Chapter 3
Cost Control
COST CONTROL
 Cost control is a business’s efforts to manage how much it
spends
 Every business needs to make more money than it spends in
order to survive. That is, its sales, or revenue, have to be
higher than its costs.
 Revenue is the income from sales before expenses, or
costs, are subtracted.
 Cost is the price an operation pays out in the purchasing
and preparation of its products or the providing of its
service.
TYPES OF COSTS
 A successful restaurant or foodservice operation needs to
manage and control many costs.
 Food costs, beverage costs, and labor costs each have
components that are related to sales levels.
 Variable or semi-variable costs can change based on
sales. These are controllable costs because the
operation has a certain amount of control in how it spends
on these aspects of the operation.
 Overhead cost is a fixed or non-controllable cost,
meaning it needs to be paid regardless of whether the
operation is making or losing money.
 Fixed costs do not change based on the operation’s sales.
OPERATING BUDGET
An operating budget is a financial plan for a
specific period of time
 A fo r e ca st i s a pre di c t i o n o f s a les
l evels o r c o s t s t h a t w i l l o c c ur
duri n g a s pe c i fic t i m e pe ri o d.
 M o s t fo re c a st ing te c h n iq ues re l y o n
h av ing a c c ura te h i s to ric al d a t a fo r
t h e o pe ra t i on.
 Th e m o s t c o m mon fo o ds e r vic e
reve n ue fo re c a st ing te c h n iques a re
ba s e d o n t h e n um be r o f c us to m er s
a n d ave rage s a les p e r c u s to me r .
 A s a les h is to r y i s a re c o rd o f t h e
n um be r o f po r t i o n s o f eve r y i te m
s o l d o n a m e n u.
 M o s t o pe ra t i ons c a n run h i s torical
s a l es a n d pro duc t i o n re po r t s fro m
t h e i r p o in t - o f - s ale ( P OS) s y s te ms .
PROFIT AND LOSS REPORT
A profit-and-loss report (P&L) is a compilation of sales and
cost information for a specific period of time
 A P & L s h ows w h et h e r a n o pe ra t i on
h a s m a de o r l o s t m o n ey duri n g t h e
t i m e pe ri o d c ove red by t h e re po r t .
 Th e P & L, o r i n c o me s t a te m ent ,
h e l ps m a n ager s g a ug e a n
o pe ra t i on’s pro fi t a bi lit y a s we l l a s
c o m pa re a c t ua l re s ul t s to ex pe c te d
g o a ls.
 A P & L a l so h e l ps m a n ageme nt
dete rm i ne a re a s w h e re
a dj us t ment s m us t be m a de to bri n g
bus i n ess o pe ra t i ons i n l i ne w i t h
e s t a blished fi n a n cial g o a ls.
 Fo r a n o pe ra t io n to be pro fi t a bl e ,
s a l es m us t exc e e d c o s t s.
COST-CONTROL TOOLS
 Advances in technology have drastically increased the number
of options available to operations in controlling costs.
 Software programs can be used to complete the calculations
required in cost planning, controlling sales, controlling
inventory, and focusing on the menu.
 Computer software can easily provide better access to
information, more accurate and convenient collection of
information, and improved analysis of that information.
 If used ef fectively, technology can help in running an
operation more ef ficiently and helping to reduce and
ef fectively control costs .
SECTION 3.1 SUMMARY
 Every business needs to obey one basic principle to
survive: it must make more money than it spends.
 Food costs, beverage costs, and labor costs each
have components that are related to sales levels.
 An operating budget is a financial plan for a specific
period of time. It lists the anticipated sales revenue
and projected costs and gives an estimate of the
profit or loss expected for the period.
 A profit-and-loss report is a compilation of sales and
cost information for a specific period of time that
shows whether an operation has made or lost money.
7
STEPS IN CONTROLLING FOOD COSTS
 Food costs must be controlled during all seven stages of the
food flow process:
1. Purchasing
2. Receiving
3. Storage
4. Issuing
5. Preparation
6. Cooking (production)
7. Service (sale)
DETERMINING FOOD COST
 Food cost is the actual dollar value of the food
used by an operation during a certain period.
 Food cost includes the cost of food sold, given away,
wasted, spoiled, incorrectly prepared, overportioned,
overproduced, or pilfered.
 Inventory is the dollar value of a food product in storage
and can be expressed in terms of units, values, or both:
 Opening inventory is the physical inventory at the beginning of
a given period.
 The closing inventory is the inventory at the end of a given
period.
 The formula for obtaining an actual food cost accurately
is:
(Opening inventory + Purchases = Total food available) –
Closing inventory = Total food cost
DETERMINING FOOD COST PERCENTAGE
 Total food cost percentage is the relationship
between sales and the cost of food to achieve
those sales.
 Analyze food cost percentage by comparing it to
company standards, historical costs, or even
industry standards.
 To determine the percentage, divide the total food
cost by the sales:
Total food cost ÷ Sales = Food cost percentage
 Food cost is a variable cost: It should increase or
decrease in direct proportion to an increase or
decrease in sales if all of the standards and food
controls are followed correctly.
ESTABLISHING STANDARD
PORTION COSTS
 Most every operation has standardized recipes that are
followed every time a menu item is prepared.
 For every standardized recipe, an operation should establish a
standard portion cost , which is the exact amount that one
serving, or portion, of a food item should cost when prepared
according to the item’s standardized recipe.
 A recipe cost card is a tool used to calculate the standard
portion cost for a menu item.
 As with the standardized recipe, a recipe cost card should
exist for every multiple -ingredient item listed on the menu.
AS-PURCHASED VERSUS
EDIBLE-PORTION COSTS
 The as-purchased (AP) method is used to cost an
ingredient at the purchase price before any trim or
waste is taken into account.
 In the AP method, all ingredient quantities are listed
on the standardized recipe in the form in which they
are purchased.
 The edible-portion (EP) method is used to cost an
ingredient after trimming and removing waste, so
that only the usable portion of the item is reflected.
 Using the EP method to cost an ingredient, the
quantity is listed on the standardized recipe using
only the edible portion of that particular ingredient.
12
RECIPE YIELDS
 A recipe yield is the process of determining the number of
portions that a recipe produces.
 To determine how many portions a recipe yields, calculate the
total volume of the recipe either by weight or by volume,
depending on how the portion size is calculated.
 Understanding recipe yields is one of the keys to successful
food preparation and controlling food costs. The
measurements given in recipes must be followed exactly.
 Once a yield is known and properly followed, it’s easier to
increase or decrease the size of the recipe based upon the
operation’s changing needs.
CONTROLLING PORTION
SIZES
 Controlling portions is very important for a restaurant
to meet its standard food cost.
 Tools that are essential for accurate portion control
include:






Scoops
Ladles
Serving spoons
Serving dishes
Ramekins, bowls, cups, and so on
Portion scales
 Another mechanism for ensuring that portions are the
right size is to proportion any item that can be
preportioned before serving.
MONITORING PRODUCTION VOLUME AND
COST
 When restaurants produce too much, food cost goes up;
produce too little, and sales are lost.
 A food production chart shows how much product should
be produced by the kitchen during a given meal period.
 A well-structured chart can ensure product quality, avoid
product shortages, and minimize waste, spoilage, theft,
energy costs, and administrative costs.
 Sales history is critical in helping management forecast how
many portions of each menu item to produce on a given day.
MENU PRICING
 The menu is the primary sales tool in most restaurant
and foodservice operations.
 There are a number of methods for menu pricing:
 A contribution margin is the portion of dollars that a particular
menu item contributes to overall profits. To use the contribution
margin method, an operation must know the portion costs for
each item sold.
 In the straight markup pricing method, multiply raw food costs by
a predetermined fraction.
 With the average check method, the total revenue is divided by
the number of seats, average seat turnover, and days open in one
year.
 The food cost percentage is equal to the food cost divided by
food sales.
SECTION 3.2 SUMMARY
 Food costs must be controlled during all seven
stages of the food flow process, from the actual
purchasing of food items to how they are served
to customers.
 Food cost is the actual dollar value of the food
used by an operation during a certain period.
 Food cost percentage is the relationship
between sales and the cost of food to achieve
those sales.
 Most operations have standardized recipes that
are followed every time a menu item is
prepared.
SECTION 3.2 SUMMARY (CONT.)
 Two methods used to determine the cost of
ingredients in a standardized recipe are the
AP method, which means “as purchased,” and
the EP method, which stands for “edible
portion.”
 A recipe yield is the process of determining the number
of portions that a recipe will produce.
 Controlling portions is very important for a restaurant to
meet its standard-food cost.
 The menu is the primary sales tool in most restaurant
and foodservice operations.
BUDGETING LABOR COSTS
 Labor is a semivariable, controllable cost. Labor costs are
tied to sales, but not directly.
 Most operations have both full -time and part-time staff.
 Operations must be aware of the fluctuations in their
sales so as to have just the right amount of staff on hand
to handle customers efficiently,
 It is an important part of the management function to
make sure that payroll cost is in line with the budgeted
standard.
 Ideal labor cost is the standard the restaurant uses to
budget for staffing needs; it represents what management
predicts will happen.
3.3
LABOR COST FACTORS
 Business volume, or the amount of sales an operation is
doing for a given time period, impacts labor costs.
 Employee turnover is the number of employees hired to
fill one position in a year ’s time.
 Quality standards also affect labor cost. Quality
standards are the specifications of the operation with
regard to products and service.
 A restaurant or foodservice operation must meet
operational standards. If an employee does not prepare
a product that meets the operation’s standards, the item
must be redone. This costs money, in terms of wasted
product and lost productivity.
SCHEDULING
 A master schedule is a template that shows the number of
people needed in each position to run the restaurant or
foodservice operation for a given time period.
 To make the best estimates for a reasonable master schedule,
it also needs to consider current trends.
 After determining the anticipated sales, management
determines the payroll dollars, which are the number of
dollars available for payroll for a scheduling period.
 A crew schedule is a chart that shows employees’ names and
the days and times they are to work.
 A contingency plan helps an operation remain ef ficient and
productive even during adverse conditions.
SECTION 3.3 SUMMARY
 Operations must be aware of the fluctuations in their sales
so as to have just the right amount of staff on hand to
handle customers efficiently.
 Four primary factors affect labor costs:

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Business volume
Employee turnover
Quality standards
Operational standards
 Scheduling depends greatly on how much revenue an
operation is bringing in and how much revenue an operation
expects to bring in.
QUALITY STANDARDS FOR
PURCHASING AND RECEIVING
 Purchasing: Prior to ordering, receiving, and storing
quality products, consider where the products were
grown or produced.
 Those with purchasing responsibility should seek
suppliers who are considered to be ethical, reliable,
and financially stable.
 Receiving: Once purchase orders have been made,
the next step is to receive the item in the most
efficient, safe, and effective way possible.
 Well-defined receiving procedures ensure that an
operation receives only the products that meet its
established standards for quality and quantity.
QUALIT Y STANDARDS
FOR STORING
 Storing: It’s critical that operations create quality standards
for proper storage.
 Monitor perishable food daily to preserve its quality.
 Some food items have manufacturer ’s recommendations for
storing the product.
 Store food with proper labels, and rotate all products in
storage following the FIFO (first in, first out) system.
 In addition to checking the food in the storage facilities, the
storage facilities themselves should be checked regularly to
make sure they are clean and functioning properly and
efficiently.
QUALIT Y STANDARDS FOR FOOD
PRODUCTION AND SERVICE
 Standard-portion sizes, standardized recipes, and standard portion costs are all food -production standards.
 It is important that managers ensure that standards are met
throughout the foodservice cycle.
 It is important that operations have quality assurance
measures in place right up to the service stage of the food flow process.
 The key to identifying deviations from standard recipes and
presentations is regular monitoring and the understanding
by the staff that it is the responsibility of everyone in the
establishment to ensure quality.
QUALIT Y STANDARDS
FOR INVENTORY
 Taking physical inventory means counting and
recording the number of each item in the storeroom.
 Closely monitor inventory to ensure that products are
ordered as they are needed.
 Carefully monitoring inventory also helps ensure that
no product goes to waste. Minimizing waste keeps
costs down and sales up.
 Determine actual food costs by opening and closing
inventories for a given period.
 Use the latest purchase price (FIFO), actual purchase
price, weighted average purchase price, or last in, first
out (LIFO) method to determine the value of the closing
inventory.
3.4
SECTION 3.4 SUMMARY
 It is important to take cost -control
measures in all aspects of the food flow process, from purchasing to
service.
 Standardizing food production helps
to ensure quality standards as well,
because each item is gauged on
one standard.
 Closely monitor inventory to ensure
that products will be ordered more
efficiently as they are needed.