Chapter 8 Monthly Inventory and Monthly Food Cost Principles of Food, Beverage, and Labour Cost Controls, Canadian Edition

Learning Objectives After reading this chapter, you should be able to: 8.1 Explain the importance of monitoring a foodservice operation to assess monthly performance. 8.2 Describe the procedure for taking physical inventory at the end of the month. 8.3 Distinguish between opening (beginning) inventory and closing (ending) inventory. 8.4 List and describe five ways to assign unit costs to a food inventory and explain the effect on cost of each method. 8.5 Calculate cost of food consumed. 8.6 Calculate cost of food sold. 8.7 Prepare a simple monthly food cost report and calculate monthly food cost percent. 8.8 Explain the possible shortcomings of a system in which judgments about operations are made exclusively based on monthly food cost and food cost percent. 8.9 Explain how computers are used to value inventories and to verify employee adherence to standard procedures for issuing foods from inventory.

Important Chapter Terms Closing inventory: Physical inventory at the end of a period, expressed in terms of units, value, or both Intraunit transfer: Food or beverage transfer between departments in a single hotel, restaurant, or similar establishment Interunit transfer: Food or beverage transfer between units in a chain

Monthly Inventory Taking Physical Inventory count the actual number of units of each item on hand record that number on appropriate form determine the value of the goods extend and record the value

Valuing Physical Inventory There are at least five ways of assigning values to units of product in a physical inventory: 1.Actual purchase price 2.First-in, first-out (latest prices) 3.Weighted average purchase price 4.Latest purchase price (most recent prices) 5.Last-in, first-out (earliest prices)

Latest purchase price (most recent price) The latest purchase price method for valuing the closing inventory: most widely accepted approach used the justification: if it were necessary to replace the remaining cans, the cost of replacement at the present moment would likely be the latest price at which the items were purchased

Monthly Food Cost Determination The cost of food issued for any month is determined by means of the following formula: Opening inventory + Purchase = Total available - Closing inventory = Cost of food issued

Adjustments to Food Issued Transfers Intraunit transfers from bar to kitchen from kitchen to bar Interunit transfers Steward Sales Gratis to Bars Promotion Expense

Cost of Employee Meals 1.Cost of separate issues 2.Prescribed amount per meal per employee 3.Prescribed amount per period 4.Sales value multiplied by cost percent By means of these or other alternative techniques, it is possible to arrive at a reasonable figure for the cost of employee meals.

Determining Cost of Food Sold Opening inventory +Purchases =Total available for sale –Closing inventory =Cost of food issued +Cooking liquor +Transfers from other units =Subtotal –Food to bar (directs) –Transfers to other units –Steward sales –Gratis to bar(s) –Promotion expense =Cost of food consumed –Cost of employees’ meals =Cost of food sold

Monthly Food Cost Once the cost of food sold is known, food cost percent can be determined: Food Cost %= Cost of food sold Food Sales

Inventory Turnover Excessive food costs due to the spoilage of food stored too long Excessive amounts of cash tied up in inventory Excessive labour costs to receive and store foods Excessive space required for storage Unwarranted opportunities for misuse/theft

Rate of Inventory Turnover To measure how often a food inventory has been consumed and replenished during an accounting period: Average inventory = Opening inventory + Closing inventory 2 Inventory turnover= Cost of food sold Average inventory

Key Terms Actual purchase price method, p. 221 Average inventory, p. 235 Closing inventory, p. 220 Cost of employee meals, p. 228 Cost of food consumed, p. 226 Cost of food issued, p. 224 Cost of food sold, p. 230 First-in, first-out method, p. 221 Gratis to bar, p. 227 Interunit transfer, p. 227 Intraunit transfer, p. 226 Inventory turnover, p. 234 Last-in, first-out method, p. 223 Latest purchase price method, p. 222 Monthly food cost, p. 224 Opening inventory, p. 220 Physical inventory, p. 219 Steward sales, p. 227 Weighted-average purchase price method, p.222

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