Food Business Entrepreneurial Training Academy

#4: Understanding Costs

DUBLIN, CAAPRIL 25, 2018

Alameda County SBDC

Thank you to Our Sponsor

Understanding Costs

Food Cost Sample Food Costing Costing a Recipe Cost of Goods Sold Labor Costs Fixed Costs

Introduction

What price should you set for your products? Cover your costs Include a margin The margin is where you make your profit Typical margin for a restaurant is 10-15% Typical margin for CPG is 15-20%

Percentages vs Cash

Food CostsYour food cost is the percentage of your sales that went to the cost of the food itself.

So if you sold a pizza pie for $10 and spent $3 on the ingredients, then your food cost would be:

Food cost= $3.00/$10.00 X 100 = 30%

? Why is this 30% and not an odd number?

Sample Food Cost #1Formula is = costs/sales x 100 = food cost %

What is the food cost for this combo plate? Enchilada and crispy taco combo $8.95 Ingredients for enchilada cost $1.30 Ingredients for crispy taco cost $0.85

$1.30+.85= $2.15 Food Cost (COGs) 2.15/8.95=.24022 .24022*100= 24.02%

Beginning of Food CostingGoods Onhand Pricing Units OuncesTorani Syrups 12 4 25 servings (1 bottle)Ocean Spray Cranberries 6# 7.5 34 servingsSkippy PB 2.25 jars 8 1Nutella 1.65 jars 10 40 servings (2 bottles)Apricot Preserves 15 jars 14 181 servings (1 can) 8 lbsRaspberry 2.6 cases 14 181 servings (1 can) 8 lbsBlackberry 1 jar 14 181 servings (1 can) 8 lbsStrawberry 14 cases 14 181 servings (1 can) 8 lbsSweetened Condensed Milk 32 cans 15.5 102 servings (1 can) 8lbsCorn Husks 12 #Cinnamon 0.95 4 1 1lbsAllspice 0.65 7.5 1 1lbsGinger 0.45 5.5 1 1lbsNutmeg 0.25 10 1 1lbsRice Krispies 9 boxes 19 12 156 ozDulce de Leche (50% less sugar) 32 cans 30 24 336 ozSun Maid Raisins 7.5lbs 33 24 216 ozDarigold Butter 12 each 3 1 1 lbs.Darigold Butter Chips 1.95 11 1 1 lbs.

Recipe CostingDanish Dough per recipe cost/unit Recipe cost

Flour/# 2 0.458 0.9161 Batch Danish

Salt 1 04 Almond Rings

Yeast/T 2 0.09 0.181 Doz CinnBuns

Butter/# 1 2.83 2.83

Milk/C 1 0.5 0.5

Eggs/ea 2 0.12 0.24

Sugar/# 0.75 0.59 0.44

Cost/Batch 5.11

Sample Food Cost #2

Formula is = costs/sales x 100 = food cost %

One dozen cookies cost $3.75 to make One cookie sells for $1.50 Two cookies sell for $2.80 Six cookies sell for $8

Which of these has the lowest food cost?

Cookie Food Cost3.75/12 =.312 per cookie

One cookie sells for $1.50(.312/1.50) =.208 x 100 = 20.8%

Two cookies sell for $2.80(.312 x2) = .624/2.80 =.222 x 100 = 22.2%

Six cookies sell for $8(.312 x 6) = 1.872/8 = .234 x 100 = 23.4%

Sample Food Cost #3Formula is = cost/food cost = sales

What if I want to set a sales price based on a certain food cost?

Use the formula above… The ice cream scoop costs $0.75 to make I want a 25% food cost How much should I sell the scoop for?

.75/25= ?

Real World Food Cost Analysis Use food cost analysis to help you set prices

Make sure you are covering your costs with a healthy margin

Use food cost analysis to keep up with the competition How are they sourcing ingredients? What food prep methods are they using?

Use food cost analysis to guard against waste and inefficiency Are you losing inventory to spoilage?

Costing a RecipeWhen you introduce a new food product/menu item you can calculate the food cost by costing the recipe.

Gather all the ingredients and their prices Calculate the cost of each ingredient Total the cost of the recipe Determine the serving size for the recipe Find the cost per serving

Taking InventoryWhen you are already in operation, you can determine your overall food cost for any given time period by taking inventory: Take an inventory of all your food stock at the

beginning of the period Track your receipts for any inventory that you buy

during the period Take an inventory of all your food stock at the

end of the period

Cost of Goods Sold- 2 formulas Once you have this inventory information you are ready to calculate cost of goods sold:

COGS = beginning inventory + purchases - ending inventory= Cost of Food Sales

Food Cost = Cost of Food Sales / Food Sales

Using COGS to Find Food CostFormula: COGS / Sales = Food Cost

Try it! Beginning inventory of $5k Purchases of $9K Ending inventory of $4k Sales of $40K

Labor CostsYour labor cost is the percentage of your net sales that went into the cost of the labor used to produce and sell it.

So if you sold a pizza pie for $10 and spent $3 on labor, then your labor cost would be:

Labor cost= $3.00/$10.00 X 100 = 30%

Why Labor Costs Are DifferentThere are two ways to calculate food cost - by item or by time period. But you can’t calculate labor cost by item.

Time spent on a pizza slice at a shop: Opening the store and setting up tables Baking the pizza Cleaning the kitchen Running the counter

What Goes Into Labor Costs Define your time period (28-30 days is good) Employee salaries paid Hourly wages paid Overtime paid Benefits paid (health, sick leave, etc.) Payroll taxes paid

Sample Labor Cost #1

Formula is = costs/sales x 100 = labor cost %

What is the labor cost for this food truck? Employee wages and taxes were $895 Net sales were $3,759

Sample Labor Cost #2Formula is = cost/labor cost = sales

What if I want to set a sales target with a certain labor cost in mind? Let’s say I want a 30% labor cost…. My labor bill last month was $1,500

How much do I need to make in sales this month if I spend the same on labor again?

Remember the Cookies?Selling in bulk helps lower labor costs

Look back at the slide with the cookies See how the food cost kept creeping up when we

gave discounts for buying in bulk? So why do businesses do that?

Time is Money Bread and Butter

What Else Lowers Labor Costs?• Cross-training your employees

• Allows you to schedule fewer employees per shift• Helps prevent overtime ERs

• Track your sales-per-hour• Schedule more staff when you’re the busiest• Make sure your staff is handling orders efficiently

Variable Vs Fixed Costs• Variable Costs:• Costs that vary month to month• Costs that we can influence immediately with our

decisions • Things like food cost and labor cost

• Fixed Costs:• Costs that stay the same month to month• Costs we decide once and then can’t easily alter

Course Syllabus 10/22/18 Class 1: Concept (mission/vision/values) 10/24/18 Class 2: Operating Models 10/29/18 Class 3: Consumer Packaged Goods & Food

Service Models 11/01/18 Class 4: Understanding Costs (cash/profit) 11/05/18 Class 5: Operations 11/07/18 Class 6: Marketing 11/13/18 Class 7: Financial Projections 11/14/18 Class 8: Legalities & Resources 11/26/18 Class 9: Funding 11/28/18 Class 10: Your Business Plan