Professional Chefs Association
- Continuing Education PCA –
F & B Cost Control
- Determining Standards
- The Budget Process
- The Menu
- Design Effective Controls
- Producing, Serving Controls
- Talking About Food Cost
- Taking Corrective Actions
- Revenue Control
The owners of
most F&B operations are generally concerned with the level of profit of the
operation. In order to maximize profit, it is necessary to make sure that costs
are kept in line with what they should have been (expenses) and that
appropriate marketing is done to get customers in the door (revenues). It is
important to recognize that in addition to profit centered enterprises, many
F&B operations do not have profit as their major objective. Many
institutional operations are focused on breaking even or maintaining a
particular budget level. Whichever approach is followed, the primary job of the
chef, as kitchen manager, is to make sure that the quality of the product is as
good as it can be and that the costs are kept under control.
When we speak about keeping costs under control, we generally mean that we
optimize costs, not minimize costs. Many F&B operations get into trouble
because they think that the right approach is to have the lowest costs
possible. When this happens, the customer is often less than satisfied with the
product and/or service they receive. If this should happen, there will be
serious marketing problems for the operation. If we choose to have optimal
costs, we are then saying that we will give the customer something that costs
exactly what it should cost. We are in fact giving them a ‘standardized’
Many of you may be familiar with the term ‘standard’ as it is used extensively
in the industry. The terms standard purchase specifications, standard recipes,
standard yields, standard portion size, and standard portion cost have become
everyday words in the modern kitchen manager’s vocabulary. Some chefs resist
the standardized approach as they see it undermining their creativity or
flexibility; however, nothing could be further from the truth. Any chef can
still create whatever dish is appropriate for their customers. The only
conditions we are adding are that it must always be the same quality and the
same cost. Can you think of a time when you would want to serve a lower quality
item to the customer than what you normally serve? If you did, they would likely
not return to your establishment. Of course, being able to do it exactly the
same every time depends on you being able to purchase the same quality of
ingredients at the same price. If the quality of the ingredients changes, then
the dish is no longer the same and if our cost to purchase the ingredients
changes, then we have to account for that. There is little doubt that the
restaurants which fail are the ones which are unable to deliver a consistency
of product and service and those which do not properly account for their costs.
Should your customers order a particular dish, they will expect it to be just
as good the next time they come to your establishment or as the last time they
were there. It is a well known fact that one of the key marketing concepts in
F&B operations is the idea of consistency. Customers want to know
that what they will be receiving will always be good. In terms of costs,
you cannot effectively price your menu if you do not know what any particular
Standard = What it should be
Once you have a system of standards in place, you can easily calculate exactly
where you are for any given period in terms of costs and therefore, in terms of
profitability as well.
BASIC TRUTH # 1
No system of cost controls can be
without a complete set of standards in place!
While there are many definitions of the term standard, I believe that the
simplest and most effective one is “what it should be”. If we are talking about
the standard portion size, we are saying that the size of the portion should
consistently be the same. For example, we always serve a 12 oz striploin
steak or the burger patty in our cheeseburger is always 4 oz. raw weight. The
fast food chains have known about standards for many years and, perhaps, no one
practices cost control better than them. No matter what you think about their
product, you can always be assured that it will be consistent. They have
established a particular level of quality which they wish to maintain and then
everything they do is designed to ensure that it will always be that same level
of quality. Their success is based entirely on that fact. One of the key
reasons why people go to MacDonald’s is because they know exactly
what they are going to get. With the exception of minor regional differences, a
Big Mac is the same in Halifax, Helsinki, or Hawaii. In every location.
BASIC TRUTH # 2
No matter how much money you spend on
if you cannot deliver a consistent, quality F&B product you will fail!
MacDonald’s marketing success is based on that consistency of
product and service and their financial success is directly a result of that
consistency as well. Before the end of this module you will be able to develop
a costing system that will a) help the general management team market your
facility more effectively and b) provide accurate timely information on which
you can base good decisions and thereby maximize the profit potential of your
When you complete this module you will be able to:
- have an understanding of management practices within the food and
- understand of the importance of the concept of cost control
- identify and characterize costs using standard accounting
- plan for F&B operations using break-even analysis, operating
budgets, sales projections, and profit planning tools
- explain the relevance of the term contribution margin
- understand how profit can actually be a cost to you
Each of the learning objectives portions of this module has a separate section.
Each section has an introduction and contains required reading from the
textbook. The most helpful review and discussion questions from the textbook
which deal with each section are identified. There is a self test at the end of
each section to check your understanding of the material contained in that
section. Answers are provided at the end of the course notes.
Basic Overview of the F&B Industry
To begin, the student should read Chapters 1 and 2 in the textbook. These
chapters provide a basic overview of management within the food service
industry and give the reader a valuable perspective on the views of the author.
This book is clearly written and directed at the food service professional. It describes
the classic approach to managing F&B operations but also looks at more
comprehensive and more current approaches to managing costs. It should be clear
that no matter what type of food service establishment you work in, the same
basic principles of management apply. Success in every type of operation
depends on only two things: a) being able to attract customers and b) making
sure that adequate controls are in place to maximize profits. Organizations
which are not designed to be profit making or which do not attract customers
but have a population to feed (such as institutional feeders like a prison,
nursing home, or hospital) are perhaps even more difficult to operate as they
must meet particular budgets. They have to be very accurate in controlling
costs as they do not have revenue to make adjustments in to offset any
Chapter 1 gives you an overview of the size and scope of the F&B industry.
It also addresses some of the key problems facing the food service industry.
For Turnover, provides you with a brief overview of the problem of employee
turnover in the hospitality industry and provides simple solutions for the
manager to implement.
Understand the Importance of the Concept of Cost Control
While Chapter 2 may be the shortest chapter, it provides the foundation for
this whole course. It explains the importance of developing an effective
control system and describes the implementation of the control process. The
control process involves four key steps: determining a standard by which one
can measure operational effectiveness, analyze actual results, compare actual
results to standards, and take corrective action if necessary.
I once had a very knowledgeable F&B manager tell me that there are only
three places where extra food costs go in any F&B operation:
- in the garbage
- out the back door
- on the customer’s plates
Waste, theft, and over-portioning account for virtually all the cost overruns
one finds in F&B. Proper controls will lower the probability of incurring
many of these costs but, at the very least, it will allow the kitchen manager
to explain and/or account for any losses.
The textbook does not devote space to defining the types of costs and their use
in understanding the income statement of a typical food and beverage operation.
Exhibit 1 illustrates the general format for an Income Statement (or Profit and
Loss statement). Supplementary Exercise #1 gives you some experience in
recognizing fixed and variable costs.
Exhibit 1 Income Statement
There are a
number of generic categorizations which are used to describe costs. First, we
could look at costs as controllable or uncontrollable. We could also talk about
costs in terms of being fixed or variable. When we talk about fixed costs we
are basically talking about those costs which never change no matter what
volume of business your operation may achieve. An example of this would be your
property tax. It is a set amount whether you did $10 or $10 million. Another
way to describe a fixed cost would be one which you know in advance for a
particular period to the penny, e.g.
My monthly rent
Variable costs are those which vary directly with your level of sales. For
example, my hourly labor cost will generally go up and down as sales go up and
down. Most times we express this as a percentage amount. We may say our labor
cost is 33% or that it is 33 cents for every dollar of sales. It is possible to
have some costs which have both a fixed and variable component. Your rent may
be $1000 per month (fixed) plus 3% of your gross sales (variable).
The term contribution margin (CM) is one which is very useful in analyzing
F&B operations. This refers to what is often called the Gross Profit (GP)
calculated by subtracting only the food and beverage costs from the revenues.
What CM actually describes is the amount of money left over, after we subtract
our food and beverage costs, which can go to cover all our other expenses.
Recipe Costing Worksheet
Determining Food and Beverage Standards
The foundation of this course is the control process and
for the control process to work properly a comparison of costs must take place
to determine the effectiveness of the manager. It is relatively easy to see how
one calculates the actual food costs for any particular operation (and we will
develop this process in great detail in a later module), however, it is not as
simple to develop the system of standards which those actual costs will be
compared against. It is worth repeating the Key Definition at this point.
Standard = What it should be
This provides us with a comparison point for our effectiveness measures. In
other words, were the actual costs equal to ‘what they should have been’ or is
the actual quality of the food equal to ‘what it should have been’. This
process is called analysis of variance: ie. look at the actual cost and see if
it varied from what it should have been. The manager’s job is a constant
monitoring of the operation to ensure that things are in line with what they
should be and quickly rectifying the situation when things are not.
There is a natural flow to the required
standards. It begins with Standard Purchase Specifications which provide the
supplier with an EXACT description of everything which is to be purchased by
this facility. They are required to provide the operation with products which
are specified and not to substitute products, EVEN IF THAT PRODUCT MAY BE A
HIGHER STANDARD. This may be difficult to understand but if a food service
establishment is to establish consistency of product, the same ingredients must
be used at all times. This is evident in the next standard, Standard Recipes.
These are exact formulas for each menu item and no variance from this recipe
may be made. It is clear that if you purchase the exact same product every time
and prepare it in exactly the same way every time, then the final output which
the customer receives MUST be exactly the same every time. This is a result of
the Standard Yield. This not only provides a consistent product for the
customer but it also provides a consistency in cost which is essential for the
required analysis of variance to take place. The consistent product yield then
allows a consistent serving size and cost. These are called the Standard
Portion Size and Standard Portion Cost.
This last standard is the culmination of the standards process. This ‘standard’
cost may now be translated to mean ‘what the cost should have been’ for any
menu item sold.
The book also describes the process as it
relates to beverage costs. It should be noted that the control process should
not be any different for beverages than it is for food. All the same principles
apply and as we will see in a later module, the comprehensive control process
which everyone recognizes for liquor operations is equally applicable to food.
The basis of comparison for managers to undertake then is the Actual Calculated
Total Food Cost compared to the Total Standard Food Cost. In order to come up
with the Total Standard Food Cost one simply has to multiply the number sold of
each menu item by the Standard Food Cost for those items. The point of sale
(POS) systems in use today provide quick and easy statistics on daily sales.
Most of these systems also allow the manager to input the standard cost for
each item into the system so the POS actually gives a Total Standard Cost
Report automatically. When the actual costs are calculated it is quite simple
to see if the costs were what they should have been.
Virtually all professional F&B operations require
strict budgeting procedures to be followed. Budgets provide the framework for
forecasting the need for supplies and labor and they also cause the F&B
manager to focus on specific costs for specific periods. They are also good
because the require the manager to look back at prior results very carefully
and to analyze them to see why they happened the way they did. The budgeting
process is not really difficult, however, care must be taken to ensure a high
degree of accuracy as the budget becomes a fairly strict rule of thumb for the
operation. You don’t want to be put in a position of having to frequently
change your projections or to have problems due to over-forecasting or
Preparing a budget is far less complicated than it appears on the surface. It
should be taken one small step at a time and then added up to arrive at a final
figure. The first component which needs to be calculated is the revenue
section. Revenues are the dollars which come into the operation through a
variety of sources. The primary source of revenue is food and beverage sales to
customers. It is also possible that there could be some miscellaneous sales
categories such tobacco products, candy, newspapers, promotional clothing, etc
and these are generally separated from the F&B sales as they have no
bearing on those sales. It should be noted that there may be a considerable
amount of inventory in these items and they should be monitored closely also.
We generally prepare budgets for specific time periods such as weekly, monthly,
and annually. Many of the costs, such as property taxes, are annual expenses
and need to be broken down to the amount allocated to the period in question,
ie. $1200 in annual property taxes would become $100 per month.
Step 1: Revenues
Perhaps surprisingly, the first step in budget preparation
is to determine the number of seats in the facility which can be occupied by
customers. Following that we need to determine what times the restaurant will
be open and then determine how many times we might expect to turn the tables in
each meal period. We should then go to our sales history and select the
appropriate check average for each period.
100 seats in the restaurant; open for breakfast, lunch, and dinner
Breakfast = 1.0 times or 100 guests;
Lunch = 2.0 times or 200 guests;
Dinner = 1.65 times or 165 guests
Check average: Breakfast = $4.75; Lunch = $5.95; Dinner = $12.95
We can now calculate the total potential sales from this information.
Breakfast: 100 seats x 1.5 x $4.75 = $ 712.50
Lunch: 100 seats x 2.0 x $5.95 = $1190.00
Dinner: 100 seats x 1.65 x $12.95 = $2136.75
Total Daily Sales = $4039.25
This is the potential revenue for one specific day. You can then take this
information and multiply it by the number of days the operation is open to come
up with a final sales figure. In order to be very accurate, however, you should
really work out these numbers for every day. Many days have different levels of
business, ie. Fridays may generally be busier for lunch and Saturdays for
dinner and hardly any guests for breakfast on Sunday depending on each
particular operation. Certain days of the month, such as ‘check day’ when the
pension checks come out or ‘pay day’ when a factory in town pays every second
Thursday, may change the level of sales for any given day. Although it may
appear to be a formidable task to do this for every day these are pretty
straight forward calculations, even when done by hand with a calculator; when
you use spreadsheets, it becomes very simple.
Categories such as beverage sales often are a function of the food sales. You
may find that beverage sales typically add up to 23% of what the food sales are
so when you calculate your food sales total, you simply multiply that by 23% to
come up with the projected beverage sales. Be careful because you may also see
that beverage sales might be shown as a percentage of TOTAL sales. So, in the
above example you could have the beverage sales amount divided by the total
Food Sales $4039.25 81.3%
Beverage Sales $ 929.02 18.7%
TOTAL SALES $4968.27 100 %
Step 2: Expenses
The next step in budget preparation is to come up with the
total of all expenses related to the sales you are projecting. This is still a
fairly simple process but is somewhat more complicated than determining
revenues. If you have good accurate records, you will know what the historical
costs have been and you can then use them as a basis for determining your
future costs. Your fixed costs are quite straight forward as they are known in
advance. These do not change no matter how much business you do (property
taxes, fixed rent, etc) The costs which are variable go up and down as your revenues
go up and down. For example, your food cost and beverage cost are a percentage
of the selling prices, your labor is generally referred to as a percentage of
sales (although fixed salaries such as that of the manager should fall into the
fixed cost category). You already have your revenue numbers so you can simply
determine what the costs would be associated with that level of sales.
In on going operations, the budget is often simply increased by a set amount
such as: we anticipate a 10% increase in sales this year. This is a very simple
way of projecting; however, as you can see from our prior calculations, it is
not a really accurate way to forecast future revenues and expenses. You are
better off to calculate the numbers as we did above every time. It really
doesn’t take too much time and you will have much more accurate information
with which to make your decisions on things like purchases and staffing levels.
If you are in a start up operation and do not have any historical figures to
work with it is more difficult but not impossible. You must forecast or budget
in the same way but without that history you need to use your knowledge of
local trends and conditions and monitor the budget even more closely on a daily
basis. You then must adjust your figures up or down depending on what happens.
As time passes, you will add more and more information to your files and it
will become easier to forecast revenues and expenses. Exhibit 3 on page 85 in
your textbook effectively illustrates how a budget can be presented.
Step 3: Analyzing The Data
Exhibit 5 in your textbook on page 88 provides an
excellent illustration of how to report your budget data and compare that to
the actual results as they occur. The step by step approach used effectively
walks you through the evaluation process.
In operations such as institutional feeders (a prison or nursing home, for
example), the main requirement is generally that the operation be on target
with respect to the budget. It is commonplace that these operations would not
have cash revenues but would be required to budget based on the number of
expected meals and then keep costs in line with the projections. For these
operations breakeven analysis is very important.
It is easy to see why an institutional feeder would be
interested in the breakeven level of sales. They are looking to ensure that
they do not have cost overruns but they also do not want to be too far under
budget. As well, the cast of the meals is generally determined in advance and
based on certain levels of quality. There may be some cost savings but that is
not the primary role of the manager. They must be absolutely sure not to go
For a profit generating operation, you might ask - why would they have to know
the point at which the operation would breakeven? It is quite simple: the
operation would like to make a profit but could sustain itself in a time when
it might breakeven; however, operations cannot afford to lose money. Going in
the ‘red’ as it is referred to cannot go on for an extended period of time or
the business goes under. It is important then to determine the sales level or
number of guests that are needed to breakeven and to monitor that the operation
is there at a minimum.
Economics textbooks and many business books show you a graph of breakeven
analysis. For our purposes here it is not necessary to graph the breakeven. The
calculations are enough and are clearly described on pages 94-99 in your
textbook. The Lumberjack Café example on pages 94-95 demonstrate the basic
The textbook refers to the menu as ‘the foundation for control. It is the
beginning and end of the control process. There are three key steps in the menu
control process. Menu planning is the first step whereby the manager/owner
determines what are the most profitable and popular items which will be sold
(prepared). In a retail F&B operation it is critical to plan what products
will be acceptable to the buying public, what price they would be willing to
pay, and at what level of profitability for the operation. There is also a
‘chicken and egg’ type question which arises: Which comes first, the facility
design or the menu? It should be clear that the design of any given restaurant
should follow the development of the menu. The types of equipment and
facilities depends on what items will be prepared, what kind of atmosphere is
desired, the price which must be charged, and the location chosen. The
available budget also is a major consideration. The following figure represents
a very comprehensive overview of the menu planning process.
When planning and designing an menu for a foodservice operation you need to
take the following criteria into consideration:
- How many customers will you serve per meal?
- What type of service will be provided?
- What kitchen facilities are available?
- What are the hours of service?
- What type of service is desired?
- What is the largest number of customers/meal
- What type of menu is contemplated?
- How many menu choices will there be?
- What is the seat turnover?
- What seating arrangement will be utilized?
- What table sizes will be used (two seat, four
- What is the aisle size and space per seat?
- How many service stations are there in the
- What is the amount and type of table side
- What is the price range of the menu items?
- How many employees are there and what are
their skill levels?
- What is the availability of all ingredients
during the year?
- What are the local and seasonal market
conditions affecting cost and availability of food products and related
- What is the quality level chosen?
- Is the menu compatible with the restaurant
theme or cuisine?
- Is there any special equipment required?
- What is the food cost goal?
- What can be done to avoid menu monotony?
- What is the profit goal that you expect to
- What menu prices would be attractive, and meet
- What balance do you need between light and
heavy meals, regular items, specials, etc.?
One of the most common design faults in F&B operations is
not having enough space allocated for the production areas. There is often too
much space allocated to the service area as this is considered revenue
generating space. Many operations want to maximize the revenue generating space
and this means that they do not leave enough space for production. Cramped
kitchens, inadequate dishwashing space, lack of proper storage and receiving
facilities, poor staff rooms for lockers, eating, taking breaks, and washrooms
are all often a result of attempting to maximize the revenue generating space.
The general rule is that there should be a minimum ratio of 1/3 to 2/3 for
production versus service space. This will allow for proper production and
service of the required menu items.
The second key step is the pricing decision. Your textbook has a very good
discussion of ways to price menu items. One of the most common approaches is
determining ‘what the traffic will bear’ or ‘How much can I charge and get away
with it?’ Few operations have the luxury of pricing in this fashion. It has no
bearing on the profitability of the menu and does not take the customers needs
and wants into consideration. Another less than satisfactory approach is
looking at what the competition is charging and then charging the same or less
for similar products. This is also a poor approach because you have not taken
into consideration the cost structure of the competitor which may be lower than
yours thereby allowing him/her to sell at a lower price. It may be that you
cannot make a profit at those prices. If so, you should consider selling a
different product or price yours appropriately and then use marketing concepts
to differentiate your product. Why sell products at a loss? It is a slippery
slope to bankruptcy to do that. In institutional operations it is just as
critical to price your menu items properly. You will be generally be required
to follow a strict budget. This is often more difficult than in a retail type
operation. You do not have the ability to increase traffic or to adjust prices
in mid contract so you have much less flexibility. If you make a mistake in
determining your selling price, you may be stuck with that decision for some
The final step in the menu control process is that of evaluation. You must keep
on top of your sales records at all times. You need to know which items are
selling and how profitable they are. The best way to do this is by using menu
engineering. There are a variety of ways in which this can be done but the most
common approach is to look at how many of each item you sell on a day to day
basis (popularity) and how much you make on each one (profitability). Pages 124
through 137 in the textbook outline this process very well. You are trying to
place your menu items in four categories, those which are:
- popular and profitable (stars)
- popular but not profitable (plow horses)
- profitable but not popular (puzzles)
- those which are neither profitable nor popular
You may have seen this matrix approach used to describe other concepts but it
does work well for analyzing the menu. The question most often asked is: how
does one differentiate between profitable and unprofitable and between popular
and unpopular? The most common approach is to use averaging. Looking at the
total number of items sold and expressing the sales of each item as a
percentage works well. You then can take the items which have a percentage
above the average as being popular and those below the average as unpopular.
The same can be done for profitability. Taking the average profitability of all
items (total contribution margin (CM) divided by the number of items sold gives
the average CM. When you look at the CM of each individual item you can then
easily see which items are above the average and those which are below. Your
book has a very good discussion of how you handle each of the various
There is often a move toward eliminating dogs from your menu. Be careful here!
Remember you are using averaging so you will always have some items below
average. You may want to use this analysis as a guideline just to train your
staff in what they should be trying to sell most. Another factor to consider is
something called the ‘veto vote’. Often F&B operations are required to keep
items on the menu that are clearly dogs. Let us say for example, that four
individuals are going to lunch and three want hamburgers but one says that they
are on a diet and only want to have a salad. Perhaps an establishment does not
want to carry a salad on the menu but if they don’t, they will lose the whole
group to a restaurant where all the group can be satisfied. In other words,
that one person can veto where the group goes to lunch. Even though a salad may
be a dog, it must be kept on the menu.
The Design of
an Effective Control Process
TRUTH # 3
it comes in your door, control it!
In prior modules we have put into place a system of standards which will allow
us to determine how effective we have been in meeting our cost objectives. But
all of this would be for nothing if we did not have a system of controls in
place to protect the assets of our business. If there are no controls in place,
assets such as inventory can be stolen, deteriorate if not handled properly,
misplaced, or simply wasted. We could also get the wrong items or be charged
incorrect prices for what we have received (if we ever even receive it!). We
will begin this module with the assumption that standard purchase
specifications are in place and that all your suppliers and staff are aware of
them and use them exclusively.
Chapter 6 in your text discusses the controls required to do effective
purchasing and receiving. Whether your operation is small or large, it is
equally important that the proper controls be in place. A mistake on a small
order can be a big thing for a very small operation while a large operation
affords the opportunity to make many mistakes on such a large volume. Both
instances are serious to the operator in question. The process of record
keeping is extremely important in these functional areas. Without appropriate
records, you cannot trace errors or mistakes and you do not have the correct
information for your costing system.
While the vast majority of employees are honest, it only takes one or two dishonest
individuals to destroy an operation. Putting a system of controls in place is
not designed to catch dishonest people, it is to provide you the manager with a
level of comfort that you have protected the assets of the business and that
your ability to be effective is maintained. Putting the proper controls in
place also removes the temptation to steal and employees are surprisingly
comfortable with this situation.
The prospect of theft is not the only reason we implement these controls. The
possibility of error is also very high. These errors cost money and must be
avoided at all costs. People make mistakes naturally so it is important for the
operation to catch them as they occur.
Control in the purchasing area is primarily to make sure standards are followed
and to address security concerns. Careless and unscrupulous individuals can
cost you a lot of money and the proper controls will prevent this.
Today there has been a shift towards more ‘one stop shopping approaches’ to
purchasing. Large producers have expanded their product lines to increase their
profitability. This has put pressure on F&B operations to be more in line
with dealing with a single supplier. Now it is common to find suppliers who can
supply virtually one hundred percent of a restaurants’ needs. Putting all your
eggs in one basket often seems to be dangerous but there are some big
advantages to this approach. Not having to deal with multiple suppliers saves
considerable time and effort. Most suppliers claim that the prices even themselves
out and that there is no price disadvantage with this approach. It is possible
that there could be a problem with obtaining goods from another supplier if
your normal supplier has run out of a particular product because you are not a
regular customer and may have to go to the bottom of their list.
The receiving area is perhaps the one which requires the most attention. It is
here that many unnecessary costs can be avoided. Proper training of the
personnel is extremely important because they have to be aware of the various
products which will be coming in the door and to handle them as effectively and
efficiently as possible thereby minimizing problems. Compliance with standards
and security issues are of extreme importance in the receiving process.
Again, keeping accurate records is extremely important. The receiving report or
Daily Purchases register is one of the key pieces of the total cost control
system. The receiver checks the incoming items to be sure they are the correct
items which have been ordered as per the standard purchase specifications. It
is also important that the price is checked at some point; however, in larger
operations this function is often carried out in another area such as the
accounting office. The receiving department is then required to move the goods
to a secure area as soon as possible and ensure that they are never left
exposed to potential spoilage or theft. Your book has a sample receiving form
on Page 168.
Perhaps the greatest requirement of the receiving process is to check incoming
goods to ensure they are what was ordered both in terms of quality and
quantity. Even operations which would be considered relatively large, such as a
typical hotel, would still have to check every item. Extremely large operations
such as the military and some private facilities which would purchase millions
of dollars of supplies per month cannot possibly visually examine every item
which comes in but they do a selective sampling process which has been
validated for accuracy.
Questions which will help your understanding of the purchasing and receiving
control process are found on page 173 in your textbook. Answers to these
questions can be found at the end of these notes.
Storing And Issuing Controls
Storing is another point in the system where the control process can easily go
off the rails. In many operations, the receiving, storing, and issuing
procedures are handled by the same individual or group of individuals. In cases
like this it is important for the manager to keep a careful watch on things as
there is a lot of responsibility for control in the hands of one or a few
people. In larger operations, part of the control process is that each of these
functions is done by different individuals thereby ensuring checks and balances
in the system. Obviously, proper storage is important from a security of assets
perspective but it can be costly if goods are stored improperly causing damage.
At this point we encounter the physical inventory for the first time. Inventory
is extremely valuable and can cost in the many thousands of dollars. It is
important then to keep an appropriate amount of inventory on hand because there
are large costs associated with having too much (carrying costs such as
interest, too much space for storage with the associated cost of construction
and heat and lights, etc.) Having too little means stock outs with the
resultant unhappy chefs and ultimately – unhappy guests.
Proper record keeping is essential here as well. A perpetual inventory system
for such things as liquor is very important to keep on top of the varied and
expensive inventory. Requisition slips are the ‘purchase invoices’ for
departments and the record of exit from the storeroom. The receiving supplier
invoices are the record of entrance to the stores area. Proper control can take
place if these are well documented.
The Headache of Taking Inventory
As mentioned earlier, inventory taking is an extremely unpleasant task for many
managers and they often put it off when it should really never be delayed. The
information derived from the inventory is crucial to being able to make
profitable decisions. There is no way to come up with actual cost results
without taking inventory. There are, however, only two things which a manager
needs to do to simplify the process.
Firstly, it is important to be organized. A place for everything and everything
in its place is not really difficult to do. Each storeroom should be arranged
in a specific way and goods on shelves should be in a particular order.
Obviously, this is easier if you have a fast food operation which has a very
limited inventory but it is also possible in any F&B operation with a bit
more effort. The second factor is for you (or someone who works for you) to
have basic spreadsheet skills. This will allow you to use a small spreadsheet
file to assist in taking the inventory. The spreadsheet files disk contains a
file called INV.wk1 which shows how this can be accomplished. Following is
Exhibit 1 which illustrates the spreadsheet.
Exhibit 3 Physical Inventory & Valuation, Sorted for item
number & category
Exhibit 4 Physical Inventory & Valuation, Sorted for location &
Exhibit 2 shows what the spreadsheet looks like when it has been sorted to take
inventory. As you can see, the locations have all come into order and the
counting sequence for each location is also in order. What an easy way to do
inventory. When the counting is completed, all that has to happen is to re-sort
the spreadsheet back into its original form as in Exhibit 1. This is quite
simple when you have learned some extremely basic skills with respect to
spreadsheet programs. The totals are automatically calculated so the whole
process may actually take as little as 10 seconds once the inventory amounts
are entered. This means that the whole process to take inventory might be as
short as an hour if the manager is somewhat organized. Now there is virtually
no reason why actual cost analysis cannot be done at least on a weekly basis.
The information provided here will obviously be very helpful in determining the
degree of success you have achieved this period but it will also help in such
things as menu planning decisions and purchasing decisions. You will always
know what you have on hand and what you will require.
Production and Serving
Success in any
F&B operation depends on being able to serve a consistent product in a cost
effective manner. It is clear that production and service standards play a big
role in ensuring that this process can take place. This does not however, take
place in a vacuum. It is one thing to follow standards to the letter but if you
have not planned properly, no level of standards will save you if you haven’t
got enough of the product to sell when demanded by the client. In order to do
that, you must do adequate forecasting.
Basic Truth #4
Forecasting is very difficult,
especially about the future.
There are a variety of forecasting techniques available for all food service
managers to use but there are only four main criteria which you will use to
determine which one is best for your purposes:
- level of accuracy desired
- the past demand pattern
- ease of use
There is generally a trade off between cost and accuracy. If you want to
be extremely accurate you would generally have to pay a substantial amount
for such a technique. On the other hand, if you are willing to forgo
accuracy to some degree, you can do forecasting very inexpensively.
The past demand pattern has a big impact on which technique you would use.
If, for example, the past demand pattern is very erratic or unstable it
would be necessary to look at the most recent data as the older data may
be meaningless. If the past demand pattern has been rising or falling,
certain techniques such as an averaging technique may provide forecasted
figures which lag behind the actual amounts.
The advent of the microcomputer and spreadsheets has made forecasting much
easier than it has been in past years. Now one can evaluate a number of
techniques with relative ease. As in all things, however, nothing beats
experience in the field about which the forecasting is being done and a
goodly supply of past information.
For our purposes here, we are going to assume that we are forecasting for
an ongoing operation which has been in operation for some time. There is a
disk included with the notes package which has a number of spreadsheet
files which have names Forecast.wk1 and twelve other files from hotel1.wk1
to hotel12.wk1. These files represent a full years’ data in Forecast.wk1
and each of the twelve months on the others. I have purposely saved these
files in the least complicated Lotus 1-2-3 fashion, with the .wk1 extension. Each of the
1 - 12 files represents a month of data for the hotel. They are simply
lists of information about the Truly Canadian Hotel. The file contains
information for the past year on how many guests stayed in the hotel and
how many ate in the hotel dining room each day. Those of you who are
familiar with Lotus 1-2-3 or any other spreadsheet package will have
little difficulty using this information. If you are not comfortable
with using a spreadsheet package, please see below for a description of
how to do this manually.
Applications Of Forecasting
In using spreadsheets to do forecasting, we
will look at a variety of possible techniques and choose the one which has
the least error. One spreadsheet process is to plot the data on a
graph to see if there are any patterns in the data. You get a feel for how
stable the past demand pattern really is. You may find that it is far
simpler to sort the data into logical segments such as all the days of the
week ie. all Tuesdays in a group and then use only the Tuesday data to
forecast for the next Tuesday. Once you sort the data and choose which
days you will use, you then need to try out a number of potential
techniques to see which one has the least error. Once you graph the data,
you will be able to tell readily if the past demand pattern is quite
stable as in Figure A, or if it is very erratic like in Figure B. The more
stable the pattern, the easier it is to forecast.
Please read the Supplemental Reading,
“Forecasting Methods” to see how to do the mechanics of forecasting.
If you are not familiar with using a spreadsheet package, I must
encourage you to investigate ways and means of learning how to use any one
of the standard spreadsheet packages such as Microsoft Excel, Lotus 1-2-3,
or Quattro Pro. It is almost becoming a necessity for all managers to be
able to use these tools effectively. They greatly simplify many of the
routine tasks of management. Places to check on potential course offerings
would be extension or continuing education programs at your local high
school, community college, or university. Almost all of them offer
non-credit courses in using computers and software. It is also possible to
take courses by correspondence to learn these skills. Virtually all of the
software packages contain a tutorial program to teach the user how to
begin and progress quickly.
Having said this, it is still possible to do all of these techniques
manually. After all, the computer is really nothing more than a
sophisticated calculator — but a very powerful calculator. Begin by
looking at the information contained in Figure C. This is the data for
January 1997. We will try out a number of forecasting techniques to see
which one has the least amount of error. The simplest techniques are the
moving averages. We could use a three, four, or five period moving
average. As new data becomes available, you drop off the oldest data and
continue to do this for all the data. You then look at which one was the
most accurate. To measure accuracy we can use something called the ‘mean
absolute deviation’ the MAD.
In other words, we look to see what the amount was on average. It is
called the ‘absolute’ difference as it doesn’t matter if it is high or
low, just that there is a difference - meaning that it was not correct. In
this example, we are looking at the daily figures for January and trying
to forecast how many people will be coming into the dining room on
Perhaps the most common statistic quoted by F&B managers with respect to
their operations is the food cost percentage. Virtually every operation I am
familiar with uses this as a yardstick for measuring success. Historically,
there was no other measure which was used. Today, we have recognized that this
is a good tool to see where we stand in a general manner; however, there are
other tools which should be used in addition to this very simplistic measure.
We will develop these tools as we progress in the subsequent modules.
For illustrative purposes, we can assume that we have an operation which serves
only food without beverage sales. (By the way, beverage sales generally refer
to alcoholic beverage sales. Sales such as juice, coffee, pop, etc fall under
the category of food sales.)
The food cost percentage is simply the cost of food sold divided by the sales.
It is important to differentiate between the cost of food which was actually
sold and costs of food which was not actually sold. Food not sold could be
things such as staff meals, wastage, food such as cherries and lemons sent to
the bar for use in making drinks, etc. There should be vouchers or requisitions
from other departments to account for such food items. Staff meals should be
carefully recorded. Any waste should be noted and a separate cost line for it
should be created in the expense part of the financial statement. Once this is done
we can then account for any items which were not directly sold to the guests.
When we know the true amount for the cost of the food sold (the actual cost) we
can then compare this against what the cost should have been (the standard
At this point it is possible to determine the effectiveness and efficiency of
the kitchen operation.
Calculating The Actual Food Cost
Opening Inventory (the closing inventory from the previous
Purchases (the invoice amounts from each of the Daily Purchases Register files)
Closing inventory (the goods counted after the close of business of the last
day of the period)
– any adjustments
– cost of staff meals
– waste report costs
– food transferred to the bar (or other departments)
– any goods returned to suppliers for credit
– any other goods transferred out (to other units for example)
goods transferred in from other departments (wine for cooking from the bar)
any other goods transferred in
= TOTAL COST OF FOOD SOLD
Some operations have controlled storerooms where any goods leaving them is
accounted for on a requisition and that requisition becomes an invoice for the
kitchen or department receiving them. This is common in a hotel with central
stores which sends out goods to various units within the hotel. In such an
operation each department would have to account for their food costs
independently and the requisitions would be their purchases. Sometimes,
however, goods go directly to the kitchen rather than to the central stores. Examples
of this might be bread and milk where the bakery and dairy place the fresh
goods directly in the kitchen instead of the central storeroom. Any such goods
need to be carefully accounted for and included in the food cost total. As we
will see in the controls section later, it is important to be especially
careful when accounting for these goods as it is possible for theft to occur
The process for operations with beverage sales is not
really any different. You simply must take care to ensure that the beverages
are treated in exactly the same way. In addition it is important to make sure
that the costs for food and the costs for beverage are not mixed together. They
should be accounted for and analyzed separately but on the same financial
You can see from the above that we have excluded all costs not related to
things we actually sold and have added in costs of any goods we have received
from any other sources not reflected in the invoices from our suppliers. Now
when we say the food cost is 32.5% , for example, we know that that cost
reflects the cost of the food that was actually sold.
Daily Vs To-Date Costs
It is most useful to keep a running total of sales and
costs which is generally referred to as the “to-date” report. Many operations
have the daily food cost report and the to-date report on the same sheet. The
following table represents a typical sales history report which includes the
concepts of to-date sales.
Exhibit 5 Daily and To-Date Food Cost
Analyzing Food Costs
It is commonplace for many operations to use only the food cost percentage as a
measure of success for the facility. This is a dangerous approach to
management. It is clearly a good rule of thumb to see if you are in the
ballpark of where costs should be but it does not accurately reflect how good a
job you did as a manager in making sure the costs were what they should have
been. We will see in future modules that there are a lot of very bad things
that can happen in the operation of the facility which are masked by the food
cost percentage. On the surface it may be good that the target food cost of
32%, for example, was achieved. It is critical to be aware that what one is
referring to in terms of a specific food cost percentage is the AVERAGE food
cost percentage. Many different things can happen, such as higher and lower
food costs balancing out to be 32%. Some of these may be appropriate but what
if the quality of some food was poor and other food was much better that it
should have been? It averaged out to what it should have been but one customer
was gypped and another got more than they deserved. Both are a problem because
one is mad at being gypped and the other now has an unrealistic perception of
what a certain dish is supposed to be and will be disappointed on the next
visit when it is ordered again and the quality is lower than the last time.
BASIC TRUTH # 5
Inconsistencies are perhaps the greatest problem for F&B
operations and are totally covered up by averaging food cost percentages.
In subsequent modules we will see that it is possible to still use the idea of
food and beverage cost percentages as an important yardstick of performance but
other more accurate measures of effectiveness such as analysis of variance will
be utilized as well.
Applying the concept of ‘ideal cost’ and The Myth of the Food Cost
In many books, the term ideal cost is also referred to as potential cost or
even the standard cost. Whatever term you are comfortable with using does not
matter because they all mean exactly the same thing. If you see any of these
terms in books or in exhibits in these notes, you can be sure that it means
“what the cost should have been”. In Module #2 we developed the concept of the
standard cost for food and beverage items. This was calculated by taking the
standard recipe, preparing the item using products purchased with standard
purchase specifications, and then working out the standard cost per portion. In
other words, the exact cost that every menu item should be. Once we have this
amount for every menu item we can use this to figure out what the cost for our
daily sales should have been. The following figure represents a summation of
daily sales for a particular F&B operation.
Exhibit 6 Summation of Daily Sales
This sample menu details the sales for a given day in this restaurant. Columns
1 through 6 are imported from the standard recipe cards. The selling price
comes from the menu and the remaining columns are simple calculations. This is
another example of rows and columns which shows how simple this is using
spreadsheets. Everything in this chart can be done by hand in a few minutes.
We see here that the total standard food cost for all items sold is $1100.89,
the actual sales are $3007.65 and the standard food cost percentage is 36.60%.
This is an interesting and effective way to present the statistics because we can
determine the standard food cost percentage for each menu item and for each
category as well. For example, the three appetizers have a food cost percentage
of 44.75%, 32.00%, and 33.68% respectively. The overall standard cost
percentage for appetizers is 40.43%. This is a great illustrative example
because you can see that if the mix of items which are sold changes, then the
overall percentage can change significantly. If we had only sold shrimp
cocktail, the food cost percentage for appetizers would have been 44.75%.
A VERY IMPORTANT BASIC TRUTH - # 6
You don’t take percentages to the bank, you take dollars!!!!!!!
This is just one reason why it is dangerous to use only the food cost as a
measure of success. Although we have a food cost percentage of 44.75% on Shrimp
Cocktail, every one we sell returns $2.21 to our pocket! The Fruit Cup has a
better food cost percentage of 32% but we only make 85 cents on each one of
those. Which one would you rather your service staff sell?
A much better measure of success is to look at the food that was actually sold
(as in the Sales History Report) and see what the cost should have been (the
Total Standard Cost) and then use the formulas which were developed earlier in
this Module to calculate the actual food costs. Now we have something concrete
to go on. We can see what the costs actually were (for what was sold) and
compare that number to what they should have been (for what was sold). Looking
at any differences between these numbers is called analysis of variance and
helps the manager track down where potential losses may have occurred. If you
have this much information on a daily or weekly basis, any problems are
apparent immediately and you can track them down and take corrective action
right away before too many losses or problems have mounted up.
I know that the experienced managers among you are saying: this is a lot of
work and I have too many operational issues to deal with to do this every day.
It is possible to simplify and streamline the process to make it much faster
and easier. It is clearly in your best interest because you are likely going to
be evaluated on the financial performance of the restaurant above all
else while still being held responsible for all those other important
The creation of the system of standards is a given for every food and beverage
facility. As stated earlier, you cannot be successful in the long term without
them — period! Once this has been done, the standard cost worksheet is easy.
The sales figures are taken from the point of sale system or the guest checks.
It is very important to remember that ALL of these can be done by hand without
any technology. It just speeds it up by a factor of 100 to use a spreadsheet to
do it. A computer is nothing more than a big calculator. If you are not
comfortable using one, hire an individual who has these basic skills at the
very minimum. I am also not talking about some highly expensive computer to do
this. The oldest computers without any bells and whistles can do all these
things. It is better to buy something more modern that has the power to do
other things for you but it is not an absolute requirement. Using a computer
has become a necessity in business today if you want to be an effective
manager. It allows you to have current, timely information with which to make
decisions about your operation and frees time for you to focus on other
One of the tasks which must be done to complete this analysis of variance is to
take inventory. It is not possible to calculate the Actual Costs without having
done this step. Unfortunately, taking inventory is perhaps the most time
consuming task which managers have to endure in the cost control process. It is
for this reason that doing inventory is not done as often as it should be. In
many cases, even if the inventory is counted, the next step of extending the
totals is often put off due to time constraints or lack of good information
about prices of products and/or poor record keeping. In Module #5 we developed
a system whereby it is possible to take inventory almost on a daily basis
without taking hardly any time from your day. Once this hurdle is overcome, the
analysis of variance becomes quick and painless.
information is all collected and analyzed, the manager then has to look at
where any variance took place. It is obvious that there may be a
problem when the actual cost is HIGHER than the standard cost (ie. higher than
it should have been) but it is just as important to examine variance where the
actual food cost is LOWER than the standard food. This might not sound logical
but remember, when we established our system of standards we did this to
determine what things SHOULD have been. If costs were lower than what they
should have been it means that something was probably not equal to our
There are several reasons why costs might have been lower than they should have
- costs were lower due to a decrease in costs
from a supplier which was not taken into consideration when developing our
Standard Portion Cost
- customers received a smaller portion than they
were supposed to get thereby undermining the concept of product
- an inferior quality ingredient was substituted
for what it should have been which may very well have undermined the concept
of product consistency
While number 1 is not a very serious problem, it makes the manager’s job
much more difficult as numbers and calculations should be as accurate as
possible so as to give true results for the manager to measure
effectiveness properly. On the other hand, numbers 2 and 3 present a
major problem for the manager as they totally undermine the system of
standards in place and represent a serious breach of operational policy.
Particular attention should be paid to Exhibit 4, Checklist For
Profitable Food Operation and Exhibit 5, Checklist for Profitable
Beverage Operation as they provide an excellent and comprehensive list of
areas to assess in order to facilitate the control function in
Corrective action should basically involve compliance with the complete
standards process and strict adherence to the principles of effective
control discussed in the prior modules.
Basic Truth # 7
Effective, tight control is not
designed to catch thieves, it is put in place to eliminate errors, to let
potential thieves know that you are watching, and to eliminate the temptation
for theft by removing any opportunity.
I once heard a human resource specialist deliver a lecture on theft in
operations and she began the process by saying that ‘you must treat all
employees as potential thieves and to actively attempt to catch individuals in
the act’. What a sad philosophy to govern your working life! It is true that a
large number of employees in all industries indicate that they have stolen from
an employer (although that can mean something a small as a pen or a piece of
pie), however, it is another thing to be obsessed with this as a manager. It is
important to note that many organizations do report employee theft to be one of
their major concerns. Retail operations claim that theft by employees and
customers accounts for a major percentage of all their losses. Having a
proactive theft prevention approach rather than a reactive “catch the thief”
approach is a much better attitude for management to have.
Remove the temptation by having effective controls thereby eliminating any opportunity
for theft. Having a system of controls in place indicates to employees that you
are on top of things in your operation and that any discrepancies will be
noticed quickly and investigated. The investigation is not to try to ‘catch a
thief’ but is designed to find out why things were not what they should have
been. This is a big difference in outlook and philosophy but still serves as an
effective theft deterrent.
I believe that when employees feel that they have been treated unfairly, they
often tend to ‘get back at’ the employer and this sometimes involves stealing.
Putting policies and procedures in place which treat employees properly will
decrease the problem of theft. Employees also often have an unrealistic
perspective of how profitable a F&B operation really is. They only see the
revenues flowing in and don’t see how much is actually paid out. They often
think that the owner is wealthy when in fact, the business could be operating
at a loss. They feel inequity because of the mistaken idea that all this money
is being kept by the owner and they don’t get a fair share. Communication of
the real costs of doing business can be a real eye-opener for employees.
Chapter 11 in the textbook deals with control of the revenue of the operation.
The food service business is basically a cash business and cash remains one of
the most difficult things to control.
The advent of the ‘plastic’ credit cards and debit cards has dramatically
reduced the amount of actual cash that an operation may have on hand at any
given time but it remains a significant amount particularly in such operations
as fast food establishments. As well, the products which F&B operations use
are commodities which everybody uses on a daily basis and therefore are prone
Revenue Canada and the Provincial Tax office will
expect that F&B operations keep strict records. In fact it is a requirement
to do so. There must be an audit trail which can account for all transactions.
In order for this to happen in retail F&B operations, there must be
numerically ordered guest checks. Every one must be accounted for. Missing
checks will indicate to the auditor that perhaps checks are actually being
collected and then destroyed therefore removing any evidence of a sale. The
owner then pockets the cash thereby evading taxes. Today, most operations have
a point of sale system (POS) which tracks all transactions and actually prints
the guest checks. These will allow the auditor to have a much easier time
accounting for all transactions. There still has to be a way to handle the cash
payments however. There are only two basic approaches: a) there is a central
cashier or b) each server keeps their own bank and settles up with management
at the end of the shift.