[Year

]
Amrapali
Institute of
Hotel
Management

OM SINGH

[FOOD COST
CONTROL]
DHM - 2
 FOOD COST CONTROL

Unit – 1 DHM – 2nd year

Contents

FOOD COST CONTROL

• Introduction of Cost Control.

• Define Cost Control

• The Objective and Advantages of Cost Control.

• Basic Costing

• Food Costing

Learning Objectives:--

After learning this topic students will able to --

• Define Control

• Define Cost and different type of cost

• Understand the objectives of food control

• Calculation of Food Cost

• Know the responsibilities of control in food and beverage operations.

• Describe food and beverage control system

• Understand the concept of Food Cost and why it is important for hotel
business

Cost: Accountants define a cost as a reduction in the value of an asset for the
purpose of securing benefits and gain. As we use the term in our discussion of cost
control in the Food and beverage business. Cost is defined as the expense to a hotel
or restaurant for goods or service when the goods are consumed or the service
rendered. Food and beverages are considered “consumed” when they have been
used, wastefully or otherwise and are no longer available for the purpose for which
they are acquired. The cost of any item may be expressed in variety of units,
weight, volume or total value.

Type of Cost:

• Fixed Cost and variable cost

 - Fixed Cost: these are the cost which are normally un affected by the
change in sales volume. Items of fixed cost are as follows :-

# Example insurance, premium, real estates, depreciation in equipments

etc.

- Variable Costs: - These are the cost which has direct relationship with
the sales volume. As business volume increases, variable cost will
increase; as volume decreases variable cost should be decrease. Item of
variable cost are as follows :-

# Labor cost, Raw material Cost, Beverage cost etc.

• Controllable and Non – controllable cost :

- Controllable cost is those that can be changed in the short term. All the
variable cost are generally controllable. The cost of food or beverage for
example can be changed in several ways by changing portion sizes by
changing ingredients or by changing both of these .The cost of labor can
be increased or decreased in the short term by bring additional employees
or by laying some of them off.

- Non – Controllable Cost: These are the cost which normally doesn’t
change in the short time. These are usually fixed cost, and the list of most
common would include rent, interest, mortgage, real estate etc.

• Unit and total cost

- Unit cost can be defined as the expense incurred in the preparation of

one individual portion of the dish or any other items like beverage etc.

- Total cost can be defined as the expense incurred in preparation of all

the food stuffs served in any meal period.

• Prime cost : This term refer to the cost of material and labor ,food beverage
and payroll.

• Historical and Planned Cost :

- Historical cost can be defined as the cost incurred in past for .operating
the business entity Such type of cost can be found in business record
,books of accounts ,financial statements,employee time cards and similar
other statements. These historical cost are very much helpful in projecting
the planned cost for any business entity. Manage by comparing historical
cost or data can easily estimate or project the cost for future operation.

- Plannes cost can be defined as the cost estimated or projected to

operate any business entity in future.
Different type of Cost related to Hotel Industry :

• Food Cost

• Beverage Cost

• Labor Cost

• Fuel Cost

• Operational Cost

Introduction to Cost Controls

Food & Beverage control may be defined as the guidance and regulation of the
costs and revenue for operating catering activity in hotels
,restaurants,hospitals,school ,employee restaurants and other establishment

Control: is a process used by managers to direct, regulate and restrain the action
of people so that the established goal of an enterprise may be achieved.

Cost Control; is defined as the process used by managers to regulate costs and
guard against excessive costs. It is an ongoing process and involves every step in
the chain of purchasing, receiving storing, issuing and preparing food and beverage
for sale as well as training and scheduling the personnel involved. The main goal of
cost control is to eliminate excessive cost for food, beverage and labor- to exert
some governing power costs in all areas to ensure that the enterprise will operate
at a profit.

The main advantages of Food and Beverage cost control are summarized
as follows:

• Ti ascertains the profitability of each revenue producing departments.

• To reveal the possible source of economy and result in a rational utilization of

material and labor.

• To obtain information for the adaptation of a sound pricing policy

• To facilitate speedy quotation for specifical function such as banquets and

wedding receptions.

• To make comparison

• To use control data for making policy decisions by the management.

• Analyses of income and expenditure

 • Establishments and maintenance of standards

• Pricing

• Prevention of waste

• Prevention of frauds

• Management information

Food Cost may be defined as the ratio of the cost of food consumed compared to
the revenue received for food sales. The food cost percentage is a task to measure
the efficiency of a food operation / kitchen. This percentage may vary as much as 5
percent from month to month, it is a normal practice in many hotels to investigate
any fluctuation exceeding 2 percent of sales. The food cost may be calculated on a
daily, weekly or monthly basis depending on when the food inventory is taken. This
estimate of daily food usage may be derived from the total of the direct purchase
and requisition from the storeroom for the day which is then compared to sales
totals.

The relationship between sales and cost may be expressed as cost percentage or
the ratio of sales to costs. The formula for calculating of this percentage could be
used as follows:--

Cost /sales = Cost Percentage

Food Cost / Food Sale = Food Percentage

Food Cost is the is the expenditure on food and raw materials which the largest
single element of cost in any catering establishment. The maintenance of food cost
at pre determined level is therefore important because the food cost percentage
determines to a large extent the profit.

Food cost percentage is the percentage found on the total sales that is cost of
material ,labor,overhead and profit.

Objectives of Food Control:-

--- A detailed analysis of the income and expense of food and beverages:

--- Sales analysis of food and beverage items by analyzing.

• Food and Beverage sales

• The sales mix

• Average spending Power (ASP)

 • Number of customer served

--- Cost analysis of Food and Beverage items

• Calculation of food and beverage costs

• Portion Control

• Labor Cost

--- Calculation of gross profit

--- Calculation of net profit

• To establish standard operation procedure (SOPs) for the operation.

• Fixing Menu pricing and quotation for special functions.

• To prevent wastage of raw material, time Labor etc.

• Prevention of frauds by staff and customers

• Preparation and submission of management report and information and

corrective and remedial measure for improvement.

Calculation of Food CostThere are several basic terms which need to be

emphasized with regard to the Calculation of Food Cost ,such as –

• Food Cost : This refer to the cost of food incurred in preparing the meals
served.

• Food Cost percentage : Refer to the percentage of the revenue from sales
incurred in preparing the meals ,that is , the cost of food as a percentage of
sales of food.

• Gross profit or Kitchen gross profit : The excess of sales over the cost of food
expressed as a percentage or in financial terms.

• Potentail food cost (Sales ) : the food cost under perfect condition .this may
be expressed as a percentage or in financial terms.

Calculation of the potential food cost

The potential food cost is the cost of the food under perfect and ideal conditions.
The potential food cost of an operation is the principal and most effective
 method of evaluating the actual food cost . Any variance higher than 1
percent between the potential and actual costs should be investigated.

The calculations are in three main steps.

• For each individual menu item multiply the number of portions actually sold
during a sample week as determined by the restaurant sale analysis by the
potential food cost per portion to obtain the total potential cost of food sold
for that week.

• Multiply the same portions actually sold as above by the menu selling price
and arrive at the potential total sales.

• Divide the potential total food cost by the potential total food sales and arrive
at a figure which when expressed as a percentage is the percentage food
cost percentage.

To be able to do the above calculation it would be necessary to have the following

information to hand.

• A detailed sale analysis of all items sold in the various outlets together with
their selling prices.

• Standard recipe cards of all the menu items costed out.

• Summary of potential food cost obtained from the standard recipe card.

• Average market price for the main ingredients taken from invoices, food
marketing, reports or food cost indices report.

- ANALYSIS OF INCOME AND EXPENDITURE: In food cost control, stress

is placed not only in analysis of sales, cost of sales, profit etc. but also on
the
analysis of total quantities as between various sections of the business.
- PRICING OF FOOD AND QUOTATIONS: It provides sound basis for
menu
pricing expenses for banquets.
- PREVENTION OF WASTAGE AND INEFFICIENCY: The purpose control
is to
ensure that current results are accordance with predetermined objectives.
For this,
all wastage must be prevented so that food cost remains as originally
fixed.
- DATA FOR MANAGEMENT REPORTS: It provides data for periodical
reports
 on food operations.

OBSTACLES TO FOOD COST CONTROL: What are the obstacles to food cost
Control :-

Unpredictability of volume of business: Sales instability is

inherent in all
establishment. Moreover, the sale of food/drinks varies day to day and
even
during the day
Perishability of food: Food is perishable; hence there should be no
over
buying and food prepared must be in line with the anticipated demand
to keep
food cost in check

- Daily variations in food production.

- Short cycle of operations: The cycle of operations in any catering
establishment is short; hence control procedures must be frequent and
periodic
reports are a must.
High degree of departmentalization: Each catering
establishment has
several selling outlets

Essential of a Control System:-

It is important when examining an existing control system or preparing to install

a system into a new operation that the following point should be born in mind :

• Any control system should be comprehensive and cover all the outlets of an
establishment and all stage of the food control cycle.

• The cost of maintaining the system should be in relation to the saving to be

made the level of sophistication of the control system usually increasing with
the increase in the volume of sales and the complexity of the menu.

• The control system should be easy to operate and to be understand by all

level of staff.

• The control system should be seen by staff to be working. That is,the

management act in appositive way to adverse trading results and follow up
on future results to check if the corrective action taken is effective.

• To be effective the information produced must be accurate and up – to –date.

Method of Food Cost Control :

- Weekly Monthly Food Cost report : For calculating of the monthly food
costs for an operation where detailed information is not thought to be
necessary or for a small or owner-managed unit where the control is an
everyday part of the manager”s activity in order for the operation to be
successful. The weekly/monthly food cost report is almost a reconciliation
report on an activity that is tightly controlled daily by management :

Advantages of this method are :

• It is simple and quick to produce.

• It can give an indication of the general performance of the unit.

Dis-advantages though are:

• This information is only produced after seven or twenty –eight days of

operation.

• It provides no intermediate information so that any undesirable trends may

be corrected earlier.

• It does not provide daily or to-date information on purchase requisitions and

sales that a unit.

- Daily Food Cost report :

This food cost method is suitable for a small-to-medium sized operation or

where not too sophisticated method is required or where the cost involved
in relation to the saving to be red out of the kitchen to the bars and the
cost of employees meals made do not justify a more involved method.

Advantage of this basic food report is:

• It is simple and easy to follow

• It give a reasonably detailed account of the general performance of the

business on a day-to- day basis

• It records the daily stock level, daily purchases, daily food requisitioned and
daily food sales and enables the daily food cost percentage to be calculated.
This information is used for preparing to – date totals.
 • The to-date food cost percentage smoothes out the uneven daily food cost
percentage and highlights the corrective action to be taken. if necessary
early in the month. The uneven daily food cost percentage is often caused
when food is requisitioned on one day to be processed and sold on
subsequent days.

Disadvantages of the basic food cost report are:

• Although simple and easy to prepare the report relies heavily on the accuracy
of the basic information to be collected. For example the total of daily
purchase, daily requisition etc.

• It is not totally accurate as it ignores such things as the cost of the staff meal,
food transferred to bars.

- A detailed daily food cost report:

This food cost report is a development of the previous report and refines
the accuracy of the report by taking into account the cost of beverages
transferred into kitchen , the cost of food transfer.

Control Techniques :--

Control may be defined as a process by means of which managers attempt to

direct, regulate and restrain the action of people in order to achieve desired goals of
the establishments financial success, preservation of sound environment, promotion
of better health.

The food and beverage business involves the purchasing, receiving, storage and
issuing of raw material for the purpose of manufacturing products for sale .At each
stage of operation it is necessary to institute control techniques. These techniques
and devices depend on the nature of the difficulty to be controlled the situation and
the style of the individuals making the selection.

Some of the control techniques may be discussed as follows:-

• Establishing Standards

• Quality Standards

• Quantity Standards

• Standard Cost

• Establishing Procedures

• Setting examples
 • Observing and correcting employee action

• Requiring records and reports

• Preparing and following budgets

• Ensuring and Discipline employees.

Review and Discussion Questions:

Q.1 - Define Control? What are the objectives of Food Control?

Q 2 – What are the main advantages of Food Control?

Q 3 – What is Food Cost? What the importance of food cost for the hotels and
restaurant?

Q 4 – How you calculate the food cost for the hotel?

Q.5 – What is Cost? Explain different type of cost?

Q 6 -- Explain Control techniques?

References

• Management & Cost Control –by- Jagmohan Negi ( Page no : 1 – 22)

• Supported Notes – Self made notes and material collected from the industry

Key Words:

- Fixed Cost and Variable Cost

- Cost Control

- Food Cost

- Food cost Control