Cost Control Measures for Food Service Operations

Chapter 9

Objectives
Define the Siamese twins of management Summarize the importance of control systems Clarify the use of financial statements Define fixed, variable, conversion, and common costs

Objectives (contd.)
Outline the purpose of production reports Relate the concept of food cost and the Forty Thieves Summarize inventory management Explain how to calculate food and labor costs

Objectives (contd.)
Describe how to make payroll calculations Perform break-even analysis and illustrate the method used for graphing

Using Other Peoples Money

Food service operators can improve profitability with efficient purchasing, stock management, and cost controls
Purchase stock using free credit from suppliers Maintain minimal yet sufficient stock Quick turns allow goods to be sold before the bills are due

The Importance of Control Systems

Controls, or systems of measure
Gauge progress of business towards its goals

Planning and controls are the Siamese Twins of Management

The Importance of Control Systems (contd.)

Control process consists of four steps:
Establish standards and procedures Train employees to follow them Monitor performance Take appropriate action to correct deviations

The Importance of Quality Standards

Quality can be measured using predetermined standards Measurement should be made each time a meal is served

Evaluating Performance Using Financial Statements

Four primary financial statements used to manage and control finances
Income statements Balance sheets Cash flow statements Operating budgets

Managing by Income Statements

Income statement (profit and loss statement)
Gives detailed listing of revenue and expenses over the accounting period

Basic formula for the income statement

Revenue Expenses + Gains - Losses = Income

Managing by Income Statements (contd.)

Three sections of the P&L statement
Gross profit section
Sales, cost of sales, and gross profit

Operating expense
Operating expenses and operating income

Nonoperating expense
Interest and income taxes

Managing by Balance Sheets

Balance sheet shows a companys assets and liabilities Shareholder equity is calculated as:
Assets Liabilities = Net worth

Balance sheets are prepared for shareholders or loan officers, to show the financial health of the business

Managing by Cash Flow

Cash flow is the comparison of cash on hand to bills due in the near future Accounts payable
Money due to the business

Accounts receivable
Money the business owes others

Managing by Operating Budgets

Operating budgets forecast expenses a business must incur to achieve targeted sales revenues Operating budgets are income statements prepared for a future date Sales are a companys revenue

Managing by Operating Budgets (contd.)

Prime costs are food and labor expenses
Most restaurants like to keep their prime costs between 60-69 percent of sales

Fixed costs (overhead)

Remain the same no matter how many customers are served

Managing by Operating Budgets (contd.)

Variable (controllable) costs
Change depending on the number of customers served

Conversion costs
Direct labor plus business overhead

Common costs
Shared costs that are not easily assigned

Evaluating Performance by Other Management Tools

The food service industry uses management tools that are unique to the industry
In addition to traditional management tools

Make-or-Buy Decisions
Operator must decide whether to make or buy Ready-to-eat foods have a higher food cost but a lower labor cost If costs are comparable, operator must decide which is better for his operation
Factors: space, uniqueness

Production Reports
Serve three primary purposes
Control, communication, and calculation

Used to record activity surrounding all prepared menu items The Forty Thieves of Food Cost lists ways in which money can be lost

Menu Engineering
Menu analysis is recording sales history of all items sold
Evaluating items contribution to profit Evaluating customer appeal

Menu engineering
Classifies each item according to popularity index and profitability index

Controlling Inventory
Weekly inventory
May be necessary if food cost figures not in line with budgets

Another method of control:

Restricting purchases to a certain percentage of sales

Calculating Inventory Turnover

The rate of inventory turnover is a sign of efficiency and effective purchasing Relevant equations:

Calculating Food and Beverage Costs

Food cost percentage
Ratio of food costs to sales

Methods to help lower food costs

Adjust pricing strategies Provide proper training; minimize waste Reduce product quality; update inventory values; organize storage room

Calculating Food and Beverage Costs (contd.)

Methods to help lower food costs (contd.)
Control portion sizes; monitor weights Link chef pay to food cost percentage Set up purchase order system and budget Use trade-outs Look for discounts

Calculating Food and Beverage Costs (contd.)

Standardized recipe and portion costs
Standardized recipes are critical to achieving consistent profit There are 12 steps that can help in developing a standardized recipe Recipe costs should be calculated prior to menu pricing

Calculating Labor Costs

Labor costs are all monies paid to employees to run the business Labor cost percentage is relationship between labor costs and sales

Calculating Labor Costs (contd.)

Calculating payroll
Hourly wage plus overtime, or salary Deductions must be withheld
Federal and state income taxes Social security Voluntary deductions

Break-Even Analysis
Used to evaluate how much sales revenue is needed to cover the costs of the establishment
Often employed when considering a capital investment or business expansion

Calculating the Break-Even Point

Break-even point
Volume of sales needed to cover the total costs

9.13 Break-even graph

Summary
Food service operators can improve profitability with efficient purchasing, stock management, and cost controls Control systems are used to evaluate progress toward profitability goals Four primary financial statements are used to manage and control finances

Summary (contd.)
Important tools to achieving profitability
Production reports Menu engineering Controlling inventory Calculating inventory turnover Calculating food, beverage and labor costs Break-even analysis