1 FRMCA Level 2, Chapter 3 Cost Control 2015 Summer Institutes Level 3

2 Session Objectives List the steps in the process to control food costs. Identify the types of costs incurred by a foodservice business and give examples of each. Explain the purposes of a budget. Explain the purpose of a profit-and-loss report. Identify methods for analyzing profit-and-loss reports.

3 Session Objectives continued Identify tools to help control costs. Define and calculate food cost and food cost percentage. Given a problem, calculate as-purchased (AP) and edible-portion (EP) amounts. Develop a recipe cost card for a standardized recipe. Calculate a recipe’s yield and the number of portions it will produce.

4 Session Objectives continued Use a conversion factor to calculate a new yield for an existing recipe. Explain the importance of portion control to food cost. Forecast sales by analyzing and evaluating sales histories, popularity indices, and production sheets. Explain the importance of standards for controlling production volume. List and describe standard procedures used for controlling production volume. List and explain the various methods for menu pricing.

5 Session Objectives continued Explain the importance of standard labor costs to a business’s success. List factors that affect labor costs. Describe the relationship between sales volume and labor costs. List and describe purchasing, receiving, and storage procedures that help to preserve quality and control costs. Explain the purpose of invoices in a foodservice business.

6 Session Objectives continued List ways to evaluate a finished product for quality. Determine the dollar value of inventory.

7 Cost Control Overview Cost control is a business’s efforts to manage how much it spends. –Every business needs to make more money than it spends in order to survive—that is, its sales, or revenue, have to be higher than its costs. Revenue is the income from sales before expenses, or costs, are subtracted. Cost is the price an operation pays out in the purchasing and preparation of its products or the provision of its service.

8 Types of Costs A successful restaurant or foodservice operation needs to manage and control many costs. Food costs, beverage costs, and labor costs each have components that are related to sales levels. Variable or semi-variable costs can change based on sales. –These are controllable costs because the operation has a certain amount of control in how it spends on these aspects of the operation. 3.1

9 Types of Costs continued Fixed costs do not change based on the operation’s sales. Overhead cost is a fixed or non-controllable cost, meaning it needs to be paid regardless of whether the operation is making or losing money. 3.1

10 An operating budget is a financial plan for a specific period of time. It is useful for measuring actual performance against anticipated performance. Operating Budgets 3.1

11 Operating Budgets continued A forecast is a prediction of sales levels or costs that will occur during a specific time period. –Most forecasting techniques rely on having accurate historical data for the operation. –The most common foodservice revenue forecasting techniques are based on the number of customers and average sales per customer. –Averaging sales information for two or three recent and similar periods is called the moving average or smoothing technique. A sales history is a record of the number of portions of every item sold on a menu. –Most operations can run historical sales and production reports from their point-of-sale (POS) systems.

12 Profit-and-Loss Report A profit-and-loss report (P&L), also called an income statement, is a compilation of sales and cost information for a specific period of time. A P&L shows whether an operation has made or lost money during the time period covered by the report. –Sales must exceed costs for an operation to be profitable. It helps managers gauge an operation’s profitability and to compare actual results to expected goals. It helps management determine areas where adjustments must be made to bring business operations in line with established financial goals. 3.1

13 Cost-Control Tools Advances in technology have drastically increased the number of options available to operations in controlling costs. Software programs: –Can be used to complete the calculations required in cost planning, controlling sales, controlling inventory, and focusing on the menu –Can easily provide better access to information, more accurate and convenient collection of information, and improved analysis of that information –If used effectively, technology can help run an operation more efficiently and reduce and effectively control costs 3.1

14 Food costs must be controlled during all seven stages of the food flow process: 1.Purchasing 2.Receiving 3.Storage 4.Issuing 5.Preparation 6.Cooking (production) 7.Service (sale) Steps in Controlling Food Costs 3.2

15 Determining Food Cost Food cost is the actual dollar value of the food used by an operation during a certain period. Food cost Includes the cost of food that has been: –Sold –Given away –Wasted –Spoiled –Incorrectly prepared –Over-portioned –Overproduced –Pilfered 3.2

16 Determining Food Cost continued Inventory is the dollar value of a food product in storage and can be expressed in terms of units, values, or both: –Opening inventory is the physical inventory at the start of a given period. –Closing inventory is the inventory at the end of a given period. The formula for obtaining an actual food cost accurately is: –(Opening inventory + Purchases = Total food available) – Closing inventory = Total food cost To determine the percentage, divide the total food cost by the sales: –Total food cost ÷ Sales = Food cost percentage 3.2

17 Determining Food Cost Percentage Total food cost percentage is the relationship between sales and the cost of food to achieve those sales. Analyze food cost percentage by comparing it to company standards, historical costs, or even industry standards. Food cost is a variable cost: It should increase or decrease in direct proportion to an increase or decrease in sales if all of the standards and food controls are followed correctly. Food cost percentage should not vary greatly from period to period. 3.2

18 Establishing Standard Portion Costs Standard portion cost: The exact amount that one serving, or portion, of a food item should cost when prepared according to the item’s standardized recipe. To calculate standard portion cost: –Total recipe cost ÷ Number of portions in the recipe = Standard portion cost 3.2

19 Establishing Standard Portion Costs continued Most operations have standardized recipes for every menu item prepared. –Operations should establish a standard portion cost for every standardized recipe. A recipe cost card is a tool used to calculate the standard portion cost for a menu item. –A recipe cost card should exist for every multiple-ingredient item listed on the menu. –Most recipe cost cards are kept electronically in recipe software or spreadsheets.

20 Developing a Recipe Cost Card 1.List all the ingredients (from the standardized recipe). 2.List the amount needed, and the unit of measurement being used. 3.List the cost for each ingredient (amount paid), the unit of measurement, and the seller used (found on the seller’s invoice). 4.Convert the seller’s unit of measurement to the recipe’s unit of measurement. 5.Convert the cost for the seller’s unit of measurement to your measurement unit cost. 6.Multiply the number of units needed for the recipe by the cost per unit. 7.Follow the steps for all other ingredients. 8.Divide the recipe cost by the number of portions to calculate the standard portion cost.

21 Sample Recipe Cost Card

22 As-purchased versus Edible-portion Costs As-purchased (AP) method is used to calculate the cost of an ingredient at the purchase price, before any trim or waste is taken into account. –All ingredient quantities are listed on the standardized recipe in the form in which they are purchased. Edible-portion (EP) method is used to calculate the cost of an ingredient after trimming and removing waste, so that only the usable portion of the item is reflected. –Ingredient quantities are listed using only the edible portion of the product. Recipes must be carefully written and carefully read to ensure the correct method is used when preparing the product. 3.2

23 AP and EP Examples

24 Recipe Yields A recipe yield is the process of determining the number of portions that a recipe produces. To determine how many portions a recipe yields: –Calculate the total volume of the recipe either by weight or by volume, depending on how the portion size is calculated. Understanding recipe yields is one of the keys to successful food preparation and controlling food costs. Measurements given in recipes must be followed exactly. Once a yield is known and properly followed, it is easier to increase or decrease the size of the recipe based on the operation’s changing needs. 3.2

25 Recipe Yields continued 3.2 Converting Recipe Yields 1.Decide how many servings you need (desired yield). 2.Use the following formula: desired yield ÷ original yield = conversion factor (number to multiply ingredients by). For example, if a chili recipe serves 80 and needs to be made for 40: 40 ÷ 80 = 0.5. Conversion factor is Multiply each ingredient amount by the conversion factor. 4. As needed, convert answers to logical, measurable amounts. Example: 6/4 cups flour = 1 ½ cups; 12 Tbs. brown sugar = ¾ cups

26 Monitoring Production Volume and Cost When restaurants produce too much, food cost goes up; produce too little, and sales are lost. A food production chart shows how much product should be produced by the kitchen during a given meal period. –A well-structured chart can ensure product quality, avoid product shortages, and minimize waste, spoilage, theft, energy costs, and administrative costs. Sales history is critical in helping management forecast how many portions of each menu item to produce on a given day. 3.2

27 Menu Pricing There are a number of methods for menu pricing: Contribution margin: The portion of dollars that a particular menu item contributes to overall profits –To use the contribution margin method, an operation must know the portion costs for each item sold. Straight markup pricing method: Multiply raw food costs by a predetermined fraction

28 Menu Pricing continued Average check method: Total revenue is divided by the number of seats, average seat turnover, and days open in one year Food cost percentage: Equal to the food cost divided by food sales –Food costs for each item are divided by a desired food cost percentage to determine menu price.

29 Labor is a semi-variable, controllable cost. Labor costs are tied to sales, but not directly. –The fixed elements of labor cost decrease by a percentage. Labor costs are calculated in much the same way as food cost percentages. Most operations have both full- time and part-time staff. –Operations must be aware of the fluctuations in their sales so as to have just the right number of staff on hand to handle customers efficiently. Budgeting Labor Costs 3.3

30 Budgeting Labor Costs continued It is an important part of the management function to make sure that payroll cost is in line with the budgeted standard. Ideal labor cost is the standard used by restaurants to budget for staffing needs; it represents what management predicts will happen.

31 Labor Cost Factors Business volume: Amount of sales an operation is doing for a given time period Employee turnover: Number of employees hired to fill one position in a year’s time Quality standards: Specifications of the operation with regard to products and service Operational standards: If an employee does not prepare a product that meets the operation’s standards, the item must be redone. This costs money, in terms of wasted product and lost productivity. 3.3

32 Quality Standards for Purchasing and Receiving Purchasing: Prior to ordering, receiving, and storing quality products, consider where the products were grown or produced. –Those with purchasing responsibility should seek suppliers who are considered to be ethical, reliable, and financially stable. Receiving: Once purchase orders have been made, the next step is to receive the item in the most efficient, safe, and effective way possible. –Well-defined receiving procedures ensure that an operation receives only the products that meet its established standards for quality and quantity. 3.4

33 1.Place delivery items in the “receiving area.” 2.Obtain a copy of the purchase order. 3.Have a copy of the purchase specifications available. 4.Check the delivery quantity against the purchase order and invoice. –An invoice is a vendor document detailing items purchased, date of order, purchaser, and sales price. Receiving Procedure 3.4

34 5.Confirm purchase amounts by using the appropriate measure (count or weight). 6.Compare invoice price to purchase order price. Receiving Procedure continued

35 Quality Standards for Storing Storing: Operations must create quality standards for proper storage. Monitor perishable food daily to preserve its quality. Some food items have manufacturer’s recommendations for storing the product. Store food with proper labels, and rotate all products in storage following the FIFO (first in, first out) system. Storage facilities should be checked regularly to make sure they are clean and functioning properly and efficiently. 3.4

36 Evaluating for Quality Identify deviations from standard recipes and presentations by: Regular monitoring Ensuring all staff understand their responsibility for ensuring quality Determining the root causes of problems Working with the entire staff to implement corrections –Examples of corrections include revising recipes, revising product specifications, and selecting a new vendor. 3.4

37 Valuing Inventory Use one of four methods to calculate value of the closing inventory: 1.Latest purchase price, First In, First Out (FIFO): Multiply the number of units of each item by the most recent price paid for the item. 2.Actual purchase price: Multiply the number of units of each items by the price actually paid for each unit. 3.4

38 Valuing Inventory continued 3.Weighted average purchase price: Multiply the number of units of each item in the opening inventory and later purchases by the price paid for each unit, add the prices together, and divide by the total number of items. 4.Last in, first out (LIFO): Multiply the number of units of each item by the earliest price paid for the item. 3.4