Cost Control Measures for Food Service Operations

1. Cost Control Measuresfor Food Service Operations Chapter 9

2. Objectives • Define the Siamese twins of management • Summarize the importance of control systems • Clarify the use of financial statements • Define fixed, variable, conversion, and common costs

3. Objectives (cont’d.) • Outline the purpose of production reports • Relate the concept of food cost and the Forty Thieves • Summarize inventory management • Explain how to calculate food and labor costs

4. Objectives (cont’d.) • Describe how to make payroll calculations • Perform break-even analysis and illustrate the method used for graphing

5. Using Other People’s Money • Food service operators can improve profitability with efficient purchasing, stock management, and cost controls • Purchase stock using free credit from suppliers • Maintain minimal yet sufficient stock • Quick turns allow goods to be sold before the bills are due

6. The Importance of Control Systems • Controls, or systems of measure • Gauge progress of business towards its goals • Planning and controls are the “Siamese Twins of Management”

7. The Importance of Control Systems (cont’d.) • Control process consists of four steps: • Establish standards and procedures • Train employees to follow them • Monitor performance • Take appropriate action to correct deviations

8. The Importance of Quality Standards • Quality can be measured using pre-determined standards • Measurement should be made each time a meal is served

9. Evaluating Performance Using Financial Statements • Four primary financial statements used to manage and control finances • Income statements • Balance sheets • Cash flow statements • Operating budgets

10. Managing by Income Statements • Income statement (profit and loss statement) • Gives detailed listing of revenue and expenses over the accounting period • Basic formula for the income statement • Revenue – Expenses + Gains - Losses = Income

11. Managing by Income Statements (cont’d.) • Three sections of the P&L statement • Gross profit section • Sales, cost of sales, and gross profit • Operating expense • Operating expenses and operating income • Nonoperating expense • Interest and income taxes

12. Managing by Balance Sheets • Balance sheet shows a company’s assets and liabilities • Shareholder equity is calculated as: • Assets – Liabilities = Net worth • Balance sheets are prepared for shareholders or loan officers, to show the financial health of the business

13. Managing by Cash Flow • Cash flow is the comparison of cash on hand to bills due in the near future • Accounts payable • Money due to the business • Accounts receivable • Money the business owes others

14. Managing by Operating Budgets • Operating budgets forecast expenses a business must incur to achieve targeted sales revenues • Operating budgets are income statements prepared for a future date • Sales are a company’s revenue

15. Managing by Operating Budgets (cont’d.) • Prime costs are food and labor expenses • Most restaurants like to keep their prime costs between 60-69 percent of sales • Fixed costs (overhead) • Remain the same no matter how many customers are served

16. Managing by Operating Budgets (cont’d.) • Variable (controllable) costs • Change depending on the number of customers served • Conversion costs • Direct labor plus business overhead • Common costs • Shared costs that are not easily assigned

17. Evaluating Performance by Other Management Tools • The food service industry uses management tools that are unique to the industry • In addition to traditional management tools

18. Make-or-Buy Decisions • Operator must decide whether to make or buy • Ready-to-eat foods have a higher food cost but a lower labor cost • If costs are comparable, operator must decide which is better for his operation • Factors: space, uniqueness

19. Production Reports • Serve three primary purposes • Control, communication, and calculation • Used to record activity surrounding all prepared menu items • “The Forty Thieves of Food Cost” lists ways in which money can be lost

20. Menu Engineering • Menu analysis is recording sales history of all items sold • Evaluating item’s contribution to profit • Evaluating customer appeal • Menu engineering • Classifies each item according to popularity index and profitability index

21. Controlling Inventory • Weekly inventory • May be necessary if food cost figures not in line with budgets • Another method of control: • Restricting purchases to a certain percentage of sales

22. Calculating Inventory Turnover • The rate of inventory turnover is a sign of efficiency and effective purchasing • Relevant equations:

23. Calculating Food and Beverage Costs • Food cost percentage • Ratio of food costs to sales • Methods to help lower food costs • Adjust pricing strategies • Provide proper training; minimize waste • Reduce product quality; update inventory values; organize storage room

24. Calculating Food and Beverage Costs (cont’d.) • Methods to help lower food costs (cont’d.) • Control portion sizes; monitor weights • Link chef pay to food cost percentage • Set up purchase order system and budget • Use trade-outs • Look for discounts

25. Calculating Food and Beverage Costs (cont’d.) • Standardized recipe and portion costs • Standardized recipes are critical to achieving consistent profit • There are 12 steps that can help in developing a standardized recipe • Recipe costs should be calculated prior to menu pricing

26. Calculating Labor Costs • Labor costs are all monies paid to employees to run the business • Labor cost percentage is relationship between labor costs and sales

27. Calculating Labor Costs (cont’d.) • Calculating payroll • Hourly wage plus overtime, or salary • Deductions must be withheld • Federal and state income taxes • Social security • Voluntary deductions

28. Break-Even Analysis • Used to evaluate how much sales revenue is needed to cover the costs of the establishment • Often employed when considering a capital investment or business expansion

29. Calculating the Break-Even Point • Break-even point • Volume of sales needed to cover the total costs 9.13 Break-even graph

30. Summary • Food service operators can improve profitability with efficient purchasing, stock management, and cost controls • Control systems are used to evaluate progress toward profitability goals • Four primary financial statements are used to manage and control finances

31. Summary (cont’d.) • Important tools to achieving profitability • Production reports • Menu engineering • Controlling inventory • Calculating inventory turnover • Calculating food, beverage and labor costs • Break-even analysis