1. Food Cost
Controlling Foodservice Costs

2. 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?”

3. 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)

4. 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.

5. 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.

6. 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.

7. 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).

8. 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.”

9. 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?”

10. 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

11. 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.

12. 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.”

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

14. 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.

15. 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.

16. 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)

17. 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!

18. 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.

19. 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.”

20. 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.

21. 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.

22. 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.

23. 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.

24. 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.

25. 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)

26. 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.

27. 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—$2.91 ($ ÷ 50 portions = $2.91 per portion)

28. 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

29. 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)

30. 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.

31. 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)