A Closer Look at Food Cost

2
OH 2-1 2-1

Controlling Foodservice Costs

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 2-2

Food Cost
The actual dollar value of the food used in a

foodservice operation

Often referred to as cost of food sold

OH 2-3

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 2-4

Theft Increases Food Cost

Employee theft can

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

OH 2-5

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 2-6

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 2-7

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 2-8

Bar Transfers continued

In a busy bar, the

amount of food that is transferred from the kitchen to the bar can be significant.

OH 2-9

The Food Cost Formula

Opening inventory + Purchases Total food available Closing inventory Cost of food sold

OH 2-10

The Food Cost Formula in Use

Opening inventory + Purchases Total food available Closing inventory Cost of food sold + $5,000 $30,000 $35,000 $4,000 $31,000

OH 2-11

Physical Inventory

To accurately calculate cost of food sold, managers must take a physical inventory.
OH 2-12

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 2-13

The Food Cost Percentage Formula

Food cost Sales = Food cost percentage

OH 2-14

The Food Cost Percentage Formula in Use

Food cost percentage 0.28 or 28.0%

Food cost

Sales =

$7,000

$25,000 =

OH 2-15

Two Ways to Make a Decimal Conversion

Method One
Move the decimal

Method Two
Multiply by 100.

two places to the right.

.35 = 35%

0.35 x 100 = 35%

OH 2-16

Food Cost Percentage

Allows managers in one restaurant to compare

their food usage efficiency to that of previous time periods

efficiency of one restaurant to another

Can be used to compare the food usage

Allows comparison to the restaurants budgeted

food cost percentage or other standard

OH 2-17

Food Cost Percentage continued

Is the proportion of the restaurants 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 2-18

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.

will go up and down in direct proportion to sales.

If controls and standards are in place, food cost

If controls and standards are not in place, it

will not!

OH 2-19

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).

each of these will result in an unchanged food cost percentage.

An equal percentage increase (or decrease) in

OH 2-20

Ten Percent Increase in Sales and Cost of Food

Original cost of food

$1,000

Original sales
Food cost percentage

$3,000
33%

With 10% increase in sales and food cost

New cost of food

$1,100

New sales
Food cost percentage
OH 2-21

$3,300
33%

Ten Percent Decrease in Sales and Cost of Food

Original cost of food

$1,000

Original sales
Food cost percentage

$3,000
33%

With a 10% decrease in sales and food cost

New cost of food

$ 900

New sales
Food cost percentage
OH 2-22

$2,700
33%

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 2-23

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 2-24

Food Cost Percentage

Should be controlled

Should not be allowed to fall far below the

restaurants standard

OH 2-25

Food Cost Percentage continued

If food cost

percentages are allowed to drop below the restaurants standards, the guests perceptions of value may be negatively affected.

OH 2-26

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.
A restaurants food cost percentage should increase when sales increase and decrease when sales decrease. (True/False) Which best describes food cost as an expense? A. It is fixed B. It is semivariable C. It is variable D. It is noncontrollable A managers job is to reduce the food cost percentage as much a possible. (True/False)

2.

3.

4.

OH 2-27

Key Term Review

Closing inventory
Food cost

Opening inventory
Purchases

Food cost percentage Total food available Inventory

OH 2-28

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 2-29