Controlling Costs; The processes…. Gilbert Noussitou 2006 L3-1

Gilbert Noussitou 2006L3-2 Food Cost % Question: ◦What Should the Food Cost % be? Answer: ◦The difference between the Contribution Margin and the Selling Price Selling Price – all costs – profit = Food Cost

Gilbert Noussitou 2006L3-3 Food Cost % o Ratio of product cost compared to selling price Food Cost % = Portion Cost Selling Price o Cost Markup –also known as the cost factor Cost Markup = Selling Price Portion Cost or 100 Cost %

Gilbert Noussitou 2006 L3- 4 Food Cost %: What should it be? Staff Costs32% Operating Expenses18% Occupancy Costs11% Desired Profits12% Total Contribution Margin73% Sales100% Food Cost27%

Gilbert Noussitou 2006L3-5 Potential Profitability More important than food cost is profitability. Every menu item must generate its share of income to paid for all other costs and profit. ◦Referred to as: contribution margin or gross profit Contribution Margin is the difference between the product cost & the selling price.

Gilbert Noussitou 2006L3-6 Profitability The larger the contribution margin is, the larger the amount of funds available to operate the business & the larger the net profit will be Regardless of the food cost %, items with the largest contribution margin are the most profitable Sales – Cost of Sales = Gross profit Gross Profit = Contribution Margin (C.M.)

Gilbert Noussitou 2006L3-7 Contribution Margin Chicken Sandwich $1.25$4.6527%$3.40 Fish Burger $2.20$ %$4.30 Steak Sandwich $3.10$7.7540% $4.65 Item Food Cost Selling Price F.C. % C.M.

Gilbert Noussitou 2006L3-8 The Profit Myth In other words, profits are what ever is left after expenses have been paid. Profits should be treated as a must be paid item just like rent is. Then the formula becomes: In most peoples mind; Revenue – Expenses = Profit Revenue – Required Profits = Allowable Expenses In this case, the only way to survive is to manage expenses properly!!!

Gilbert Noussitou 2006L3-9 The BUDGET A budget is a plan for operating a business expressed in financial terms or a plan to control expenses and profit in relation to sales. A budget is a tool used with performance reports to coordinate, evaluate and control operations in accordance with the goals specified in the BUDGET plan. Cont…

The Budget (cont.) Budgeting provides and organized procedure for planning and for development of standards of performance in numerical terms. Planning, coordination and control are the three primary objectives of Budgeting. Budgets provide basis for control but they must be planned and implemented by all operational personnel within the organization.

Gilbert Noussitou 2006L3-11 Steps in Planning a Budget 1 st Step: Budget Sales 2 nd Step: Budget Expenditures 3 rd Step: Budget Cash Flow 4 th Step: Budget Capital Expenditures 5 th Step: Compile Forecast Income Statement

Control Point Flow Chart Menu Planning  Purchasing  Receiving  Storing  Issuing  Preparing  Cooking  Holding  Serving    ☺ Guest Satisfaction & Profit Target ☺ Gilbert Noussitou 2006 L3- 12 Control the processes, not the end result!!!

COST CONTROL PROCESS Establish standards: (Standards = expected level of performance) Measure actual results of operation Compare actual results to standards Identify corrective action Select corrective action Review corrective action Gilbert Noussitou 2006 L3- 13

Food Cost Controls 1. Standard Product Specifications 2. Standard Recipes 3. Standard Yields: ◦Ratio of useable product to total weight before processing 4. Standard Portions ◦Count – ladle – scoop – bowl – weigh – etc. 5. Standard Portion Cost ◦Always resulting from the 4 previous standards!!! Gilbert Noussitou 2006 L3- 14 There are five main standards related to cost control

Yield & Cost Calculations are an accurate reflection of desired results based on market expectations encouraging excellence are reasonable & challenging are specific & measurable allow slight flexibility to encourage creativity & challenge include feed back (in control system) Gilbert Noussitou 2006 L3- 15 Effective Standards:

PROBLEM: FOOD COST IS TOO HIGH!? Reduce dollar value of food in each sale Increase revenue from each sale Reduce inefficiency in handling food Change (review) the menu Gilbert Noussitou 2006 L3- 16 POSSIBLE SOLUTIONS:

Cost Controls Use of Leftovers Normal waste is costed and sold Abnormal waste is used but not sold Proper planning is essential Gilbert Noussitou 2006 L3- 17 What is the best way to use leftovers? T H E B E S T W A Y T O U S E L E F T - O V E R S I S … … N O T T O H A V E A N Y ! EVERYTHING YOU BUY MUST BE SOLD

Taking Inventory; Is that a cost control measure? Gilbert Noussitou 2006 L3- 18

THE FORMULA FOR FOOD COST CALCULATION Gilbert Noussitou 2006 L3- 19 OPENING INVENTORY$11, PLUS PURCHASES (less credits) + $40, MINUS CLOSING INVENTORY- $9, EQUALS COST OF FOOD SOLD (or used)= $42, Sales are $120,000 Food Cost % = (cost) $42, x 100 = 35% (Sales) $120,000.00

Gilbert Noussitou 2008L3-20 JanuaryFebruaryMarch Opening inventory$5,779.97$5,897.13$5, Purchases + $9, $8,999.19$8, TOTAL COST (available for sale) = $15, $14,896.32$13, Closing Inventory - $5, $5,247.91$4, FOOD COST (used) = $9, $9,648.41$8, Cash sales$18,992.89$16,707.84$14, Staff meals (sold) + $1, $1,679.13$1, Charges (sold to other departments) + $1, $1,213.97$ TOTAL SALES = $22, $19,600.94$17, Food cost percentage42.98% (43) 49.22% (49) 50.49% (50) Example #1

Gilbert Noussitou 2008L3-21 JanuaryFebruaryMarch Opening inventory$5,779.97$5,897.13$5, Purchases + $9, $8,999.19$8, TOTAL COST (available for sale) = $15, $14,896.32$13, Closing Inventory - $5, $5,247.91$4, TOTAL COST OF FOOD (used) = $9, $9,648.41$8, Staff meals (sold at cost) - $1, $1,679.13$1, Charges (inter-departmental & Mgmt) - $1, $1,213.97$ TOTAL FOOD COST (actually sold) = $6, $6,755.31$6, SALES$18,992.89$16,707.84$14, Food cost percentage32.71% (33) 40.43% (40) 42.22% (42) Example #2