1. A Closer Look at Food Cost2
Controlling Foodservice Costs
OH 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.
We will be talking about food cost and why food cost is so important to restaurant managers.

3. Test Your Knowledge (True or False)
When food is purchased and received, it immediately becomes part of food cost.
Food cost includes food used to provide employee meals.
Opening inventory is the same number as the closing inventory of the previous period.
Food cost percentage is obtained by dividing food cost by sales.
Because food cost is a variable expense, it always increases and decreases as sales increase or decrease and does so in direct proportion.
False (p18)
True (p19)
True (p20)
True (p22)
True (p.23)

4. 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.
the cost of food sold to customers
the value of food that is given away, wasted, or stolen
Food cost — actual dollar value of the food used by an operation during a certain period Often referred to as “cost of food sold”
“How often do you think managers should calculate their food cost?”
“food” is one of the two “prime” costs for which managers are responsible. What is the other? Labor
If managers are not careful, the cost of food given away, wasted, and stolen can be greater than the cost of food sold. .
Examples of waste and theft
Spoilage, larger food portions than standards predict.
Employees eating food that is not comp
Ask students to identify several reasons why foodservice employees might be tempted to steal from their employer.
Employee theft can be difficult to prevent, but its control is vitally important to ensuring profitability

5. Reductions from Cost of Food
Food Cost
Reductions from Cost of Food
Employee meals
Complimentary (“Comp”) meals
Grease sales
Transfers to other units
Food to Bar Transfers
The following costs are SUBTRACTED from the cost of food:
The actual cost of the food served to employees
(The value of employee meals is properly accounted for as a “labor” cost, and not a “food” cost.)
The actual cost of the food that is given away (not its selling price)
Payments from sales of used oil or grease, bones, and fat scraps.
(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.)
Transfers to another unit (if there are multiple units) and Food to Bar Transfer
(Typical products transferred to the bar include nonalcoholic beverages, fruits, vegetables, spices, juices, and dairy products. In a busy bar, the amount of food that is transferred from the kitchen to the bar can be significant.
Transfers INTO a unit are ADDED to its food cost. Examples of transfers into a foodservice unit (and out of the bar) might be items such as wines and liqueurs used for cooking.
Ask students if they think a restaurant that supplies employee meals will attract better workers than one which does not.
What are some reasons why managers might give away (comp) food to guests?
Make this an activity
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).
Good restaurant accounting practice seeks to match sales with the actual costs incurred to generate the sales.

6. The Food Cost Percentage
Food Cost Formula
Opening inventory
$5,000 +
Purchases
$30,000
Total food available
$35,000 –
Closing inventory
$4,000
Cost of food sold
$31,000
(Food cost percentage is VERY important on test)
Total food available—dollar amount of all food available for sale, computed as beginning inventory plus purchases
To accurately calculate cost of food sold, managers must take a physical inventory.
Physical inventory is the actual inventory on hand. It is counted.
You can estimate what inventory you have but that would not account for theft, waste and other food items physically missing.
Other than calculating food cost, why it is important to take periodic food inventories?
Potential answers could include
Identify spoiled or damaged inventory items
Check storage area conditions for temperature
Check storage areas for cleanliness
Inventory—dollar value of a food product in storage; can be expressed in terms of units, dollar value, or both
Opening inventory—dollar value of the physical inventory at the beginning of a given period (also called beginning inventory)
Purchases— dollar value of the food purchased during an accounting period (less any appropriate subtractions)
Closing inventory - dollar value of the physical inventory at the end of an accounting period
the closing inventory for an accounting period becomes the opening inventory for the following period.
Ask students to identify some common accounting periods; i.e. day, week, month.
If taking inventory is so important to determining food cost, why not do it every day?”

7. Food Cost Percentage Food cost ÷ Sales = Food cost percentage
$7, ÷ $25,000
0.28 or 28.0%
The appendix in the back of the text has a math review.
Food cost percentage—relationship between sales and the cost spent on food to achieve those sales
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.”

8. Food Cost Percentage
Two Ways to Make a Decimal Conversion
Move the decimal two places to the right = 35%
Multiply by x 100 = 35%
Food Cost Percentage
the proportion of the restaurant’s sales that is used to pay for food
Means “out of each dollar”
Must be controlled by management
Should not be allowed to fall far below the restaurant’s standard
A 35% food cost percentage means that “out of each dollar” of sales, the restaurant pays $0.35 for food.
If food cost percentages are allowed to drop below the restaurant’s standards, the guests’ perceptions of value may be negatively affected.
Explain the danger of reducing a food cost percentage far below the standards set by management.
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)
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!
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.

9. A/B =C Food Cost Percentage What happens to C if A and/or B change?
A = Food Cost B = Sales C = Food Cost Percentage
What happens to C if A and/or B change?
Ask students to restate these concepts in a manager’s terms.
1. If A stays the same, and B increases, C decreases.
If costs can be kept constant, when sales increase, the food cost percentage will decrease.
2. If A stays the same, and B decreases, C increases.
If food costs remain the same, but sales go down, the food cost percentage will increase.
3. If A decreases, and B stays the same, C decreases.
If food costs decrease, and sales stay the same, the food cost percentage will go down.
4. If A increases, and B stays the same, C increases.
If food costs increase and sales stay the same, the food cost percentage will go up.
5. If A increases at the same proportional rate that B increases, C stays the same
If food costs and sales cost change (increase or decrease) at the same rate, the food cost percentage will stay the same.
The emphasis of the class is on item #5 on this slide.

10. Food Cost Percentage Original Values 10% increase in both
10% decrease in both
Cost of Food
$1000
$1100
$900
Sales
$3000
$3300
$2700
Food Cost Percentage
33%
Ask students for logical reasons about why the food cost percentage might not stay the same under varying sales conditions.
The formula for food cost percentage is
Cost of Food = Food Cost Percentage
Sales
If you increase or decrease the numerator and denominator by the same amount the percentage will stay the same.
If the original cost is $1000 and the original sales are $3000 the Food cost percentage is $1000/$3000 = 33%
If you add 10% to the cost and the sales you get $1100/$3300 = 33%
If you subtract 10% from the cost and the sales you get $900/$2700 = 33%

11. Food Cost Percentage
Allows managers to compare their food usage efficiency to
previous time periods
another restaurant
the food cost budget
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
Is the proportion of the restaurant’s sales that is used to pay for food
Ask what would make the percentage go down.
Smaller portions
Ask what would make the percentage go up.
Larger portions
Point out that managers are often evaluated on the basis of their ability to achieve targeted food cost percentages.

12. 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 a possible. (True/False)
Subtracted
False C

13. Chapter Learning Objectives— What Did You Learn?
Calculate food cost
Calculate food cost percentage
Explain the effect that cost and sales have on food cost percentage
Ask students to do a personal assessment of the extent to which they know the information or can perform the activity noted in each objective.