What is Cost Control???

Minimizing costs the company

must expend without sacrificing the
end product (service/food) that the
customer receives.
Revenue and Expense
Revenue - Expenses = Profit

Revenue – Desired Profit = Ideal Expense

Expense
Revenue = Expense %

Revenue (100%)
- Food and Beverage Cost %
- Labor Cost %
- Other Expense %
= Profit %
 A budget is simply a forecast or
estimate of projected revenue, expense,
and profit.
The 28-day-period approach to budgeting divides a year
into 13 equal periods of 28 days each. This helps the
manager compare performance from one period to the
next without having to compensate for “extra” days in any
one period.

If significant variations with planned results from a budget

occur, management must:
1. Define the problem
2. Determine the cause
3. Take corrective action
Sales Forecasts
Advantages to Precise
Sales Forecasts
1) Revenue Estimates
2) Expense $ Estimates
3) Scheduling Workers
4) Scheduling Food and Service Production needs
5) Proper purchasing of amounts of food for
immediate use.
6) Increased operational efficiency – lower
pricing, increased benefits for workers.
7) Increased dollars for growth
8) Increased profit levels and stockholder value
 Sales This Year – Sales Last Year = Variance
Percentage variance indicates the percentage change in sales
from one time period to the next. 
Sales This Year –Sales Last Year
Sales Last Year = Percentage Variance
or
Variance
Sales Last Year = Percentage Variance

 
 Revenue forecast is calculated using the following formula: 
Forecast =Sales Last Year + (Sales Last Year X %Increase) 
 Forecasting
 The guest count forecast is determined by
multiplying guest count last year by the % increase
estimate, and then adding the guest count last year.
 Guest Count Last Year + (Guest Count Last Year x %
Increase Estimate) = Guest Count Forecast
Or
Guests Last Year x (1.00 + % Increase Estimate) = Guest Count
Forecast
 Cost of Food & Bev
•Once you know the average number of people selecting a given menu item, and the total
number of guests who made the selections, you can compute the popularity index, which
is defined as the percentage of total guests choosing a given menu item from a list of
alternatives.
Popularity Index =Total Number of a Specific Menu Item Sold
Total Number of All Menu Items Sold

 
The basic formula for individual menu item forecasting, based on an item’s
individual sales history, is as follows:
 
Number of Guests Expected x Item Popularity Index
= Predicted Number of That Item to Be Sold
Standardized Recipes
The standardized recipe controls both the quantity and quality of what
the kitchen will produce. It consists of the procedures to be used in
preparing and serving each of your menu items. The standardized recipe
is the key to menu item consistency, and ultimately, operational success.

 In general, standardized recipes contain the following information:

1. Item name
2. Total yield (number of servings)
3. Portion size
4. Ingredient list
5. Preparation/method section
6. Cooking time and temperature
7. Special instructions, if necessary
8. Recipe cost (optional)
Converting Recipes – Factor or Percentage

Yield Desired
Current Yield = Conversion Factor

Ingredient Weight / Total Recipe Weight = % of Total

then
% of Total x Total Amount Required
= New Recipe Amount
Waste, Yield AP & EP
Yield % = 1.00 - Waste %
AP – Waste (EP)
AP = Yield %
EP Required
Yield % = AP Required

EP Required =AP Required x Yield %

Calculating Food Cost
Determining Actual Food Expense
 Cost of food sold is the dollar amount of all food actually sold, thrown away, wasted or stolen. It is
computed as follows:
Beginning Inventory
  PLUS
  Purchases
= Goods Available for Sale
  MINUS
  Ending Inventory
= Cost of Food Consumed
  MINUS
  Employee Meals
  = Cost of Food Sold
Six Column Reporting
Six Column Food Cost % Estimate
1. Purchases Today
Sales Today = Cost % Today
2. Purchases to Date
Sales to Date = Cost % to Date
Sales Purchases Cost &
Weekday Today To Date Today To Date Today To Date
Monday $850.40 $850.40 $1,106.20 $1,106.20 130.08% 130.08%
Tuesday $920.63 $1,771.03 $841.40 $1,947.60 91.39% 109.97%
Wednesday $1,185.00 $2,956.03 $519.60 $2,467.20 43.85% 83.46%
Thursday $971.20 $3,927.23 $488.50 $2,955.70 50.30% 75.26%
Friday $1,947.58 $5,874.81 $792.30 $3,748.00 40.68% 63.80%
Saturday $2,006.41 $7,881.22 $286.20 $4,034.20 14.26% 51.19%
Sunday $2,404.20 $10,285.42 $0.00 $4,034.20 0.00% 39.22%
Calculating Beverage Cost
Beginning Inventory
  PLUS
  Purchases
= Goods Available for Sale
  Less
  Ending Inventory
  Less
  Transfers from Bar
  Plus
  Transfers to Bar
  = Cost of Beverage Sold
Calculating Sales Mix & Terms
Item Dollar Sales
Total Beverage Sales = Item % of Total Beverage
Sales

Two-key system
Oxidation
Broken case
Empty for full system of managment
F&B Production

Necessary Components of F&B Production Planning:

1) Maintain Sales Histories
2) Forecast Future Sales Histories
3) Purchase and store needed F&B supplies
4) Plan daily production schedules
5) Issue needed products to production areas
6) Manage the food and beverage production process
Controlling Product Issues
Issues Today
Sales Today = Beverage/Food Cost Estimate Today

The six-column form requires only that the manager divide today’s
issues by today’s sales to arrive at the today estimate as follows
Beverage Cost
Issues Sales Estimate

Date Today To Date Today To Date Today To Date

1-Jan 945 945 1450.22 1450.22 65.16% 65.16%
2-Jan 785 1730 1688.4 3138.62 46.49% 55.12%
3-Jan 816.5 2546.5 2003.45 5142.07 40.75% 49.52%
4-Jan 975.4 3521.9 1920.41 7062.48 50.79% 49.87%
5-Jan 1595 5116.9 5546.5 12608.98 28.76% 40.58%
6-Jan 1100.2 6217.1 5921.27 18530.25 18.58% 33.55%
7-Jan 18.4 6235.5 495.2 19025.45 3.72% 32.77%

Total 6235.5 19025.45 32.77%

Methods of Inventory Control
 A physical inventory is one in which an actual,
physical count and valuation of all inventory on
hand is taken at the beginning and close of each
accounting period.
 A perpetual inventory system is one in which
additions to and deletions from total inventory
are recorded as they occur.
 The ABC system attempts to combine both the
physical and perpetual inventory systems. It
separates inventory items into three main
categories
ABC Inventory System
o Category A items are those that require tight control and the
most accurate record keeping. Those are typically high-
value items, which can make up 70% to 80% of the total
inventory value.
o Category B items are those that make up 10% to 15% of the
inventory value and require only routine control and record
keeping.
o Category C items make up only 5% to 10% of the inventory
value. These items require only the simplest of inventory
control systems
Inventory Control Formulas
Cost in Product Category
Total Cost in All Categories = Proportion of Total Product Cost

Cost as per Standardized Recipes

Total Sales =Attainable Product Cost %

Actual Product Cost

Attainable Product Cost = Operational Efficiency Ratio
Principles of Cost Percentages
 The food cost percentage equation is extremely
interesting. In its simplest form, it can be
represented as:
A
where B =C
A = Cost of Goods Sold
B = Sales
C = Cost Percentage
If costs can be kept constant but sales increase, the cost
percentage goes down.

If costs remain constant but sales decline, cost percentage

increases.

If costs go up at the same rate sales go up, your cost

percentage will remain unchanged.

If costs can be reduced but sales remain constant, the cost

percentage goes down.

If costs increase with no increase in sales, the cost

percentage will go up.
Managing F&B Pricing

 Standard Menu
 Daily Menu
 Cycle Menu
 Value Pricing
 Bundling
Factors Influencing Menu Pricing
1. Local competition
2. Service levels
3. Guest type
4. Product quality
5. Portion size
6. Ambience
7. Meal period
8. Location
9. Sales mix
Selling Price Determination
Cost of a Specific Food Item Sold
Desired Food Cost % of That Item

= Selling Price of That Item

Multiplier Method

1.00
Desired Product Cost % = Pricing Factor

Pricing Factor x Product Cost = Menu Price

Contribution Margin Method
Selling Price – Product Cost = Contribution
Margin

Product Cost + Contribution Margin Desired = Selling Price

Pricing Buffets
Total Buffet Product Cost
Guests Served = Buffet Product Cost per
Guest

The secret to keeping selling price low for

a salad bar or buffet is to apply the ABC
method. A items should comprise no
more than 20% of the total product
available; B items, no more than 30%;
and C items, 50%.
Labor Cost
 Labor Expense includes salaries and wages, but it consists of
other labor-related costs as well.
 Payroll refers to the gross pay received by an employee in
exchange for his or her work.
 A salaried employee receives the same income per week or
month regardless of the number of hours worked.
 Minimum staff is used to designate the least number of
employees, or payroll dollars, required to operate a facility or
department within the facility.
 Fixed Payroll refers to the amount an operation pays in salaries.
 Variable Payroll consists of those dollars paid to hourly
employees. Sometimes employees have both a fixed and
variable element to their pay.
Productivity Standards
Output
Input =Productivity Ratio

Cost of Labor
Total Sales =Labor Cost %

Total Sales
Labor Hours Used = Sales per Labor Hour

Cost of Labor
Guests Served = Labor Dollars per Guest Served
Productivity and Scheduling
hour 7.5
Productivity = covers = 60 = 0.125

Productivity X Forecast Cover = Scheduled Hours

0.125 x 3000 Covers = 375 hours

Factors Influencing Productivity
10 Key Factors Affecting
Employee Productivity
1. Employee Selection
2. Training
3. Supervision
4. Scheduling
5. Breaks
6. Morale
7. Menu
8. Convenience vs. Scratch Preparation
9. Equipment
10. Service Level Desired
 A job specification is a listing of the personal
characteristics needed to perform the tasks contained in
a particular job description.
 A job description is a listing of the tasks that must be
accomplished by the employee hired to fill a particular
position.
 Task training is the training undertaken to ensure an
employee has the skills to meet productivity goals.
Employee Turnover
Employee Turnover Rate = # of Employees Separated
# of Employees in Workforce

A voluntary separation is one in which the employee made the

decision to leave the organization.
An involuntary separation is one in which management has
caused the employee to separate from the organization.

Employee Turnover Rate =

Number of Employees Separated

Number of Employees in Workforce
Managing Other Expenses
 Other expenses are those items that are neither
food, beverage, nor labor.
 While there are many ways in which to consider
other expenses, two views of these costs are
particularly useful for the foodservice manager.
They are:
1.Fixed, variable, or mixed
2.Controllable or non-controllable
  The following shows how fixed, variable,
and mixed expenses behave as sales volume
increases:
Expense As a Percentage of Sales Total Dollars

Fixed Decreases Remains the

Expense Same

Variable Remains the Same Increases

Expense

Mixed Decreases Increases

Expense
Financial Analysis
 To ensure that this financial information is presented in a
way that is both useful and consistent, the uniform systems
of accounts have been established for many areas of the
hospitality industry.
 The USAR can better be understood by dividing it into
three sections: gross profit, operating expenses, and non-
operating expenses.
 These three sections are arranged on the income statement
from most controllable to least controllable by the
foodservice manager.
The gross profit section consists of food and beverage sales and
costs that can and should be controlled by the manager on a daily
basis.
The operating expenses section is also under the control of the
manager but more so on a weekly or monthly basis (with the
exception of wages which you can control daily).
Nonoperating expenses section is the least controllable by the
foodservice manager. For example, interest paid to creditors for
short-term or long-term debt is due regardless of the ability of the
manager to control operations.
The income statement is an aggregate statement. This means that
all details associated with the sales, cost, and profits of the
foodservice establishment are summarized on the P&L statement.
Although this summary gives the manager a one-shot look at the
performance of the operation, the details are not included directly on
the statement.
Analysis of Sales/Volume
Overall sales increases or decreases can be
computed using the following steps:
1.Determine sales for this accounting period.
2.Determine the difference between this
period’s sales minus last period’s sales.
3.Divide the difference in #2 by last period's
sales to determine percentage variance.
 There are several ways a foodservice
operation experiences total sales (dollar)
volume increases. These are:
1. Serve the same number of guests at a
higher check average.
2. Serve more guests at the same check
average.
3. Serve more guests at a higher check
average.
The procedure to adjust sales variance for known
menu price increases is as follows:

Step 1. Increase prior period sales (last year) by

amount of the price increase. Ex: if prices were
increased 5% on all menu items, increase the prior
period sales by 5%.

Step 2. Subtract the result in Step 1 from this

period's sales.

Step 3. Divide the difference in Step 2 by the value

of Step 1.
Analysis of Food Cost & Inventory
A food cost percentage can be computed for
each food sub-category. For instance, the
cost percentage for the category Meats and
Seafood would be computed as follows:

Meats and Seafood Cost

Total Food Sales = Meats and Seafood Cost %
Inventory turnover refers to the number of times
the total value of inventory has been purchased
and replaced in an accounting period.
Cost of Food Consumed
Average Inventory Value= Food Inventory Turnover

The higher the Food Inventory Turnover

number, the greater the frequency of orders
and typically the smaller the inventory size.
Analysis of Profit
Net Income This Period – Net Income Last Period
Net Income Last Period
= Profit Variance %
Profit Planning Strategies
Three of the most popular systems of menu
analysis are:
Variables Considered Analysis Method Overall Goal

Food Cost % Food Cost % Matrix Minimize overall FC%

Popularity

Contribution Margin Contribution Margin Matrix Maximize CM

Popularity

Goal Value Analysis Contribution Margin % Algebraic Equation Achieving certain

Popularity Profit Percentage Goals
Selling Price
Variable Cost %
Food Cost %

A matrix allows menu items to be placed into categories based on

whether they are above or below menu item averages such as food cost
%, popularity, and contribution margin.
When analyzing a menu using the Food Cost Percentage
Method, you are seeking menu items that have the effect of
minimizing your overall food cost percentage.
The characteristics of the menu items that fall into each of
the four matrix squares are unique and thus should be
marketed differently
1 – High FC%, Low Popularity %
2 – High FC%, High Popularity %
1 2 3 – Low FC%, Low Popularity %
FC% 4 – Low FC%, High Popularity %

3 4

Popularity %
Each of the menu items that fall in the
squares requires a special marketing strategy,
depending on its square location.

1 – High CM, Low Popularity %

2 – High CM, High Popularity %
1 2 3 – Low CM, Low Popularity %
CM$ 4 – Low CM, High Popularity %

3 4

Popularity %
The selection of either food cost
percentage or contribution margin as a
menu analysis technique is really an attempt
by the foodservice operator to answer the
following questions:
1. Are my menu items priced correctly?
2. Are the individual menu items
selling well enough to warrant keeping
them on the menu?
3. Is the overall profit margin on my
menu items satisfactory?
The goal value formula is as follows:
A x B x C x D = Goal Value
A = 1.00 - Food Cost % (Contribution Margin %)
B = Item Popularity
C = Selling Price
D = 1.00 - (Variable Cost % + Food Cost %)

Food Cost % Number Selling Variable Cost %

Item (in decimal form) Sold Price (in decimal form)
Fajita Plate 0.38 147 $12.95 0.28
Enchilada Dinner 0.35 200 9.95 0.28
Menudo 0.25 82 6.95 0.28
Mexican Salad 0.30 117 7.95 0.28
Chalupa Dinner 0.28 125 8.95 0.28
Burrito Dinner 0.33 168 9.95 0.28
Taco Dinner 0.26 225 5.95 0.28
Overall Menu
(Goal Value) 0.32 152 8.95 0.28

Average Goal Value = 0.68 x 152 x 8.95 x 0.40 = 370

The computed goal value carries no unit
designation; that is, it is neither a percent nor
a dollar figure because it is really a numerical
target or score. Anything scoring above the
average would be considered a good item,
anything below would be considered an item
that needs some re-thinking.
Food Cost % Number Selling Variable Cost %
Item (in decimal form) Sold Price (in decimal form) Goal Value
Fajita Plate 0.62 147 $12.95 0.40 472.1
Enchilada Dinner 0.65 200 $9.95 0.40 517.4
Menudo 0.75 82 $6.95 0.40 171.0
Mexican Salad 0.70 117 $7.95 0.40 260.4
Chalupa Dinner 0.72 125 $8.95 0.40 322.2
Burrito Dinner 0.67 168 $9.95 0.40 448.0
Taco Dinner 0.74 225 $5.95 0.40 396.3
Average 0.68 152 $ 8.95 0.4 370.0
Contribution margin for the overall
operation is defined as the dollar amount that
contributes to covering fixed costs and
providings for a profit. This is different than
the C.M. for a menu item in that it takes into
account both important variable costs – food
and labor.
Total Sales - Variable Costs = Contribution Margin

C.M. % = Contribution Margin $/ Total Sales $

C.M. per Guest = Contribution Margin $ / Guests

 To determine the dollar sales required to break
even, use the following formula:
Fixed Costs
Contribution Margin % = Break-Even Point in Sales
In terms of the number of guests that must be
served in order to break even, use the following
formula:
Fixed Costs
Contribution Margin per Unit (Guest)
= Break-Even Point in Guests Served
 Minimum Sales Point (MSP) is the dollar sales
volume required to justify staying open for a given
period of time.
 The information necessary to compute MSP is as
follows:
1.   Food cost %
2.   Minimum payroll cost for the time period
3. Variable cost %
 Fixed costs are eliminated from the calculation
because even if volume of sales equals zero, fixed
costs still exist and must be paid.
Minimum Operating Cost = FC% +VC%
MSP = Minimum Labor Cost
1 – Minimum Operating Cost
Or it could be written as:

MSP = Minimum Labor Cost

1 – (FC% + VC%)
Budgeting
Developing the Budget 
 To establish any type of budget, you need to have the
following information available:
  1. Prior period operating results
2. Assumptions of next period operations
3. Goals
4. Monitoring policies
 annual budget
 achievement budget
To determine a food budget, compute the
estimated food cost as follows:

1. Last Year’s Average Food Cost per Meal

= Last Year’s Cost of Food / Total Meals Served
2. Last Year’s Food Cost per Meal
+ % Estimated Increase in Food Costs
= This Year’s Food Cost per Meal
3. This Year’s Food Cost Per Meal
x Number of Meals to Be Served This Year
= Estimated Cost of Food This Year
 To determine a labor budget, compute the
estimated labor cost as follows:

1. Last Year’s Labor Cost per Meal

= Last Year’s Cost of Labor / Total Meals Served
2. Last Year’s Labor Cost per Meal +
% Estimated Increase in Labor Cost =
This Year’s Labor Cost per Meal
3. This Year’s Labor Cost per Meal x
Number of Meals to Be Served This Year
= Estimated Cost of Labor This Year
Yardstick Method
 Some operators elect to utilize the yardstick
method of calculating expense standards so
determinations can be made as to whether
variations in expenses are due to changes in
sales volume, or other reasons such as waste or
theft. The yardstick method helps you identify
specific problems quickly and accurately.