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Course subject

PRINCILPLES OF FOOD & BEVERAGE COST CONTROL

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Progress Test Project Exams Trans/Emails Diligence Homework Make-up Lessons

Course content

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On completion of this lesson, you should be able to:

1. Define the terms cost and sales2. Define and distinguish between various

types of costs3. Distinguish between monetary and non

monetary sales concepts

Lesson Objectives

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SALES TUSCANY BISTRO Food $1,533,400

786,250 Beverage $ 270,600 138,750 Total Sales $1,804,000 925,000COST OF SALES Food $ 644,028

275,187 Beverage $ 86,592 34,688 Total COS $ 730,620 309,875GROSS PROFIT $ 1,073,380 615,125CONTROLLABLE EXPENSES Salaries & Wages $ 487.080 185,000 Employee benefits $ 121,770 46,250 Other controllable expenses $ 220,600 138,750 Total controllable expenses $ 829,450 370,000INCOME B4 OC, INT & DEPRECIATION $ 243,930 245,125OC $ 120,553 78,625INT $ 27,060 13,875DEPRECIATION $ 60,200 46,250RESTAURANT PROFIT $ 36,117 106,375

Statement of Income

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Definition of cost in cost control context:

1. Cost is defined as the expense to a hotel or restaurant for goods or services when goods are consumed (wastefully or otherwise) or the services rendered

2. Cost of any items may be expressed in a variety of units:

Weight Volume Total value

Cost Concepts

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Fixed cost:1. Examples include

Insurance premium Real estate taxes Depreciation of equipments Advertising expense

2. Normally unaffected by changes in sale volume

3. May change overtime but unrelated to short term changes in business volume

4. Sometimes tied indirectly to long-term volume changes

Cost Concepts-Fixed & Variable

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Variable cost:1. Examples include

Food & beverage items (directly variable) Labor cost (Payroll cost-partial)

2. Directly related to the business volume3. In certain organizations, labor cost

(salaries, wages, employee benefits) is considered as semi-variable, consisting of 2 components (fixed and variable)

Cost Concepts-Fixed & Variable

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Controllable costs are those that can be changed in the short run. They may consist of fixed and variable cost

Advertising Repair and maintenance Labor cost (Payroll cost) Food & Beverage

Non-controllable costs are those that cannot be changed in the short term. Consists of mainly fixed costs

Rent Depreciation License fee

Cost Concepts-Controllable and Non-controllable

Fixed

Variable

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Unit cost are derived from total cost or vice versa These concepts are best illustrated by examples:

Cost of 1 strip loin = $52.50 (total cost) (15 servings)Cost of 1 portion = $ 3.50 (unit cost)

Average unit cost is dealt with in F&B business Unit cost information is important for

establishing menu prices and determining unit profitability

Total cost information is normally used for broader purposes like determining the relationship between total costs and total sales

How would fixed cost and variable cost behave when the concept of unit and total cost is applied?

Cost Concepts-Unit and Total cost

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Prime cost is a term the F&B industry uses to refer to the F&B cost and labor cost or payroll.

Prime cost is of greatest interest to most owners and managers. The level and control of prime cost play a large part in determining whether or not an establishment meets its financial goals

Other operating costs not included in the prime cost are collectively known as overhead cost (mainly fixed cost)

Cost Concepts-Prime Cost and Overheads

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Various classifications of cost

Fixed cost

Variable cost

Semi variable cost

Unit cost

Total cost

Average unit cost

Actual unit cost

Historical cost

Planned cost

Prime cost

Controllable cost

Noncontrollable cost

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Sales are, as defined in the F&B context, exchanges of products and services of a restaurant, bar, or related enterprise for value. In F&B Operations, sales may be expressed in monetary and non-monetary terms.

Sales Defined

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Monetary Terms1. Total sales2. Total sales by category3. Total sales by server4. Total sales by seat5. Sale price6. Average sale

Average sale per customer Average sale per server

Sales Defined

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Non-monetary Terms1. Total number of items2. Covers3. Average covers

Per hour Per day Per server

4. Seat turnover5. Sales mix

Sales Defined

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On completion of this lesson, you should be able to:

1. Describe the significance of cost-to-sales relationships

2. Identify several cost-to-sale ratios important in F&B management

3. Perform various calculations using cost percent formulas

4. List and discuss factors that cause industry wide variations in cost percents

Lesson Objectives

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Raw dollar value on its own is of no significance in the context of cost control and performance comparison

Cost expressed in ratio in relation to the sales volume with which they vary will allow food service managers to make accurate judgment of different areas of concern and prescribe appropriate remedies

The Cost to Sale Ratio

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Basic formula for calculating cost to sale ratio used in the industry for calculating cost to sale ratio is:

Cost/Sales = Cost per dollar of saleor as a % = Cost % (to 1 decimal

point) This formula is extended to areas of

1. Food2. Beverage3. Labor

The Cost to Sale Ratio

Prime cost

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SALES TUSCANY % BISTRO % Food $1,533,400 786,250 Beverage $ 270,600 138,750 Total Sales $1,804,000 100 925,000 100 COST OF SALES Food $ 644,028 42 275,187 35

Beverage $ 86,592 32 34,688 25 Total COS $ 730,620 40.5 309,875 33.5GROSS PROFIT $ 1,073,380 615,125CONTROLLABLE EXPENSES Salaries & Wages $ 487,080 185,000 Employee benefits $ 121,770 46,250 Other controllable expenses $ 220,600 138,750 Total controllable expenses $ 829,450 370,000INCOME B4 OC, INT & DEPRE $ 243,930 245,125OC $ 120,553 78,625INT $ 27,060 13,875DEPRECIATION $ 60,200 46,250RESTAURANT PROFIT $ 36,117 2.0 106,375

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Statement of Income

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Basic formula for calculating cost to sale ratio used in the industry for calculating cost to sale ratio is:

Cost/Sales = Cost per dollar of saleor as a % = Cost % (to 1 decimal

point) This formula is extended to areas of

1. Food2. Beverage3. Labor

The Cost to Sale Ratio

Prime cost

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Other important formulas derived from the cost to sale percentage formula are:

1. Cost/cost % = selling price (important for achieving budgeted food cost in

banquet statement of income including future events)

2. Sales x cost % = Cost (establish budget amount that can be spent in

working out a menu)

The Cost to Sale Ratio

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Cost percents vary considerably from one operation to another. Possible reasons include:

Type of service (Labour cost) Location (Rental Cost) Price Structure (Food cost) Type of Menu (Labour & Food Cost)

Industry-wide Variations in Cost %

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Two hypothetical operational model1. Operate with low profit margin per item

and depend on high business volume to meet sales objectives. To offset higher food cost

Cheaper and unskilled labor is hired Staff strength is kept to a minimum Multi-skilling of staff

2. Operate with high profit margin per item with lower business volume. Skilled staff and thus higher labor cost is incurred but offset by lower food cost due to higher priced menu items

Industry-wide Variations in Cost %