Chapter 11 Food Cost Controls and Analysis

HB 267 Jeff Elsworth

Fastest & Most Efficient Way to Increase

Is it:

Increase Sales? Or Reduce Costs?

Answer

In the short run, it is most definitely to reduce costs. In the long run, sales needs to be addressed because eventually costs will reach a point that threatens quality standards.

Sales Increases

Bring in new customers Get present customers to spend more Get regular customers to come in more often Raise prices

In Order to Increase Sales

Need to advertise Need to discount prices You end up having to spend money in the hopes of increasing business, which in turn requires even greater sales increases than if you did not have the additional expense.

Reduce Costs

Shop around for lower prices Reduce waste Control portioning Reduce leftovers Schedule leaner Reduce payroll

Factors that Influence Food Cost Percentage

The as-purchased price of ingredients The portion size The menu price

Steps for Food Cost Control

Accurately forecast what and how much you are going to sell of each menu item Purchase and prepare according to forecasts Portion effectively Control waste and theft

Four Standards of Food Cost Control

Standardized purchase specifications Standardized recipes Standardized portions Standardized yields

Income Statement for Angelos Restaurant April, 2001

Food Sales Beverage Sales Total Sales Cost of Food Consumed Less Employee Meals Food Transfers to Bar Discounts and Comps Cost of Food Sold Beverage Cost Total Cost of F & B Sold

$36,700 $14,000 $50,700 $15,500 ($1,200) ($450) ($270) $13,580 $2,940 $16,520

72.39% 27.61% 100.00% 42.23% (4.11%)

37.00% 21.00% 32.58%

Cost of Food Sold Worksheet w/o Numbers

Beginning Inventory (Ending Inventory for the previous month)

+ = = -

Food Purchases for the current month Total Food Available for Sale Ending Inventory (as of last day of month) Cost of Food Consumed Employee Meals Food Transfers to Bar, Discounted & Comp meals; and add any beverage transfers to kitchen Cost of Food Sold

Cost of Food Sold Worksheet

Beginning Inventory Food + Food Purchases = Total Food Available for Sale - Ending Inventory = Cost of Food Consumed - Employee Meals - Food Transfers to Bar -Discount/Comp Meals = Cost of Food Sold

$5,800 $15,000 $20,800 $5,300 $15,500 ($1,200) ($450) ($270) $13,580

The Four Faces of Food Cost

Food Cost (Original) Maximum Allowable Food Cost
Calculated from Operating Budget

Actual Food Cost (AFC)

Shown on Income Statement

Potential Food Cost (PFC)

Determined by Sales Mix

Standard Food Cost (SFC)

PFC + Allowances

Maximum Allowable Food Cost %

What the food cost percentage cannot exceed if profit goals are to be achieved: Express labor and overhead costs as dollar ($) values. (This is all controllable and fixed expenses except food cost.) Impute a minimum profit goal percentage. Convert $ to % by dividing by sales for the corresponding period of expenses, e.g., month. Subtract the total percentage of expenses + profit from 100% to arrive at MFC%.

Example

Payroll 25% Overhead 21% Profit Goal 10% Total 56% 100%- 56% = 44% MFC

Actual Food Cost %

The food cost the operation ran during the current month, typically reported on the Income Statement: Assumes accurate inventories are taken Calculated by dividing cost of food sold by food sales
(CFS) $13,580/$36,700 = 37.00% AFC Wrong: (CFC) $15,500/$36,700 = 42.23%

Potential Food Cost a.k.a. Theoretical Food Cost

Based on the Menu Sales Mix Assumes zero waste and theft Assumes CFC & CFS are the same Calculated by dividing weighted food cost by weighted food sales Example: See Table 3.6 on page 300 in text $12,417 / $36,697 = 33.84%

Standard Food Cost (compared to AFC)

Potential Food Cost plus allowances PFC 33.84% + 5.23% = 39.07%
Allowances include: known waste, quality control, bar transfers, employee meals, complimentary and discounted meals, etc.

The Four Faces of Food Cost

Maximum Allowable Food Cost Actual Food Cost Potential Food Cost Standard Food Cost

44.0% 37.00% 33.84% 39.07%

Cost Problems

Actual Cost Can Be Fudged By Unscrupulous Manager

Inventory Padding Will Cause Actual Cost To Decrease Ignoring In-Process Inventories May Allow Manager To Hide Theft/Pilferage Transfers Can Be Hidden

Cost Calculations

Actual Costs Should Be Calculated For Food, Beverage, And Non-Food Supplies You Should Always Do A Monthly Actual Cost Calculation For Food and Non-Food Supplies You Should Always Do A Bi-Weekly Cost Calculation For Beverage

Daily Cost Calculations

Will Work Well In A Predictable Operation The Daily Cost Is Assumed To Be Equal To:

Issues + Directs +/- Adjustments That Occur That Day Essentially, This Is A Form Of Cash Accounting System Theoretically: The To-Date Cost % Every Tenth Day Is Close To The Actual Cost

Why is FC % Important? How do we control it?

Your job may depend on hitting the desired food cost percentages It affects the bottom line Setting prices too high = no customers Setting prices too low = no profit/no job Control: Know your cost & price it right

Purchasing, Portioning, Tracking sales Control theft, rotate, recycle

FC Controls

Purchase only whats needed:

Inventory should be less than 3 days worth of sales

Watch what you pay . . . Smart buying decisions Push items with lower FC menu engineering Be sure you are getting paid for whats sold: Steak counts & Sales tracking Eliminate waste Get all the staff involved: Know what things cost

Purchasing and Receiving Controls

All aspects of planning for controls begin with the customer and the menu. They determine what items must be purchased. Management and staff must be trained and skilled in the art of purchasing. Cost savings in purchasing go directly to the bottom line.

Purchasing and Receiving Controls

Effective purchasing controls impact the operations costs in a variety of ways.

Food Beverage Labor Smallwares Direct operating expenses Depreciation and taxes Inventory

Purchasing and Receiving Controls

Consider this: Assume a restaurant earns a profit of 10%, which as we know is pretty good. Now assume that $500 a week is wasted through poor purchasing practices. How much must the restaurant generate in additional revenues to pay for the $500 of wasted product?

Purchasing and Receiving Controls

$500 right?? WRONG! Revenues generated by the sale of food & beverages must also be used to pay for other food and beverage items, labor, lights, rent, smallwares, taxes, etc. So to maintain the 10% profit level the restaurant must generate additional revenues above and beyond the normal $500 and 10% profit margin.

Purchasing and Receiving Controls

The restaurant would need to generate $500/.10 = $5000 That means the first $5000 of revenues in the next week would in reality be allocated to replacing the lost revenues of the week before. This does not even consider lost interest or increased labor cost due to replacement of the wasted items.

Purchasing

Purchasing methods differ with the type and size of the operation. Large multi-operation establishments such as hotels, hospitals or universities may use a requisition system. Products are purchased and stored in a central storeroom, then requested by the various users and departments.

Purchasing

Restaurants and smaller operators must order products directly from the suppliers. This places the responsibility directly on the person placing the orders. In smaller operations this person is likely the General Manager or an Assistant. In larger operations an employee may be specially trained for this function.

Suppliers

Evaluate for consistency of:

Correct products Quality of the products Reasonable prices Prompt delivery within the terms of the restaurant Service including product information

Suppliers

Factors to consider when selecting a supplier:

Location delivery times and transportation costs Quality of suppliers operations Technical ability of suppliers staff Value Price versus quality relationship Compatibility Honest and fairness Quality of delivery personnel

Purchasing Proper Quality

Quality (def.) Suitability of a product for its intended use. The more suitable the product the higher the quality. Standard purchasing specifications (Specs) must be developed and documented in detail for every product purchased.

Purchasing Proper Quality

Specs should include:

Quality description Size requirement Weight requirement Value designation Brand if applicable

A purchase order should be completed for each supplier order. The purchase order should include the detail required to ensure proper delivery of the product ordered.

Specification Example

Canned tomatoes

Unit, case Trade spec, extra or standard U.S. grade, B Detailed requirements, Jersey, Michigan or Midwestern pack preferred, minimum drained weight per no. 10 can, 63.5-68 ounces, tomatoes to be 70% whole. Pack, 6 - #10 cans per case

Purchasing Proper Quantity

Purchasing too much of an item is just as bad as purchasing too little. Problems with too much product include:

Cash flow tied up in excess inventory

Lost interest on cash

Increased storage cost and displacement Quality deterioration Increased chance of theft

Purchasing Proper Quantity

Purchasing too little of an item can result in:

Lost sales from unavailable product for menu items Dissatisfied guests High prices incurred from rush deliveries or buying outside of contracted prices Time wasted chasing down product

Determining Purchasing Quantities

Popularity of the menu item Cost concerns

Future costs Seasonal costs and availability Will increased costs lead to increased menu prices that will in turn decrease the sales

Storage space available Safety level or par stock Supplier constraints

Minimum shipment requirements Cant break a case

Determining Purchasing Quantities

Purchasing of fresh food should be determined by calculating the quantity needed for immediate use. Non-perishable items are usually purchased by determining a minimum and maximum level (par).

Takes into consideration the usage rate of the item and the lead time required to receive the product.

Purchasing Ethics and Security

Ethical and security issues:

Kickbacks Fake companies dont buy out of a trunk Reprocessing of invoices Invoice errors and changes Credit memo problems Substitutions lesser quality, bait & switch Purchasing manager/staff theft

Cost Reduction Techniques

Negotiate prices periodically Regularly review quality standards Evaluate convenience/value added products Discontinue unneeded supplier services Combine orders, reduce shipping costs Purchase in larger quantities Pay cash or pay within credit terms Consider cooperative purchasing agreements Review promotional discounts Food shows, new products, trade magazine ads.

Receiving Controls

Train receiving personnel properly Restrict receiving duties to a few trained staff members Expensive or special items may require that the manager or chef receive the product.

Liquor Fish Steaks Produce

Receiving Controls

Have receiving procedures in place

Check incoming items against purchase order Check products against specs Check items against the invoice and verify the invoice against the purchase order Accept products Move products to its proper storage immediately. Label, date and rotate Complete necessary receiving documents Receiving report, accounting report, inventory record

Security Issues in Receiving

Lesser quality then spec Short weight or count Previously frozen presented as fresh Ice added to weight of container Mix inferior items in the bottom of case Empty bottles or cans in sealed case Packaging compromised Monitor delivery personnel Keep the back door locked!!

Inventory

Items sitting on the shelf are not generating revenue or profit The longer an item sits on the shelf the more likely that:

It will deteriorate It will be stolen It will be forgotten about

Inventory

Expensive or easily stolen items should be stored in a locked space and regularly accounted for. In many restaurants items such as liquor, steaks, fish, and expensive desserts are counted daily or by the shift and reconciled against the daily or shift sales. Missing items must be accounted for

Inventory

Product rotation should follow the FIFO method

FIFO = First In First Out

Shelves should be stocked with FIFO in mind. New products should be dated and rotated behind older items. In many cases specialized shelving units can be used to facilitate stock rotation

Can rack

Inventory

Inventory amounts are used to determine accounting costs Inventory items are subject to taxes in some instances Cost of goods sold for food and beverages is determined based on purchases and inventory Cost of goods sold (COGS) = Beginning inventory + purchases ending inventory

Inventory

Example: If beginning inventory (last months ending inventory) is $20,000 Purchases for the month are $50,000 Ending inventory (from the physical count) is $24,000, then: COGS = $20,000 + 50,000 - 24,000 COGS = $46,000

Inventory

Inventory Turnover Rate is used to determine how many times your inventory items are converted into revenues. Based on the average inventory for the month and the cost of goods sold. Avg. monthly inventory = (BI + EI)/2 Inventory turnover = COGS/Avg. inventory

Inventory

Example:
BI = $20,000 EI = $24,000 COGS = $46,000

Avg. inventory = (20,000 + 24,000)/2 Avg. inventory = $22,000 Inventory turnover rate = $46,000/22,000 Inventory turnover rate = 2.09 times Cost of inventory is turned into revenues 2.09 times per month

Inventory

The lower the inventory turnover rate figure the more money that is being tied up in inventory. Need to look at the increases and decreases in this number over time as a sign of efficient purchasing and inventory practices. This number can also be compared to other restaurants in the company or benchmarked against similar restaurants in the industry. Inventory turnover rates can also be calculated for product categories like produce or meat.

Assigning Value to Inventory

Methods vary but include:

Take the average price of the product purchased over the month LIFO Last In First Out, Uses the last purchase price of an item as the assigned value FIFO uses the first purchase price of an item as the assigned value Highest price method least ethical, depending upon point at which item was purchased.

LIFO most accurately reflects the actual cost of the ending inventory. When variance occur management must determine the reasons for the differences.

Accounting For and Tracking Costs

Tracking costs for an established operation can be as easy as tracking the ratio of purchases to sales. If you purchase $4000 in food for a week and your sales for the week are $12,500, given that your beginning and ending inventory levels are stable your food cost would be 32% ($4000/12,500).

Control Analysis

Need to have figures to use as a comparison These figures will differ depending upon whether your operation is within a chain or independent. It will also depend upon whether you are a new restaurant of an established operation. The key is consistency.

Control Analysis

Comparison figures may include:

Industry averages

NRA State restaurant association Government figures, Census, BLS Similar restaurants Similar locations Similar sales/customer profiles

Company averages

Control Analysis

Comparison figures may include:

Past financial statements

Historical figures Actual figures Ratios and percentages Compare actual to budgeted figures Red Lobster uses the number of entrees sold to measure restaurant performance.

Past and current budgets

In-house tools

Control Analysis

Questions to consider during the comparison process:

Is the standard cost correct?

Is it an accurate measure for comparison to your operation?

Is your actual cost correct? Have any of the cost components changed?

Have menu prices increased, cost of goods increased of specs changed?

Are the variances similar/different between the methods?

Control Analysis

Questions to consider during the comparison process:

Is the difference between the standard/budget costs versus the actual costs significantly different from other periods? Does the amount of variance warrant action? How much variance is deemed acceptable?

If variance from the budget is 2% and food cost is $30,000, then variance is $600.

In what area of the operation is the variance of greatest concern?

Analyzing Variances

Are there reasonable explanations?

Menu mix increased the sale of higher cost items. Cost of goods changed dramatically Failure to follow procedures Theft Waste

Identify the potential savings by isolating the variances and determining the value of the savings required to get the figures back in line.

Analyzing Variances

Example: If food cost is 4% over budget on sales of $120,000 for the period, then the difference [$120,000 X .04] = $4800. You need to identify areas or ways to save or correct problems that will result in a saving of $4800 over the next period. Reminder, this is money you cannot recover, only correct for in the future.

Identifying the Problem

Isolate the problem by asking questions:

When is the problem occurring? In what area/department is the problem? Is problem related to certain day-part? Are gross revenues decreasing? Are seat turnovers decreasing? Are customer counts down? Have operating costs increased in other areas? Are standards and procedures being followed? Does the staff realize the impact of the variances?

Take Corrective Action

If you can isolate the problem then a single corrective action may resolve the issue. Typically however it requires many small corrective actions to implement change. Develop a plan and make sure all management and staff are aware of it. Make managers and affected employees responsible for the implementation of the corrective action.

Take Corrective Action

Develop measurable outcomes for the corrective actions. Reward staff for accomplishments Keep staff informed as to the progress of the actions. Measurable outcomes mean you can evaluate the progress and usefulness of the action.

How did it impact the employees? The guests? Will the action be useful for future problems? Can the lessons learned be applied to other areas?

Cost Controls