Food and Beverage Accounting

Table of Contents
Basic Accounting Tools
Forecasting Sales Analyzing Expenses Department Budget

Basic Accounting Tools

The Accounting Factors The purpose of this classification:
To list the exact areas for auditing To ensure the accuracy of record.
Importance of food cost analysis:

Inaccurate records - wasting of time Damaging - if decisions are made on misleading results.

 Any undetected error in the following areas is

considered a factor that will distort food cost results and create unexplained variances.
Accordingly, every area should be audited,

making corrections if needed and confirming that the records in each area are accurate.

Types of records:

Mixing up billings between periods.

The cutoff date between accounting periods is

very important. Processing a food invoice in January that was actually purchased and delivered in February will produce an inaccurate food cost percentage for both January and February.

Types of records:

Over-billing.
i.e: i. Undetected errors on the suppliers

invoice, such as the wrong quantity, unit, price per unit, or an arithmetic error would affect your food cost analysis. Others: receiving two jars of apple sauce and processing an invoice for two cases of apple sauce will obviously inflate the cost of food if not caught and corrected.

Types of records:

Coding error.
Any wrong posting to the food cost account will

affect your analysis. It is possible that the light bulb invoice was coded by accident as food or the beer bottle refund was credited to food cost, etc.

Types of records:

Inventory inaccuracy.
Inaccuracy of the closing or the opening

inventory will affect the food cost result for the period. The inaccuracy could be in the inventory count, the unit, the price per unit, and/or the extension.

Types of records:

Transactions from and to food.

Inaccurate transactions between the food as a

profit center and other profit centers could affect the food cost results
for example, transactions such as food to bar,

beverages for cooking, food for mix, office usage, house promotion, etc.

Types of records:

Accruals inaccuracy.
Error in food accruals for current or last period,

defined as the cost of food that was ordered and received but the invoice has not been processed, will affect food cost results.

Types of records:

Accounting treatment inconsistency.

Inconsistency in the accounting treatment from

one period to another will have an effect on food cost. For example, the accounting treatment for a food delivery charge, the cost of staff meals, or the method of pricing the inventory must be consistent from one period to another or food cost results will reflect such variances.

Types of records:

House use unaccounted for.

There is always the possibility that ingredients or

prepared food was legitimately issued to or used by the house but no record was made or kept as a result of a weak internal control.
Such unaccounted for house use, regardless of

the intention, will affect the food cost.

Types of records:

Giveaways not recorded.

Giveaways such as fruit baskets or any

complimentary food item issued to a guest or potential guest which was not recorded or accounted for will have an effect on the food cost results if not caught and corrected during the period.

Types of records:

Short deliveries and returned items.

Regardless of the intention, there is always the

possibility that food items are ordered and paid for, yet never received. Also there is a possibility that certain items were rejected and returned to the supplier and no record was made or kept because of weak internal control. Food cost will be inflated by these mix-ups.

Types of records:

Inaccurate sales records.

Regardless of the intention, food sales

understated, and/or overstated will have an impact on the food cost percentage.

Forecasting Sales

 Sales Forecast is a prediction of future sales,

based mainly on past sales performance. Sales forecasting takes into account the economic climate, current sales trends, company capacity for production, company policy, and market research. A sales forecast can be a good indicator of future sales in stable market conditions, but may be less reliable in times of rapid market change.

 A sales forecast enables an organization to

proactively prepare for actual sales management. Based on the forecast, the organization can design and allocate sales territories, determine the strength of the sales force and formulate effective sales compensation strategies. Market potential, sales potential and consumer buying power index are the three factors which determine the sales forecast.

Analyzing Expenses

How to Analyze Your Performance in the Food Cost Area

The amount of time and effort required to do the

monthly food cost analysis will depend mainly on the type of information (system and equipment) available and the experience of the people involved. The following are the steps to be taken to analyze the performance in the food cost area.

Step 1
Ensure that the targeted food cost

percentage for the period is more than just wishful thinking. The target must be the calculated food cost potential.

Step 2
Check the accuracy of your records.
It is quite possible that the alarming food cost

percentage is nothing more than a clerical error in accounting factors such as the value of the inventory or the accruals.

Step 3 & 4
3. Prepare a comprehensive and precise list of

all the factors (reasons) that can affect the food cost percentage in your operation.
4. Determine which of these factors affected the

food cost percentage during the period.

Step 5 & 6
5. Quantify (measure) the effect of each factor

on the total food cost in dollar terms or percentage.

6. List these factors in groups that can make

your analysis more meaningful, and easier to read and prepare.

Step 7
7. Prepare your monthly report and write your

comments, including the type of corrective actions to be taken to improve performance.

 Food cost analysis is more meaningful, productive,

and useful, the main factors that affect the food cost percentage must be identified.
Three important group factors: Accounting factors, Controllable factors, and Uncontrollable factors

How to Become Efficient in the Food Cost Area

It is important to emphasize that efficient

performance in the food cost area does not mean blindly cutting costs regardless of the effect it might have on the quality and quantity of the food served. In fact, this will most likely end up having a negative impact on the food cost, especially in the long run.

 The only way to actually achieve an efficient

operation in the food cost area is by implementing the following cycle:

Planning.
In this stage, the decision makers will choose

after studying the market, the clientele, the type of skills, and equipment available what type of menu will be served. Target goals are then set in each of the four variables, namely menu prices, calculating the food cost potential, the dollars to be spent on labor, and all the other expenses.

 How to plan food cost target?

a recipe sheet is prepared to identify and calculate the type and amount of ingredients required to produce every item on the menu.
Management will cost and price these items,

then calculate the food cost potential.

The food cost potential (prices, expenses, people skills, equipment, etc.)

=
END PRODUCTS (purchasing, receiving, storing, issuing, producing, and serving) desired return on investment

 In other words, a planned

food cost percentage is that which will produce, with the other factors, the desired results for the operation.
Staff training and several

other issues are covered in this stage.

Control.
Once the operation starts, management needs

continuous feedback about the performance, not only in the food cost area, but also in all other activities. only possible with good internal controls which can be defined as "all the measures taken by the operation such as policies, procedures, and systems, etc. to safeguard the resources against error, fraud, and inefficiency.

 Example: Policies and procedures such as the use of

daily quotations and order forms are a must, all food suppliers must be approved in advance, buying should be within the approved specifications, the executive chef must sign all food purchase orders or requisitions, items received should be checked, counted, and weighed, etc.

 The system should produce steady, timely, and

accurate data about performance as well. Amount and type of controls will depend on:
size of the establishment, the experience of the people involved, type of system and equipment in use.
i.e: small operation: - owner or the manager can

rely on visual supervision (there is no need for costly and complicated controls). Larger operation: - more sophisticated controls

Analysis.
Sometimes the type of information produced by

the system is either not enough or needs to be broken down further. Sometimes the data needs to be measured in relation to other data. During this stage, management will be able to identify the problem, its size, what caused it, and ultimately how to rectify it.

Corrective Actions.
Management must act as soon as the feedback

reveals any inefficiency. It must take the necessary steps to tighten control over the operation and improve efficiency by reinforcing desirable performances and eliminating the unacceptable ones.

Department Budget

 What is department budget?

is a profit plan and a control tool for a food service business that addresses all revenue and expense items appearing on the business s income statement.

Annual department budget are commonly

divided into monthly plans.

 These monthly plans become standards against

which management can evaluate the actual results of operations each month.
Department budget enables management to

accomplish two of its most important functions: planning and control.

 Who is responsible for budgeting?

Heads of Department or a budget committee that will review each departments income and expense

plans a property wide budget is approved.

As a Profit Plan
The department budget is developed by : projecting revenue, determining profit requirements and

estimating expenses for each month of the

upcoming fiscal year.

 These monthly plans are then combined to form

the operations budget for the year.

 Revision of operations budgets is done through

the budget year.

This re-forecasting is necessary only when

actual results begin to vary significantly from the operations budget due to changes that occur after the budget has been prepared.

Projecting Revenue
Revenue is projected by forecasting food and

beverage sales for the budget period.

Sales histories and past monthly income

statements are the basic sources of information that managers use to project revenue.

 Other factors for consideration: New competition and other activities over which

the operation has little or no conditions Predicted increases in inflation or Changing lifestyles within the community

Estimating Expense Levels

Many expenses are directly related to sales

volume and will vary as sales volume changes.

For example, food costs and beverage costs

increase as sales increase because more food and beverage products must be purchased.

 Expenses can be estimated by:

comparing past expenses with projected sales

level. Other types of expenses do not fluctuate with sales volume and therefore are much easier to estimate. These expenses often referred to as fixed costs include rent, depreciation, insurance, license fees etc.

*As Control Tool

Developing a thorough operations budget

reminds managers of the extent to which they are responsible for meeting revenue, profit and expense goals. The department budget helps to identify responsibility and encourages managers to use the budget as a control tool.

 The process of budgetary control identifies and

analyzes significant variances between budgeted figures and actual results of operations.
Variance analysis may include that additional

investigation by management is required to determine the exact causes of significant variances.

 Once these causes have been identified ,

management is able to take whatever actions are necessary. In order for budgets to be used effectively for control purposes, reports are generally prepared on a monthly basis. These reports are useful only when they are timely and relevant.

Exercises
Define Cost Control?
What is the main purpose of having a good cost

control?