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Importance of Managerial Accounting in Business Organisations

It has been found that management accounts are invaluable when it comes to a company making important and timely management decisions about their business.
It is clear that different businesses will have different management accounting needs and this will depend on the areas that the business finds are most important to them. A few examples of the areas that may be as follows;

– The sales process: this includes distribution, debtors and pricing.

– The purchasing process – this area includes records of stock levels and creditors.

– Records regarding employees.

– A fixed asset register

Companies are under no legal obligation to draw up management accounts; however, many find that it makes running a business so much simpler if they do prepare the accounts. In fact, many companies produce them as regularly as monthly or quarterly.

Management accounts are usually for analysing the recent past performances of the business and also usually study elements that look at the future of the company as well. This can include looking at profit forecasts, cashflow and sales. The figures found from this analysis are compared against figures that have been gathered from past forecasts and budgets.

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The information gathered for the management accounting is usually broken down so that the performance of different parts of the company can all be measured separately to ensure that they are all working to the best of their abilities. An example of this is that a specific product could be monitored in order to see how well it has done across different outlets.

Businesses who are selling a variety of products are advised to produce a financial breakdown for each of them. This will allow you to make sure that very profitable products are not subsidising those that are failing to sell as well.

By organising the financial side of your company in this way, you will be able to monitor trends in the business, therefore highlighting any variations in your income and spending that may require your attention. This will save companies from resorting to taking out large loans in order to subsidise their business and will therefore have a positive effect on the financial side of the company in the long run.

It is clear that different businesses will have different management accounting needs and this will depend on the areas that the business finds are most important to them.

The information that has been gathered for the management accounting tends to be broken down so that the productivity of separate parts of the business can be monitored.

By organising your business in this way, you can see where changes are needed and save yourself from having to take out any large loans .

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Shedding Light on Menu Engineering’ in Terms of Growing a Business

Menu engineering is an interdisciplinary approach in the deliberate and strategic construction of menus.

Sometimes called -Menu Psychology’, the term menu engineering is generally adopted as a standard Best Practice within the Hospitality and Restaurant Industries. The objective with menu engineering is to maximize a concept’s profitability by leading the customer to certain purchases, and avoiding others, in addition to -engineering’ recipes to maximize profits at the product and category level.

Menu Engineering is comprises of five key areas

Psychology (perception, attention, emotion/effect)

Recipe construction and the best balance between quality and cost

Managerial Accounting (contribution margin and unit cost analysis)

Marketing & Strategy (pricing, promotion)

Graphic Design (layout, typography)

Psychology of menu engineering

Visual perception is inextricably linked to how customers read a menu. By strategically arranging menu items and categories within the pages of the menu, operators can promote high profit dishes while allowing less profitable dishes to be understated. This strategy enhances the sales mix, profitability, and thus represents a key element in the business strategy.

Managerial accounting

The primary goal of menu engineering is to encourage purchase of targeted items, generally the most profitable items, and to discourage purchase of the least profitable items. With this in mind, restaurants should first calculate the true cost of each menu item, (including condiments and non menu foods such as salt, pepper, oil, etc.) therefore extending to all items listed on the menu, and reflecting all costs incurred to produce and serve [each item]. Optimally item costs should include: food cost (including wasted product and product loss), incremental labor (e.g., cost in on site production, dessert production, or additional preparation), condiments and packaging. Only incremental costs and efforts should be included in the item cost, as there will be a static labor requirement in all cases.

After an item’s cost and price have been determined (see pricing in the Marketing section), evaluation of an item’s profitability is based on the item’s Contribution Margin. The contribution margin is calculated as the menu price minus the cost. Menu engineering then focuses on maximizing the contribution margin of each guest’s order. Recipe costing should be updated (at least the ingredient cost portion) whenever the menu is reprinted or whenever items are re-engineered. Some simplified calculations of contribution margin include only food costs.

Marketing (price & promotion)

By using guest demand (also called the menu mix) and gross profit margins, the relative performance of each menu item is determined, and assigned one of the following terms (based on the BCG Matrix):

Stars

Stars are extremely popular and have a high contribution margin. Ideally Stars should be your flagship or signature menu item.

Plow Horse

Plow Horses are high in popularity, but low in contribution margin. Plow horse menu items sell well, but don’t significantly increase revenue.

Puzzles

Puzzles are generally low in popularity and higher contributions. Puzzle dishes are very difficult to sell, but have a high profit margin.

Dogs

Dogs are low in popularity and low in contribution margin. Basically, they are difficult to sell and when sold they are not particularly profitable.

In general, items within a relevant comparable set (for example, entrees, or chicken entrees) should be priced to have similar contribution margins – this way, the restaurant would make the same amount of money, no matter what item the guest chooses to order.

Additional considerations

While the practice of menu engineering has been around now for about 30 years, and focuses on the combined menu sales mix and item profit, additional factors can come into play in an effort to enhance profitability through careful menu analysis. A primary area to evaluate is purchasing, as poorly executed purchasing can often lead to substantial over payments – for example; buying from a large distributor, while providing ease of purchase and convenience, can add up to 50% more on certain ingredient costs thus making a substantial increase in overall food cost, (not to mention the elevated carbon footprint). By using local and specialist purveyors, restaurants can often reduce their ingredient cost and enhance quality.

The Next Idea demonstrated this exact point when engaged to review the menu of a themed restaurant brand. Through its discovery stage, it became apparent that, in an age where the consumer was becoming increasingly aware of product quality and value, this client was failing on both accounts, as the menu was essentially provided by a national US Distributor, and ingredients were purchased frozen and simply re-heated on site, resulting in a lack of differentiation, high menu prices and mediocre customer satisfaction. TNI challenged the food production and supply chain process (which was typical for the industry). Our proposal was to produce food from scratch, within the kitchens, which we had concluded, would enhance quality and substantially reduce costs. After considerable analysis and trials, we were given the approval to implement this new operational approach across the portfolio. The result was a 12% higher customer satisfaction rating, 2% reduction in labor cost, and massive 4% reduction in food cost.

In summary: Menu engineering has been employed by food service professional industry for many years now, and operators generally possess a sophistication level where work in this area is both very helpful and critical to support a profitable business. It is important to note that, like all other management strategies, menu engineering is not something that can simply be purchased. Success depends on the right mix of products and services, and of course the necessary expertise. In the end, a well-implemented menu engineering program will represent a significant tactic to elevate food and beverage profitability.

About The Author

The author is associated with The Next Idea. The Next Idea provides all cafe interior design, cafe logo, photography, restaurant Interior design, menu engineering, etc. Our restaurant design capabilities include: exterior restaurant marketing display design and manufacturing, restaurant marketing display design, and restaurant decor theme creation.