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

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Food Cost Percentage

• (Food cost Food sales) 100

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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

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Prime Cost

• Prime cost is a term used to refer to the cost of
  materials and laborfood, 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

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Why is it Important to Separate Costs?
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Actual vs. Standard Food Cost

• Actual food cost
• Represents what the food cost is for a specified
  period
• Reported on income statement/PL
• Standard food cost
• Represents what the food cost should be for a
  specified period

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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

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An Example
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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)

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Sample Inventory Records

• Used for the following examples
• Opening inventory 10 cans _at_ 2.35 23.50
• Purchased on the 7th 24 cans _at_ 2.50 60.00
• Purchased on the 15th 24 cans _at_ 2.60 62.40
• Purchased on the 26th 12 cans _at_ 2.30 27.60
• 20 cans remain in ending inventory

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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 _at_ 2.35 9.40 12
  _at_ 2.30 27.60 4 _at_ 2.60 10.40
• 20 47.40

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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 _at_ 2.30 27.60
• 8_at_ 2.60 20.80
• 20 48.40

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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 _at_ 2.48 49.60

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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 _at_ 2.30 46 .00

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Last-In, First-Out Method (Earliest
Prices)

• If this method were used 10 _at_ 2.35
  23.50 10 _at_ 2.50 25.00 20 (Total)
  48.50

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Comparison of Methods
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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

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Example

• Opening inventory 2,000
• Purchases _____________ 6,000
• Total available 8,000
• Closing inventory________ 3,000
• Cost of food issued 5,000

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Adjustments to Cost of Food Issued

• Intraunit and interunit transfers
• Grease sales
• Steward sales
• Gratis to bar
• Promotion expense

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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

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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

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Determining the Cost of Employee Mealscontinued

• 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

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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

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Standard Food Cost

• 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

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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

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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

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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

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Standard Recipescontinued

• 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

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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

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Calculating Standard Portion Cost

• Two methods for calculating standard portion
  cost
• Formula
• Recipe detail and cost card

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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
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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

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Recipe Detail Cost Card 1
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Recipe Detail Cost Card 2
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Portion Food Cost

• Portion food cost Total food cost Number of
  servings
• Example 109.40 50 2.19
  

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Pricing Products Properly

• Price of an item multiplied by its sales mix is
  the restaurants revenue attributable to that
  item
• In other words, the number of customers
  multiplied by the average check equals total sales

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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