Cost Control Measures
for Food Service Operations
Chapter 9
Objectives
• Define the Siamese twins of
management
• Summarize the importance of control
systems
• Clarify the use of financial statements
• Define fixed, variable, conversion, and
common costs
Objectives (cont’d.)
• Outline the purpose of production
reports
• Relate the concept of food cost and the
Forty Thieves
• Summarize inventory management
• Explain how to calculate food and labor
costs
Objectives (cont’d.)
• Describe how to make payroll
calculations
• Perform break-even analysis and
illustrate the method used for graphing
Using Other People’s Money
• Food service operators can improve
profitability with efficient purchasing,
stock management, and cost controls
– Purchase stock using free credit from
suppliers
– Maintain minimal yet sufficient stock
– Quick turns allow goods to be sold before
the bills are due
The Importance of Control
Systems
• Controls, or systems of measure
– Gauge progress of business towards its
goals
• Planning and controls are the “Siamese
Twins of Management”
The Importance of Control
Systems (cont’d.)
• Control process consists of four steps:
– Establish standards and procedures
– Train employees to follow them
– Monitor performance
– Take appropriate action to correct
deviations
The Importance of Quality
Standards
• Quality can be measured using predetermined standards
• Measurement should be made each
time a meal is served
Evaluating Performance Using
Financial Statements
• Four primary financial statements used
to manage and control finances
– Income statements
– Balance sheets
– Cash flow statements
– Operating budgets
Managing by Income Statements
• Income statement (profit and loss
statement)
– Gives detailed listing of revenue and
expenses over the accounting period
• Basic formula for the income statement
– Revenue – Expenses + Gains - Losses =
Income
Managing by Income Statements
(cont’d.)
• Three sections of the P&L statement
– Gross profit section
• Sales, cost of sales, and gross profit
– Operating expense
• Operating expenses and operating income
– Nonoperating expense
• Interest and income taxes
Managing by Balance Sheets
• Balance sheet shows a company’s
assets and liabilities
• Shareholder equity is calculated as:
– Assets – Liabilities = Net worth
• Balance sheets are prepared for
shareholders or loan officers, to show
the financial health of the business
Managing by Cash Flow
• Cash flow is the comparison of cash on
hand to bills due in the near future
• Accounts payable
– Money due to the business
• Accounts receivable
– Money the business owes others
Managing by Operating Budgets
• Operating budgets forecast expenses a
business must incur to achieve targeted
sales revenues
• Operating budgets are income
statements prepared for a future date
• Sales are a company’s revenue
Managing by Operating Budgets
(cont’d.)
• Prime costs are food and labor
expenses
– Most restaurants like to keep their prime
costs between 60-69 percent of sales
• Fixed costs (overhead)
– Remain the same no matter how many
customers are served
Managing by Operating Budgets
(cont’d.)
• Variable (controllable) costs
– Change depending on the number of
customers served
• Conversion costs
– Direct labor plus business overhead
• Common costs
– Shared costs that are not easily assigned
Evaluating Performance by Other
Management Tools
• The food service industry uses
management tools that are unique to
the industry
– In addition to traditional management tools
Make-or-Buy Decisions
• Operator must decide whether to make
or buy
• Ready-to-eat foods have a higher food
cost but a lower labor cost
• If costs are comparable, operator must
decide which is better for his operation
– Factors: space, uniqueness
Production Reports
• Serve three primary purposes
– Control, communication, and calculation
• Used to record activity surrounding all
prepared menu items
• “The Forty Thieves of Food Cost” lists
ways in which money can be lost
Menu Engineering
• Menu analysis is recording sales history
of all items sold
– Evaluating item’s contribution to profit
– Evaluating customer appeal
• Menu engineering
– Classifies each item according to
popularity index and profitability index
Controlling Inventory
• Weekly inventory
– May be necessary if food cost figures not
in line with budgets
• Another method of control:
– Restricting purchases to a certain
percentage of sales
Calculating Inventory Turnover
• The rate of inventory turnover is a sign
of efficiency and effective purchasing
• Relevant equations:
Calculating Food and Beverage
Costs
• Food cost percentage
– Ratio of food costs to sales
• Methods to help lower food costs
– Adjust pricing strategies
– Provide proper training; minimize waste
– Reduce product quality; update inventory
values; organize storage room
Calculating Food and Beverage
Costs (cont’d.)
• Methods to help lower food costs
(cont’d.)
– Control portion sizes; monitor weights
– Link chef pay to food cost percentage
– Set up purchase order system and budget
– Use trade-outs
– Look for discounts
Calculating Food and Beverage
Costs (cont’d.)
• Standardized recipe and portion costs
– Standardized recipes are critical to
achieving consistent profit
– There are 12 steps that can help in
developing a standardized recipe
– Recipe costs should be calculated prior to
menu pricing
Calculating Labor Costs
• Labor costs are all monies paid to
employees to run the business
• Labor cost percentage is relationship
between labor costs and sales
Calculating Labor Costs (cont’d.)
• Calculating payroll
– Hourly wage plus overtime, or salary
– Deductions must be withheld
• Federal and state income taxes
• Social security
• Voluntary deductions
Break-Even Analysis
• Used to evaluate how much sales
revenue is needed to cover the costs of
the establishment
– Often employed when considering a capital
investment or business expansion
Calculating the
Break-Even Point
• Break-even point
– Volume of sales
needed to cover
the total costs
9.13 Break-even graph
Summary
• Food service operators can improve
profitability with efficient purchasing,
stock management, and cost controls
• Control systems are used to evaluate
progress toward profitability goals
• Four primary financial statements are
used to manage and control finances
Summary (cont’d.)
• Important tools to achieving profitability
– Production reports
– Menu engineering
– Controlling inventory
– Calculating inventory turnover
– Calculating food, beverage and labor costs
– Break-even analysis