5/8/2014

PCA Food & Beverage Cost Controls - Finance 101

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PCA edu

F & B Cost Control

Introduction
Determining Standards
The Budget Process
The Menu
Design Effective Controls
Producing, Serving Controls
Talking About Food Cost
Taking Corrective Actions
Revenue Control

Module One

Introduction
The owners of most F&B operations are generally concerned with the level of profit of the operation. In order to maximize profit, it is necessary to make sure that
costs are kept in line with what they should have been (expenses) and that appropriate marketing is done to get customers in the door (revenues). It is important to
recognize that in addition to profit centered enterprises, many F&B operations do not have profit as their major objective. Many institutional operations are focused on
breaking even or maintaining a particular budget level. Whichever approach is followed, the primary job of the chef, as kitchen manager, is to make sure that the
quality of the product is as good as it can be and that the costs are kept under control.
When we speak about keeping costs under control, we generally mean that we optimize costs, not minimize costs. Many F&B operations get into trouble because they
think that the right approach is to have the lowest costs possible. When this happens, the customer is often less than satisfied with the product and/or service they
receive. If this should happen, there will be serious marketing problems for the operation. If we choose to have optimal costs, we are then saying that we will give the
customer something that costs exactly what it should cost. We are in fact giving them a standardized product.
Many of you may be familiar with the term standard as it is used extensively in the industry. The terms standard purchase specifications, standard recipes, standard
yields, standard portion size, and standard portion cost have become everyday words in the modern kitchen managers vocabulary. Some chefs resist the standardized
approach as they see it undermining their creativity or flexibility; however, nothing could be further from the truth. Any chef can still create whatever dish is
appropriate for their customers. The only conditions we are adding are that it must always be the same quality and the same cost. Can you think of a time when you
would want to serve a lower quality item to the customer than what you normally serve? If you did, they would likely not return to your establishment. Of course,
being able to do it exactly the same every time depends on you being able to purchase the same quality of ingredients at the same price. If the quality of the
ingredients changes, then the dish is no longer the same and if our cost to purchase the ingredients changes, then we have to account for that. There is little doubt that
the restaurants which fail are the ones which are unable to deliver a consistency of product and service and those which do not properly account for their costs.
Should your customers order a particular dish, they will expect it to be just as good the next time they come to your establishment or as the last time they were there.
It is a well known fact that one of the key marketing concepts in F&B operations is the idea of consistency. Customers want to know that what they will be receiving
will always be good. In terms of costs, you cannot effectively price your menu if you do not know what any particular dish costs.

KEY DEFINITION
Standard = What it should be
Once you have a system of standards in place, you can easily calculate exactly where you are for any given period in terms of costs and therefore, in terms of

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Once you have a system of standards in place, you can easily calculate exactly where you are for any given period in terms of costs and therefore, in terms of
profitability as well.
BASIC TRUTH # 1
No system of cost controls can be effective
without a complete set of standards in place!
While there are many definitions of the term standard, I believe that the simplest and most effective one is what it should be. If we are talking about the standard
portion size, we are saying that the size of the portion should consistently be the same. For example, we always serve a 12 oz striploin steak or the burger patty in our
cheeseburger is always 4 oz. raw weight. The fast food chains have known about standards for many years and, perhaps, no one practices cost control better than
them. No matter what you think about their product, you can always be assured that it will be consistent. They have established a particular level of quality which
they wish to maintain and then everything they do is designed to ensure that it will always be that same level of quality. Their success is based entirely on that fact.
One of the key reasons why people go to MacDonalds is because they know exactly what they are going to get. With the exception of minor regional differences, a Big
Mac is the same in Halifax, Helsinki, or Hawaii. In every location.
BASIC TRUTH # 2
No matter how much money you spend on advertising,
if you cannot deliver a consistent, quality F&B product you will fail!
MacDonalds marketing success is based on that consistency of product and service and their financial success is directly a result of that consistency as well. Before the
end of this module you will be able to develop a costing system that will a) help the general management team market your facility more effectively and b) provide
accurate timely information on which you can base good decisions and thereby maximize the profit potential of your F&B operation.
LEARNING OBJECTIVES
When you complete this module you will be able to:

a.
b.
c.
d.
e.
f.

have an understanding of management practices within the food and beverage industry
understand of the importance of the concept of cost control
identify and characterize costs using standard accounting principles
plan for F&B operations using break-even analysis, operating budgets, sales projections, and profit planning tools
explain the relevance of the term contribution margin
understand how profit can actually be a cost to you

DIRECTIONS
Each of the learning objectives portions of this module has a separate section. Each section has an introduction and contains required reading from the textbook. The
most helpful review and discussion questions from the textbook which deal with each section are identified. There is a self test at the end of each section to check your
understanding of the material contained in that section. Answers are provided at the end of the course notes.

Section 1
Basic Overview of the F&B Industry
Introduction
To begin, the student should read Chapters 1 and 2 in the textbook. These chapters provide a basic overview of management within the food service industry and give
the reader a valuable perspective on the views of the author. This book is clearly written and directed at the food service professional. It describes the classic approach
to managing F&B operations but also looks at more comprehensive and more current approaches to managing costs. It should be clear that no matter what type of
food service establishment you work in, the same basic principles of management apply. Success in every type of operation depends on only two things: a) being able
to attract customers and b) making sure that adequate controls are in place to maximize profits. Organizations which are not designed to be profit making or which
do not attract customers but have a population to feed (such as institutional feeders like a prison, nursing home, or hospital) are perhaps even more difficult to operate
as they must meet particular budgets. They have to be very accurate in controlling costs as they do not have revenue to make adjustments in to offset any increased
costs.
Chapter 1 gives you an overview of the size and scope of the F&B industry. It also addresses some of the key problems facing the food service industry. For Turnover,
provides you with a brief overview of the problem of employee turnover in the hospitality industry and provides simple solutions for the manager to implement.

Section 2
Understand the Importance of the Concept of Cost Control
Introduction
While Chapter 2 may be the shortest chapter, it provides the foundation for this whole course. It explains the importance of developing an effective control system and
describes the implementation of the control process. The control process involves four key steps: determining a standard by which one can measure operational
effectiveness, analyze actual results, compare actual results to standards, and take corrective action if necessary.
I once had a very knowledgeable F&B manager tell me that there are only three places where extra food costs go in any F&B operation:

a. in the garbage
b. out the back door
c. on the customers plates
Waste, theft, and over-portioning account for virtually all the cost overruns one finds in F&B. Proper controls will lower the probability of incurring many of these

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Waste, theft, and over-portioning account for virtually all the cost overruns one finds in F&B. Proper controls will lower the probability of incurring many of these
costs but, at the very least, it will allow the kitchen manager to explain and/or account for any losses.

Section 3
Incom e Statem ents
Introduction
The tex tbook does not dev ote space to defining the ty pes of costs and their use in understanding the income statement of a ty pical food and bev erage operation. Ex hibit 1
illustrates the general format for an Income Statement (or Profit and Loss statement). Supplementary Ex ercise #1 giv es y ou some ex perience in recognizing fix ed and v ariable
costs.

Exhibit 1 Incom e Statem ent

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There are a number of generic categorizations which are used to describe costs. First, we could look at costs as controllable or uncontrollable. We could also talk about
costs in terms of being fixed or variable. When we talk about fixed costs we are basically talking about those costs which never change no matter what volume of
business your operation may achieve. An example of this would be your property tax. It is a set amount whether you did $10 or $10 million. Another way to describe
a fixed cost would be one which you know in advance for a particular period to the penny, e.g.
My monthly rent is $1507.00.
Variable costs are those which vary directly with your level of sales. For example, my hourly labor cost will generally go up and down as sales go up and down. Most
times we express this as a percentage amount. We may say our labor cost is 33% or that it is 33 cents for every dollar of sales. It is possible to have some costs which
have both a fixed and variable component. Y our rent may be $1000 per month (fixed) plus 3% of your gross sales (variable).
The term contribution margin (CM) is one which is very useful in analyzing F&B operations. This refers to what is often called the Gross Profit (GP) calculated by
subtracting only the food and beverage costs from the revenues. What CM actually describes is the amount of money left over, after we subtract our food and
beverage costs, which can go to cover all our other expenses.
Exhibit 2 Recipe Costing Worksheet

Module Two

Determining Food and

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Determining Food and

Beverage Standards

The foundation of this course is the control process and for the control process to work properly a comparison of costs must take place to determine the effectiv eness of the
manager. It is relativ ely easy to see how one calculates the actual food costs for any particular operation (and we will dev elop this process in great detail in a later module),
howev er, it is not as simple to dev elop the sy stem of standards which those actual costs will be compared against. It is worth repeating the Key Definition at this point.

KEY DEFINITION
Standard = What it should be

This prov ides us with a comparison point for our effectiv eness measures. In other words, were the actual costs equal to what they should hav e been or is the actual quality of the
food equal to what it should hav e been. This process is called analy sis of v ariance: ie. look at the actual cost and see if it v aried from what it should hav e been. The managers job is
a constant monitoring of the operation to ensure that things are in line with what they should be and quickly rectify ing the situation when things are not.
There is a natural flow to the required standards. It begins with Standard Purchase Specifications which prov ide the supplier with an EXACT description of ev ery thing
which is to be purchased by this facility . They are required to prov ide the operation with products which are specified and not to substitute products, EV EN IF THAT PRODUCT
MAY BE A HIGHER STANDARD. This may be difficult to understand but if a food serv ice establishment is to establish consistency of product, the same ingredients must be used at
all times. This is ev ident in the nex t standard, Standard Recipes. These are ex act formulas for each menu item and no v ariance from this recipe may be made. It is clear that if y ou
purchase the ex act same product ev ery time and prepare it in ex actly the same way ev ery time, then the final output which the customer receiv es MUST be ex actly the same ev ery
time. This is a result of the Standard Y ield. This not only prov ides a consistent product for the customer but it also prov ides a consistency in cost which is essential for the required
analy sis of v ariance to take place. The consistent product y ield then allows a consistent serv ing size and cost. These are called the Standard Portion Size and Standard Portion Cost.
This last standard is the culmination of the standards process. This standard cost may now be translated to mean what the cost should hav e been for any menu item sold.
The book also describes the process as it relates to bev erage costs. It should be noted that the control process should not be any different for bev erages than it is for food.
All the same principles apply and as we will see in a later module, the comprehensiv e control process which ev ery one recognizes for liquor operations is equally applicable to
food.
The basis of comparison for managers to undertake then is the Actual Calculated Total Food Cost compared to the Total Standard Food Cost. In order to come up with the Total
Standard Food Cost one simply has to multiply the number sold of each menu item by the Standard Food Cost for those items. The point of sale (POS) sy stems in use today prov ide
quick and easy statistics on daily sales. Most of these sy stems also allow the manager to input the standard cost for each item into the sy stem so the POS actually giv es a Total
Standard Cost Report automatically . When the actual costs are calculated it is quite simple to see if the costs were what they should hav e been.

Module Three

The Budget Process

The Budget
V irtually all professional F&B operations require strict budgeting procedures to be followed. Budgets prov ide the framework for forecasting the need for supplies and labor
and they also cause the F&B manager to focus on specific costs for specific periods. They are also good because the require the manager to look back at prior results v ery
carefully and to analy ze them to see why they happened the way they did. The budgeting process is not really difficult, howev er, care must be taken to ensure a high degree
of accuracy as the budget becomes a fairly strict rule of thumb for the operation. Y ou dont want to be put in a position of hav ing to frequently change y our projections or
to hav e problems due to ov er-forecasting or under-forecasting.
Preparing a budget is far less complicated than it appears on the surface. It should be taken one small step at a time and then added up to arriv e at a final figure. The first
component which needs to be calculated is the rev enue section. Rev enues are the dollars which come into the operation through a v ariety of sources. The primary source
of rev enue is food and bev erage sales to customers. It is also possible that there could be some miscellaneous sales categories such tobacco products, candy , newspapers,
promotional clothing, etc and these are generally separated from the F&B sales as they hav e no bearing on those sales. It should be noted that there may be a considerable
amount of inv entory in these items and they should be monitored closely also. We generally prepare budgets for specific time periods such as weekly , monthly , and
annually . Many of the costs, such as property tax es, are annual ex penses and need to be broken down to the amount allocated to the period in question, ie. $1 200 in
annual property tax es would become $1 00 per month.

Budget Preparation:
Step 1: Revenues
Perhaps surprisingly , the first step in budget preparation is to determine the number of seats in the facility which can be occupied by customers. Following that we need to
determine what times the restaurant will be open and then determine how many times we might ex pect to turn the tables in each meal period. We should then go to our
sales history and select the appropriate check av erage for each period.
Exam ple:
1 00 seats in the restaurant; open for breakfast, lunch, and dinner
Seat turnov er:
Breakfast = 1 .0 times or 1 00 guests;
Lunch = 2.0 times or 200 guests;
Dinner = 1 .65 times or 1 65 guests
Check av erage: Breakfast = $4.7 5; Lunch = $5.95; Dinner = $1 2.95

We can now calculate the total potential sales from this information.
Breakfast: 1 00 seats x 1 .5 x $4.7 5 = $ 7 1 2.50
Lunch: 1 00 seats x 2.0 x $5.95 = $1 1 90.00

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Dinner: 1 00 seats x 1 .65 x $1 2.95 = $21 36.7 5
T otal Daily Sales = $4039.25
This is the potential rev enue for one specific day . Y ou can then take this information and multiply it by the number of day s the operation is open to come up with a final
sales figure. In order to be v ery accurate, howev er, y ou should really work out these numbers for ev ery day . Many day s hav e different lev els of business, ie. Friday s may
generally be busier for lunch and Saturday s for dinner and hardly any guests for breakfast on Sunday depending on each particular operation. Certain day s of the month,
such as check day when the pension checks come out or pay day when a factory in town pay s ev ery second Thursday , may change the lev el of sales for any giv en day .
Although it may appear to be a formidable task to do this for ev ery day these are pretty straight forward calculations, ev en when done by hand with a calculator; when y ou
use spreadsheets, it becomes v ery simple.
Categories such as bev erage sales often are a function of the food sales. Y ou may find that bev erage sales ty pically add up to 23% of what the food sales are so when y ou
calculate y our food sales total, y ou simply multiply that by 23% to come up with the projected bev erage sales. Be careful because y ou may also see that bev erage sales
might be shown as a percentage of TOTAL sales. So, in the abov e ex ample y ou could hav e the bev erage sales amount div ided by the total sales ($929.02/$4968.27 ).
Food Sales $4039.25 81 .3%
Bev erage Sales $ 929.02 1 8.7 %
T OT AL SALES $4968.27 100 %

Budget Preparation:
Step 2: Expenses
The nex t step in budget preparation is to come up with the total of all ex penses related to the sales y ou are projecting. This is still a fairly simple process but is somewhat
more complicated than determining rev enues. If y ou hav e good accurate records, y ou will know what the historical costs hav e been and y ou can then use them as a basis
for determining y our future costs. Y our fix ed costs are quite straight forward as they are known in adv ance. These do not change no matter how much business y ou do
(property tax es, fix ed rent, etc) The costs which are v ariable go up and down as y our rev enues go up and down. For ex ample, y our food cost and bev erage cost are a
percentage of the selling prices, y our labor is generally referred to as a percentage of sales (although fix ed salaries such as that of the manager should fall into the fix ed cost
category ). Y ou already hav e y our rev enue numbers so y ou can simply determine what the costs would be associated with that lev el of sales.
In on going operations, the budget is often simply increased by a set amount such as: we anticipate a 1 0% increase in sales this y ear. This is a v ery simple way of projecting;
howev er, as y ou can see from our prior calculations, it is not a really accurate way to forecast future rev enues and ex penses. Y ou are better off to calculate the numbers as
we did abov e ev ery time. It really doesnt take too much time and y ou will hav e much more accurate information with which to make y our decisions on things like
purchases and staffing lev els.
If y ou are in a start up operation and do not hav e any historical figures to work with it is more difficult but not impossible. Y ou must forecast or budget in the same way but
without that history y ou need to use y our knowledge of local trends and conditions and monitor the budget ev en more closely on a daily basis. Y ou then must adjust y our
figures up or down depending on what happens. As time passes, y ou will add more and more information to y our files and it will become easier to forecast rev enues and
ex penses. Ex hibit 3 on page 85 in y our tex tbook effectiv ely illustrates how a budget can be presented.

Budget Preparation:
Step 3: Analyzing The Data
Ex hibit 5 in y our tex tbook on page 88 prov ides an ex cellent illustration of how to report y our budget data and compare that to the actual results as they occur. The step by
step approach used effectiv ely walks y ou through the ev aluation process.
In operations such as institutional feeders (a prison or nursing home, for ex ample), the main requirement is generally that the operation be on target with respect to the
budget. It is commonplace that these operations would not hav e cash rev enues but would be required to budget based on the number of ex pected meals and then keep
costs in line with the projections. For these operations breakev en analy sis is v ery important.

Breakeven Analysis
It is easy to see why an institutional feeder would be interested in the breakev en lev el of sales. They are looking to ensure that they do not hav e cost ov erruns but they also
do not want to be too far under budget. As well, the cast of the meals is generally determined in adv ance and based on certain lev els of quality . There may be some cost
sav ings but that is not the primary role of the manager. They must be absolutely sure not to go ov er budget.
For a profit generating operation, y ou might ask - why would they hav e to know the point at which the operation would breakev en? It is quite simple: the operation would
like to make a profit but could sustain itself in a time when it might breakev en; howev er, operations cannot afford to lose money . Going in the red as it is referred to cannot
go on for an ex tended period of time or the business goes under. It is important then to determine the sales lev el or number of guests that are needed to breakev en and to
monitor that the operation is there at a minimum.
Economics tex tbooks and many business books show y ou a graph of breakev en analy sis. For our purposes here it is not necessary to graph the breakev en. The calculations
are enough and are clearly described on pages 94-99 in y our tex tbook. The Lumberjack Caf ex ample on pages 94-95 demonstrate the basic breakev en concepts.

Module Four

The Menu
The tex tbook refers to the menu as the foundation for control. It is the beginning and end of the control process. There are three key steps in the menu control process. Menu
planning is the first step whereby the manager/owner determines what are the most profitable and popular items which will be sold (prepared). In a retail F&B operation it is
critical to plan what products will be acceptable to the buy ing public, what price they would be willing to pay , and at what lev el of profitability for the operation. There is also a
chicken and egg ty pe question which arises: Which comes first, the facility design or the menu? It should be clear that the design of any giv en restaurant should follow the
dev elopment of the menu. The ty pes of equipment and facilities depends on what items will be prepared, what kind of atmosphere is desired, the price which must be charged, and
the location chosen. The av ailable budget also is a major consideration. The following figure represents a v ery comprehensiv e ov erv iew of the menu planning process.

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Menu Planning
When planning and designing an menu for a foodserv ice operation y ou need to take the following criteria into consideration:
How many customers will y ou serv e per meal?
What ty pe of serv ice will be prov ided?
What kitchen facilities are av ailable?
What are the hours of serv ice?
What ty pe of serv ice is desired?
What is the largest number of customers/meal period?
What ty pe of menu is contemplated?
How many menu choices will there be?
What is the seat turnov er?
What seating arrangement will be utilized?
What table sizes will be used (two seat, four seat, etc.)?
What is the aisle size and space per seat?
How many serv ice stations are there in the dining area?
What is the amount and ty pe of table side serv ice?
What is the price range of the menu items?
How many employ ees are there and what are their skill lev els?
What is the av ailability of all ingredients during the y ear?
What are the local and seasonal market conditions affecting cost and av ailability of food products and related needs?
What is the quality lev el chosen?
Is the menu compatible with the restaurant theme or cuisine?
Is there any special equipment required?
What is the food cost goal?
What can be done to av oid menu monotony ?
What is the profit goal that y ou ex pect to achiev e?
What menu prices would be attractiv e, and meet these goals?
What balance do y ou need between light and heav y meals, regular items, specials, etc.?

One of the most common design faults in F&B operations is not hav ing enough space allocated for the production areas. There is often too much space allocated to the serv ice area
as this is considered rev enue generating space. Many operations want to max imize the rev enue generating space and this means that they do not leav e enough space for
production. Cramped kitchens, inadequate dishwashing space, lack of proper storage and receiv ing facilities, poor staff rooms for lockers, eating, taking breaks, and washrooms
are all often a result of attempting to max imize the rev enue generating space. The general rule is that there should be a minimum ratio of 1 /3 to 2/3 for production v ersus serv ice
space. This will allow for proper production and serv ice of the required menu items.
The second key step is the pricing decision. Y our tex tbook has a v ery good discussion of way s to price menu items. One of the most common approaches is determining what the
traffic will bear or How much can I charge and get away with it? Few operations hav e the lux ury of pricing in this fashion. It has no bearing on the profitability of the menu and
does not take the customers needs and wants into consideration. Another less than satisfactory approach is looking at what the competition is charging and then charging the same
or less for similar products. This is also a poor approach because y ou hav e not taken into consideration the cost structure of the competitor which may be lower than y ours
thereby allowing him/her to sell at a lower price. It may be that y ou cannot make a profit at those prices. If so, y ou should consider selling a different product or price y ours
appropriately and then use marketing concepts to differentiate y our product. Why sell products at a loss? It is a slippery slope to bankruptcy to do that. In institutional operations
it is just as critical to price y our menu items properly . Y ou will be generally be required to follow a strict budget. This is often more difficult than in a retail ty pe operation. Y ou do
not hav e the ability to increase traffic or to adjust prices in mid contract so y ou hav e much less flex ibility . If y ou make a mistake in determining y our selling price, y ou may be
stuck with that decision for some time.
The final step in the menu control process is that of ev aluation. Y ou must keep on top of y our sales records at all times. Y ou need to know which items are selling and how
profitable they are. The best way to do this is by using menu engineering. There are a v ariety of way s in which this can be done but the most common approach is to look at how
many of each item y ou sell on a day to day basis (popularity ) and how much y ou make on each one (profitability ). Pages 1 24 through 1 37 in the tex tbook outline this process v ery
well. Y ou are try ing to place y our menu items in four categories, those which are:

a.
b.
c.
d.

popular and profitable (stars)

popular but not profitable (plow horses)
profitable but not popular (puzzles)
those which are neither profitable nor popular (dogs)

Y ou may hav e seen this matrix approach used to describe other concepts but it does work well for analy zing the menu. The question most often asked is: how does one
differentiate between profitable and unprofitable and between popular and unpopular? The most common approach is to use av eraging. Looking at the total number of items sold
and ex pressing the sales of each item as a percentage works well. Y ou then can take the items which hav e a percentage abov e the av erage as being popular and those below the
av erage as unpopular. The same can be done for profitability . Taking the av erage profitability of all items (total contribution margin (CM) div ided by the number of items sold
giv es the av erage CM. When y ou look at the CM of each indiv idual item y ou can then easily see which items are abov e the av erage and those which are below. Y our book has a v ery
good discussion of how y ou handle each of the v arious categories.
There is often a mov e toward eliminating dogs from y our menu. Be careful here! Remember y ou are using av eraging so y ou will alway s hav e some items below av erage. Y ou may
want to use this analy sis as a guideline just to train y our staff in what they should be try ing to sell most. Another factor to consider is something called the v eto v ote. Often F&B
operations are required to keep items on the menu that are clearly dogs. Let us say for ex ample, that four indiv iduals are going to lunch and three want hamburgers but one say s
that they are on a diet and only want to hav e a salad. Perhaps an establishment does not want to carry a salad on the menu but if they dont, they will lose the whole group to a
restaurant where all the group can be satisfied. In other words, that one person can v eto where the group goes to lunch. Ev en though a salad may be a dog, it must be kept on the
menu.

Module Five

The Design of an Effective

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The Design of an Effective

Control Process

BASIC TRUTH # 3
If it comes in your door, control it!
In prior modules we have put into place a system of standards which will allow us to determine how effective we have been in meeting our cost objectives.
But all of this would be for nothing if we did not have a system of controls in place to protect the assets of our business. If there are no controls in place,
assets such as inventory can be stolen, deteriorate if not handled properly, misplaced, or simply wasted. We could also get the wrong items or be charged
incorrect prices for what we have received (if we ever even receive it!). We will begin this module with the assumption that standard purchase specifications
are in place and that all your suppliers and staff are aware of them and use them exclusively.
Chapter 6 in your text discusses the controls required to do effective purchasing and receiving. Whether your operation is small or large, it is equally
important that the proper controls be in place. A mistake on a small order can be a big thing for a very small operation while a large operation affords the
opportunity to make many mistakes on such a large volume. Both instances are serious to the operator in question. The process of record keeping is
extremely important in these functional areas. Without appropriate records, you cannot trace errors or mistakes and you do not have the correct
information for your costing system.
While the vast majority of employees are honest, it only takes one or two dishonest individuals to destroy an operation. Putting a system of controls in place
is not designed to catch dishonest people, it is to provide you the manager with a level of comfort that you have protected the assets of the business and that
your ability to be effective is maintained. Putting the proper controls in place also removes the temptation to steal and employees are surprisingly
comfortable with this situation.
The prospect of theft is not the only reason we implement these controls. The possibility of error is also very high. These errors cost money and must be
avoided at all costs. People make mistakes naturally so it is important for the operation to catch them as they occur.
Control in the purchasing area is primarily to make sure standards are followed and to address security concerns. Careless and unscrupulous individuals can
cost you a lot of money and the proper controls will prevent this.
Today there has been a shift towards more one stop shopping approaches to purchasing. Large producers have expanded their product lines to increase
their profitability. This has put pressure on F&B operations to be more in line with dealing with a single supplier. Now it is common to find suppliers who can
supply virtually one hundred percent of a restaurants needs. Putting all your eggs in one basket often seems to be dangerous but there are some big
advantages to this approach. Not having to deal with multiple suppliers saves considerable time and effort. Most suppliers claim that the prices even
themselves out and that there is no price disadvantage with this approach. It is possible that there could be a problem with obtaining goods from another
supplier if your normal supplier has run out of a particular product because you are not a regular customer and may have to go to the bottom of their list.
Receiving Controls
The receiving area is perhaps the one which requires the most attention. It is here that many unnecessary costs can be avoided. Proper training of the
personnel is extremely important because they have to be aware of the various products which will be coming in the door and to handle them as effectively
and efficiently as possible thereby minimizing problems. Compliance with standards and security issues are of extreme importance in the receiving process.
Again, keeping accurate records is extremely important. The receiving report or Daily Purchases register is one of the key pieces of the total cost control
system. The receiver checks the incoming items to be sure they are the correct items which have been ordered as per the standard purchase specifications.
It is also important that the price is checked at some point; however, in larger operations this function is often carried out in another area such as the
accounting office. The receiving department is then required to move the goods to a secure area as soon as possible and ensure that they are never left
exposed to potential spoilage or theft. Your book has a sample receiving form on Page 168.
Perhaps the greatest requirement of the receiving process is to check incoming goods to ensure they are what was ordered both in terms of quality and
quantity. Even operations which would be considered relatively large, such as a typical hotel, would still have to check every item. Extremely large
operations such as the military and some private facilities which would purchase millions of dollars of supplies per month cannot possibly visually examine
every item which comes in but they do a selective sampling process which has been validated for accuracy.
Questions which will help your understanding of the purchasing and receiving control process are found on page 173 in your textbook. Answers to these
questions can be found at the end of these notes.
Storing And Issuing Controls
Storing is another point in the system where the control process can easily go off the rails. In many operations, the receiving, storing, and issuing procedures
are handled by the same individual or group of individuals. In cases like this it is important for the manager to keep a careful watch on things as there is a lot
of responsibility for control in the hands of one or a few people. In larger operations, part of the control process is that each of these functions is done by
different individuals thereby ensuring checks and balances in the system. Obviously, proper storage is important from a security of assets perspective but it
can be costly if goods are stored improperly causing damage. At this point we encounter the physical inventory for the first time. Inventory is extremely
valuable and can cost in the many thousands of dollars. It is important then to keep an appropriate amount of inventory on hand because there are large
costs associated with having too much (carrying costs such as interest, too much space for storage with the associated cost of construction and heat and
lights, etc.) Having too little means stock outs with the resultant unhappy chefs and ultimately unhappy guests.
Proper record keeping is essential here as well. A perpetual inventory system for such things as liquor is very important to keep on top of the varied and
expensive inventory. Requisition slips are the purchase invoices for departments and the record of exit from the storeroom. The receiving supplier invoices
are the record of entrance to the stores area. Proper control can take place if these are well documented.
The Headache of Taking Inventory
As mentioned earlier, inventory taking is an extremely unpleasant task for many managers and they often put it off when it should really never be delayed.
The information derived from the inventory is crucial to being able to make profitable decisions. There is no way to come up with actual cost results without
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The information derived from the inventory is crucial to being able to make profitable decisions. There is no way to come up with actual cost results without
taking inventory. There are, however, only two things which a manager needs to do to simplify the process.

Firstly, it is important to be organized. A place for everything and everything in its place is not really difficult to do. Each storeroom should be arranged in a
specific way and goods on shelves should be in a particular order. Obviously, this is easier if you have a fast food operation which has a very limited inventory
but it is also possible in any F&B operation with a bit more effort. The second factor is for you (or someone who works for you) to have basic spreadsheet
skills. This will allow you to use a small spreadsheet file to assist in taking the inventory. The spreadsheet files disk contains a file called INV.wk1 which
shows how this can be accomplished. Following is Exhibit 1 which illustrates the spreadsheet.

Exhibit 3 Physical Inventory & Valuation, Sorted for item number & category

Exhibit 4 Physical Inventory & Valuation, Sorted for location & counting sequence

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Exhibit 2 shows what the spreadsheet looks like when it has been sorted to take inventory. As you can see, the locations have all come into order and the
counting sequence for each location is also in order. What an easy way to do inventory. When the counting is completed, all that has to happen is to re-sort
the spreadsheet back into its original form as in Exhibit 1. This is quite simple when you have learned some extremely basic skills with respect to
spreadsheet programs. The totals are automatically calculated so the whole process may actually take as little as 10 seconds once the inventory amounts are
entered. This means that the whole process to take inventory might be as short as an hour if the manager is somewhat organized. Now there is virtually no
reason why actual cost analysis cannot be done at least on a weekly basis.
The information provided here will obviously be very helpful in determining the degree of success you have achieved this period but it will also help in such
things as menu planning decisions and purchasing decisions. You will always know what you have on hand and what you will require.

Module Six

Production and Serving

Controls

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Production and Serving Controls

Success in any F&B operation depends on being able to serv e a consistent product in a cost effectiv e manner. It is clear that production and serv ice standards play a big role in
ensuring that this process can take place. This does not howev er, take place in a v acuum. It is one thing to follow standards to the letter but if y ou hav e not planned properly , no
lev el of standards will sav e y ou if y ou hav ent got enough of the product to sell when demanded by the client. In order to do that, y ou must do adequate forecasting.

Basic Truth #4
Forecasting is very difficult, especially about the future.

There are a v ariety of forecasting techniques av ailable for all food serv ice managers to use but there are only four main criteria which y ou will use to determine which one is best
for y our purposes:

a.
b.
c.
d.

cost
lev el of accuracy desired
the past demand pattern
ease of use

1.
There is generally a trade off between cost and accuracy . If y ou want to be ex tremely accurate y ou would generally hav e to pay a substantial amount for such a technique.
On the other hand, if y ou are willing to forgo accuracy to some degree, y ou can do forecasting v ery inex pensiv ely .
The past demand pattern has a big impact on which technique y ou would use. If, for ex ample, the past demand pattern is v ery erratic or unstable it would be necessary to
look at the most recent data as the older data may be meaningless. If the past demand pattern has been rising or falling, certain techniques such as an av eraging technique
may prov ide forecasted figures which lag behind the actual amounts.
The adv ent of the microcomputer and spreadsheets has made forecasting much easier than it has been in past y ears. Now one can ev aluate a number of techniques with
relativ e ease. As in all things, howev er, nothing beats ex perience in the field about which the forecasting is being done and a goodly supply of past information.
For our purposes here, we are going to assume that we are forecasting for an ongoing operation which has been in operation for some time. There is a disk included with the
notes package which has a number of spreadsheet files which hav e names Forecast.wk1 and twelv e other files from hotel1 .wk1 to hotel1 2.wk1 . These files represent a full
y ears data in Forecast.wk1 and each of the twelv e months on the others. I hav e purposely sav ed these files in the least complicated Lotus 1 -2-3 fashion, with the .wk1
ex tension. Each of the 1 - 1 2 files represents a month of data for the hotel. They are simply lists of information about the Truly Canadian Hotel. The file contains information
for the past y ear on how many guests stay ed in the hotel and how many ate in the hotel dining room each day . Those of y ou who are familiar with Lotus 1 -2-3 or any other
spreadsheet package will hav e little difficulty using this information. If you are not com fortable with using a spreadsheet package, please see below for a
description of how to do this m anually.

Spreadsheet Applications Of Forecasting

In using spreadsheets to do forecasting, we will look at a v ariety of possible techniques and choose the one which has the least error. One spreadsheet process is to plot the
data on a graph to see if there are any patterns in the data. Y ou get a feel for how stable the past demand pattern really is. Y ou may find that it is far simpler to sort the data
into logical segments such as all the day s of the week ie. all Tuesday s in a group and then use only the Tuesday data to forecast for the nex t Tuesday . Once y ou sort the data
and choose which day s y ou will use, y ou then need to try out a number of potential techniques to see which one has the least error. Once y ou graph the data, y ou will be able
to tell readily if the past demand pattern is quite stable as in Figure A, or if it is v ery erratic like in Figure B. The more stable the pattern, the easier it is to forecast.

Please read the Supplem ental Reading, Forecasting Methods to see how to do the m echanics of forecasting.

Manual Forecasting
If y ou are not familiar with using a spreadsheet package, I must encourage y ou to inv estigate way s and means of learning how to use any one of the standard spreadsheet
packages such as Microsoft Ex cel, Lotus 1 -2-3, or Quattro Pro. It is almost becoming a necessity for all managers to be able to use these tools effectiv ely . They greatly
simplify many of the routine tasks of management. Places to check on potential course offerings would be ex tension or continuing education programs at y our local high
school, community college, or univ ersity . Almost all of them offer non-credit courses in using computers and software. It is also possible to take courses by correspondence
to learn these skills. V irtually all of the software packages contain a tutorial program to teach the user how to begin and progress quickly .
Hav ing said this, it is still possible to do all of these techniques manually . After all, the computer is really nothing more than a sophisticated calculator but a v ery powerful
calculator. Begin by looking at the information contained in Figure C. This is the data for January 1 997 . We will try out a number of forecasting techniques to see which one
has the least amount of error. The simplest techniques are the mov ing av erages. We could use a three, four, or fiv e period mov ing av erage. As new data becomes av ailable,
y ou drop off the oldest data and continue to do this for all the data. Y ou then look at which one was the most accurate. To measure accuracy we can use something called the
mean absolute dev iation the MAD. In other words, we look to see what the amount was on av erage. It is called the absolute difference as it doesnt matter if it is high or
low, just that there is a difference - meaning that it was not correct. In this ex ample, we are looking at the daily figures for January and try ing to forecast how many people
will be coming into the dining room on February 1 st.

Module Seven

Talking About Food Costs

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Perhaps the most common statistic quoted by F&B managers with respect to their operations is the food cost percentage. V irtually ev ery operation I am familiar with uses this as a
y ardstick for measuring success. Historically , there was no other measure which was used. Today , we hav e recognized that this is a good tool to see where we stand in a general
manner; howev er, there are other tools which should be used in addition to this v ery simplistic measure. We will dev elop these tools as we progress in the subsequent modules.
For illustrativ e purposes, we can assume that we hav e an operation which serv es only food without bev erage sales. (By the way , bev erage sales generally refer to alcoholic
bev erage sales. Sales such as juice, coffee, pop, etc fall under the category of food sales.)
The food cost percentage is simply the cost of food sold div ided by the sales. It is important to differentiate between the cost of food which was actually sold and costs of food
which was not actually sold. Food not sold could be things such as staff meals, wastage, food such as cherries and lemons sent to the bar for use in making drinks, etc. There should
be v ouchers or requisitions from other departments to account for such food items. Staff meals should be carefully recorded. Any waste should be noted and a separate cost line
for it should be created in the ex pense part of the financial statement. Once this is done we can then account for any items which were not directly sold to the guests. When we
know the true amount for the cost of the food sold (the actual cost) we can then compare this against what the cost should hav e been (the standard cost).
At this point it is possible to determine the effectiv eness and efficiency of the kitchen operation.

Calculating The Actual Food Cost

Opening Inv entory (the closing inv entory from the prev ious period)
PLUS
Purchases (the inv oice amounts from each of the Daily Purchases Register files)
MINUS
Closing inv entory (the goods counted after the close of business of the last day of the period)
MINUS
any adjustments
cost of staff meals
waste report costs
food transferred to the bar (or other departments)
any goods returned to suppliers for credit
any other goods transferred out (to other units for ex ample)
PLUS
goods transferred in from other departments (wine for cooking from the bar)
any other goods transferred in
= T OT AL COST OF FOOD SOLD
Some operations hav e controlled storerooms where any goods leav ing them is accounted for on a requisition and that requisition becomes an inv oice for the kitchen or
department receiv ing them. This is common in a hotel with central stores which sends out goods to v arious units within the hotel. In such an operation each department would
hav e to account for their food costs independently and the requisitions would be their purchases. Sometimes, howev er, goods go directly to the kitchen rather than to the central
stores. Ex amples of this might be bread and milk where the bakery and dairy place the fresh goods directly in the kitchen instead of the central storeroom. Any such goods need to
be carefully accounted for and included in the food cost total. As we will see in the controls section later, it is important to be especially careful when accounting for these goods as
it is possible for theft to occur here.

Beverage Costs
The process for operations with bev erage sales is not really any different. Y ou simply must take care to ensure that the bev erages are treated in ex actly the same way . In addition
it is important to make sure that the costs for food and the costs for bev erage are not mix ed together. They should be accounted for and analy zed separately but on the same
financial statement.
Y ou can see from the abov e that we hav e ex cluded all costs not related to things we actually sold and hav e added in costs of any goods we hav e receiv ed from any other sources
not reflected in the inv oices from our suppliers. Now when we say the food cost is 32.5% , for ex ample, we know that that cost reflects the cost of the food that was actually sold.

Daily Vs To-Date Costs

It is most useful to keep a running total of sales and costs which is generally referred to as the to-date report. Many operations hav e the daily food cost report and the to-date
report on the same sheet. The following table represents a ty pical sales history report which includes the concepts of to-date sales.

Exhibit 5 Daily and To-Date Food Cost Report

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Analyzing Food Costs

It is commonplace for many operations to use only the food cost percentage as a measure of success for the facility . This is a dangerous approach to management. It is clearly a
good rule of thumb to see if y ou are in the ballpark of where costs should be but it does not accurately reflect how good a job y ou did as a manager in making sure the costs were
what they should hav e been. We will see in future modules that there are a lot of v ery bad things that can happen in the operation of the facility which are masked by the food cost
percentage. On the surface it may be good that the target food cost of 32%, for ex ample, was achiev ed. It is critical to be aware that what one is referring to in terms of a specific
food cost percentage is the AV ERAGE food cost percentage. Many different things can happen, such as higher and lower food costs balancing out to be 32%. Some of these may be
appropriate but what if the quality of some food was poor and other food was much better that it should hav e been? It av eraged out to what it should hav e been but one customer
was gy pped and another got more than they deserv ed. Both are a problem because one is mad at being gy pped and the other now has an unrealistic perception of what a certain
dish is supposed to be and will be disappointed on the nex t v isit when it is ordered again and the quality is lower than the last time.

BASIC TRUTH # 5

Inconsistencies are perhaps the greatest problem for F&B operations and are totally covered up by averaging food cost percentages.

In subsequent modules we will see that it is possible to still use the idea of food and bev erage cost percentages as an important y ardstick of performance but other more accurate
measures of effectiv eness such as analy sis of v ariance will be utilized as well.

Applying the concept of ideal cost and The Myth of the Food Cost Percentage
In many books, the term ideal cost is also referred to as potential cost or ev en the standard cost. Whatev er term y ou are comfortable with using does not matter because they all
mean ex actly the same thing. If y ou see any of these terms in books or in ex hibits in these notes, y ou can be sure that it means what the cost should hav e been. In Module #2 we
dev eloped the concept of the standard cost for food and bev erage items. This was calculated by taking the standard recipe, preparing the item using products purchased with
standard purchase specifications, and then working out the standard cost per portion. In other words, the ex act cost that ev ery menu item should be. Once we hav e this amount
for ev ery menu item we can use this to figure out what the cost for our daily sales should hav e been. The following figure represents a summation of daily sales for a particular F&B
operation.

Exhibit 6 Sum m ation of Daily Sales

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This sample menu details the sales for a giv en day in this restaurant. Columns 1 through 6 are imported from the standard recipe cards. The selling price comes from the menu and
the remaining columns are simple calculations. This is another ex ample of rows and columns which shows how simple this is using spreadsheets. Ev ery thing in this chart can be
done by hand in a few minutes.
We see here that the total standard food cost for all items sold is $1 1 00.89, the actual sales are $3007 .65 and the standard food cost percentage is 36.60%. This is an interesting
and effectiv e way to present the statistics because we can determine the standard food cost percentage for each menu item and for each category as well. For ex ample, the three
appetizers hav e a food cost percentage of 44.7 5%, 32.00%, and 33.68% respectiv ely . The ov erall standard cost percentage for appetizers is 40.43%. This is a great illustrativ e
ex ample because y ou can see that if the mix of items which are sold changes, then the ov erall percentage can change significantly . If we had only sold shrimp cocktail, the food
cost percentage for appetizers would hav e been 44.7 5%.

A VERY IMPORTANT BASIC TRUTH - # 6

Y ou dont take percentages to the bank, you take dollars!!!!!!!

This is just one reason why it is dangerous to use only the food cost as a measure of success. Although we hav e a food cost percentage of 44.7 5% on Shrimp Cocktail, ev ery one we
sell returns $2.21 to our pocket! The Fruit Cup has a better food cost percentage of 32% but we only make 85 cents on each one of those. Which one would y ou rather y our serv ice
staff sell?
A much better measure of success is to look at the food that was actually sold (as in the Sales History Report) and see what the cost should hav e been (the Total Standard Cost) and
then use the formulas which were dev eloped earlier in this Module to calculate the actual food costs. Now we hav e something concrete to go on. We can see what the costs actually
were (for what was sold) and compare that number to what they should hav e been (for what was sold). Looking at any differences between these numbers is called analy sis of
v ariance and helps the manager track down where potential losses may hav e occurred. If y ou hav e this much information on a daily or weekly basis, any problems are apparent
immediately and y ou can track them down and take correctiv e action right away before too many losses or problems hav e mounted up.
I know that the ex perienced managers among y ou are say ing: this is a lot of work and I hav e too many operational issues to deal with to do this ev ery day . It is possible to simplify
and streamline the process to make it much faster and easier. It is clearly in y our best interest because y ou are likely going to be ev aluated on the financial performance of the
restaurant abov e all else while still being held responsible for all those other important operations issues.
The creation of the sy stem of standards is a giv en for ev ery food and bev erage facility . As stated earlier, y ou cannot be successful in the long term without them period! Once
this has been done, the standard cost worksheet is easy . The sales figures are taken from the point of sale sy stem or the guest checks. It is v ery important to remember that ALL of
these can be done by hand without any technology . It just speeds it up by a factor of 1 00 to use a spreadsheet to do it. A computer is nothing more than a big calculator. If y ou are

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these can be done by hand without any technology . It just speeds it up by a factor of 1 00 to use a spreadsheet to do it. A computer is nothing more than a big calculator. If y ou are
not comfortable using one, hire an indiv idual who has these basic skills at the v ery minimum. I am also not talking about some highly ex pensiv e computer to do this. The oldest
computers without any bells and whistles can do all these things. It is better to buy something more modern that has the power to do other things for y ou but it is not an absolute
requirement. Using a computer has become a necessity in business today if y ou want to be an effectiv e manager. It allows y ou to hav e current, timely information with which to
make decisions about y our operation and frees time for y ou to focus on other operational concerns.
One of the tasks which must be done to complete this analy sis of v ariance is to take inv entory . It is not possible to calculate the Actual Costs without hav ing done this step.
Unfortunately , taking inv entory is perhaps the most time consuming task which managers hav e to endure in the cost control process. It is for this reason that doing inv entory is
not done as often as it should be. In many cases, ev en if the inv entory is counted, the nex t step of ex tending the totals is often put off due to time constraints or lack of good
information about prices of products and/or poor record keeping. In Module #5 we dev eloped a sy stem whereby it is possible to take inv entory almost on a daily basis without
taking hardly any time from y our day . Once this hurdle is ov ercome, the analy sis of v ariance becomes quick and painless.

Module Eight

Taking Corrective Action

Once the information is all collected and analy zed, the manager then has to look at where any v ariance took place. It is obv ious that there may be a problem when the actual cost is
HIGHER than the standard cost (ie. higher than it should hav e been) but it is just as important to ex amine v ariance where the actual food cost is LOWER than the standard food.
This might not sound logical but remember, when we established our sy stem of standards we did this to determine what things SHOULD hav e been. If costs were lower than what
they should hav e been it means that something was probably not equal to our standard.
There are sev eral reasons why costs might hav e been lower than they should hav e been:

1. costs were lower due to a decrease in costs from a supplier which was not taken into consideration when dev eloping our Standard Portion Cost
2. customers receiv ed a smaller portion than they were supposed to get thereby undermining the concept of product consistency
3. an inferior quality ingredient was substituted for what it should hav e been which may v ery well hav e undermined the concept of product consistency
a.
While number 1 is not a v ery serious problem, it makes the managers job much more difficult as numbers and calculations should be as accurate as possible so as to
giv e true results for the manager to measure effectiv eness properly . On the other hand, numbers 2 and 3 present a major problem for the manager as they totally
undermine the sy stem of standards in place and represent a serious breach of operational policy .
Particular attention should be paid to Ex hibit 4, Checklist For Profitable Food Operation and Ex hibit 5, Checklist for Profitable Bev erage Operation as they prov ide an
ex cellent and comprehensiv e list of areas to assess in order to facilitate the control function in operations.
Correctiv e action should basically inv olv e compliance with the complete standards process and strict adherence to the principles of effectiv e control discussed in the
prior modules.

Module Nine

Revenue Control
Basic Truth # 7
Effective, tight control is not designed to catch thieves, it is put in place to elim inate errors, to let potential thieves know that you are watching, and to
elim inate the tem ptation for theft by rem oving any opportunity.

I once heard a human resource specialist deliv er a lecture on theft in operations and she began the process by say ing that y ou must treat all employ ees as potential thiev es and to
activ ely attempt to catch indiv iduals in the act. What a sad philosophy to gov ern y our working life! It is true that a large number of employ ees in all industries indicate that they
hav e stolen from an employ er (although that can mean something a small as a pen or a piece of pie), howev er, it is another thing to be obsessed with this as a manager. It is
important to note that many organizations do report employ ee theft to be one of their major concerns. Retail operations claim that theft by employ ees and customers accounts for
a major percentage of all their losses. Hav ing a proactiv e theft prev ention approach rather than a reactiv e catch the thief approach is a much better attitude for management to
hav e.
Remov e the temptation by hav ing effectiv e controls thereby eliminating any opportunity for theft. Hav ing a sy stem of controls in place indicates to employ ees that y ou are on top
of things in y our operation and that any discrepancies will be noticed quickly and inv estigated. The inv estigation is not to try to catch a thief but is designed to find out why things
were not what they should hav e been. This is a big difference in outlook and philosophy but still serv es as an effectiv e theft deterrent.
I believ e that when employ ees feel that they hav e been treated unfairly , they often tend to get back at the employ er and this sometimes inv olv es stealing. Putting policies and
procedures in place which treat employ ees properly will decrease the problem of theft. Employ ees also often hav e an unrealistic perspectiv e of how profitable a F&B operation
really is. They only see the rev enues flowing in and dont see how much is actually paid out. They often think that the owner is wealthy when in fact, the business could be
operating at a loss. They feel inequity because of the mistaken idea that all this money is being kept by the owner and they dont get a fair share. Communication of the real costs of
doing business can be a real ey e-opener for employ ees.
Chapter 1 1 in the tex tbook deals with control of the rev enue of the operation. The food serv ice business is basically a cash business and cash remains one of the most difficult
things to control.
The adv ent of the plastic credit cards and debit cards has dramatically reduced the amount of actual cash that an operation may hav e on hand at any giv en time but it remains a

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significant amount particularly in such operations as fast food establishments. As well, the products which F&B operations use are commodities which ev ery body uses on a daily
basis and therefore are prone to theft.
Rev enue Canada and the Prov incial Tax office will ex pect that F&B operations keep strict records. In fact it is a requirement to do so. There must be an audit trail which can
account for all transactions. In order for this to happen in retail F&B operations, there must be numerically ordered guest checks. Ev ery one must be accounted for. Missing
checks will indicate to the auditor that perhaps checks are actually being collected and then destroy ed therefore remov ing any ev idence of a sale. The owner then pockets the cash
thereby ev ading tax es. Today , most operations hav e a point of sale sy stem (POS) which tracks all transactions and actually prints the guest checks. These will allow the auditor to
hav e a much easier time accounting for all transactions. There still has to be a way to handle the cash pay ments howev er. There are only two basic approaches: a) there is a central
cashier or b) each serv er keeps their own bank and settles up with management at the end of the shift.

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