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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
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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 • 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 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
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
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 = $ 9.40 12 @ $2.30 = $27.604 @ $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 = $23.50 10 @ $2.50 = $25.00 20 (Total) = $48.50
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
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 Food 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 unit Purchase 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
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