Principles of Control

Section Objectives

Upon completing this section, you should be able to:• Explore basic food cost-control principles

Important Concepts and Percentages

• Sales (Revenue)– Defined as revenue resulting from the exchange

of products and services for value – In most operations, total revenue is broken into

two components: food and beverage– You can increase revenue by:

• Increasing the number of guests served• Increasing the amount that guests spend• Employing a combination of the two

• Food and beverage costs are considered direct variable costs

– They are closely related to business volume

– As sales increase, food and beverage costs increase and vice versa

Food and Beverage Costs

Food Cost Percentage

(Food cost ÷ Food sales) × 100

Beverage Cost Percentage

(Beverage cost ÷ Beverage sales) × 100

Labor Cost

• Labor (payroll) cost is considered a semi-variable cost– A portion of the labor cost is related to business

volume, while the other portion is not– What is the difference?

Labor Cost Percentage

(Labor cost ÷ Total revenue) × 100

Prime Cost

• Prime cost is a term used to refer to the cost of materials and labor—food, beverage, and payroll– Taken together, these represent the largest

portion of total costs– Prime cost should not be more than 60% to

70% if you want to meet overhead and also make a profit

Why is it Important to Separate Costs?

Sales Sales Food $800,000 Food $200,000 Beverage $200,000 Beverage $800,000 Total $1,000,000 Total $1,000,000

Of Total Respective Of Total RespectiveCost of Goods Sales Sales Cost of Goods Sales Sales Food $200,000 20.00% 25.00% Food $200,000 20.00% 100.00% Beverage $50,000 5.00% 25.00% Beverage $50,000 5.00% 6.25% Total $250,000 25.00% 25.00% Total $250,000 25.00% 25.00%

Scenario #1 Scenario #2

Actual vs. Standard Food Cost

• Actual food cost

– Represents what the food cost is for a specified period

– Reported on income statement/P&L

• Standard food cost

– Represents what the food cost should be for a specified period

Actual and Standard Food Cost Discrepancies

Discrepancies between standard and actual food costs are due to the following:

• Waste• Spoilage• Pilferage/Theft• Yield• Portion Control

Actual Food Cost Monthly Inventory

• Physical inventory is taken at the end of an accounting period, after close of business

– Requires counting and recording number of units

on hand

– Usually requires two people: one to count, one to record

• Once the total value of inventory is calculated, known as closing inventory for the period, it automatically becomes the opening inventory for the next period

An Example

Valuing Physical Inventory

• There are at least 5 methods to assign value to the units of product in a physical inventory:– Actual purchase price method– First-in, first-out method (FIFO)– Weighted average purchase price method– Latest purchase price method– Last-in, first-out method (LIFO)

Sample Inventory Records

Used for the following examples:

• Opening inventory = 10 cans @ $2.35 = $23.50

• Purchased on the 7th = 24 cans @ $2.50 = $60.00

• Purchased on the 15th = 24 cans @ $2.60 = $62.40

• Purchased on the 26th = 12 cans @ $2.30 = $27.60

• 20 cans remain in ending inventory

Actual Purchase Price Method

• Most accurate method

• Can be done only if prices are marked on each of the cases

• Assuming that 20 cans remain in inventory, the value would be:

4 @ $2.35 = $ 9.4012 @ $2.30 = $27.60 4 @ $2.60 = $10.40

20 = $47.40

First-In, First-Out Method (FIFO)

• Assuming stock was properly rotated, those items remaining on the shelf are the most recently purchased

• 12 cans were purchased on the 26th, while 24 cans were purchased on the 15th

12 @ $2.30 = $27.60

8@ $2.60 = $20.80

20 = $48.40

Weighted Average Purchase Price Method

• Reasonable alternative when large amounts of stock in inventory

• Determined by multiplying number of units purchased in a month by their specific purchase prices, adding these values to determine a grand total, then dividing by total number of units

• 70 units total $173.50 = $ 2.48 a unit

20 @ $2.48 = $49.60

Latest Purchase Price Method (Most Recent Price)

• Widely used approach• Cost of replacement at the present moment

would likely be the latest price at which the items were purchased

• Last purchase price = $ 2.30 a unit

20 @ $2.30 = $46.00

Last-In, First-Out Method (Earliest Prices)

• If this method were used:10 @ $2.35 = $23.5010 @ $2.50 = $25.0020 (Total) = $48.50

Comparison of Methods

Opening Inventory $ 23.50 $ 23.50 $ 23.50 $ 23.50 $ 23.50Purchases 150.00 150.00 150.00 150.00 150.00Total Available 173.50 173.50 173.50 173.50 173.50Closing Inventory 47.40 48.40 49.60 46.00 48.50Cost of Food $ 126.10 $ 125.10 $ 123.90 $ 127.50 $ 125.00

First-In,First-OutMethod

ActualPurchase

PriceMethod

WeightedAverageMethod

LatestPurchase

PriceMethod

Last-InFirst-OutMethod

Monthly Food Cost Determination

• The cost of food issued for any month is determined by the following formula:

Opening inventory

+ Purchases

= Total available

– Closing inventory

= Cost of food issued

Example

Opening inventory $2,000

+ Purchases _____________ $6,000

= Total available $8,000

– Closing inventory________ $3,000

= Cost of food issued $5,000

Adjustments to Cost of Food Issued

• Intraunit and interunit transfers

• Grease sales

• Steward sales

• Gratis to bar

• Promotion expense

Determining Cost of Food Consumed

Opening inventory+ Purchases _= Total available for sale– Closing inventory _= Cost of food issued+ Cooking liquor+ Transfers from other units– Food to bar (directs)– Transfers to other units– Grease sales– Steward sales– Gratis to bars– Promotion expense _= Cost of food consumed

Determining the Cost of Employee Meals

• There are 4 techniques for determining the cost of employee meals

– Cost of separate issues• Meals provided to employees

– Prescribed amount per meal per employee• Chef is allotted a fixed amount of money per

employee per meal• For example: $2.50 per employee for lunch,

$3.00 for dinner

Determining the Cost of Employee Meals—continued

• Prescribed amount per period – Amount credited to food cost per period– For example: Employees have $1,000

monthly for meals• Sales value multiplied by cost percentage

– Employees are asked to record what they eat per meal

– Checks are totaled at the end of the period, and the grand total is then multiplied by the average food cost percentage

Determining Cost of Food Sold

• To determine the cost of food sold, one must subtract employee meals from the cost of food consumed

Cost of food consumed

– Cost of employees’ meals

= Cost of food sold

Standard Food Cost

• Begins with portions

• Portions of a given menu item should be identical to one another in 4 ways:

– Ingredients

– Quantity

– Proportions of ingredients

– Production method

• To guarantee this, the following standards must be developed:

– Standard portion size

– Standard recipe

– Standard portion cost

Standard Portion Size

• Quantity of any item to be served each time that item is ordered

• Every item on a menu can be quantified in 1 of 3 ways:

– By weight

– By volume

– By count

Results of Not Following Portion Sizes

• Customers compare their food with that of others and notice a difference

• Customers might complain, never return, or both• Servers argue with customers over portion sizes

Standard Recipes

• A recipe is a list of the ingredients and the quantities of those ingredients needed to produce a particular item, along with a procedure or method to follow

• A standard recipe is the recipe that has been designated the correct one to use in a given establishment

• Standard recipes help ensure that the quality of any item will be the same each time the item is produced

Standard Recipes—continued

• Stored in computers and can be changed frequently

• In some restaurants, pictures and drawings are placed with the recipe

• If not followed, costs will be different each time an item is prepared

Standard Portion Cost

• To calculate standard portion cost:– Determine the individual cost for each ingredient– Add up the cost of each ingredient, resulting in

the cost of making the recipe– Divide the cost by the number of portions the

recipe yields

Calculating Standard Portion Cost

• Two methods for calculating standard portion cost: – Formula– Recipe detail and cost card

Standard Portion Cost Formula

• Simplest (and most widely used) way to calculate standard portion cost

• Standard portion cost =

÷Number of portions

per unitPurchase price

per unit

Recipe Detail and Cost Card

• Basically, a recipe card with costs• If applicable, it is possible to determine the

standard cost of a single portion by dividing the number of portions produced into the total cost of preparing the recipe

Recipe Detail Cost Card #1

Ingredients Quantity Unit Cost Total CostPita Shell 1 each 0.17 0.17Corned Beef 4 oz. 0.28 1.11Swiss Cheese 1 oz. 0.20 0.20Sauerkraut 2 oz. 0.04 0.09Dijon Mustard Mix 2 oz. 0.18 0.36Clamshell 1 each 0.19 0.19Napkin and Fork Combo 1 each 0.03 0.03Total $2.15Sales Price $5.95Food Cost % 36.15%0

Reuben Panini

Recipe Detail Cost Card #2

Recipe: Catch of the Day Recipe Yield: 50 Servings Actual Yield in Servings: 50 Date: Size of Servings: 6 oz

Ingredients

Amount

Purchase Unit

Price

Small Unit

Price

Total Cost

Fish 19 lbs. $ 5.50/lb. $ 5.50 $ 104.50 Butter 3 lbs. $ 1.40/lb. $ 1.40 $ 4.20 Lemon Juice 1/2 cup $ 4.00/quart $ 0.50 $ 0.50 Salt $ 0.02 Spices $ 0.02 Total Cost: $ 109.24

Portion Food Cost

• Portion food cost = Total food cost ÷ Number of servings

Example: $109.40 ÷ 50 = $2.19

Pricing Products Properly

• Price of an item multiplied by its sales mix is the restaurant’s revenue attributable to that item– In other words, the number of customers

multiplied by the average check equals total sales

Menu Pricing

• There are a number of methods for establishing menu prices

– Nonstructured pricing method

– Factor pricing method or percentage markup system

– Prime cost pricing method

– Actual cost pricing method

– Gross profit or gross markup system

– Food and labor percentage markup system

– Forced food cost pricing method

– Contribution margin approach to menu pricing