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 pre-determined 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 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