Principles of Control

1. Principles of Control

2. Section Objectives Upon completing this section, you should be able to: • Explore basic food cost-control principles

3. Important Concepts and Percentages • Sales (Revenue) • Defined as revenue resulting from the exchange of products and services for value • In most operations, total revenue is broken into two components: food and beverage • You can increase revenue by: • Increasing the number of guests served • Increasing the amount that guests spend • Employing a combination of the two

4. Food and Beverage Costs • Food and beverage costs are considered direct variable costs • They are closely related to business volume • As sales increase, food and beverage costs increase and vice versa

5. Food Cost Percentage (Food cost ÷ Food sales) × 100

6. Beverage Cost Percentage (Beverage cost ÷ Beverage sales) × 100

7. Labor Cost • Labor (payroll) cost is considered a semi-variable cost • A portion of the labor cost is related to business volume, while the other portion is not • What is the difference?

8. Labor Cost Percentage (Labor cost ÷ Total revenue) × 100

9. Prime Cost • Prime cost is a term used to refer to the cost of materials and labor—food, beverage, and payroll • Taken together, these represent the largest portion of total costs • Prime cost should not be more than 60% to 70% if you want to meet overhead and also make a profit

10. Why is it Important to Separate Costs?

11. Actual vs. Standard Food Cost • Actual food cost • Represents what the food cost is for a specified period • Reported on income statement/P&L • Standard food cost • Represents what the food cost should be for a specified period

12. Actual and Standard Food Cost Discrepancies Discrepancies between standard and actual food costs are due to the following: • Waste • Spoilage • Pilferage/Theft • Yield • Portion Control

13. Actual Food Cost Monthly Inventory • Physical inventory is taken at the end of an accounting period, after close of business • Requires counting and recording number of units on hand • Usually requires two people: one to count, one to record • Once the total value of inventory is calculated, known as closing inventory for the period, it automatically becomes the opening inventory for the next period

14. An Example

15. Valuing Physical Inventory • There are at least 5 methods to assign value to the units of product in a physical inventory: • Actual purchase price method • First-in, first-out method (FIFO) • Weighted average purchase price method • Latest purchase price method • Last-in, first-out method (LIFO)

16. Sample Inventory Records Used for the following examples: • Opening inventory = 10 cans @ $2.35 = $23.50 • Purchased on the 7th = 24 cans @ $2.50 = $60.00 • Purchased on the 15th = 24 cans @ $2.60 = $62.40 • Purchased on the 26th = 12 cans @ $2.30 = $27.60 • 20 cans remain in ending inventory

17. Actual Purchase Price Method • Most accurate method • Can be done only if prices are marked on each of the cases • Assuming that 20 cans remain in inventory, the value would be: 4 @ $2.35 = $ 9.40 12 @ $2.30 = $27.604 @ $2.60 = $10.40 20 = $47.40

18. First-In, First-Out Method (FIFO) • Assuming stock was properly rotated, those items remaining on the shelf are the most recently purchased • 12 cans were purchased on the 26th, while 24 cans were purchased on the 15th 12 @ $2.30 = $27.60 8@ $2.60 = $20.80 20 = $48.40

19. Weighted Average Purchase Price Method • Reasonable alternative when large amounts of stock in inventory • Determined by multiplying number of units purchased in a month by their specific purchase prices, adding these values to determine a grand total, then dividing by total number of units • 70 units total $173.50 = $ 2.48 a unit 20 @ $2.48 = $49.60

20. Latest Purchase Price Method (Most Recent Price) • Widely used approach • Cost of replacement at the present moment would likely be the latest price at which the items were purchased • Last purchase price = $ 2 .30 a unit 20 @ $2.30 = $46 .00

21. Last-In, First-Out Method (Earliest Prices) • If this method were used: 10 @ $2.35 = $23.50 10 @ $2.50 = $25.00 20 (Total) = $48.50

22. Comparison of Methods

23. Monthly Food Cost Determination • The cost of food issued for any month is determined by the following formula: Opening inventory + Purchases = Total available – Closing inventory = Cost of food issued

24. Example Opening inventory $2,000 + Purchases _____________ $6,000 = Total available $8,000 – Closing inventory________ $3,000 = Cost of food issued $5,000

25. Adjustments to Cost of Food Issued • Intraunit and interunit transfers • Grease sales • Steward sales • Gratis to bar • Promotion expense

26. Determining Cost of Food Consumed Opening inventory + Purchases _ = Total available for sale – Closing inventory _ = Cost of food issued + Cooking liquor + Transfers from other units – Food to bar (directs) – Transfers to other units – Grease sales – Steward sales – Gratis to bars – Promotion expense _ = Cost of food consumed

27. Determining the Cost of Employee Meals • There are 4 techniques for determining the cost of employee meals • Cost of separate issues • Meals provided to employees • Prescribed amount per meal per employee • Chef is allotted a fixed amount of money per employee per meal • For example: $2.50 per employee for lunch, $3.00 for dinner

28. Determining the Cost of Employee Meals—continued • Prescribed amount per period • Amount credited to food cost per period • For example: Employees have $1,000 monthly for meals • Sales value multiplied by cost percentage • Employees are asked to record what they eat per meal • Checks are totaled at the end of the period, and the grand total is then multiplied by the average food cost percentage

29. Determining Cost of Food Sold • To determine the cost of food sold, one must subtract employee meals from the cost of food consumed Cost of food consumed – Cost of employees’ meals = Cost of food sold

30. Begins with portions Portions of a given menu item should be identical to one another in 4 ways: Ingredients Quantity Proportions of ingredients Production method To guarantee this, the following standards must be developed: Standard portion size Standard recipe Standard portion cost Standard Food Cost

31. Standard Portion Size • Quantity of any item to be served each time that item is ordered • Every item on a menu can be quantified in 1 of 3 ways: • By weight • By volume • By count

32. Results of Not Following Portion Sizes • Customers compare their food with that of others and notice a difference • Customers might complain, never return, or both • Servers argue with customers over portion sizes

33. Standard Recipes • A recipe is a list of the ingredients and the quantities of those ingredients needed to produce a particular item, along with a procedure or method to follow • A standard recipe is the recipe that has been designated the correct one to use in a given establishment • Standard recipes help ensure that the quality of any item will be the same each time the item is produced

34. Standard Recipes—continued • Stored in computers and can be changed frequently • In some restaurants, pictures and drawings are placed with the recipe • If not followed, costs will be different each time an item is prepared

35. Standard Portion Cost • To calculate standard portion cost: • Determine the individual cost for each ingredient • Add up the cost of each ingredient, resulting in the cost of making the recipe • Divide the cost by the number of portions the recipe yields

36. Calculating Standard Portion Cost • Two methods for calculating standard portion cost: • Formula • Recipe detail and cost card

37. Standard Portion Cost Formula • Simplest (and most widely used) way to calculate standard portion cost • Standard portion cost = ÷ Number of portions per unit Purchase price per unit

38. Recipe Detail and Cost Card • Basically, a recipe card with costs • If applicable, it is possible to determine the standard cost of a single portion by dividing the number of portions produced into the total cost of preparing the recipe

39. Recipe Detail Cost Card #1

40. Recipe Detail Cost Card #2

41. Portion Food Cost • Portion food cost = Total food cost ÷ Number of servings Example: $109.40 ÷ 50 = $2.19

42. Pricing Products Properly • Price of an item multiplied by its sales mix is the restaurant’s revenue attributable to that item • In other words, the number of customers multiplied by the average check equals total sales

43. Menu Pricing • There are a number of methods for establishing menu prices • Nonstructured pricing method • Factor pricing method or percentage markup system • Prime cost pricing method • Actual cost pricing method • Gross profit or gross markup system • Food and labor percentage markup system • Forced food cost pricing method • Contribution margin approach to menu pricing