A Closer Look at Food Cost

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A Closer Look at Food Cost
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• Controlling Foodservice Costs

OH 2-1
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Chapter Learning Objectives

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

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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
• 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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Revenue Security

• PRODUCT ISSUES
• GUEST CHARGES
• SALES RECEIPTS
• SALES DEPOSITS

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Internal Threats to Revenue Security

• Guest Check
• Omission of recording guests order on check.
• Double dropped checks.
• Precheck / postcheck system
• Employees are prohibited from issuing any
  products without a guest check.

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Internal Threats to Revenue Security

• Cashier theft
• Coupons.
• Overcharge guests.
• Cash register is short or over.
• Bonding
• Purchasing insurance policy on an employee.

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

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Determining Inventory Value

• Issuing - the process of placing products into
  the production system. It begins the food
  production process.
• Item Amount x Item Value Item Inventory Value
• Physical Inventory - Inventory in which the food
  products are actually counted.

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Physical Inventory

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

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The Food Cost Formula

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The Food Cost Formula in Use

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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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An Ice Cream store had a opening inventory of
22,500 for June. Closing inventory was 27,500
and purchases totaled 39,000. What was the cost
of food sold?
22,500 39,000 61,500 27,500
34,000

• Opening Inventory
• Purchases
• Total Food available
• Closing Inventory
• Cost of Food Sold

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The Food Cost Percentage Formula

THE MOST IMPORTANT FORMULA!!!
EXPENSE (cost)  Expense REVENUE (sales)
ROUND TO THE TENTHS PLACE!!!
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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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The Food Cost Percentage Formula in Use

ROUND TO THE TENTHS PLACE!!!
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If the cost of food sold was 34,000 and sales
for the month were 98,000, what was the food
cost percentage?

• Cost of Food sold 34,000
• Sales 98,000

34.7 Food Cost
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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 restaurants budgeted
  food cost percentage or other standard

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Food Cost Percentage continued

• Is the proportion of the restaurants 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 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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10 Increase/Decrease in Sales Cost of Food
Realigned numbers

• Original cost of food 1,000
• Original sales 3,000
• Food cost percentage 33.3
• INCREASE
• New cost of food 1,100
• New sales 3,300
• Food cost percentage 33.3

DECREASE 900 2,700 33.3
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The ABCs of Food Cost Percentage (A/B C)

• Where A Food Cost
• B Sales
• C Food Cost

ORIGINAL 1,000 33.3 3,000

• 1. If A stays the same, and B increases, C
  decreases.
• 2. If A stays the same, and B decreases, C
  increases.

1,000 30.3 3,300
1,000 37 2,700
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1,000 33.3 3,000
ORIGINAL CALCULATION

• 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.

900 30 3,000
1,100 36.7 3,000
1,100 33.3 3,300
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Food Cost Percentage

• Should be controlled
• Should not be allowed to fall far below the
  restaurants standard
• If food cost percentages are allowed to drop
  below the restaurants standards, the guests
  perceptions of value may be negatively affected.

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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 restaurants 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 managers job is to reduce the food cost
  percentage as much a possible. (True/False)

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Key Term Review

• Closing inventory
• Food cost
• Food cost percentage
• Inventory

• Opening inventory
• Purchases
• Total food available

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Chapter Learning ObjectivesWhat Did You Learn?

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