OH 2-1

Agenda

Chapter Two PowerPoint

Chapter Two - Workbook problems & discussion questions

Chapter Three - Discussion questions

Next week

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An Overview of Food Cost & Cost Control

Controlling Foodservice Costs

2OH 2-2

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Chapter Learning Objectives

Differentiate among the three standards used in food and beverage: quality, quantity, and cost.

Calculate food cost using the basic formula for food cost.

Explain the effect that changes in food cost and sales have on food cost percentage.

Differentiate between asset and debit calculations for food cost.

Calculate food cost percent.

Utilize an operating budget.

Perform a make or buy analysis.

Investigate outsourcing.

Recognize techniques of revenue control.

Discriminate among the various threats to profit due to theft.

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Establishing Standards

Determine who will be your customer

Establish policies and standards that are based on customer base

Quality Standard

Quantity Standard

Price/Cost Standard

Standard Operating Procedures (S.O.P)

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Food Cost

The actual dollar value of the food used in a foodservice operation

Often referred to as “cost of food sold”

How often do you think managers should calculate food cost?

Includes the cost of food sold to customers

Also includes the value of food that is given away, wasted, or even stolen

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Theft Increases Food Cost

Employee theft can be difficult to prevent, but its control is vitally important to ensuring profitability.

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Reductions from Cost of Food

Employee meals The actual cost of the food served to

employees is subtracted from cost of food.

Complimentary (“Comp”) meals The actual cost of the food that is given away

(not its selling price) is subtracted from cost of food.

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Reductions from Cost of Food continued

Grease sales Payments from sales of used oil or grease, bones,

and fat scraps are subtracted from food cost.

Transfers to other units If an operation has more than one unit, transfers TO

another unit are subtracted from food cost.

Transfers INTO a unit are added to its food cost.

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Bar Transfers

Food to Bar Transfers The value of items transferred to the bar for making

drinks is subtracted from food cost.

Typical products transferred to the bar include nonalcoholic beverages, fruits, vegetables, spices, juices, and dairy products.

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Bar Transfers continued

In a busy bar, the amount of food that is transferred from the kitchen to the bar can be significant.

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Promotional Expenses

Food cost associated with promotion of the business

What are some examples of promotional coupons?

Where might you find or place these?

Expense/write off of meals to promote customer satisfaction - Examples

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Steward Sales

Employees allowed to buy products at a wholesale or slightly marked up price

How can this effect food cost?

Should this be allowed?

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The Food Cost Formula

Opening inventory

+ Purchases

Total food available

– Closing inventory

Cost of food sold

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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

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Physical Inventory

To accurately calculate cost of food sold, managers must take a physical inventory.

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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

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The Food Cost Percentage Formula

Food cost ÷ Sales = Food cost percentage

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The Food Cost Percentage Formula in Use

Food cost ÷ Sales = Food cost percentage

$7,000 ÷ $25,000 = 0.28 or 28.0%

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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%

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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

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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

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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!

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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.

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Ten Percent Increase in Sales andCost 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

Food cost percentage 33%

Realigned numbers

Realigned numbers

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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

Food cost percentage 33%

Realigned numbers

Realigned numbers

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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.

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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.

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Food Cost Percentage

Should be controlled

Should not be allowed to fall far below the restaurant’s standard

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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.

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How Would You Answer the Following Questions?

1. The cost of employee meals should be (subtracted/added) to the cost of food before computing a food cost percentage.

2. A restaurant’s food cost percentage should increase when sales increase and decrease when sales decrease. (True/False)

3. Which best describes food cost as an expense?A. It is fixedB. It is semivariableC. It is variableD. It is noncontrollable

4. A manager’s job is to reduce the food cost percentage as much a possible. (True/False)

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Operating Budget and P & L Statements

An operating budget is prepared prior to the start of the period for which it is written

Where do the numbers come from in the operating budget? Sales, food cost %, labor, etc.

P & L Statements – actual performance

Compared, define variations and take appropriate action

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Forecasting

An estimate of sales and expenses for a shorter period of time than the budget

Why is forecasting important?

• Things may have changed since budget was written

• The bottom line profit/loss must be realized

• Business may need to be adjusted to accomplish budget goals

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Forecasting Sales

Components needed:

Check Average

Turnover (if full service restaurant)

Day parts (meal periods served)

Days of operation

Past history

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Forecasting Sales continued

Important formulas:

Average check x turnover x # of seats x days of operation = Total Sales

Average check x # of guests X days of operation = Total Sales

Past sales x % (in decimal form) increase or decrease = Total Sales

Sales may need to be forecasted for all areas of operation: dining room, bar, catering, room service, etc.

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Forecasting Expenses

Food cost forecasting, based on: Actual food cost percent of selling price – determined by management Previous history

Labor forecasting based on: Previous history % of sales Actual forecasted labor

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Forecasting Expenses continued

Controllable cost forecasting based on: Actual cost of goods Previous history % of sales

Non-Controllable or fixed costs based on actual dollars: Rent, utilities, capital depreciation, insurance, interest Taxes based on % of sales

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Profit and Loss – Bottom line

Without the ability to anticipate and schedule around forecasted business, an operation may over/under purchase or over/under forecast labor.

Some components of the operating budget will be static and can be permanently calculated; others may be adjusted to maintain accuracy as actual costs are incurred and sales are made.

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Make or Buy Analysis

Decision to make a product or to purchase.

Calculate the actual food cost of the item, per portion

Consider labor if labor can be reduced when the item is purchased

Compare purchase price of equivalent quality and quantity

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Cost-Benefit Analysis

Determine if your operation should perform a task or service or if it can be contracted or outsourced. You must compare apples to apples Quality must match your standard for the entire

operation

Reasons to outsource Brand recognition Do not have the expertise Labor/union costs

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Key Term Review

Closing inventory

Food cost

Food cost percentage

Inventory

Opening inventory

Purchases

Quality Standard

Quantity Standard

Price/Cost Standard

Standard Operating Procedure

Total food available

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Chapter Learning Objectives—What Did You Learn?

Calculate food cost

Calculate food cost percentage

Explain the effect that cost and sales have on food cost percentage

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Let’s take a Break

Be back in 15 minutes

Upon return: Student Workbook for Chapter 2 & 3

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Next Week

Read Chapter s 4 & 5 and complete the workbook