introduction to food, beverage and labor cost control

J. Desmond Keefe IIISouthern New Hampshire University

Copyright 2006 by John Wiley & Sons, Inc. All rights reserved

Important Concepts Revenue is the amount of dollars you take in. Expenses are the costs of the items required tooperate the business. Profit is the amount of dollars that remain after all expenses have been paid.

Revenue - Expenses = ProfitCopyright 2006 by John Wiley & Sons, Inc. All rights reserved

COSTS There are four costs a Food Service Managermust concern themselves with

Food costs are the costs associated with actuallyproducing the menu items. In most cases, food costs will make up the largest or second largest expense category you must learn to manage.


COSTSBeverage costs are those related to the sale of alcoholic beverages. Costs of a non-alcoholic nature are considered an expense in the Food Costs category. Alcoholic beverages accounted for in the Beverage Costs category include beer, wine, and liquor. It may also include the costs of ingredients necessary to produce these drinks, such as cherries, lemons, olives, limes, mixers like carbonated beverages and juices, and other items commonly used in the production and service of alcoholic beverages.


COSTSLabor costs include the cost of all employees necessary to run the business, including taxes and benefits. In most operations, labor costs are second only to food costs in total dollars spent. Overhead costs include all expenses that are neither food, beverage nor labor, such as utilities, rent, linen, etc.Copyright 2006 by John Wiley & Sons, Inc. All rights reserved

Getting Started Good managers learn to understand, control, andmanage their expenses. Numbers can be difficult to interpret due to inflation. Therefore, the industry uses percentage calculations. Percentages are the most common standard used for evaluating costs in the foodservice industry.


Cost Percents Food Cost = Food Cost % Food Sales Beverage Cost = Beverage Cost % Beverage Sales Labor Costs = Labor Cost % Total SalesCopyright 2006 by John Wiley & Sons, Inc. All rights reserved

Cost Percents Percent (%) means out of each hundred. There are three (3) ways to write a percent: Common Form In its common form, the "%" sign is used toexpress the percentage, as in 10%. Fraction Form In fraction form, the percent is expressed as the part, or a portion of 100, as in 10/100. Decimal Form The decimal form uses the (.) or decimal point to express the percent relationship, as in 0.10.


There are various types of costs Fixed costs are those that are normally unaffected bychanges in sales volume. Variable costs are those that are clearly related to business volume. Directly variable costs are those that are directly linked to volume of business, such that every increase or decrease in volume brings a corresponding increase or decrease in cost. Semi variable costs have both fixed and variable elements.


Costs Controllable costs are those that can be changed in theshort term. Variable costs are normally controllable. Noncontrollable costs are those that cannot normally be changed in the short term. These are usually fixed costs. Unit costs may be food or beverage portions or units of work. Total costs may be the total cost of labor for one period.


Costs Prime cost is the sum of food costs, beveragecosts, and labor costs (salaries and wages, plus employee benefits). Historical costs can be found in business records, books of account, and other similar records. Planned costs are projections of what costs will be or should be for a future period.


Monetary Sales Monetary terms include total sales Total sales maybe given by category (such as total food sales or total beverage sales), by server, or by seat (total dollar sales for a given time period divided by the number of seats in the restaurant). Other monetary terms include sales price, average sale per customer (the result of dividing total dollar sales by the number of sales or customers), average sales per server.Copyright 2006 by John Wiley & Sons, Inc. All rights reserved

Nonmonetary Sales Nonmonetary terms include total number sold (such asnumber of steaks sold in a given time period) and covers (one diner). Total covers refers to the total number of customers served in a given period. Other nonmonetary terms include seat turnover (the number of seats occupied during a given period divided by the number of seats) and sales mix (a term that describes the relative quantity sold of any menu item compared to other items in the same category).


Understanding the Profit and Loss Statement A simplified statement that details revenue, expenses and profit, for a given period of time, is called the profit and loss statement (P&L). It lists revenue, food and beverage cost, labor cost, other expense, and profit. The P&L is important because it describes the efficiency and profitability of an operation.


Simplified Profit and Loss Put in another format, the equation looks as follows:

Revenue (100%) - Food & Beverage Cost % - Labor Cost % - Overhead Cost % Copyright 2006 by John Wiley & Sons, Inc. All rights reserved = Profit %

Understanding the Profit and Loss Statement The primary purpose of preparing a P&L is to identify revenue, expenses, and profits for a given time period. Common percentages used in a P&L statement:


1. Food and Beverage Cost Revenue = Food and Beverage Cost % 2. Labor Cost Revenue 3. Overhead Cost Revenue 4. Profit Revenue

= Labor Cost % = Overhead Cost %

= Profit %


Simplified Profit and Loss Statement Sales ______ 100% Food Cost 349,725 33% Labor Cost ______ 29% Overhead ______ _____ Profit ______ 7%


introduction to food, beverage and labor cost control

Documents

total costs

variable costs

fixed costs

planned costs

unit costs

historical costs

overhead costs

noncontrollable costs