A Closer Look at Food Cost

1. A Closer Look at Food Cost • Controlling Foodservice Costs 2 OH 2-1

2. Chapter Learning Objectives • Calculate food cost. • Calculate food cost percentage. • Explain the effect that changes in food cost and sales have on food cost percentage.

3. Food Cost • The actual dollar value of the food used in a foodservice operation • Often referred to as “cost of food sold”

4. Food Cost continued • Includes the cost of food sold to customers • Also includes the value of food that is given away, wasted, or even stolen

5. Employee theft can be difficult to prevent, but its control is vitally important to ensuring profitability. Theft Increases Food Cost

6. Employee meals The actual cost of the food served to employees is subtracted from cost of food. Complimentary (“Comp”) meals The actual cost of the food that is given away (not its selling price) is subtracted from cost of food. Reductions from Cost of Food

7. Grease sales Payments from sales ofused oil or grease, bones, and fat scraps are subtracted from food cost. Transfers to other units If an operation has more than one unit, transfers TO another unit are subtracted from food cost. Transfers INTO a unit are added to its food cost. Reductions from Cost of Food continued

8. Bar Transfers • Food to Bar Transfers • The value of items transferred to the bar for making drinks is subtracted from food cost. • Typical products transferred to the bar include nonalcoholic beverages, fruits, vegetables, spices, juices, and dairy products.

9. Bar Transfers continued • In a busy bar, the amount of food that is transferred from the kitchen to the bar can be significant.

10. The Food Cost Formula

11. The Food Cost Formula in Use

12. Physical Inventory To accurately calculate cost of food sold, managers must take a physical inventory.

13. Food Cost Formula Definitions • Opening inventory • Dollar value of the physical inventory at the beginning of an accounting period • Purchases • Dollar value of all food purchased (less any appropriate subtractions) during the accounting period • Closing inventory • Dollar value of the physical inventory counted at end of the accounting period

14. The Food Cost Percentage Formula

15. The Food Cost Percentage Formula in Use

16. Method One Move the decimal two places to the right. .35 = 35% Method Two Multiply by 100. 0.35 x 100 = 35% Two Ways to Make a Decimal Conversion

17. Food Cost Percentage • Allows managers in one restaurant to compare their food usage efficiency to that of previous time periods • Can be used to compare the food usage efficiency of one restaurant to another • Allows comparison to the restaurant’s budgeted food cost percentage or other standard

18. Food Cost Percentage continued • Is the proportion of the restaurant’s sales that is used to pay for food • Means “out of each dollar” • A 35% food cost percentage means that “out of each dollar” of sales, the restaurant pays $0.35 for food. • Must be controlled by management

19. Costs and Sales Affect Food Cost Percentage • Food cost is a variable cost, so it should increase when sales increase and decrease when sales decrease. • If controls and standards are in place, food cost will go up and down in direct proportion to sales. • If controls and standards are not in place, it will not!

20. How Costs and Sales Affect Food Cost Percentage • A food cost percentage is computed using both a food cost (the numerator) and sales (the denominator). • An equal percentage increase (or decrease) in each of these will result in an unchanged food cost percentage.

21. Realigned numbers Ten Percent Increase in Sales andCost of Food • Original cost of food $1,000 • Original sales $3,000 • Food cost percentage 33% With 10% increase in sales and food cost • New cost of food $1,100 • New sales $3,300 • Food cost percentage 33%

22. Realigned numbers Ten Percent Decrease in Sales and Cost of Food • Original cost of food $1,000 • Original sales $3,000 • Food cost percentage 33% With a 10% decrease in sales and food cost • New cost of food $ 900 • New sales $2,700 • Food cost percentage 33%

23. The ABCs of Food Cost Percentage (A/B = C) • Where: A = Food Cost B = Sales C = Food Cost Percentage 1. If A stays the same, and B increases, C decreases. 2. If A stays the same and B decreases, C increases.

24. ABCs of Food Cost Percentage (A/B = C) continued 3. If A decreases, and B stays the same, C decreases. 4. If A increases, and B stays the same, C increases. 5. If A increases at the same proportional rate that B increases, C stays the same.

25. Food Cost Percentage • Should be controlled • Should not be allowed to fall far below the restaurant’s standard

26. Food Cost Percentage continued • If food cost percentages are allowed to drop below the restaurant’s standards, the guests’ perceptions of value may be negatively affected.

27. How Would You Answer the Following Questions? • The cost of employee meals should be (subtracted/added) to the cost of food before computing a food cost percentage. • A restaurant’s food cost percentage should increase when sales increase and decrease when sales decrease. (True/False) • Which best describes food cost as an expense? • It is fixed • It is semivariable • It is variable • It is noncontrollable • A manager’s job is to reduce the food cost percentage as much a possible. (True/False)

28. Closing inventory Food cost Food cost percentage Inventory Opening inventory Purchases Total food available Key Term Review

29. Chapter Learning Objectives—What Did You Learn? • Calculate food cost • Calculate food cost percentage • Explain the effect that cost and sales have on food cost percentage