What is Cost Control???

Minimizing costs the company must expend without sacrificing the end product (service/food) that the customer receives.

Revenue and ExpenseRevenue and ExpenseRevenue - Expenses = Profit

Revenue – Desired Profit = Ideal Expense

Expense Revenue = Expense %

Revenue (100%)- Food and Beverage Cost %- Labor Cost %- Other Expense %= Profit %

A budget is simply a forecast or estimate of projected revenue, expense, and profit.

The 28-day-period approach to budgeting divides a year into 13 equal periods of 28 days each. This helps the manager compare performance from one period to the next without having to compensate for “extra” days in any one period.

If significant variations with planned results from a budget occur, management must:

1. Define the problem

2. Determine the cause

3. Take corrective action

Advantages to Precise Sales Forecasts

1) Revenue Estimates

2) Expense $ Estimates

3) Scheduling Workers

4) Scheduling Food and Service Production needs

5) Proper purchasing of amounts of food for immediate use.

6) Increased operational efficiency – lower pricing, increased benefits for workers.

7) Increased dollars for growth

8) Increased profit levels and stockholder value

Sales ForecastsSales Forecasts

Sales This Year – Sales Last Year = Variance

Percentage variance indicates the percentage change in sales from one time period to the next. 

Sales This Year –Sales Last Year

Sales Last Year = Percentage Variance

or

Variance

Sales Last Year = Percentage Variance

 

Revenue forecast is calculated using the following formula: 

Forecast =Sales Last Year + (Sales Last Year X %Increase) 

 The guest count forecast is determined by multiplying guest count last year by the % increase estimate, and then adding the guest count last year.

 Guest Count Last Year + (Guest Count Last Year x % Increase Estimate) = Guest Count Forecast

Or

Guests Last Year x (1.00 + % Increase Estimate) = Guest Count Forecast

ForecastingForecasting

Cost of Food & BevCost of Food & Bev•Once you know the average number of people selecting a given menu item, and the total number of guests who made the selections, you can compute the popularity index, which is defined as the percentage of total guests choosing a given menu item from a list of alternatives.

Popularity Index =Total Number of a Specific Menu Item Sold

Total Number of All Menu Items Sold

 

The basic formula for individual menu item forecasting, based on an item’s individual sales history, is as follows:

 

Number of Guests Expected x Item Popularity Index

= Predicted Number of That Item to Be Sold

Standardized RecipesThe standardized recipe controls both the quantity and quality of what the kitchen will produce. It consists of the procedures to be used in preparing and serving each of your menu items. The standardized recipe is the key to menu item consistency, and ultimately, operational success.

Standardized RecipesThe standardized recipe controls both the quantity and quality of what the kitchen will produce. It consists of the procedures to be used in preparing and serving each of your menu items. The standardized recipe is the key to menu item consistency, and ultimately, operational success.

 In general, standardized recipes contain the following information:

1. Item name

2. Total yield (number of servings)

3. Portion size

4. Ingredient list

5. Preparation/method section

6. Cooking time and temperature

7. Special instructions, if necessary

8. Recipe cost (optional)

Converting Recipes – Factor or PercentageConverting Recipes – Factor or Percentage

Yield Desired

Current Yield = Conversion Factor

Ingredient Weight / Total Recipe Weight = % of Total

then

% of Total x Total Amount Required

= New Recipe Amount

Waste, Yield AP & EPWaste, Yield AP & EPYield % = 1.00 - Waste %

AP – Waste (EP)

AP = Yield %

EP Required

Yield % = AP Required

EP Required =AP Required x Yield %

Calculating Food CostCalculating Food CostDetermining Actual Food Expense

Cost of food sold is the dollar amount of all food actually sold, thrown away, wasted or stolen. It is computed as follows:

Beginning Inventory

  PLUS

  Purchases

= Goods Available for Sale

  MINUS

  Ending Inventory

= Cost of Food Consumed

  MINUS

  Employee Meals

  = Cost of Food Sold

Six Column ReportingSix Column ReportingSix Column Food Cost % Estimate

1. Purchases Today

Sales Today = Cost % Today

2. Purchases to Date

Sales to Date = Cost % to DateSales Purchases Cost &

Weekday Today To Date Today To Date Today To DateMonday $850.40 $850.40 $1,106.20 $1,106.20 130.08% 130.08%Tuesday $920.63 $1,771.03 $841.40 $1,947.60 91.39% 109.97%Wednesday $1,185.00 $2,956.03 $519.60 $2,467.20 43.85% 83.46%Thursday $971.20 $3,927.23 $488.50 $2,955.70 50.30% 75.26%Friday $1,947.58 $5,874.81 $792.30 $3,748.00 40.68% 63.80%Saturday $2,006.41 $7,881.22 $286.20 $4,034.20 14.26% 51.19%Sunday $2,404.20 $10,285.42 $0.00 $4,034.20 0.00% 39.22%

Calculating Beverage CostCalculating Beverage CostBeginning Inventory

  PLUS

  Purchases

= Goods Available for Sale

  Less

  Ending Inventory

  Less

  Transfers from Bar

  Plus

  Transfers to Bar

  = Cost of Beverage Sold

Calculating Sales Mix & TermsCalculating Sales Mix & Terms

Item Dollar Sales

Total Beverage Sales = Item % of Total Beverage Sales

Two-key system

Oxidation

Broken case

Empty for full system of managment

F&B Production F&B Production

Necessary Components of F&B Production Planning:1) Maintain Sales Histories2) Forecast Future Sales Histories3) Purchase and store needed F&B supplies4) Plan daily production schedules5) Issue needed products to production areas6) Manage the food and beverage production process

Controlling Product IssuesControlling Product IssuesIssues Today

Sales Today= Beverage/Food Cost Estimate Today

The six-column form requires only that the manager divide today’s issues by today’s sales to arrive at the today estimate as follows

Beverage CostIssues Sales Estimate

Date Today To Date Today To Date Today To Date1-Jan 945 945 1450.22 1450.22 65.16% 65.16%2-Jan 785 1730 1688.4 3138.62 46.49% 55.12%3-Jan 816.5 2546.5 2003.45 5142.07 40.75% 49.52%4-Jan 975.4 3521.9 1920.41 7062.48 50.79% 49.87%5-Jan 1595 5116.9 5546.5 12608.98 28.76% 40.58%6-Jan 1100.2 6217.1 5921.27 18530.25 18.58% 33.55%7-Jan 18.4 6235.5 495.2 19025.45 3.72% 32.77%

Total 6235.5 19025.45 32.77%

Methods of Inventory ControlMethods of Inventory Control A physical inventory is one in which an actual,

physical count and valuation of all inventory on hand is taken at the beginning and close of each accounting period.

A perpetual inventory system is one in which additions to and deletions from total inventory are recorded as they occur.

The ABC system attempts to combine both the physical and perpetual inventory systems. It separates inventory items into three main categories

ABC Inventory SystemABC Inventory Systemo Category A items are those that require tight control and the

most accurate record keeping. Those are typically high-value items, which can make up 70% to 80% of the total inventory value.

o Category B items are those that make up 10% to 15% of the inventory value and require only routine control and record keeping.

o Category C items make up only 5% to 10% of the inventory value. These items require only the simplest of inventory control systems

Inventory Control FormulasInventory Control FormulasCost in Product CategoryTotal Cost in All Categories = Proportion of Total Product Cost

Actual Product Cost Attainable Product Cost = Operational Efficiency Ratio

Cost as per Standardized RecipesTotal Sales =Attainable Product Cost %

Principles of Cost PercentagesPrinciples of Cost Percentages The food cost percentage equation is extremely

interesting. In its simplest form, it can be represented as:

whereA = Cost of Goods SoldB = SalesC = Cost Percentage

AB = C

If costs can be kept constant but sales increase, the cost percentage goes down.

If costs remain constant but sales decline, cost percentage increases.

If costs go up at the same rate sales go up, your cost percentage will remain unchanged.

If costs can be reduced but sales remain constant, the cost percentage goes down.

If costs increase with no increase in sales, the cost percentage will go up.

If costs can be kept constant but sales increase, the cost percentage goes down.

If costs remain constant but sales decline, cost percentage increases.

If costs go up at the same rate sales go up, your cost percentage will remain unchanged.

If costs can be reduced but sales remain constant, the cost percentage goes down.

If costs increase with no increase in sales, the cost percentage will go up.

Managing F&B PricingManaging F&B Pricing

Standard Menu Daily Menu Cycle Menu Value Pricing Bundling

Factors Influencing Menu PricingFactors Influencing Menu Pricing1. Local competition2. Service levels3. Guest type4. Product quality5. Portion size6. Ambience7. Meal period8. Location9. Sales mix

Selling Price DeterminationSelling Price Determination

Cost of a Specific Food Item SoldDesired Food Cost % of That Item

= Selling Price of That Item

Multiplier MethodMultiplier Method

1.00Desired Product Cost % = Pricing Factor

Pricing Factor x Product Cost = Menu Price

Contribution Margin MethodContribution Margin Method

Selling Price – Product Cost = Contribution Margin

Product Cost + Contribution Margin Desired = Selling Price

Pricing BuffetsPricing BuffetsTotal Buffet Product Cost Guests Served = Buffet Product Cost per

Guest

The secret to keeping selling price low for a salad bar or buffet is to apply the ABC method. A items should comprise no more than 20% of the total product available; B items, no more than 30%; and C items, 50%.

Labor CostLabor Cost Labor Expense includes salaries and wages, but it consists of

other labor-related costs as well. Payroll refers to the gross pay received by an employee in

exchange for his or her work. A salaried employee receives the same income per week or

month regardless of the number of hours worked. Minimum staff is used to designate the least number of

employees, or payroll dollars, required to operate a facility or department within the facility.

Fixed Payroll refers to the amount an operation pays in salaries.

Variable Payroll consists of those dollars paid to hourly employees. Sometimes employees have both a fixed and variable element to their pay.

Productivity StandardsProductivity StandardsOutputInput =Productivity Ratio

Cost of LaborTotal Sales =Labor Cost %

Total SalesLabor Hours Used = Sales per Labor Hour

Cost of LaborGuests Served = Labor Dollars per Guest Served

Productivity and SchedulingProductivity and Scheduling

hour 7.5 Productivity = covers = 60 = 0.125

Productivity X Forecast Cover = Scheduled Hours

0.125 x 3000 Covers = 375 hours

Factors Influencing ProductivityFactors Influencing Productivity

10 Key Factors AffectingEmployee Productivity

1. Employee Selection 2. Training 3. Supervision 4. Scheduling 5. Breaks6. Morale7. Menu8. Convenience vs. Scratch Preparation9. Equipment10. Service Level Desired

A job specification is a listing of the personal characteristics needed to perform the tasks contained in a particular job description.

A job description is a listing of the tasks that must be accomplished by the employee hired to fill a particular position.

Task training is the training undertaken to ensure an employee has the skills to meet productivity goals.

Employee TurnoverEmployee TurnoverEmployee Turnover Rate = # of Employees Separated

# of Employees in Workforce

A voluntary separation is one in which the employee made the decision to leave the organization.An involuntary separation is one in which management has

caused the employee to separate from the organization.

Employee Turnover Rate =

Number of Employees SeparatedNumber of Employees in Workforce

Managing Other ExpensesManaging Other Expenses Other expenses are those items that are neither

food, beverage, nor labor.

While there are many ways in which to consider other expenses, two views of these costs are particularly useful for the foodservice manager. They are:

1.Fixed, variable, or mixed

2.Controllable or non-controllable

The following shows how fixed, variable, and mixed expenses behave as sales volume increases:

Expense

As a Percentage of Sales

Total Dollars

Fixed Expense

Decreases Remains the Same

Variable Expense

Remains the Same Increases

Mixed Expense

Decreases Increases

Financial AnalysisFinancial Analysis

To ensure that this financial information is presented in a way that is both useful and consistent, the uniform systems of accounts have been established for many areas of the hospitality industry.

The USAR can better be understood by dividing it into three sections: gross profit, operating expenses, and non-operating expenses.

These three sections are arranged on the income statement from most controllable to least controllable by the foodservice manager.

The gross profit section consists of food and beverage sales and costs that can and should be controlled by the manager on a daily basis.

The operating expenses section is also under the control of the manager but more so on a weekly or monthly basis (with the exception of wages which you can control daily).

Nonoperating expenses section is the least controllable by the foodservice manager. For example, interest paid to creditors for short-term or long-term debt is due regardless of the ability of the manager to control operations.

The income statement is an aggregate statement. This means that all details associated with the sales, cost, and profits of the foodservice establishment are summarized on the P&L statement. Although this summary gives the manager a one-shot look at the performance of the operation, the details are not included directly on the statement.

Analysis of Sales/Volume

Overall sales increases or decreases can be computed using the following steps:

1.Determine sales for this accounting period.

2.Determine the difference between this period’s sales minus last period’s sales.

3.Divide the difference in #2 by last period's sales to determine percentage variance.

There are several ways a foodservice operation experiences total sales (dollar) volume increases. These are:

1. Serve the same number of guests at a higher check average.

2. Serve more guests at the same check average.

3. Serve more guests at a higher check average.

The procedure to adjust sales variance for known menu price increases is as follows:

Step 1. Increase prior period sales (last year) by amount of the price increase. Ex: if prices were increased 5% on all menu items, increase the prior period sales by 5%.

Step 2. Subtract the result in Step 1 from this period's sales.

Step 3. Divide the difference in Step 2 by the value of Step 1.

The procedure to adjust sales variance for known menu price increases is as follows:

Step 1. Increase prior period sales (last year) by amount of the price increase. Ex: if prices were increased 5% on all menu items, increase the prior period sales by 5%.

Step 2. Subtract the result in Step 1 from this period's sales.

Step 3. Divide the difference in Step 2 by the value of Step 1.

Analysis of Food Cost & InventoryAnalysis of Food Cost & InventoryA food cost percentage can be computed

for each food sub-category. For instance, the cost percentage for the category Meats and Seafood would be computed as follows:

Meats and Seafood Cost

Total Food Sales = Meats and Seafood Cost %

Inventory turnover refers to the number of times the total value of inventory has been purchased and replaced in an accounting period.

Cost of Food Consumed

Average Inventory Value= Food Inventory Turnover

The higher the Food Inventory Turnover number, the greater the frequency of orders and typically the smaller the inventory size.

Analysis of ProfitAnalysis of Profit

Net Income This Period – Net Income Last Period

Net Income Last Period

= Profit Variance %

Profit Planning StrategiesProfit Planning Strategies

Three of the most popular systems of menu analysis are:

Variables Considered Analysis Method Overall Goal

Food Cost % Food Cost % Matrix Minimize overall FC%Popularity

Contribution Margin Contribution Margin Matrix Maximize CMPopularity

Goal Value Analysis Contribution Margin % Algebraic Equation Achieving certainPopularity Profit Percentage GoalsSelling PriceVariable Cost %Food Cost %

A matrix allows menu items to be placed into categories based on whether they are above or below menu item averages such as food cost %, popularity, and contribution margin.

When analyzing a menu using the Food Cost Percentage Method, you are seeking menu items that have the effect of minimizing your overall food cost percentage.

The characteristics of the menu items that fall into each of the four matrix squares are unique and thus should be marketed differently

1 2

3 4

FC%

Popularity %

1 – High FC%, Low Popularity %

2 – High FC%, High Popularity %

3 – Low FC%, Low Popularity %

4 – Low FC%, High Popularity %

Each of the menu items that fall in the squares requires a special marketing strategy, depending on its square location.

1 2

3 4

CM$

Popularity %

1 – High CM, Low Popularity %

2 – High CM, High Popularity %

3 – Low CM, Low Popularity %

4 – Low CM, High Popularity %

The selection of either food cost percentage or contribution margin as a menu analysis technique is really an attempt by the foodservice operator to answer the following questions:

1. Are my menu items priced correctly?

2. Are the individual menu items selling well enough to warrant keeping them on the menu?

3. Is the overall profit margin on my menu items satisfactory?

The goal value formula is as follows:A x B x C x D = Goal ValueA = 1.00 - Food Cost % (Contribution Margin %)

B = Item Popularity

C = Selling Price

D = 1.00 - (Variable Cost % + Food Cost %)

ItemFood Cost %

(in decimal form)Number

SoldSelling Price

Variable Cost %(in decimal form)

Fajita Plate 0.38 147 $12.95 0.28Enchilada Dinner 0.35 200 9.95 0.28Menudo 0.25 82 6.95 0.28Mexican Salad 0.30 117 7.95 0.28Chalupa Dinner 0.28 125 8.95 0.28Burrito Dinner 0.33 168 9.95 0.28Taco Dinner 0.26 225 5.95 0.28Overall Menu (Goal Value) 0.32 152 8.95 0.28

Average Goal Value = 0.68 x 152 x 8.95 x 0.40 = 370

ItemFood Cost %

(in decimal form)Number

SoldSelling Price

Variable Cost %(in decimal form) Goal Value

Fajita Plate 0.62 147 $12.95 0.40 472.1Enchilada Dinner 0.65 200 $9.95 0.40 517.4Menudo 0.75 82 $6.95 0.40 171.0Mexican Salad 0.70 117 $7.95 0.40 260.4Chalupa Dinner 0.72 125 $8.95 0.40 322.2Burrito Dinner 0.67 168 $9.95 0.40 448.0Taco Dinner 0.74 225 $5.95 0.40 396.3Average 0.68 152 8.95$ 0.4 370.0

The computed goal value carries no unit designation; that is, it is neither a percent nor a dollar figure because it is really a numerical target or score. Anything scoring above the average would be considered a good item, anything below would be considered an item that needs some re-thinking.

Contribution margin for the overall operation is defined as the dollar amount that contributes to covering fixed costs and providings for a profit. This is different than the C.M. for a menu item in that it takes into account both important variable costs – food and labor.

Total Sales - Variable Costs = Contribution MarginC.M. % = Contribution Margin $/ Total Sales $C.M. per Guest = Contribution Margin $ / Guests

To determine the dollar sales required to break even, use the following formula:

Fixed Costs

Contribution Margin % = Break-Even Point in Sales

In terms of the number of guests that must be served in order to break even, use the following formula:

Fixed Costs

Contribution Margin per Unit (Guest)

= Break-Even Point in Guests Served

Minimum Sales Point (MSP) is the dollar sales volume required to justify staying open for a given period of time.

The information necessary to compute MSP is as follows:

1.   Food cost %

2.   Minimum payroll cost for the time period

3. Variable cost %

Fixed costs are eliminated from the calculation because even if volume of sales equals zero, fixed costs still exist and must be paid.

Minimum Operating Cost = FC% +VC%

MSP = Minimum Labor Cost

1 – Minimum Operating Cost

Or it could be written as:

MSP = Minimum Labor Cost

1 – (FC% + VC%)

BudgetingBudgeting

Developing the Budget  To establish any type of budget, you need to have the

following information available:

  1. Prior period operating results

2. Assumptions of next period operations

3. Goals

4. Monitoring policies annual budget achievement budget

To determine a food budget, compute the estimated food cost as follows:

1. Last Year’s Average Food Cost per Meal = Last Year’s Cost of Food / Total Meals Served

2. Last Year’s Food Cost per Meal + % Estimated Increase in

Food Costs = This Year’s Food Cost per Meal

3. This Year’s Food Cost Per Meal x Number of Meals to Be Served This Year = Estimated Cost of Food This Year

 To determine a labor budget, compute the estimated labor cost as follows:1. Last Year’s Labor Cost per Meal

= Last Year’s Cost of Labor / Total Meals Served

2. Last Year’s Labor Cost per Meal + % Estimated Increase in

Labor Cost = This Year’s Labor Cost per Meal

3. This Year’s Labor Cost per Meal x Number of Meals to Be Served This Year = Estimated Cost of Labor This Year

Yardstick MethodYardstick Method Some operators elect to utilize the yardstick

method of calculating expense standards so determinations can be made as to whether variations in expenses are due to changes in sales volume, or other reasons such as waste or theft. The yardstick method helps you identify specific problems quickly and accurately.