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Costing handouts

Cost is a term often used interchangeably with expenses.
General Cost Scheme
Production Costs. Cost that are incurred to make a product, like chicken entrée, are
called production or manufacturing costs. These costs are usually grouped into three main
categories: direct materials, direct labor, and production overhead.
Direct materials. Direct materials consist of those raw material inputs that become an
integral part of a finished product and can be easily traced to it. For example, raw
chicken breasts are direct material for a chicken entrée.
Direct labor. It is consists of that portion of labor costs that can be easily traced to a
product, such as cook’s hourly payroll cost.
Production Overhead - Consists of all production costs other than direct materials and
direct labor. These costs cannot be easily and conveniently traced to individual products.
Examples include equipment maintenance.
Prime versus conversion costs. Prime cost consists of direct materials plus direct labor.
Conversion costs consist of direct labor plus production overhead.
Non – production costs. Food service operations incur many other costs in addition to
production costs. Typically these are classified as marketing and administrative cost.
Marketing costs. These costs include the costs of making sales, taking customer orders
and delivering the product to customers.
Administrative costs. These costs include all executive, organizational, and clerical costs
that are not classified as production costs.
Profit describes the financial benefit realized when revenue generated from a business
activity exceeds the expenses, costs, and taxes involved in sustaining the activity in
Food and Beverage Control in Restaurants
There are primarily four Food Service categories that need to be controlled in a
1. Food Cost- Food cost is the cost incurred in preparing a dish. The food cost
includes the plate as well as the period cost. It includes the cost of the raw
materials utilized, such as meat, dairy, vegetables, grain, spices, etc. Nonalcoholic beverages are also included in the Food Cost.
2. Beverage Cost- Beverage cost is the cost related to the alcoholic beverages
served in restaurant and bars.
3. Labor Cost- Labour Cost includes the expenses incurred in maintaining the
restaurant staff. It also consists of the taxes incurred on the payrolls of the
4. Other Expenses– Other expenses include all the other costs that are incurred
while running a restaurant. These can be utilities, rent, kitchen equipment, etc.
Profit margin is one of the commonly used profitability ratios to gauge the degree to
which a company or a business activity makes money. It represents what percentage of
sales has turned into profits.
A sale is a transaction between two or more parties in which the buyer receives goods—
either tangible or intangible—services, and/or assets in exchange for money or in some
cases, other assets paid to a seller. In the financial markets, a sale can also refer to an
agreement that a buyer and seller make regarding the price of a security.
Sales are activities related to selling or the number of goods or services sold in a given
time period.
1. Food Cost Control in Restaurants
The first step of food and beverage control is Food Cost Control. But before you
go ahead and take steps to control your Food Costs, you must analyze your actual food
expenses and your Food Cost Percentage. This can be deduced by using
predefined food and beverage cost control formulas.
Food Cost Percentage is the portion of sales that was spent on food expenses.
The cost of food sold divided by total sales gives you the Food Cost Percentage.
(i) Menu Item Forecasting
(ii) Standardized Recipes
Menu item forecasting is an integral part of the Food and Beverage Control. Food Cost
Simply put, a standardized recipe consists of the detailed procedures to be used in
Control begins with forecasting the menu. Forecasting the menu is ascertaining the
preparing and serving each of your menu items and is integral to Food and Beverage
demand for different menu items. It is required to make decisions regarding raw
Control. They give a set measure of the exact amount of ingredients to be used, declare
materials to be ordered, the workforce to be supplied, time to be given, etc. Menu item
the number of servings, set portions for each meal, and of course the preparation
forecasting will decrease your food waste and save you the cost of labor and raw
method. They are critical for controlling food and beverage costs as even a slight
materials. Depending on your customer psychology you must forecast your menu to
imbalance in the servings, cascaded over a period could lead to a severe dip of your
ensure that your menu bolsters your sales.
Apart from controlling Food Costs, Standard Recipes also help in maintaining
Only after understanding the requirements of a particular item should you decide how
consistency across multiple outlets. You can achieve recipe standardization across
much of a specific item should be prepared in your restaurant. You can forecast the sales
numerous outlets and efficiently manage each by investing in a POS software with a
of a dish by calculating its Popularity Index.
recipe management feature.
Popularity Index= Total number of a specific menu item sold/ Total number of all items sold
(iii) Inventory Management
Stocking up the inventory is the first thing that restaurant owners do to get the operations
Predicted Number of Item Sold= Number of guests to visit your restaurant X Popularity Index
going. However, managing the inventory is arguably the most important part of Food
Save some unexpected surprises, it is usually quite easy to predict the number of guests
and Beverage Control. Before you go and start stocking up your inventory, you first need
to visit your restaurant. The footfall depends on several factors that must be taken into
to define what inventory levels are needed in your restaurant. That is, you need to have
consideration, such quality of your service, competition in your area, season, etc.
a clear understanding of how much stock of which items would be needed in your
Over a period, you can predict the trend of footfall. Refer to the reports generated by
restaurant kitchen, and for how long would those items last. This comes from menu
your POS software that would give you a detailed insight into the amount of footfall in
forecasting and yield management. When you forecast your menu, you determine how
your restaurant, the busiest time of the day, the most popular dish, etc. Also, try these 7
much of a dish will be required. When you manage yield per dish, you estimate how
Pro Tips to Manage Restaurant Food Costs.
much raw material will be necessary to avoid wastage. Both of them together will work
towards your food and beverage cost control by determining exactly how much
inventory would be needed.
You need to consider the storage capacity of your inventory and shelf life and
(v) Vendor Management
perishability of each item in mind before purchasing. This article will tell you more
Before you choose a vendor to supply the raw ingredients to your kitchen, you need to
about inventory management in your restaurant.
have the Purchase Order. It is essential to have a Purchase Order (PO) for all orders, no
matter how trivial they are, and their records should be maintained.
(iv) Purchasing
Once you have the Purchase Order prepared, you need to decide a b vendor for
Much care needs to be given while purchasing inventory items or your food costs might
supplying the stock to your restaurant kitchen. It is better to purchase from the same
escalate. You need to have a list of all the items that need to be purchased and how
vendor to maintain the quality and taste of your food. Buying from the same vendor at
many to be purchased. You should also order enough to maintain a steady supply so
the same price also helps in keeping the Fixed Cost of your menu. Also, to lower your
that you don’t run out of an item. Inventory Management Software comes extremely
purchasing costs order on credit instead of cash. That way you can order more for a
handy in such cases. You can mark levels for each item in the inventory, and set reminders
in the POS software that would alert you when the items run low, thus giving you ample
through your restaurant POS.
time to order more. It is also advised to order items in a ‘Purchase Group.’ Purchase
Groups because of the increased number of buyers gives you an edge over the supplier
(vi) Receiving
and so you can bargain for the price better.
Receiving is one aspect of Food and Beverage control that is often overlooked, but it is
You must also adhere to the Product Specifications while purchasing Stock Items. Product
just as important. The maximum discrepancy in stock happens while receiving the
specifications primarily consist of the Product Name, Pricing Unit, Standard Grade,
order. A not so honest employee may be tempted to steal from the inventory while
Weight/Size, Desired Packaging, Container Size, etc.
receiving the order. Dishonest employees are also known to often strike an agreement
Another factor that is crucial to Purchasing while keeping food and beverage cost control
with the Vendor and receive only half the amount of the ordered items while pocketing
in mind is the Product Yield. Product yield essentially gives the amount of the item
the money of the entire order.
ordered that can be used for preparing the dish, that is, the Edible Portion. You must
To reduce the possibility of thefts, you should ensure that the purchasing agent and
also consider the Waste Percentage of the item. Few items can be utilized whole while
receiving clerk are two different individuals and that the entire purchasing and receiving
cooking; a significant portion is often lost while chopping, trimming, and cooking.
procedure is carefully monitored.
Fortunately, you can calculate this loss, and thus order accordingly.
Receiving clerks should be adequately trained to verify the weight, quantity, quality,
Waste Percentage is given by,
and price of the products while collecting the stock items. They should be adequately
Waste Percentage= Product Loss/ Total Weight of the item when purchased.
equipped with the necessary tools for weighing and measurement of the stock.
(vii) Storage
When you predict the number of guests you will serve and the revenues they will
All Food Costing and Control methods can go in vain if the stock items purchased are not
generate in a given future period, you have created a Beverage Sales forecast. Doing
stored properly, as food items are highly perishable. You must follow proper stocking
so will provide you a clear picture of the costs that you are looking at so that you can
practices to ensure longevity to the stocked goods. There should be separate areas for
take definite steps to ensure there is no wastage or theft, and the beverage cost is
storing dry, refrigerated, and frozen products. Storage can be done in the following
waysFirst In First Out: In this method, the items that are purchased first and consumed first.
(ii) Standardized Drinks and Recipe Portions
The items that are purchased first are more likely to spoil than the items purchased later.
The most important aspect of controlling Beverage Costs is setting up a Standardized
This method is preferred in cases of grocery, dairy, etc., and is the most popular method
drink recipe. You should also have a pouring policy through which you can regulate the
of storage utilization.
drink size. Standardized portions are essential, and tools must be ensured to maintain
Last In First Out: In this method, the items that are purchased last are consumed first. The
the quality and quantity of the drink. Train your staff to use measuring cups or jiggers to
idea behind this storage is that certain items such as baked goods are best consumed
avoid overpouring.
when fresh. Last in First Out method helps to maintain quality and deliver high customer
Also, decide how you wish to serve different types of liquor. For example, do you want
to sell wine by the glass or by the bottle?
The best way to store your inventory items is to ensure that the items are kept in a cool,
dry, and sterile place. The items should also be appropriately rotated.
3. Labor Cost Control in Restaurants
The Restaurant Industry witnesses one of the highest attrition rates among all sectors,
2. Beverage Cost Control in Restaurants
especially at the junior level, leading to high overall restaurant costs. You must be able
The second part of the Food and Beverage Control is Beverage Cost Control. The process
to control your overall restaurant costs, to sustain your restaurant. Several factors
of controlling Beverage costs is pretty much similar to Food Cost control. Keeping a check
contribute to a high Labor Cost, making it a significant part of the entire Restaurant Cost.
on the Beverage Costs can be more tedious as overpouring, and spilling is quite common
Labor expense includes salaries and wages, but it consists of other labor-related costs
and leads to inflated costs. You can track and control your beverage cost using this
as well such as employee meals, training, uniform, etc.
Calculate the Labor Cost Percentage of your restaurant using this formula-
Cost of beverage sold/ Beverage sold= Beverage Cost percentage
Labor Cost Percentage: Cost of labor/ total sales
(i) Forecasting Beverage Sales
(i) Assessing and Managing Labor Productivity
While hiring employees for your restaurant, it is important first to determine the number
customer service levels may suffer or necessary tasks may not be completed on time or
of staff you’ll be needing. However, it is not just sufficient to employ the staff and expect
as well as they should be.
everything to fall miraculously into place. You need to assess the Productivity Ratio of
Scheduling efficiency can often be improved through the use of the split-shift, a technique
each staff member to maintain a Productive Workforce.
used to match individual employee work shifts with peaks and valleys of customer
Productivity standards represent what you should reasonably expect in the way of output
per unit of labor input. A productivity standard merely is management’s expectation of
the productivity ratio of each employee. Establishing productivity standards for every
4. Other Expenses Control
employee is an essential management task and the first step in controlling payroll costs.
Apart from the Food, Beverage, and Labor, certain other expenses add up to the overall
Schedule employees using productivity standards and forecasted sales volume.
Restaurant Costs. A lot of you may ask the question of how to control restaurant costs
Output/Input= Productivity Ratio
with the least possible resources. These may seem trivial, but you need to give just as
Eg: 60 guests/4 servers= 15 guests per server
much attention to these for Food and Beverage Control. These can be categorized as
This article will tell you how to control the labor costs in your restaurant.
Controllable and Non-Controllable, and Fixed and Variable Costs. For example, rent is
a Non-Controllable, fixed cost, while repairs and maintenance are variable costs.
(ii) Ensuring Employee Productivity
Food and Beverage Control is an integral part of restaurant operations, and the points
Follow these tips to enhance employee productivity in your restaurant.
mentioned above of Food and Beverage Cost Control, Labor Cost Control, and Other
1. Employee selection- Selecting the right employees plays a vital part in controlling
Costs. Keep track of all the expenses and do the needful to control them to see how your
costs. Create a clear Job Description and hiring criteria for each role and sort the
entire restaurant operation blossoms.
applications on its basis. Conduct detailed interviews and background checks before
getting anyone on board.
2. Training and Supervision- A trained employee is a productive employee. Before a
new employee joins the team, ensure that he/she has been thoroughly trained. Do not
hesitate from on-the-job training and even re-training if the need arises. Supervise the
tasks wherever possible, or assign your manager to oversee the process.
3. Scheduling- Proper scheduling ensures that the correct number of employees is
available to do the necessary amount of work. If too many employees are scheduled for
a particular time, the productivity ratios will decline. If too few employees are scheduled,