Principles of Control
Section Objectives
Upon completing this section, you should be
able to:
• Explore basic food cost-control principles
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
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
Food Cost Percentage
(Food cost ÷ Food sales) × 100
Beverage Cost Percentage
(Beverage cost ÷ Beverage sales) × 100
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?
Labor Cost Percentage
(Labor cost ÷ Total revenue) × 100
Prime Cost
• Prime cost is a term used to refer to the cost of
materials and labor—food, 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
Why is it Important to
Separate Costs?
Scenario #1
Sales
Food
Beverage
Total
$800,000
$200,000
$1,000,000
Scenario #2
Sales
Food
Beverage
Total
Of Total Respective
Cost of Goods
Sales
Sales Cost of Goods
Food
$200,000 20.00% 25.00% Food
Beverage
$50,000 5.00% 25.00% Beverage
Total
$250,000 25.00% 25.00%
Total
$200,000
$800,000
$1,000,000
Of Total Respective
Sales
Sales
$200,000 20.00% 100.00%
$50,000
5.00%
6.25%
$250,000 25.00% 25.00%
Actual vs. Standard Food Cost
• Actual food cost
– Represents what the food cost is for a
specified period
– Reported on income statement/P&L
• Standard food cost
– Represents what the food cost should be
for a specified period
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
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
An Example
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)
Sample Inventory Records
Used for the following examples:
• Opening inventory
= 10 cans @ $2.35 = $23.50
• Purchased on the 7th = 24 cans @ $2.50 = $60.00
• Purchased on the 15th = 24 cans @ $2.60 = $62.40
• Purchased on the 26th = 12 cans @ $2.30 = $27.60
• 20 cans remain in ending inventory
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 @ $2.35 = $ 9.40
12 @ $2.30 = $27.60
4 @ $2.60 = $10.40
20 = $47.40
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 @ $2.30 = $27.60
8@ $2.60 = $20.80
20 = $48.40
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 @ $2.48 = $49.60
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 @ $2.30 = $46.00
Last-In, First-Out Method
(Earliest Prices)
• If this method were used:
10 @ $2.35 = $23.50
10 @ $2.50 = $25.00
20 (Total) = $48.50
Comparison of Methods
Opening Invent ory
P urchases
T ot al Available
Closing Invent ory
Cost of Food
Actu al
Purch ase Fi rst-In, W e i gh te d
Pri ce
Fi rst-O ut Ave rage
Me th od
Me th od
Me th od
$ 23.50 $ 23.50 $ 23.50
150.00
150.00
150.00
173.50
173.50
173.50
47.40
48.40
49.60
$ 126.10 $ 125.10 $ 123.90
Late st
Purch ase
Pri ce
Me th od
$ 23.50
150.00
173.50
46.00
$ 127.50
Last-In
Fi rst-O ut
Me th od
$ 23.50
150.00
173.50
48.50
$ 125.00
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
Example
Opening inventory
$2,000
+ Purchases _____________ $6,000
= Total available
$8,000
– Closing inventory________ $3,000
= Cost of food issued
$5,000
Adjustments to Cost of Food Issued
•
•
•
•
•
Intraunit and interunit transfers
Grease sales
Steward sales
Gratis to bar
Promotion expense
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
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
Determining the Cost of Employee
Meals—continued
• 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
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
Standard Food Cost
• Begins with portions
• To guarantee this, the following
standards must be developed:
• Portions of a given menu
item should be identical to
– Standard portion size
one another in 4 ways:
– Standard recipe
– Ingredients
– Standard portion cost
– Quantity
– Proportions of ingredients
– Production method
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
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
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
Standard Recipes—continued
• 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
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
Calculating Standard Portion Cost
• Two methods for calculating standard
portion cost:
– Formula
– Recipe detail and cost card
Standard Portion Cost Formula
• Simplest (and most widely used) way to
calculate standard portion cost
• Standard portion cost =
Purchase price
÷
per unit
Number of portions
per unit
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
Recipe Detail Cost Card #1
Reuben Panini
Ingredients
Pita Shell
Corned Beef
Swiss Cheese
Sauerkraut
Dijon Mustard Mix
Clamshell
Napkin and Fork Combo
Total
Sales Price
Food Cost %
Quantity
1
4
1
2
2
1
1
Unit
each
oz.
oz.
oz.
oz.
each
each
Cost
0.17
0.28
0.20
0.04
0.18
0.19
0.03
Total Cost
0.17
1.11
0.20
0.09
0.36
0.19
0.03
$2.15
$5.95
36.15%0
Recipe Detail Cost Card #2
Recipe: Catch of the Day
Date:
Ingredients
Fish
Butter
Lemon Juice
Salt
Spices
Amount
19 lbs.
3 lbs.
1/2 cup
Recipe Yield: 50 Servings
Actual Yield in Servings: 50
Size of Servings: 6 oz
Purchase Unit
Price
$ 5.50/lb.
$ 1.40/lb.
$ 4.00/quart
Small Unit
Price
$ 5.50
$ 1.40
$ 0.50
Total Cost
Total Cost:
$ 109.24
$ 104.50
$ 4.20
$ 0.50
$ 0.02
$ 0.02
Portion Food Cost
• Portion food cost =
Total food cost ÷ Number of servings
Example: $109.40 ÷ 50 = $2.19
Pricing Products Properly
• Price of an item multiplied by its sales mix
is the restaurant’s revenue attributable to
that item
– In other words, the number of customers
multiplied by the average check equals
total sales
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