[FOOD COST CONTROL]DHM - 2

[Year]Amrapali

Institute of Hotel Management

OM SINGH

FOOD COST CONTROL

Unit – 1 DHM – 2nd year

Contents

FOOD COST CONTROL

Introduction of Cost Control.

Define Cost Control

The Objective and Advantages of Cost Control.

Basic Costing

Food Costing

Learning Objectives:--

After learning this topic students will able to --

Define Control

Define Cost and different type of cost

Understand the objectives of food control

Calculation of Food Cost

Know the responsibilities of control in food and beverage operations.

Describe food and beverage control system

Understand the concept of Food Cost and why it is important for hotel business

Cost: Accountants define a cost as a reduction in the value of an asset for the purpose of securing benefits and gain. As we use the term in our discussion of cost control in the Food and beverage business. Cost is defined as the expense to a hotel or restaurant for goods or service when the goods are consumed or the service rendered. Food and beverages are considered “consumed” when they have been used, wastefully or otherwise and are no longer available for the purpose for which they are acquired. The cost of any item may be expressed in variety of units, weight, volume or total value.

Type of Cost:

Fixed Cost and variable cost

- Fixed Cost: these are the cost which are normally un affected by the change in sales volume. Items of fixed cost are as follows :-

# Example insurance, premium, real estates, depreciation in equipments etc.

- Variable Costs: - These are the cost which has direct relationship with the sales volume. As business volume increases, variable cost will increase; as volume decreases variable cost should be decrease. Item of variable cost are as follows :-

# Labor cost, Raw material Cost, Beverage cost etc.

Controllable and Non – controllable cost :

- Controllable cost is those that can be changed in the short term. All the variable cost are generally controllable. The cost of food or beverage for example can be changed in several ways by changing portion sizes by changing ingredients or by changing both of these .The cost of labor can be increased or decreased in the short term by bring additional employees or by laying some of them off.

- Non – Controllable Cost: These are the cost which normally doesn’t change in the short time. These are usually fixed cost, and the list of most common would include rent, interest, mortgage, real estate etc.

Unit and total cost

- Unit cost can be defined as the expense incurred in the preparation of one individual portion of the dish or any other items like beverage etc.

- Total cost can be defined as the expense incurred in preparation of all the food stuffs served in any meal period.

Prime cost : This term refer to the cost of material and labor ,food beverage and payroll.

Historical and Planned Cost :

- Historical cost can be defined as the cost incurred in past for .operating the business entity Such type of cost can be found in business record ,books of accounts ,financial statements,employee time cards and similar other statements. These historical cost are very much helpful in projecting the planned cost for any business entity. Manage by comparing historical cost or data can easily estimate or project the cost for future operation.

- Plannes cost can be defined as the cost estimated or projected to operate any business entity in future.

Different type of Cost related to Hotel Industry :

Food Cost

Beverage Cost

Labor Cost

Fuel Cost

Operational Cost

Introduction to Cost Controls

Food & Beverage control may be defined as the guidance and regulation of the costs and revenue for operating catering activity in hotels ,restaurants,hospitals,school ,employee restaurants and other establishment

Control: is a process used by managers to direct, regulate and restrain the action of people so that the established goal of an enterprise may be achieved.

Cost Control; is defined as the process used by managers to regulate costs and guard against excessive costs. It is an ongoing process and involves every step in the chain of purchasing, receiving storing, issuing and preparing food and beverage for sale as well as training and scheduling the personnel involved. The main goal of cost control is to eliminate excessive cost for food, beverage and labor- to exert some governing power costs in all areas to ensure that the enterprise will operate at a profit.

The main advantages of Food and Beverage cost control are summarized as follows:

Ti ascertains the profitability of each revenue producing departments. To reveal the possible source of economy and result in a rational utilization of material and

labor. To obtain information for the adaptation of a sound pricing policy To facilitate speedy quotation for specifical function such as banquets and wedding receptions. To make comparison To use control data for making policy decisions by the management. Analyses of income and expenditure Establishments and maintenance of standards Pricing Prevention of waste Prevention of frauds Management information

Food Cost may be defined as the ratio of the cost of food consumed compared to the revenue received for food sales. The food cost percentage is a task to measure the efficiency of a food operation / kitchen. This percentage may vary as much as 5 percent from month to month, it is a normal practice in many hotels to investigate any fluctuation exceeding 2 percent of sales. The food cost may be calculated on a daily, weekly or monthly basis depending on when the food inventory is taken. This estimate of daily

food usage may be derived from the total of the direct purchase and requisition from the storeroom for the day which is then compared to sales totals.

The relationship between sales and cost may be expressed as cost percentage or the ratio of sales to costs. The formula for calculating of this percentage could be used as follows:--

Cost /sales = Cost Percentage

Food Cost / Food Sale = Food Percentage

Food Cost is the is the expenditure on food and raw materials which the largest single element of cost in any catering establishment. The maintenance of food cost at pre determined level is therefore important because the food cost percentage determines to a large extent the profit.

Food cost percentage is the percentage found on the total sales that is cost of material ,labor,overhead and profit.

Objectives of Food Control:-

--- A detailed analysis of the income and expense of food and beverages:

--- Sales analysis of food and beverage items by analyzing.

Food and Beverage sales The sales mix Average spending Power (ASP) Number of customer served

--- Cost analysis of Food and Beverage items Calculation of food and beverage costs Portion Control Labor Cost

--- Calculation of gross profit

--- Calculation of net profit

To establish standard operation procedure (SOPs) for the operation. Fixing Menu pricing and quotation for special functions. To prevent wastage of raw material, time Labor etc. Prevention of frauds by staff and customers Preparation and submission of management report and information and corrective and remedial

measure for improvement.Calculation of Food CostThere are several basic terms which need to be emphasized with regard to the

Calculation of Food Cost ,such as – Food Cost : This refer to the cost of food incurred in preparing the meals served.

Food Cost percentage : Refer to the percentage of the revenue from sales incurred in preparing the meals ,that is , the cost of food as a percentage of sales of food.

Gross profit or Kitchen gross profit : The excess of sales over the cost of food expressed as a percentage or in financial terms.

Potentail food cost (Sales ) : the food cost under perfect condition .this may be expressed as a percentage or in financial terms.

Calculation of the potential food cost The potential food cost is the cost of the food under perfect and ideal conditions. The potential food

cost of an operation is the principal and most effective method of evaluating the actual food cost . Any variance higher than 1 percent between the potential and actual costs should be investigated.

The calculations are in three main steps. For each individual menu item multiply the number of portions actually sold during a sample

week as determined by the restaurant sale analysis by the potential food cost per portion to obtain the total potential cost of food sold for that week.

Multiply the same portions actually sold as above by the menu selling price and arrive at the potential total sales.

Divide the potential total food cost by the potential total food sales and arrive at a figure which when expressed as a percentage is the percentage food cost percentage.

To be able to do the above calculation it would be necessary to have the following information to hand. A detailed sale analysis of all items sold in the various outlets together with their selling prices. Standard recipe cards of all the menu items costed out. Summary of potential food cost obtained from the standard recipe card. Average market price for the main ingredients taken from invoices, food marketing, reports or

food cost indices report.

- ANALYSIS OF INCOME AND EXPENDITURE: In food cost control, stressis placed not only in analysis of sales, cost of sales, profit etc. but also on theanalysis of total quantities as between various sections of the business.

- PRICING OF FOOD AND QUOTATIONS: It provides sound basis for menupricing expenses for banquets.

- PREVENTION OF WASTAGE AND INEFFICIENCY: The purpose control is toensure that current results are accordance with predetermined objectives. For this,all wastage must be prevented so that food cost remains as originally fixed.

- DATA FOR MANAGEMENT REPORTS: It provides data for periodical reportson food operations.

OBSTACLES TO FOOD COST CONTROL: What are the obstacles to food costControl :-

Unpredictability of volume of business: Sales instability is inherent in all establishment. Moreover, the sale of food/drinks varies day to day and even

during the day Perishability of food: Food is perishable; hence there should be no over buying and food prepared must be in line with the anticipated demand to keep

food cost in check

- Daily variations in food production.- Short cycle of operations: The cycle of operations in any catering

establishment is short; hence control procedures must be frequent and periodicreports are a must.

High degree of departmentalization: Each catering establishment hasseveral selling outlets

Essential of a Control System:-It is important when examining an existing control system or preparing to install a system into a new operation that the following point should be born in mind : Any control system should be comprehensive and cover all the outlets of an establishment and

all stage of the food control cycle. The cost of maintaining the system should be in relation to the saving to be made the level of

sophistication of the control system usually increasing with the increase in the volume of sales and the complexity of the menu.

The control system should be easy to operate and to be understand by all level of staff. The control system should be seen by staff to be working. That is,the management act in

appositive way to adverse trading results and follow up on future results to check if the corrective action taken is effective.

To be effective the information produced must be accurate and up – to –date.

Method of Food Cost Control :

- Weekly Monthly Food Cost report : For calculating of the monthly food costs for an operation where detailed information is not thought to be necessary or for a small or owner-managed unit where the control is an everyday part of the manager”s activity in order for the operation to be successful. The weekly/monthly food cost report is almost a reconciliation report on an activity that is tightly controlled daily by management :Advantages of this method are :

It is simple and quick to produce. It can give an indication of the general performance of the unit.

Dis-advantages though are: This information is only produced after seven or twenty –eight days of operation. It provides no intermediate information so that any undesirable trends may be corrected earlier. It does not provide daily or to-date information on purchase requisitions and sales that a unit.

- Daily Food Cost report :This food cost method is suitable for a small-to-medium sized operation or where not too sophisticated method is required or where the cost involved in relation to the saving to be red out of the kitchen to the bars and the cost of employees meals made do not justify a more involved method.Advantage of this basic food report is:

It is simple and easy to follow It give a reasonably detailed account of the general performance of the business on a day-to-

day basis It records the daily stock level, daily purchases, daily food requisitioned and daily food sales and

enables the daily food cost percentage to be calculated. This information is used for preparing to – date totals.

The to-date food cost percentage smoothes out the uneven daily food cost percentage and highlights the corrective action to be taken. if necessary early in the month. The uneven daily food cost percentage is often caused when food is requisitioned on one day to be processed and sold on subsequent days.Disadvantages of the basic food cost report are:

Although simple and easy to prepare the report relies heavily on the accuracy of the basic information to be collected. For example the total of daily purchase, daily requisition etc.

It is not totally accurate as it ignores such things as the cost of the staff meal, food transferred to bars.- A detailed daily food cost report:

This food cost report is a development of the previous report and refines the accuracy of the report by taking into account the cost of beverages transferred into kitchen , the cost of food transfer.

Control Techniques :--Control may be defined as a process by means of which managers attempt to direct, regulate and restrain the action of people in order to achieve desired goals of the establishments financial success, preservation of sound environment, promotion of better health.The food and beverage business involves the purchasing, receiving, storage and issuing of raw material for the purpose of manufacturing products for sale .At each stage of operation it is necessary to institute control techniques. These techniques and devices depend on the nature of the difficulty to be controlled the situation and the style of the individuals making the selection.Some of the control techniques may be discussed as follows:-

Establishing Standards Quality Standards Quantity Standards Standard Cost Establishing Procedures Setting examples Observing and correcting employee action Requiring records and reports

Preparing and following budgets Ensuring and Discipline employees.

Review and Discussion Questions:Q.1 - Define Control? What are the objectives of Food Control?Q 2 – What are the main advantages of Food Control?Q 3 – What is Food Cost? What the importance of food cost for the hotels and restaurant?Q 4 – How you calculate the food cost for the hotel? Q.5 – What is Cost? Explain different type of cost?Q 6 -- Explain Control techniques?

References

Management & Cost Control –by- Jagmohan Negi ( Page no : 1 – 22) Supported Notes – Self made notes and material collected from the industry

Key Words:

- Fixed Cost and Variable Cost

- Cost Control

- Food Cost

- Food cost Control