, paper products, beverages, etc.) to be about $75,000 a year, labor is $50,000 (including workers comp insurance), utilities (gas, electricity, telephone) are $10,000, extermination cost $1,000, miscellaneous $500, advertising $500 and annual taxes and insurance on the building and land are $2,000. There were no significant equipment purchases this year and there has been no significant depreciation on any existing equipment this year either.

The pizza place is opened 7 days a week, hours are Monday through Thursday 12pm-11pm and Friday 12pm-12am, Saturday 4pm-12am and Sunday 4pm-11pm. these hours meet the needs of the community and allow the weekday lunch rush to purchase increased numbers of smaller pizza's, the reason that these relatively low selling items remain on the menu. These hours are a direct result of activities-based costing, to meet the needs of the community and the business as competition and community makeup have changed over the years.

The owner employs one delivery driver each day and two cooks every day of the week, there are no cashiers as the owner takes care of all that and the owner pays no rent as he owns the land and building. Delivery is supplemented by the fact that the driver provides his own vehicle, carrying insurance on it as well as a delivery charge of 3.00 per order with a minimum order of $10 and no maximum order. Activities based accounting has been in place for the past two years, and the owner has taken special consideration for the needs of the business as it has evolved, and based on increased competition from competing chains and a few other small businesses of its type in the area. Activities based accounting is a more difficult system than most but has proven effective in this application, as it has led to the development of sustainable practices, and will likely lead to the development of a reduction in the cost of doing business as well as eliminate superfluous services, as is allowed. The activities-based costing has resulted in changes over the last two years, including eliminating the high cost delivery vehicle, which had previously been provided by the owner. In its stead the driver is expected to utilize his or her own vehicle, limit hours to those with peak performance for delivery, with supplementation for day corporate catering done by the owner himself.

Another change that has ensued, as a result of activities based accounting is associated with the development of a day rate of operations, or what it costs to do business, with or without sales. Reduced hours of operation on weekends as well as increased labor during high volume hours and decreased labor during slow hours. The resulting changes have made the business more profitable and have increased the desire, by the owner to better understand unit costs. For this reason the owner wishes to undertake a Cost Volume Profit Analysis on the pizza portion of the business as this portion of the business is the most labor intensive, involves the largest number of sales and has the most room for cost and/or labor reduction. Food costing has become exceedingly important as items fluctuate through the year and have gone up in unit price continually over the years, while prices must remain rather stationary to be accepted by the community. It also must be said that the community has supported this business through many years of change and brand recognition in the community is good. There are many return customers, crossing generations and there are also additional customers who have been added to the mix by the business development in the area.

Cost Volume Profit Analysis:

simple CVP analysis contains information on fixed, variable costs, unit price and expected unit sales. This work will analyze cost accounting of a small family owned pizza parlor. The CVP for the largest selling item, 37% 0f total pizza sales of 400,000 (148,000), the family size pizza, which costs $10 to make, sells for 20.25, sold 7309 units, (just over 600 units per month) with a fixed cost rate of 64,000 per year is such:

Variable Unit Cost

Fixed Cost

Expected Unit Sales

Price Per Unit

Total Revenue

Total Variable Costs

Profit

The break even point for this item which constitutes a large portion of yearly sales is then 6, 243 unit sales. Meaning that for this item alone the restaurant will not break even until October. This calculation takes into consideration only 1 menu item, which is an exploration of an idea that the owner has considered, which is to offer only the best selling pizza and in greater quantity. This idea has since been rejected in favor of the image of the pizza parlor. To perform a greater CVP on the whole of pizza sales is then required as they make up the largest percentage of sales and also have the most possibility for cost reduction and variability.

The same procedure, performed on the second highest selling item, produced a much more disturbing CVP

Variable Unit Cost

Fixed Cost

Expected Unit Sales

Price Per Unit

Total Revenue

Total Variable Costs

Profit

The break even point for the 16" pizza would not occur until sales reached 8,000, based on the current price and costs, an unobtainable goal, given that sales of this item do not usually exceed 5,000 units per year. On the third highest sales item, the 10-inch pizza a similar pattern emerges.

Variable Unit Cost

Fixed Cost

Expected Unit Sales

Price Per Unit

Total Revenue

Total Variable Costs

Profit

The break even unit number would be 12,800, which again is not obtainable, given that this item rarely sells greater than 9,000 units a year. An individual analysis that increased the variable price per unit did not alleviate this net loss, on either the 10 or the 18-inch pizza. To understand better how, each item contributes or detracts from the sales mix one must also evaluate all other items, one by one. Yet, for the purposes of this work the a CVP of the entire pizza aspect of the business gives a better idea of the total sales picture. An average cost per unit being $7.17 and an average sales price per item being $14.42 the CVP looks much more healthy.

Variable Unit Cost

Fixed Cost

Expected Unit Sales

Price Per Unit

Total Revenue

Total Variable Costs

Profit

The break even for all pizza sales would then be 8,827 units, which cannot really account for the individual items (which should each be analyzed for individual profitability), contribution to the mix but can give a much better overall view of the situation, as what is really occurring is a mix of sales of all the items, at various levels. Most months being the same, with a similar sales mix would conclude with an average unit per month sales of all pizza sizes at 2,486, which means that again if the monthly sales mix was roughly the same each month the overall period of time that the break even point would occur mid year rather than in October, which would be the case if the store only sold 1 item, the 20" pizza.

The pizza sizes are 10 inches which is an individual, 12 inches which is a small, 14 inches which is a medium, 16 inches which is a large, 18 inches which is a super, and a 20-inch pizza which is a family size. The family size pizza gets about 37% of all the sales which are $400,000, the 16-inch large comes in second accounting for 20% of pizza revenues, the 10-inch accounts for 18% and the 12-inch accounts for 15% (due to a large weekday lunch crowd) the 18-inch pizza accounts for only 10% and the remaining 5% is sales of the 14-inch pizza. The 20-inch pizza price is $20.25 with just cheese and sausage and the 16-inch cheese and sausage is $16.00 a pizza. Each pizza is priced at a markup of roughly 200% as is the standard for most restaurant food. (IRS, August 2005, NP) pizza menu accounting or the sales mix breakdown is as follows.

Pizza Size

Unit Price

Unit Cost of Sales/year

Units Sold

Sales

Total Unit

Cost

The pizza business of the restaurant therefore showed a profit of about 137,033.00 minus the wage consideration for the owner, which is not figured in the 50,000 labor costs applied above.

The up sales on toppings could potentially increase the revenue in the future, if the cost accounting is such that unit price per topping item meets or exceeds 200% of the 1 (vegi) or 2 (meat) dollar topping charge. Beverages are also not calculated in total pizza sales, but they also offer an increase in revenue, with minimal allocation.

Yearly Master Budget Sample

Total Expenses 10,959 10,459 7,959 10,459 10,459 11,859 10,459 10,459 10,909 10,909 10,459 12,009 Wages 4167 3667 4167 3867 4167 4367 4167 4917 Supplies 6250 4250 6250 5950 6250 6500 6250 7050 Insurance

Taxes 0-0 0-0-0 2000 0-0 0-0 0-0 Advertize 42-42 42-42 42-42 42-42 42-42 42-42 Other 500 0-0 0-0 0-0 0-0 0-0-0 Extermin... 83-83 83-83 83-83 83-83 83-83 83

Total Monthly Sales

Total Sales by Month 33,600 32,225 25,687 33,456 25,687 33,457 34,358 35,287 33,667 32,655 32,567 47,354

The production budget for the year 2007 including the total number of food and supplies is, about 75,000. Broken down, the monthly budget for supplies, including food, napkins, and other supplies is on average, $6,250. The production budget, includes wages, supplies, and fixed overhead costs, and is reflected in the total expenses in the master budget sample above.

Direct Materials Budget Monthly Average:

Meat

Cheese

Flour

Sugar

Salt

Tomato Sauce/Paste

Vegetables

Garlic

Spices

Yeast

Cups

Napkins

Straws yearly reported inventory for the restaurant is 75,000 and this number fluctuates daily and monthly, with the daily inventory being about $1,200 dollars and the Monthly inventory being just over $6,000. As there are just over $1,095 dollars in sales per day, on average, the inventory hold over is related to the fact that supplies come in as needed and different suppliers deliver on different days, as most supplies ordered daily are perishable. Through the week there might be $575 dollars worth of supplies to $1,200, worth if a perishable shipment has just come in or if a dry goods order has arrived on that day. Inventory controls are in place, and supplies are rotated upon arrival, to ensure that there is as little pre-purchase waste as possible. Dry goods are refilled once daily or as needed, given the daily traffic.