1. Principles of Control

2. Section Objectives
Upon completing this section, you should be able to:
Explore basic food cost-control principles

3. Important Concepts and Percentages
Sales (Revenue)
Defined as revenue resulting from the exchange of products and services for value
In most operations, total revenue is broken into two components: food and beverage
You can increase revenue by:
Increasing the number of guests served
Increasing the amount that guests spend
Employing a combination of the two

4. Food and Beverage Costs
Food and beverage costs are considered direct variable costs
They are closely related to business volume
As sales increase, food and beverage costs increase and vice versa

5. Food Cost Percentage
(Food cost ÷ Food sales) × 100

6. Beverage Cost Percentage
(Beverage cost ÷ Beverage sales) × 100

7. Labor Cost Labor (payroll) cost is considered a semi-variable cost
A portion of the labor cost is related to business volume, while the other portion is not
What is the difference?

8. Labor Cost Percentage
(Labor cost ÷ Total revenue) × 100

9. Prime Cost
Prime cost is a term used to refer to the cost of materials and labor—food, beverage, and payroll
Taken together, these represent the largest portion of total costs
Prime cost should not be more than 60% to 70% if you want to meet overhead and also make a profit

10. Why is it Important to Separate Costs?

11. Actual vs. Standard Food Cost
Actual food cost
Represents what the food cost is for a specified period
Reported on income statement/P&L
Standard food cost
Represents what the food cost should be for a specified period

12. Actual and Standard Food Cost Discrepancies
Discrepancies between standard and actual food costs are due to the following:
Waste
Spoilage
Pilferage/Theft
Yield
Portion Control

13. Actual Food Cost Monthly Inventory
Physical inventory is taken at the end of an accounting period, after close of business
Requires counting and recording number of units
on hand
Usually requires two people: one to count, one to record
Once the total value of inventory is calculated, known as closing inventory for the period, it automatically becomes the opening inventory for the next period

14. An Example

15. Valuing Physical Inventory
There are at least 5 methods to assign value to the units of product in a physical inventory:
Actual purchase price method
First-in, first-out method (FIFO)
Weighted average purchase price method
Latest purchase price method
Last-in, first-out method (LIFO)

16. Sample Inventory Records
Used for the following examples:
Opening inventory = 10 $2.35 = $23.50
Purchased on the 7th = 24 $2.50 = $60.00
Purchased on the 15th = 24 $2.60 = $62.40
Purchased on the 26th = 12 $2.30 = $27.60
20 cans remain in ending inventory

17. Actual Purchase Price Method
Most accurate method
Can be done only if prices are marked on each of the cases
Assuming that 20 cans remain in inventory, the value would be: @ $2.35 = $ @ $2.30 = $ @ $2.60 = $10.40
20 = $47.40

18. First-In, First-Out Method (FIFO)
Assuming stock was properly rotated, those items remaining on the shelf are the most recently purchased
12 cans were purchased on the 26th, while 24 cans were purchased on the 15th
$ = $27.60
$ = $20.80
20 = $48.40

19. Weighted Average Purchase Price Method
Reasonable alternative when large amounts of stock in inventory
Determined by multiplying number of units purchased in a month by their specific purchase prices, adding these values to determine a grand total, then dividing by total number of units
70 units total $ = $ a unit
$2.48 = $49.60

20. Latest Purchase Price Method (Most Recent Price)
Widely used approach
Cost of replacement at the present moment would likely be the latest price at which the items were purchased
Last purchase price = $ a unit
$2.30 = $46 .00

21. Last-In, First-Out Method (Earliest Prices)
If this method were used: $2.35 = $23.50 $2.50 = $ (Total) = $48.50

22. Comparison of Methods

23. Monthly Food Cost Determination
The cost of food issued for any month is determined by the following formula:
Opening inventory
+ Purchases
= Total available
– Closing inventory
= Cost of food issued

24. Example Opening inventory $2,000 + Purchases _____________ $6,000
= Total available $8,000
– Closing inventory________ $3,000
= Cost of food issued $5,000

25. Adjustments to Cost of Food Issued
Intraunit and interunit transfers
Grease sales
Steward sales
Gratis to bar
Promotion expense

26. Determining Cost of Food Consumed
Opening inventory
+ Purchases _
= Total available for sale
– Closing inventory _
= Cost of food issued
+ Cooking liquor
+ Transfers from other units
– Food to bar (directs)
– Transfers to other units
– Grease sales
– Steward sales
– Gratis to bars
– Promotion expense _
= Cost of food consumed

27. Determining the Cost of Employee Meals
There are 4 techniques for determining the cost of employee meals
Cost of separate issues
Meals provided to employees
Prescribed amount per meal per employee
Chef is allotted a fixed amount of money per employee per meal
For example: $2.50 per employee for lunch, $3.00 for dinner

28. Determining the Cost of Employee Meals—continued
Prescribed amount per period
Amount credited to food cost per period
For example: Employees have $1,000 monthly for meals
Sales value multiplied by cost percentage
Employees are asked to record what they eat per meal
Checks are totaled at the end of the period, and the grand total is then multiplied by the average food cost percentage

29. Determining Cost of Food Sold
To determine the cost of food sold, one must subtract employee meals from the cost of food consumed
Cost of food consumed
– Cost of employees’ meals
= Cost of food sold

30. Standard Food Cost Begins with portions
Portions of a given menu item should be identical to one another in 4 ways:
Ingredients
Quantity
Proportions of ingredients
Production method
To guarantee this, the following standards must be developed:
Standard portion size
Standard recipe
Standard portion cost

31. Standard Portion Size
Quantity of any item to be served each time that item is ordered
Every item on a menu can be quantified in 1 of 3 ways:
By weight
By volume
By count

32. Results of Not Following Portion Sizes
Customers compare their food with that of others and notice a difference
Customers might complain, never return, or both
Servers argue with customers over portion sizes

33. Standard Recipes
A recipe is a list of the ingredients and the quantities of those ingredients needed to produce a particular item, along with a procedure or method to follow
A standard recipe is the recipe that has been designated the correct one to use in a given establishment
Standard recipes help ensure that the quality of any item will be the same each time the item is produced

34. Standard Recipes—continued
Stored in computers and can be changed frequently
In some restaurants, pictures and drawings are placed with the recipe
If not followed, costs will be different each time an item is prepared

35. Standard Portion Cost To calculate standard portion cost:
Determine the individual cost for each ingredient
Add up the cost of each ingredient, resulting in the cost of making the recipe
Divide the cost by the number of portions the recipe yields

36. Calculating Standard Portion Cost
Two methods for calculating standard portion cost:
Formula
Recipe detail and cost card

37. Standard Portion Cost Formula
Simplest (and most widely used) way to calculate standard portion cost
Standard portion cost = ÷
Number of portions per unit
Purchase price per unit

38. Recipe Detail and Cost Card
Basically, a recipe card with costs
If applicable, it is possible to determine the standard cost of a single portion by dividing the number of portions produced into the total cost of preparing the recipe

39. Recipe Detail Cost Card #1

40. Recipe Detail Cost Card #2

41. Portion Food Cost
Portion food cost = Total food cost ÷ Number of servings
Example: $ ÷ 50 = $2.19

42. Pricing Products Properly
Price of an item multiplied by its sales mix is the restaurant’s revenue attributable to that item
In other words, the number of customers multiplied by the average check equals total sales

43. Menu Pricing
There are a number of methods for establishing menu prices
Nonstructured pricing method
Factor pricing method or percentage markup system
Prime cost pricing method
Actual cost pricing method
Gross profit or gross markup system
Food and labor percentage markup system
Forced food cost pricing method
Contribution margin approach to menu pricing