Controlling costs
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Controlling Costs;. The processes…. 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. Food Cost % . Selling Price. Cost Markup =. Portion Cost. Portion Cost. 100.

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Controlling costs

Controlling Costs;

The processes….

Gilbert Noussitou 2006


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

Food Cost %

Gilbert Noussitou 2006


Food cost1

Selling Price

Cost Markup =

Portion Cost

Portion Cost

100

Food Cost % =

Selling Price

Cost %

  • Ratio of product cost compared to selling price

  • Cost Markup

    • also known as the cost factor

or

Food Cost %

Gilbert Noussitou 2006


Food cost what should it be

Food Cost %: What should it be?

Gilbert Noussitou 2006


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 marginor gross profit

  • Contribution Margin is the difference between the product cost & the selling price.

Potential Profitability

Gilbert Noussitou 2006


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

Profitability

Gross Profit = Contribution Margin (C.M.)

Gilbert Noussitou 2006


Contribution margin

Food

Cost

Selling

Price

Item

C.M.

F.C. %

Chicken

Sandwich

$1.25

$4.65

27%

$3.40

Fish

Burger

34%

$4.30

$2.20

$6.50

Steak

Sandwich

$4.65

$3.10

$7.75

40%

Contribution Margin

Gilbert Noussitou 2006


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 paiditem just like rent is.

  • Then the formula becomes:

In most peoples mind;

Revenue – Expenses = Profit

Revenue – Required Profits = Allowable Expenses

The Profit Myth

In this case, the only way to survive is to manage expenses properly!!!

Gilbert Noussitou 2006


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…

TheBUDGET

Gilbert Noussitou 2006


The budget cont

  • Budgetingprovides 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.

TheBudget (cont.)


Steps in planning a budget

1st Step:Budget Sales

2nd Step:Budget Expenditures

3rd Step:Budget Cash Flow

4th Step:Budget Capital Expenditures

5th Step:Compile Forecast Income Statement

Steps in Planning a Budget

Gilbert Noussitou 2006


Control point flow chart

Control Point Flow Chart

Control the processes,

not the end result!!!

Gilbert Noussitou 2006


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

COST CONTROL PROCESS

Gilbert Noussitou 2006


Food cost controls

  • Standard Product Specifications

  • Standard Recipes

  • Standard Yields:

    • Ratio of useable product to total weight before processing

  • Standard Portions

    • Count – ladle – scoop – bowl – weigh – etc.

  • Standard Portion Cost

    • Always resulting from the 4 previous standards!!!

There are five main standards related to cost control

Food Cost Controls

Gilbert Noussitou 2006


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)

Effective Standards:

Yield & Cost Calculations

Gilbert Noussitou 2006


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

POSSIBLE SOLUTIONS:

PROBLEM:FOOD COST IS TOO HIGH!?

Gilbert Noussitou 2006


Cost controls use of leftovers

  • Normal waste is costed and sold

  • Abnormal waste is used but not sold

  • Proper planning is essential

THE BEST WAY TO USE LEFT-OVERS IS……

NOT TO HAVE ANY!

What is the best way to use leftovers?

EVERYTHING YOU BUY MUST BE SOLD

Cost ControlsUse of Leftovers

Gilbert Noussitou 2006


Taking inventory

Taking Inventory;

Is that a cost control measure?

Gilbert Noussitou 2006


The formula for food cost calculation

OPENING INVENTORY$11,000.00

PLUS

PURCHASES (less credits) + $40,000.00

MINUS

CLOSING INVENTORY- $9,000.00

EQUALS

COST OF FOOD SOLD (or used)= $42,000.00

Sales are $120,000

Food Cost % = (cost) $42,000.00 x 100 = 35%

(Sales) $120,000.00

THE FORMULA FOR FOOD COST CALCULATION

Gilbert Noussitou 2006


Controlling costs

Example #1

Gilbert Noussitou 2008


Controlling costs

Example #2

Gilbert Noussitou 2008


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