1. Cost Control Measures for Food Service Operations
Chapter 9

2. 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

3. 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

4. Objectives (cont’d.) Describe how to make payroll calculations
Perform break-even analysis and illustrate the method used for graphing

5. 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

6. 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”

7. 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

8. The Importance of Quality Standards
Quality can be measured using pre-determined standards
Measurement should be made each time a meal is served

9. Evaluating Performance Using Financial Statements
Four primary financial statements used to manage and control finances
Income statements
Balance sheets
Cash flow statements
Operating budgets

10. 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

11. 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

12. 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

13. 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

14. 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

15. Managing by Operating Budgets (cont’d.)
Prime costs are food and labor expenses
Most restaurants like to keep their prime costs between percent of sales
Fixed costs (overhead)
Remain the same no matter how many customers are served

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. Calculating Inventory Turnover
The rate of inventory turnover is a sign of efficiency and effective purchasing
Relevant equations:

23. 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

24. 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

25. 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

26. 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

27. 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

28. 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

29. Calculating the Break-Even Point
Volume of sales needed to cover the total costs
9.13 Break-even graph

30. 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

31. 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