1. Controlling Food Costs in Storage and Issuing6
Controlling Foodservice Costs
OH 6-1

2. Chapter Learning Objectives
Describe food storage techniques used to control theft.
Explain the first in, first out (FIFO) method of stock rotation.
Describe the proper method of taking inventory.
Describe the various methods of inventory pricing (valuation).
Instructor’s Notes
Indicate that these objectives (competencies) drive the information in the chapter and in this session.

3. Chapter Learning Objectives continued
Calculate inventory turnover rate and inventory value.
Compare physical inventory to perpetual inventory.
Calculate a daily food cost.
Instructor’s Notes
Indicate that these objectives (competencies) drive the information in the chapter and in this session.

4. Storage Practices Impact Profits
Spoilage of products
Theft of products
Instructor’s Notes
Ask students about which of these two threats are usually the greatest in a restaurant.
Explain that restaurant margins are small, and any food spoiled or stolen will require significant sales to generate the profits to replace the items. How much sales? Let’s see.

5. Sales Needed to Replace the Value of Spoiled or Stolen Items
Assume 5% restaurant net profit
Assume loss of two $7.00 cost each
Amount lost ÷
Net profit percentage =
Additional sales required to replace lost revenue
$ ÷
$280.00
Instructor’s Notes
Indicate that this means several customers (or many more customers) must be served just to make up for the losses caused by spoilage and theft.
Remind students that when food items are lost, due to spoilage or theft, they are not available to sell to customers and, therefore, do not generate revenue. The cost of purchasing these items has already been incurred by the restaurant. The cost of these lost items must be covered by profit from the sales of other food items.

6. Controlling Spoilage
Storage loss from spoilage is usually caused by carelessness.
Spoilage loss can be controlled.
Spoilage is caused by
Improper product rotation
Time abuse
Temperature abuse
Instructor’s Notes
Explain that inadequate sanitation practices are another leading cause of product loss due to spoilage.

7. Controlling Spoilage continued
Excellent sanitation practices help minimize spoilage loss.
Instructor’s Notes
Ask about specific threats to product quality that are posed by poor sanitation practices. Examples include: insect and rodent infestation, debris in food, and product loss (drying out) due to unsanitary storage procedures.

8. First In First Out (FIFO)
Use for refrigerated, frozen, and dry products
Use oldest product first.
Relies on
The receiving clerk (to rotate stock properly)
The person using the product (to choose properly)
Must be continually monitored by management!
Instructor’s Notes
Ask students how they practice FIFO at home (i.e., when they buy products like milk or cheeses).
Indicate that the LIFO (Last In First Out) storage method is rarely used in foodservice operations for product issuing.

9. Dry Storage Instructor’s Notes
Ask students to identify at least five items that are stored at this temperature. Examples include canned goods, flour, sugar, coffee, and most oils and spices.

10. Fresh Fruits and Vegetables
Instructor’s Notes
Ask students to identify at least five items that are stored at this temperature. Examples include fresh parsley, spinach, mushrooms, strawberries, and cucumbers at refrigerator temperatures; onions, avocadoes, bananas, and some varieties of potatoes at dry storage temperatures of 50°F to 70°F (10°C to 21°C).

11. Eggs and Dairy Instructor’s Notes
Ask students to identify at least five items that are stored at this temperature. Examples include eggs and egg products, yogurt, cheeses, sour cream, and butter.

12. Meat and Poultry Instructor’s Notes
Ask students to identify at least five items that are stored at this temperature. Examples include ground beef, steaks, chicken breasts, ham and fresh pork ribs, and processed meats (cold cuts).

13. Fish Instructor’s Notes
Ask students to identify at least five items that are stored at this temperature. Examples include fresh fish fillets, shrimp, oysters, scallops, and crab.

14. Proper Sanitation Is Key
Store foods away from walls and at least six inches above the floor.
Store dry goods in airtight containers.
Walls and floors should be nonporous and easily cleaned.
Instructor’s Notes
Mention that shelving in walk-ins and reach-ins should be slatted (not solid) to allow for proper air circulation.
Indicate that shelving material should be easily cleaned (most preferably stainless steel).
Indicate that walk-ins and reach-ins should be wiped down every day.
Mention that management must continually monitor for insect or rodent infestation.

15. Proper Sanitation Is Key continued
Rotate stock to minimize spoilage.
Organize products so they are easily found.
Label shelves and sealed food containers.
Include “use by” dates and name labels for all stored products.
Instructor’s Notes
Ask students to identify specific reasons why foods in their own refrigerators become spoiled. Answers will include poor wrapping or inadequate storage containers that allowed food to dry out, food “lost” in the refrigerator, food held too long, food spillage caused by other poorly stored foods, “use by” dates exceeded.
Ask, “How might some of the suggestions on this slide prevent food spoilage?”

16. Controlling Theft Keep storage areas locked whenever practical.
Establish a par stock per shift system for key ingredients.
Issue secondary sets of keys on an as-needed basis only.
Instructor’s Notes
Explain that key menu ingredients can be issued, under the supervision of a manager, at the beginning of each shift.
Ask, “Why are secondary sets of keys that open only specific storage areas preferable to ‘master’ keys?” Answer—Improved accountability and security; for example, the bartender should not have access to food storerooms, nor should the head cook have access to the liquor storeroom.
Ask about other problems that result from theft. Answers include inaccurate sales/buying records, excessive product “outages,” unhappy guests (because desired products are unavailable), cost of additional deliveries needed to replace items, and sense by employees that management is not in control.

17. Sample Requisition Form
Large foodservice operations may use a requisition system to help control theft-related losses.
Instructor’s Notes
Ask about the relationship between the size of an operation and the control systems used (i.e., do only large operations need controls?). The answer is “No.” All operations should utilize inventory controls appropriate for their size.

18. Inventory Types Physical inventory Perpetual inventory
An actual count of inventory items
Usually taken to obtain information for the income statement.
Perpetual inventory
A count based upon additions to (purchases) and subtractions from (requisitions) storage
If records are properly kept, it is always up-to-date.
Instructor’s Notes
Explain to students that records in a perpetual inventory may well be up-to-date, but they will also be inaccurate if theft has occurred. Unless a physical inventory is taken periodically, theft can go undetected for long periods of time when using a perpetual inventory.
Ask students how often inventory is taken in the restaurants where they work and what type of inventory system is used.

19. Common Inventory Breakdowns
Meats
Dairy
Bakery
Produce
Frozen foods
Canned foods
Dry goods
Instructor’s Notes
Explain that inventory breakdowns (categories) allow managers to better control their food costs.
Ask the following question, “What inventory categories would you recommend for each of the following:
QSR
Seafood restaurant
Steakhouse
Coffee shop and bakery
Summarize that appropriate inventory breakdowns are based upon the specific key menu items served by the restaurant.

20. Common Inventory Breakdowns continued
The type of restaurant you manage will help determine the specific inventory breakdowns best suited for your use.
Instructor’s Notes
Ask, “What inventory breakdowns would be useful for this type of establishment?”

21. Sample Inventory Sheet
Instructor’s Notes
Explain how managers use inventory sheets to value their inventories.
Explain the concept of “extending” an inventory.
Point out that spreadsheet programs make this task easy.

22. Inventory Valuation Methods
FIFO
First in, first out
Inventory is valued at its most recent (latest) cost.
Oldest product is used first.
LIFO
Last in, first out
Inventory is valued at the cost of the oldest product.
Newest product is used first.
Instructor’s Notes
Explain to students that the FIFO method values inventory at its replacement cost.
Ask, “Why do you think the FIFO inventory system is most used in foodservice operations?” Answer—the use of the oldest product first prevents loss of product due to spoilage.

23. Inventory Valuation Methods continued
Averaged price method
Inventory is valued at a composite of all prices paid for the item.
Actual price method
Each inventory item is valued at its original purchase price.
Instructor’s Notes
Point out that the averaged price method is rarely used by foodservice operations.
Point out that operations that use a POS system frequently use the actual price method. ASK, “What might be an advantage of using the actual price method of valuing inventory versus using one of the other methods?” Possible answers—the actual value of the inventory is calculated rather than an estimated value; if using a POS system, the inventory can be calculated without too much manual effort.

24. Inventory and Cost of Food Sold
Inventory value is a critical component of the cost of food sold formula.
Opening inventory +
Purchases
Total food available –
Closing inventory
Cost of food sold
Instructor’s Notes
Explain that opening inventory is also known as “beginning inventory.”
Explain that closing inventory is also known as “ending inventory.” The ending inventory of one period becomes the opening inventory of the next period.
Point out that, when opening and closing inventories are equal, purchases equals cost of food sold.

25. Inventory Turnover Calculation
Step 1 – Calculate average inventory.
Step 2 – Calculate the inventory turnover. (
Opening inventory +
Closing inventory ) ÷ 2 =
Average inventory
Instructor’s Notes
Explain that inventory turnover shows how quickly an inventory is being used. Inventory turnover is the number of times (in a specific accounting period) that the average dollar value (average inventory) has been “turned over.” Too low a number may mean the inventory is too large, while too high a number may mean there is not enough product in inventory, resulting is product shortages.
Explain that this does not mean each “item” in the inventory has been replaced.
Point out to students that foodservice inventories normally turn over one to two times per week.
Cost of food sold ÷
Average inventory =
Inventory turnover

26. Daily Food Cost Percent Calculation Using Perpetual Inventory
Step 1 – Compute daily food cost.
Step 2 – Compute food cost percentage.
Requisitions +
Transfers in –
Transfers out
Daily food cost
Instructor’s Notes
Explain that this is an estimate that is as accurate as the perpetual inventory system users make it.
Ask for reasons why there can be variation between a physical count inventory and the value of the perpetual inventory. Possible answers may include theft, spoilage, or faulty record-keeping.
Daily food cost ÷
Daily unit sales =
Daily food cost percentage

27. How Would You Answer the Following Questions?
The greatest cause of inventory loss is (theft/poor buying practices).
The most common product storage method used in foodservice is (FIFO/LIFO).
The type of inventory that is based upon a theoretical count is called a
Breakdown inventory
Requisition inventory
Physical inventory
Perpetual inventory
Daily food cost divided by (unit sales/transfers out of inventory) equals daily food cost percentage.
Instructor’s Notes
Answers
Theft
FIFO (first in, first out) D
Unit sales
Note: indicate that the last part of this discussion will provide a review of definitions for the key terms used in the chapter.

28. Key Term Review Actual price method Averaged price method
Daily food cost
Extending
FIFO method
Inventory
Inventory breakdown
Inventory turnover
Issuing
Instructor’s Notes
Actual price method—inventory valuation method that uses the actual price paid for the product to compute closing inventory values
Averaged price method—inventory valuation method that uses a composite of all prices paid for an item during the inventory period to value the closing inventory
Daily food cost—estimate of food cost based upon requisitions, transfers, and sales
Extending—multiplying the number of units of a stored item by that item’s unit price
FIFO method—first in, first out; inventory valuation method that uses the latest price paid for an item to value inventory and that requires older products be utilized before newer products
Inventory—itemized list of goods and products, their on-hand quantity, and their total dollar value
Inventory breakdown—method of categorizing an operation’s food and supplies
Inventory turnover—measure of how frequently the total value of stored items has been turned (replaced) during a specific accounting period
Issuing—removing food or beverage products from storage

29. Key Term Review continued
Latest price method
LIFO method
Padding
Perpetual Inventory
Physical inventory
Requisitions
Time and temperature control
Transfer
Instructor’s Notes
Latest price method—also known as FIFO; inventory valuation method that uses the latest price paid for a product to value inventory
LIFO method—last in, first out; inventory valuation method that uses the price paid for the oldest product to value inventory and that requires the newest products to be utilized before older products
Padding—inappropriate activity of adding a dollar value for nonexistent inventory items to the dollar value of total inventory
Perpetual inventory—theoretical inventory count based on products received and issued
Physical inventory—actual physical count and valuation of all items on hand
Requisitions—forms that contain specifics about items to be issued from storage areas
Time and temperature control—policies and procedures that monitor the time and temperatures of food that is held before service to guests
Transfer—process of moving products and their cost from one foodservice unit or department to another

30. Chapter Learning Objectives— What Did You Learn?
Describe food storage techniques used to control theft.
Explain the FIFO method of stock rotation.
Describe the proper method of taking inventory.
Describe the various methods of inventory pricing (valuation).
Instructor’s Notes
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.

31. Chapter Learning Objectives— What Did You Learn? continued
Calculate inventory turnover rate and inventory value.
Compare physical inventory to perpetual inventory.
Calculate a daily food cost.
Instructor’s Notes
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.