Food Cost Basics

A major part of your prime cost is food cost.

Food cost can be calculated as follows:

Net food purchases ÷ Net food Sales (Net means after the change in inventory)

Costing out the menu is crucial to controlling food costs. The easiest place to begin is at the bar due to price control. From there, move on to the food.

Each category should be broken down into more useful ratios. Have the chef, sous chef, or kitchen manager cost out the menu since they deal the most with the product.

A few tips to help lower food costs are:

  • Raise prices.
  • Cost out the menu and price the high cost percentage items accordingly.
  • Control portion sizes.
  • Minimize waste in the kitchen. Track waste as well.
  • Spot-check prep staff. Make sure the pre-cut portions weigh what they are supposed to.
  • Link the chef’s pay to a pre-set food cost percentage. Set up an incentive deal for the chef.
  • Set up a Purchase Order System.
  • Negotiate prices with vendors for bulk buying. Take vendor discounts when offered.
  • Organize the storage room and keep inventory to a minimum.
  • Purchase based on a budget.

If food cost is a consistent problem, an operator should start taking inventory weekly. At one particular business, our client requires his kitchen staff to know daily food cost.

He ignores inventory and uses purchases over sales. He even makes the kitchen track each entree sold. So if only one lobster is sold, the staff best not order lobster the next day. Any operator can take this one step further by tracking daily sales and purchases.

A dollar budget can be set based on projected demand. For example, if an operator expects to do $50,000.00 in food sales for the week, the chef should be given a budget of how much to spend. If the operator’s food cost goal is 30%, they can order $15,000.00 worth of food ($50,000 x 0.3). If the operator tracks purchases daily, he or she can let the chef know how close he is to the budget.

The Four Aspects of Food Cost

Food cost has a direct impact on a businesss operating profit. Because no two operations are identical, it is necessary to calculate the food cost of your particular business at least monthly – we always recommend weekly. Industry averages cannot be used as an accurate standard.

The concept of food cost must be examined at several different levels in order to take into account any and all variables. For example, one variable is your menu sales mix. When one menu item sells best than another, there will be variances in your overall food cost and you should know how this affects your profits.

Essentially, there are four aspects of food cost that must be individually calculated for each operation

  1. Maximum allowable food cost percentage
  2. Actual food cost percentage calculated for the income statement
  3. Potential food cost percentage determined by the menu sales mix
  4. Standard food cost percentage includes a waste allowance

Maximum allowable food cost

The maximum allowable food cost figure determines the food cost percentage an operation needs in order to achieve its profit objectives. It is calculated from the actual operating budget of the business. To calculate the maximum allowable food cost percentage, select a representative accounting period and determine the amounts for: payroll related expenses (salaries, wages, taxes, and fringe benefit), overhead expenses (advertising, utilities, maintenance, other supplies excluding food costs)

Also include a target figure for profits before tax. Convert the dollar value for these three areas to a percentage of the total sales. Remember that food cost is not included.

Now subtract these numbers from 100 to determine the maximum allowable food cost percentage.

If you are working with following percentages of sales, payroll 27%, overhead 20%, profit 15%, then the maximum allowable food cost percentage is 37 % (100 minus 63 ).

Actual food cost

The actual food cost percentage appears on the monthly income statement. This is the cost of the food consumed by your guests, and does not include employee meals or waste. Although the actual food cost indicates what the food cost is currently running, it has little value unless the operator knows what the target percentage should be.

Potential food cost

Potential food cost is a theoretical or ideal percentage which indicates what the food cost should be in a perfectly run business, given the sales mix. It reflects the fact that the most popular menu items will have the greatest influence on the overall food cost percentage. To calculate the food cost percentage of each dish: Multiply the food cost per item with the number of portions sold. Add both columns and then multiply the total cost by 100 and divide it by the total of the sales column. This will result in the potential food cost. If then your total cost is $ 3,000 – and your sales $ 10,000 – your potential food cost percentage will be 30.0.If the sales mix produces a potential food cost that exceeds the maximum allowable cost, profit objectives cannot be realized.

Standard food cost

Management needs to adjust the potential food cost to include waste and spoilage that occurs during normal preparation, as well as an allowance for complimentary or discounted meals to employees and guests. An acceptable variance will range from half to three percentage points of food sales. The exact percentage is determined from management studies. The standard food cost percentage is calculated by adding this variance percentage to the potential food cost. The difference between actual food cost and standard food cost reflects inefficiencies that should have been controlled by management.

How they relate

Bringing all four aspects of food cost together shows the importance of each in examining food costs

Assume that you have a maximum allowable food cost percentage of 35. The month-end food sales and inventory figures for the same period result in an actual food cost percentage of 34.0. If the food cost analysis stops at this point, one may conclude that the cost of food is in line because the actual food cost is slightly below the maximum allowable food cost percentage. However, further analysis using the weighted sales mix analysis reveals a potential food cost percentage of 29.4. The variance that exists between the actual and potential food cost percentage is 4.6 percentage points, much too high for the existing menu sales mix.

Management has set a standard food cost percentage of 2% to take into account as acceptable food waste, etc. The actual food cost percentage is still 2.6 percentage points higher than the standard food cost percentage. Thus minimum profit objectives are being exceeded, but they are not being optimized. Investigation is required and its outcomes could improve the financial performance of the business in the future.

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