I do agree with the concept of utilities as fixed cost . . . across the three years I’ve been at it, each month was pretty close to the same. HOWEVER, my utilities range from $900 to $400 within the year. For my money, a larger than 100% difference is variable . . . but it is also predictable, and therefor, fixed cost.
You’re right Nick.
Same amount of gas, but the cost per therm climbs steeply in winter. The cost per unit climbs even when consumption is fairly level or slight increase. Same with kWh of electric during summer. You guys with electric ovens feel the squeeze in summer while us gas oven guys get it in winter. Still, it’s all predictable and not tied to sales very much.NicksPizza:
You’re right Nick.
So a little Econ 101 (micro)… Something being variable does not make it a ‘variable cost’ in the accounting sense. It needs to vary directly with sales. You can argue that there’d be some differences based on sales, but it’s very small as a percentage of the overall cost. Your ovens are going to be running whether you make a pizza or not, and they’re going to use pretty much the same amount of gas either way.
“Guest” said:
Lets not forget Mr. Toarmina, the franchisor. Because God knows this has ruined me financially and I have yet to take a penny for myself out of this place.
Have you not heard of mixed costs?NicksPizza:
You’re right Nick.
So a little Econ 101 (micro)… Something being variable does not make it a ‘variable cost’ in the accounting sense. It needs to vary directly with sales. You can argue that there’d be some differences based on sales, but it’s very small as a percentage of the overall cost. Your ovens are going to be running whether you make a pizza or not, and they’re going to use pretty much the same amount of gas either way.
The other accounting test is this: If it’s truly variable, the cost should be ZERO when you have ZERO sales. If you open one day and sell nothing, you shouldn’t incur any variable costs. Utilities fail this one as well… they’re all going to still be running. You’ll use a little bit less of each, but not nearly enough to make a dent in the bill. The majority of that bill will be incurred either way.
Food, credit card discounts and delivery driver reimbursements are the only truly variable costs I can think of in this business. Even labor is very lumpy, and if you have no sales you’re still going to incur some labor costs. Those base labor costs should really be considered fixed. That’s exactly why it’s correct to include a store manager’s salary as a fixed cost, and not as a percentage of labor.
Before we can spend much more time haggling over fixed and variable costs, someone or the group should decide on what definitions will be used in the discussion. There are several out there: some are general terms, some are industry specific, some are restaurant directed and some are developed by experts in the pizza industry to use as benchmarks in developing business plans and budgets and accounting.
Fair enough. I am not new to this industry, I am well aware of the fact that it is common to consider everything other than Labor and COGS to be fixed. I was simply trying to challenge that notion and point out that if you give these expenses the same attention that you do variable ones that significant cost savings is out there. So many businesses I have seen ignore “fixed” expenses because they are “fixed”. In reality, they are not fixed and they are controllable. Putting a bad label on something because it is acceptable has confused most operators and made them pay less attention to these expenses than they should.DFW:
Before we can spend much more time haggling over fixed and variable costs, someone or the group should decide on what definitions will be used in the discussion. There are several out there: some are general terms, some are industry specific, some are restaurant directed and some are developed by experts in the pizza industry to use as benchmarks in developing business plans and budgets and accounting.
They are all apples to ornges, so the definition of terms will head us all down the same track. Once again the simple question hits the speedbump of not being so simple afterall
Now, THAT has big value when you put it that way. You’re right; I’ve had conversations with local independent restaurant people who gloss over their control of ‘fixed’ costs and end up losing big scratch over the year.