Presentation on theme: "A Closer Look at Food Cost"— Presentation transcript:
1 A Closer Look at Food Cost 2Controlling Foodservice CostsOH 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.Instructor’s NotesIndicate that these objectives (competencies) drive the information in the chapter and in this session.Ask the following questions, “What is food cost?” “Why is food cost so important to restaurant managers?”
3 Food CostThe actual dollar value of the food used in a foodservice operationOften referred to as “cost of food sold”Instructor’s NotesAsk students the following question, “How often do you think managers should calculate their food cost?”Remind students that “food” is one of the two “prime” costs for which managers are responsible. Ask them to identify the other. (Answer: Labor)
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 stolenInstructor’s NotesMake the following statement, “If managers are not careful, the cost of food given away, wasted, and stolen can be greater than the cost of food sold.”Ask students for examples of waste and theft.
5 Theft Increases Food Cost Employee theft can be difficult to prevent, but its control is vitally important to ensuring profitability.Instructor’s NotesAsk students to identify several reasons why foodservice employees might be tempted to steal from their employer.
6 Reductions from Cost of Food Employee mealsThe actual cost of the food served to employees is subtracted from cost of food.Complimentary (“Comp”) mealsThe actual cost of the food that is given away (not its selling price) is subtracted from cost of food.Instructor’s NotesExplain that the value of employee meals is properly accounted for as a “labor” cost, and not a “food” cost.Ask students if they think a restaurant that supplies employee meals will attract better workers than one which does not.Ask the question, “What are some reasons why managers might give away (comp) food to guests?”
7 Reductions from Cost of Food continued Grease salesPayments from sales of used oil or grease, bones, and fat scraps are subtracted from food cost.Transfers to other unitsIf 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.Instructor’s NotesExplain to students that, because the cost of oils and meat were originally added to food cost, their scrap value would be properly credited back (subtracted from) food cost.Examples of transfers to another unit could be fruits and vegetables transferred to a bar unit. Examples of transfers into a foodservice unit (and out of the bar) might be items such as wines and liqueurs used for cooking.
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.Instructor’s NotesAsk students to give an example of each of the commonly transferred items mentioned on this slide, as well as the drink in which it is used as an ingredient (examples: Coffee for Irish Coffee and limes to garnish Gin and Tonic).
9 Bar Transfers continued In a busy bar, the amount of food that is transferred from the kitchen to the bar can be significant.Instructor’s NotesExplain that good restaurant accounting practice seeks to match sales with the actual costs incurred to generate the sales.
10 The Food Cost Formula Opening inventory + Purchases Total food available–Closing inventoryCost of food soldInstructor’s NotesExplain that managers must have good math skills to do their jobs properly. Mention the appendix in the back of this text for those students who need a quick “brush up.”
11 The Food Cost Formula in Use Opening inventory$5,000+Purchases$30,000Total food available$35,000–Closing inventory$4,000Cost of food sold$31,000Instructor’s NotesAsk students, “How often did managers where you have worked take inventory?”Ask students, “ If taking inventory is so important to determining food cost, why not do it every day?”
12 Physical InventoryTo accurately calculate cost of food sold, managers must take a physical inventory.Instructor’s NotesExplain the difference between a physical inventory and an inventory “estimate.” Ask students which they believe would be most accurate.Ask students to identify three reasons (in addition to calculating food cost) why it is important to take periodic food inventories. Potential answers could includeA. Identify spoiled or damaged inventory itemsB. Check storage area conditions for temperatureC. Check storage areas for cleanliness
13 Food Cost Formula Definitions Opening inventoryDollar value of the physical inventory at the beginning of an accounting periodPurchasesDollar value of all food purchased (less any appropriate subtractions) during the accounting periodClosing inventoryDollar value of the physical inventory counted at end of the accounting periodInstructor’s NotesAsk students to identify some common accounting periods; i.e. day, week, month.Explain that the term “beginning inventory,” is used interchangeably with the term “opening inventory.”Point out that the closing inventory for an accounting period becomes the opening inventory for the following period.
14 The Food Cost Percentage Formula ÷Sales=Food cost percentageInstructor’s NotesWhen computing food cost percentage, the term “food cost” is often used interchangeably with the term “cost of food sold.”In this computation, the term “sales” means the same as the term “revenue.”
15 The Food Cost Percentage Formula in Use ÷Sales=Food cost percentage$7, ÷ $25,0000.28 or 28.0%
16 Two Ways to Make a Decimal Conversion Method OneMove the decimal two places to the right..35 = 35%Method TwoMultiply by 100.0.35 x 100 = 35%Instructor’s NotesAsk students to indicate one advantage to each method.
17 Food Cost PercentageAllows managers in one restaurant to compare their food usage efficiency to that of previous time periodsCan be used to compare the food usage efficiency of one restaurant to anotherAllows comparison to the restaurant’s budgeted food cost percentage or other standardInstructor’s NotesAsk students to suggest why there could be weekly or monthly variations in a restaurant’s food cost percentage.Ask what would make the percentage go down.Ask what would make the percentage go up.Point out that managers are often evaluated on the basis of their ability to achieve targeted food cost percentages.
18 Food Cost Percentage continued Is the proportion of the restaurant’s sales that is used to pay for foodMeans “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 managementInstructor’s NotesAsk students to compute their housing costs as a percentage of their monthly income.Ask what could cause the percentage to go down? (Answers—less costly housing or more income)
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.Instructor’s NotesInform students that the next slides will show why this is so.
21 Ten Percent Increase in Sales and Cost of Food Realigned numbersTen Percent Increase in Sales and Cost of FoodOriginal cost of food $1,000Original sales $3,000Food cost percentage 33%With 10% increase in sales and food costNew cost of food $1,100New sales $3,300Instructor’s NotesAsk students for logical reasons about why the food cost percentage might not stay the same under varying sales conditions.
22 Ten Percent Decrease in Sales and Cost of Food Realigned numbersTen Percent Decrease in Sales and Cost of FoodOriginal cost of food $1,000Original sales $3,000Food cost percentage 33%With a 10% decrease in sales and food costNew cost of food $ 900New sales $2,700Instructor’s NotesAsk students about logical reasons why the food cost percentage might not stay the same if sales decreased significantly.
23 The ABCs of Food Cost Percentage (A/B = C) Where: A = Food CostB = SalesC = Food Cost Percentage1. If A stays the same, and B increases, C decreases.2. If A stays the same and B decreases, C increases.Instructor’s NotesAsk students to restate these concepts in a manager’s terms. For example, the first of these statements can be restated as, “If costs can be kept constant, when sales increase, the food cost percentage will decrease.” The second can be restated as, “If food costs remain the same, but sales go down, the food cost percentage will increase.”
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.Instructor’s NotesAsk students to restate these concepts in a manager’s terms. For example, the first of these statements can be restated as, “If food costs are reduced, and sales stay constant, the food cost percentage will go down.”Focus the major emphasis of the class on item #5 on this slide. Ask students to restate this in their own words.
25 Food Cost Percentage Should be controlled Should not be allowed to fall far below the restaurant’s standardInstructor’s NotesExplain the danger of reducing a food cost percentage far below the standards set by management.
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 fixedIt is semivariableIt is variableIt is noncontrollableA manager’s job is to reduce the food cost percentage as much a possible. (True/False)Instructor’s NotesAnswersSubtractedFalseCIndicate that the last part of this discussion will provide a review of definitions for the key terms used in the chapter.
28 Key Term Review Closing inventory Food cost Food cost percentage Opening inventoryPurchasesTotal food availableInstructor’s NotesClosing inventory—inventory value at the end of an accounting periodFood cost—actual dollar value of the food used by an operation during a certain periodFood cost percentage—relationship between sales and the cost spent on food to achieve those salesInventory—dollar value of a food product in storage; can be expressed in terms of units, dollar value, or bothOpening inventory—value of inventory at the beginning of a given periodPurchases—value of the food purchased during a specific periodTotal food available—dollar amount of all food available for sale, computed as beginning inventory plus purchases
29 Chapter Learning Objectives— What Did You Learn? Calculate food costCalculate food cost percentageExplain the effect that cost and sales have on food cost percentageInstructor’s NotesAsk students to do a personal assessment of the extent to which they know the information or can perform the activity noted in each objective.