Reference no: EM133007156
Question: Along with burritos, Chipotle has cooked up profitable growth for many years. The company's build-your-own meal model and focus on organic and naturally raised ingredients successfully attracted millions of customers in the United States and beyond. As it continues to grow, Chipotle's success depends on the company's ability to wrap up keep its materials-cost variance increases.
For Chipotle, profitability depends on making each burrito at the lowest possible cost. In each Chipotle store, the two key direct costs are labor and materials costs. Labor costs include wages for restaurant managers and staff, along with benefits such as health insurance. Materials costs include the "critical seven" expensive food ingredients-steak, carnitas, barbacoa, chicken, cheese, guacamole, and sour cream-and items such as foil, paper bags, and plastic silverware.
To reduce labor costs, Chipotle often makes subtle recipe shifts to find the right balance between taste and cost. For example, it uses pre-chopped tomatoes shipped in plastic bags to make salsa because chopping tomatoes by hand takes too much labor. From 2010-2014, tweaks like that lowered Chipotle's labor costs from 24.7% of revenue to 22.0%. At the same time, however, materials costs rose from 30.5% of revenue to 34.6% due to the company's focus on naturally raised ingredients. Responsibly raised meat and fresh local produce cost Chipotle more than conventional ingredients, which reduces profitability. As a result, each Chipotle store aggressively manages portion control. While employees gladly oblige customers asking for extra rice, beans, or salsa, they are trained to be stingy with the "critical seven" food ingredients.
After E. coli and norovirus outbreaks in 2015, Chipotle made changes to its operations to improve food safety and reduce materials-cost variances. Cheese and some vegetables now arrive in stores pre-cut and shredded, while pork and barbacoa beef are now pre-cooked and delivered in sealed bags. With future profitability dependent on lowering its materials-cost variance, Chipotle's "food with integrity" will need to be managed very closely going forward.
-Why are standards costs used in variance analysis?
-How does a flexible budget differ from a static budget?
-What steps did Chipotle take to reduce its material and labor variances?