OH 2-1

Agenda

•Classify the cost activity

•Key Term review

•Chapter 2

OH 2-2

Classify The Cost

Controllable

Non-Controllable

Variable

Fixed

Semi-Variable

OH 2-3

Key Term Review

Control

Controllable cost

Corrective action

Cost of food sold

Fixed cost

Gross profit

Income statement

Labor expense

Line item review

Loss

OH 2-4

Key Term Review continued

Noncontrollable cost

Prime cost

Profit

Sales

Semivariable cost

Standard

Total expense

Variable cost

OH 2-5

A Closer Look at Food Cost

Controlling Foodservice Costs

2OH 2-5

OH 2-6

Chapter Learning Objectives

Calculate food cost.

Calculate food cost percentage.

Explain the effect that changes in food cost and sales have on food cost percentage.

OH 2-7

Food Cost

The actual dollar value of the food used in a foodservice operation

Often referred to as “cost of food sold”

OH 2-8

Food Cost continued

Includes the cost of food sold to customers

Also includes the value of food that is given away, wasted, or even stolen

OH 2-9

Theft Increases Food Cost

Employee theft can be difficult to prevent, but its control is vitally important to ensuring profitability.

OH 2-10

Reductions from Cost of Food

Employee meals The actual cost of the food served to

employees is subtracted from cost of food.

Complimentary (“Comp”) meals The actual cost of the food that is given away

(not its selling price) is subtracted from cost of food.

OH 2-11

Reductions from Cost of Food continued

Grease sales Payments from sales of used oil or grease, bones,

and fat scraps are subtracted from food cost.

Transfers to other units If an operation has more than one unit, transfers TO

another unit are subtracted from food cost.

Transfers INTO a unit are added to its food cost.

OH 2-12

Bar Transfers

Food to Bar Transfers The value of items transferred to the bar for making

drinks is subtracted from food cost.

Typical products transferred to the bar include nonalcoholic beverages, fruits, vegetables, spices, juices, and dairy products.

OH 2-13

Bar Transfers continued

In a busy bar, the amount of food that is transferred from the kitchen to the bar can be significant.

OH 2-14

The Food Cost Formula

Opening inventory

+ Purchases

Total food available

– Closing inventory

Cost of food sold

OH 2-15

The Food Cost Formula in Use

Opening inventory $5,000

+ Purchases + $30,000

Total food available $35,000

– Closing inventory – $4,000

Cost of food sold $31,000

OH 2-16

Physical Inventory

To accurately calculate cost of food sold, managers must take a physical inventory.

OH 2-17

Food Cost Formula Definitions

Opening inventory Dollar value of the physical inventory at the beginning of an

accounting period

Purchases Dollar value of all food purchased (less any appropriate

subtractions) during the accounting period

Closing inventory Dollar value of the physical inventory counted at end of the

accounting period

OH 2-18

The Food Cost Percentage Formula

Food cost ÷ Sales = Food cost percentage

OH 2-19

The Food Cost Percentage Formula in Use

Food cost ÷ Sales = Food cost percentage

$7,000 ÷ $25,000 = 0.28 or 28.0%

OH 2-20

Two Ways to Make a Decimal Conversion

Method One

Move the decimal two places to the right.

.35 = 35%

Method Two

Multiply by 100.

0.35 x 100 = 35%

OH 2-21

Food Cost Percentage

Allows managers in one restaurant to compare their food usage efficiency to that of previous time periods

Can be used to compare the food usage efficiency of one restaurant to another

Allows comparison to the restaurant’s budgeted food cost percentage or other standard

OH 2-22

Industry Standards Restaurants typically run in the low to mid 30%

Italian - ~ 28% Multi Unit - ~ 32% American/Regional - ~35% Steak - ~ 40%

Fine Dining Labor Food Cost

Vs.

Fast Food Food Cost Labor

OH 2-23

Food Cost Percentage continued

Is the proportion of the restaurant’s sales that is used to pay for food

Means “out of each dollar” A 35% food cost percentage means that “out of

each dollar” of sales, the restaurant pays $0.35 for food.

Must be controlled by management

OH 2-24

Costs and Sales Affect Food Cost Percentage

Food cost is a variable cost, so it should increase when sales increase and decrease when sales decrease.

If controls and standards are in place, food cost will go up and down in direct proportion to sales.

If controls and standards are not in place, it will not!

OH 2-25

How Costs and Sales Affect Food Cost Percentage

A food cost percentage is computed using both a food cost (the numerator) and sales (the denominator).

An equal percentage increase (or decrease) in each of these will result in an unchanged food cost percentage.

OH 2-26

Ten Percent Increase in Sales andCost of Food

Original cost of food $1,000

Original sales $3,000

Food cost percentage 33%

With 10% increase in sales and food cost

New cost of food $1,100

New sales $3,300

Food cost percentage 33%

Realigned numbers

Realigned numbers

OH 2-27

Ten Percent Decrease in Sales and Cost of Food

Original cost of food $1,000

Original sales $3,000

Food cost percentage 33%

With a 10% decrease in sales and food cost

New cost of food $ 900

New sales $2,700

Food cost percentage 33%

Realigned numbers

Realigned numbers

OH 2-28

The ABCs of Food Cost Percentage (A/B = C)

Where: A = Food Cost

B = Sales

C = Food Cost Percentage

1. If A stays the same, and B increases, C decreases.

2. If A stays the same and B decreases, C increases.

OH 2-29

ABCs of Food Cost Percentage (A/B = C) continued

3. If A decreases, and B stays the same, C decreases.

4. If A increases, and B stays the same, C increases.

5. If A increases at the same proportional rate that B increases, C stays the same.

OH 2-30

Food Cost Percentage

Should be controlled

Should not be allowed to fall far below the restaurant’s standard

OH 2-31

Food Cost Percentage continued

If food cost percentages are allowed to drop too far below the restaurant’s standards, the guests’ perceptions of value may be negatively affected.

OH 2-32

Finding Cost , Sales, or Percentage

OH 2-33

Examples

1. Your Cost for a catered event is $610 and the Sales were $2,000…………what is your Food Cost Percentage?

2. Sales for the day at the deli counter was $4,100 and your Food Cost % is 21%.......what was your Food Cost?

3. Cost for the rib eye for the event is $1,115 and you run a 35% Food Cost……what should your selling price (sales) be?

OH 2-34

How Would You Answer the Following Questions?

1. The cost of employee meals should be (subtracted/added) to the cost of food before computing a food cost percentage.

2. A restaurant’s food cost percentage should increase when sales increase and decrease when sales decrease. (True/False)

3. Which best describes food cost as an expense?A. It is fixedB. It is semivariableC. It is variableD. It is noncontrollable

4. A manager’s job is to reduce the food cost percentage as much a possible. (True/False)

OH 2-35

Key Term Review

Closing inventory

Food cost

Food cost percentage

Inventory

Opening inventory

Purchases

Total food available

OH 2-36

Chapter Learning Objectives—What Did You Learn?

Calculate food cost

Calculate food cost percentage

Explain the effect that cost and sales have on food cost percentage

OH 2-37

Next Week

Read Chapter 3