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

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Food Cost continued

• 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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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 7,000 25,000 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 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 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
Realigned numbers

• 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

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Ten Percent Decrease in Sales and Cost of Food
Realigned numbers

• 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

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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
  restaurants standard

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Food Cost Percentage continued

• 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