Controlling Food Costs in Storage and Issuing 6 Controlling Foodservice Costs OH 6-1

Chapter Learning Objectives Describe food storage techniques used to control theft. Explain the first in, first out (FIFO) method of stock rotation. Describe the proper method of taking inventory. Describe the various methods of inventory pricing (valuation). Instructor’s Notes Indicate that these objectives (competencies) drive the information in the chapter and in this session.

Chapter Learning Objectives continued Calculate inventory turnover rate and inventory value. Compare physical inventory to perpetual inventory. Calculate a daily food cost. Instructor’s Notes Indicate that these objectives (competencies) drive the information in the chapter and in this session.

Storage Practices Impact Profits Spoilage of products Theft of products Instructor’s Notes Ask students about which of these two threats are usually the greatest in a restaurant. Explain that restaurant margins are small, and any food spoiled or stolen will require significant sales to generate the profits to replace the items. How much sales? Let’s see.

Sales Needed to Replace the Value of Spoiled or Stolen Items Assume 5% restaurant net profit Assume loss of two steaks @ $7.00 cost each Amount lost ÷ Net profit percentage = Additional sales required to replace lost revenue $14.00 ÷ 0.05 $280.00 Instructor’s Notes Indicate that this means several customers (or many more customers) must be served just to make up for the losses caused by spoilage and theft. Remind students that when food items are lost, due to spoilage or theft, they are not available to sell to customers and, therefore, do not generate revenue. The cost of purchasing these items has already been incurred by the restaurant. The cost of these lost items must be covered by profit from the sales of other food items.

Controlling Spoilage Storage loss from spoilage is usually caused by carelessness. Spoilage loss can be controlled. Spoilage is caused by Improper product rotation Time abuse Temperature abuse Instructor’s Notes Explain that inadequate sanitation practices are another leading cause of product loss due to spoilage.

Controlling Spoilage continued Excellent sanitation practices help minimize spoilage loss. Instructor’s Notes Ask about specific threats to product quality that are posed by poor sanitation practices. Examples include: insect and rodent infestation, debris in food, and product loss (drying out) due to unsanitary storage procedures.

First In First Out (FIFO) Use for refrigerated, frozen, and dry products Use oldest product first. Relies on The receiving clerk (to rotate stock properly) The person using the product (to choose properly) Must be continually monitored by management! Instructor’s Notes Ask students how they practice FIFO at home (i.e., when they buy products like milk or cheeses). Indicate that the LIFO (Last In First Out) storage method is rarely used in foodservice operations for product issuing.

Dry Storage Instructor’s Notes Ask students to identify at least five items that are stored at this temperature. Examples include canned goods, flour, sugar, coffee, and most oils and spices.

Fresh Fruits and Vegetables Instructor’s Notes Ask students to identify at least five items that are stored at this temperature. Examples include fresh parsley, spinach, mushrooms, strawberries, and cucumbers at refrigerator temperatures; onions, avocadoes, bananas, and some varieties of potatoes at dry storage temperatures of 50°F to 70°F (10°C to 21°C).

Eggs and Dairy Instructor’s Notes Ask students to identify at least five items that are stored at this temperature. Examples include eggs and egg products, yogurt, cheeses, sour cream, and butter.

Meat and Poultry Instructor’s Notes Ask students to identify at least five items that are stored at this temperature. Examples include ground beef, steaks, chicken breasts, ham and fresh pork ribs, and processed meats (cold cuts).

Fish Instructor’s Notes Ask students to identify at least five items that are stored at this temperature. Examples include fresh fish fillets, shrimp, oysters, scallops, and crab.

Proper Sanitation Is Key Store foods away from walls and at least six inches above the floor. Store dry goods in airtight containers. Walls and floors should be nonporous and easily cleaned. Instructor’s Notes Mention that shelving in walk-ins and reach-ins should be slatted (not solid) to allow for proper air circulation. Indicate that shelving material should be easily cleaned (most preferably stainless steel). Indicate that walk-ins and reach-ins should be wiped down every day. Mention that management must continually monitor for insect or rodent infestation.

Proper Sanitation Is Key continued Rotate stock to minimize spoilage. Organize products so they are easily found. Label shelves and sealed food containers. Include “use by” dates and name labels for all stored products. Instructor’s Notes Ask students to identify specific reasons why foods in their own refrigerators become spoiled. Answers will include poor wrapping or inadequate storage containers that allowed food to dry out, food “lost” in the refrigerator, food held too long, food spillage caused by other poorly stored foods, “use by” dates exceeded. Ask, “How might some of the suggestions on this slide prevent food spoilage?”

Controlling Theft Keep storage areas locked whenever practical. Establish a par stock per shift system for key ingredients. Issue secondary sets of keys on an as-needed basis only. Instructor’s Notes Explain that key menu ingredients can be issued, under the supervision of a manager, at the beginning of each shift. Ask, “Why are secondary sets of keys that open only specific storage areas preferable to ‘master’ keys?” Answer—Improved accountability and security; for example, the bartender should not have access to food storerooms, nor should the head cook have access to the liquor storeroom. Ask about other problems that result from theft. Answers include inaccurate sales/buying records, excessive product “outages,” unhappy guests (because desired products are unavailable), cost of additional deliveries needed to replace items, and sense by employees that management is not in control.

Sample Requisition Form Large foodservice operations may use a requisition system to help control theft-related losses. Instructor’s Notes Ask about the relationship between the size of an operation and the control systems used (i.e., do only large operations need controls?). The answer is “No.” All operations should utilize inventory controls appropriate for their size.

Inventory Types Physical inventory Perpetual inventory An actual count of inventory items Usually taken to obtain information for the income statement. Perpetual inventory A count based upon additions to (purchases) and subtractions from (requisitions) storage If records are properly kept, it is always up-to-date. Instructor’s Notes Explain to students that records in a perpetual inventory may well be up-to-date, but they will also be inaccurate if theft has occurred. Unless a physical inventory is taken periodically, theft can go undetected for long periods of time when using a perpetual inventory. Ask students how often inventory is taken in the restaurants where they work and what type of inventory system is used.

Common Inventory Breakdowns Meats Dairy Bakery Produce Frozen foods Canned foods Dry goods Instructor’s Notes Explain that inventory breakdowns (categories) allow managers to better control their food costs. Ask the following question, “What inventory categories would you recommend for each of the following: QSR Seafood restaurant Steakhouse Coffee shop and bakery Summarize that appropriate inventory breakdowns are based upon the specific key menu items served by the restaurant.

Common Inventory Breakdowns continued The type of restaurant you manage will help determine the specific inventory breakdowns best suited for your use. Instructor’s Notes Ask, “What inventory breakdowns would be useful for this type of establishment?”

Sample Inventory Sheet Instructor’s Notes Explain how managers use inventory sheets to value their inventories. Explain the concept of “extending” an inventory. Point out that spreadsheet programs make this task easy.

Inventory Valuation Methods FIFO First in, first out Inventory is valued at its most recent (latest) cost. Oldest product is used first. LIFO Last in, first out Inventory is valued at the cost of the oldest product. Newest product is used first. Instructor’s Notes Explain to students that the FIFO method values inventory at its replacement cost. Ask, “Why do you think the FIFO inventory system is most used in foodservice operations?” Answer—the use of the oldest product first prevents loss of product due to spoilage.

Inventory Valuation Methods continued Averaged price method Inventory is valued at a composite of all prices paid for the item. Actual price method Each inventory item is valued at its original purchase price. Instructor’s Notes Point out that the averaged price method is rarely used by foodservice operations. Point out that operations that use a POS system frequently use the actual price method. ASK, “What might be an advantage of using the actual price method of valuing inventory versus using one of the other methods?” Possible answers—the actual value of the inventory is calculated rather than an estimated value; if using a POS system, the inventory can be calculated without too much manual effort.

Inventory and Cost of Food Sold Inventory value is a critical component of the cost of food sold formula. Opening inventory + Purchases Total food available – Closing inventory Cost of food sold Instructor’s Notes Explain that opening inventory is also known as “beginning inventory.” Explain that closing inventory is also known as “ending inventory.” The ending inventory of one period becomes the opening inventory of the next period. Point out that, when opening and closing inventories are equal, purchases equals cost of food sold.

Inventory Turnover Calculation Step 1 – Calculate average inventory. Step 2 – Calculate the inventory turnover. ( Opening inventory + Closing inventory ) ÷ 2 = Average inventory Instructor’s Notes Explain that inventory turnover shows how quickly an inventory is being used. Inventory turnover is the number of times (in a specific accounting period) that the average dollar value (average inventory) has been “turned over.” Too low a number may mean the inventory is too large, while too high a number may mean there is not enough product in inventory, resulting is product shortages. Explain that this does not mean each “item” in the inventory has been replaced. Point out to students that foodservice inventories normally turn over one to two times per week. Cost of food sold ÷ Average inventory = Inventory turnover

Daily Food Cost Percent Calculation Using Perpetual Inventory Step 1 – Compute daily food cost. Step 2 – Compute food cost percentage. Requisitions + Transfers in – Transfers out Daily food cost Instructor’s Notes Explain that this is an estimate that is as accurate as the perpetual inventory system users make it. Ask for reasons why there can be variation between a physical count inventory and the value of the perpetual inventory. Possible answers may include theft, spoilage, or faulty record-keeping. Daily food cost ÷ Daily unit sales = Daily food cost percentage

How Would You Answer the Following Questions? The greatest cause of inventory loss is (theft/poor buying practices). The most common product storage method used in foodservice is (FIFO/LIFO). The type of inventory that is based upon a theoretical count is called a Breakdown inventory Requisition inventory Physical inventory Perpetual inventory Daily food cost divided by (unit sales/transfers out of inventory) equals daily food cost percentage. Instructor’s Notes Answers Theft FIFO (first in, first out) D Unit sales Note: indicate that the last part of this discussion will provide a review of definitions for the key terms used in the chapter.

Key Term Review Actual price method Averaged price method Daily food cost Extending FIFO method Inventory Inventory breakdown Inventory turnover Issuing Instructor’s Notes Actual price method—inventory valuation method that uses the actual price paid for the product to compute closing inventory values Averaged price method—inventory valuation method that uses a composite of all prices paid for an item during the inventory period to value the closing inventory Daily food cost—estimate of food cost based upon requisitions, transfers, and sales Extending—multiplying the number of units of a stored item by that item’s unit price FIFO method—first in, first out; inventory valuation method that uses the latest price paid for an item to value inventory and that requires older products be utilized before newer products Inventory—itemized list of goods and products, their on-hand quantity, and their total dollar value Inventory breakdown—method of categorizing an operation’s food and supplies Inventory turnover—measure of how frequently the total value of stored items has been turned (replaced) during a specific accounting period Issuing—removing food or beverage products from storage

Key Term Review continued Latest price method LIFO method Padding Perpetual Inventory Physical inventory Requisitions Time and temperature control Transfer Instructor’s Notes Latest price method—also known as FIFO; inventory valuation method that uses the latest price paid for a product to value inventory LIFO method—last in, first out; inventory valuation method that uses the price paid for the oldest product to value inventory and that requires the newest products to be utilized before older products Padding—inappropriate activity of adding a dollar value for nonexistent inventory items to the dollar value of total inventory Perpetual inventory—theoretical inventory count based on products received and issued Physical inventory—actual physical count and valuation of all items on hand Requisitions—forms that contain specifics about items to be issued from storage areas Time and temperature control—policies and procedures that monitor the time and temperatures of food that is held before service to guests Transfer—process of moving products and their cost from one foodservice unit or department to another

Chapter Learning Objectives— What Did You Learn? Describe food storage techniques used to control theft. Explain the FIFO method of stock rotation. Describe the proper method of taking inventory. Describe the various methods of inventory pricing (valuation). Instructor’s Notes Ask students to do a personal assessment of the extent to which they know the information or can perform the activity noted in each objective.

Chapter Learning Objectives— What Did You Learn? continued Calculate inventory turnover rate and inventory value. Compare physical inventory to perpetual inventory. Calculate a daily food cost. Instructor’s Notes Ask students to do a personal assessment of the extent to which they know the information or can perform the activity noted in each objective.