Food Cost Controlling Foodservice Costs

Calculate food cost percentage. 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 Notes Indicate 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?”

The actual dollar value of the food used in a foodservice operation Food Cost The actual dollar value of the food used in a foodservice operation Often referred to as “cost of food sold” Instructor’s Notes Ask 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)

Includes the cost of food sold to customers 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 Instructor’s Notes Make 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.

Corrective Actions for Cost Control To reduce food cost Reduce portion size. Replace the item with a lower cost alternative. Feature menu items with higher profit margins (lower costs). Raise menu prices.

Corrective Actions for Cost Control continued To reduce food waste Monitor portion control. Monitor food storage and rotation. Monitor food purchasing (buy appropriate amounts). Minimize production errors.

Factors Affecting Food Cost Waste Over ordering Over production Theft Food to Bar transfers Food transferred to other units Employee meals Instructor’s Notes Ask 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).

The Food Cost Formula Opening inventory + Purchases Total food available – Closing inventory Cost of food sold Instructor’s Notes Explain 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.”

The Food Cost Formula in Use Opening inventory $5,000 + Purchases $30,000 Total food available $35,000 – Closing inventory $4,000 Cost of food sold $31,000 Instructor’s Notes Ask 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?”

Physical Inventory To accurately calculate cost of food sold, managers must take a physical inventory. Instructor’s Notes Explain 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 include A. Identify spoiled or damaged inventory items B. Check storage area conditions for temperature C. Check storage areas for cleanliness

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 Instructor’s Notes Ask 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.

The Food Cost Percentage Formula ÷ Sales = Food cost percentage Instructor’s Notes When 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.”

The Food Cost Percentage Formula in Use ÷ Sales = Food cost percentage $7,000 ÷ $25,000 0.28 or 28.0%

Two Ways to Make a Decimal Conversion Method One Move the decimal two places to the right. .35 = 35% Method Two Multiply by 100. 0.35 x 100 = 35% Instructor’s Notes Ask students to indicate one advantage to each method.

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 Instructor’s Notes Ask 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.

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 Instructor’s Notes Ask 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)

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!

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 Notes Inform students that the next slides will show why this is so.

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. Instructor’s Notes Ask 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.”

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 Notes Ask 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.

Ten Percent Increase in Sales and Cost 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 Instructor’s Notes Ask students for logical reasons about why the food cost percentage might not stay the same under varying sales conditions.

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 Instructor’s Notes Ask students about logical reasons why the food cost percentage might not stay the same if sales decreased significantly.

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.

Creating Recipe Cost Cards Step 1 – Copy the ingredients from the standardized recipe card to the cost card. Step 2 – List the amount of each ingredient used. Step 3 – Indicate the cost of each ingredient as listed on the invoice.

Creating Recipe Cost Cards continued Step 4 – Convert the cost of the invoice unit to the cost of the recipe unit. Example Milk purchased by the gallon for $2.80 Yields eight recipe-ready (EP) pints at $0.35 each. ($2.80 ÷ 8 pints = $0.35 per pint)

Creating Recipe Cost Cards continued Step 5 – Multiply the recipe unit cost by the amount required in the recipe. Example Recipe amount required—3 pints Cost per pint—$0.35 Ingredient cost—$1.05 (3 pints x $0.35 per pint = $1.05) Step 6 – Add the cost of all ingredients.

Creating Recipe Cost Cards continued Step 7 – Divide the total recipe cost by the number of portions produced. Example Total recipe cost—$145.50 Total recipe yield—50 portions Cost per portion—$2.91 ($145.50 ÷ 50 portions = $2.91 per portion)

Recipe Ingredient Costing Alternatives As Purchased (AP) method Price of an item before any trim or waste are considered Example—unpeeled, whole potatoes Edible Portion (EP) method Price of an item after all trim and waste has been taken into account Example—peeled, cubed potatoes

Ways to Estimate Yields Butcher’s tests To measure loss from deboning, trimming, and portioning meats, fish, and poultry Cooking loss tests To measure loss from the actual cooking process Conversion charts Tell the expected or average loss of an item from (AP) to (EP)

AP and EP As Purchased (AP) refers to products as the restaurant receives them. Edible Portion (EP) refers to products as the guests receive them.

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 as possible. (True/False) The formula to find a restaurant’s food cost percentage is sales divided by food cost equals food cost percentages. (True/False)