Cost Control and Analysis

Being a multinational restaurant serving Western fast food, comprehensive cost

control is important to its profitability. In this part, different cost components and
trends will be analyzed, and it will investigate how cost control is achieved.
(A) Cost component and trend analysis
McDonalds Corporation has four major cost components, namely Food and paper,
Payroll and employee benefits, Occupancy and Selling, general and
administrative expenses. The total cost has been decreased from $18,908 million to
$15,904 million. Food and paper cost, the major variable cost which varies directly
with the production volume, has decreased by 5.64% from 2007 to 2009. The obvious
reduction in total cost is also mainly attributable to 10.58% decline in Payroll and
employee benefits which is a mixed cost . For the major fixed cost Occupancy
expense as whole (including franchising occupancy cost), it has been reduced slightly
from 2007 to 2009 by 1.50%. Selling, general and administrative expenses
decreases by 5.61% within these 3 years.
(B) Cost control
With the pressure of inflation and increasing production cost, McDonalds corporation
uses respective tactics to control its costs. Through ownership of land and building or
long-term lease of restaurant sites, despite facing high inflation in rental costs,
McDonalds successfully controls its rental and occupancy expenses which is a heavy
component of fixed costs (McDonalds Corporation, 2010). For Payroll and
employment benefits, it has been reduced significantly because McDonalds has
increased the proportion of franchised restaurant worldwide. Due to a smaller
proportion of corporate-owned restaurants, it reduces the manpower cost needed. For
Food and paper cost which constitutes cost of goods sold, McDonalds maintains

rapid inventory turnover to ensure that there is no idle inventory which ties up cost or
causes wastage of food inventory. Therefore, it could keep the food cost lowered,
even under the upward pressure brought by inflation.
(C) Projected cost analysis
With the tactics used by McDonalds as stated above, using the previous annual rates
of change as reference, it is anticipated that all four categories of costs will decline at
a decreasing rate because of increasing inflation rate in the globe, especially in the
U.S. market which accounts for the largest share of revenue as well as costs.
2010 (projected) change in percentage
Food and paper
5022.7
-3%
Payroll and employee
3807.0
-4%
benefits
Occupancy expenses
4665.0
-3%
Selling, general and
2189.5
-2%
administrative expenses
Other (income) / expenses
N/A
N/A
Total costs
15684.2
-1.38%
(measured in USD of millions)

2009
5178.0
3965.6
4809.3
2234.2
(283.40)
15903.7

References
McDonalds Corporation. (2010). Annual Report 2009. McDonalds Corporation.
Retrieved March 27, 2011 from http://www.aboutmcdonalds.com/mcd/investors/
publications/2009_Annual_Report.html