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Saturday, May 06, 2006

Inventory Control - Decomposed

A decade before spreadsheets, inventory forms would be produced from copiers each count period. The count team would often take their counts with no knowledge of the previous count or the current replacement cost. Once the sheets were turned in to the office, a team of accountants would update the unit costs and extend the counts to reach a value.

This costing method is a hybrid of the FIFO method. Since the staff would pull recent invoices for pricing information, they were closely approximating the pure FIFO value. Most inventories were rapidly calculated with calculators and streams of tape could be found on the floor and in waste baskets.

Today, many operators use spreadsheets in place of the copied forms and adding machine calculations. Where do the current operators go to find the prices to use in extensions? I always ask how people get their numbers and the responses are quite varied. Some people use the most recent costs much like the way mentioned above (last cost method or FIFO hybrid). Others don't bother to look up new prices. They use the same numbers from the previous inventory (old cost method or hybrid LIFO). A few ambitious souls go to the trouble of looking up all prices from a two week period. They use average prices (average cost method or hybrid FIFO).

On some spreadsheets, the analysts enter count numbers in columns with beginning inventory, received (often by day of week) and ending inventory. The net counts (i.e. BI+R-EI) are multiplied by a single number. The source of the numbers vary by operation.

I'm not a fan of this method. When I passed the CPA test in 1981, inventory valuation issues dominated the theory section of the test. It would be difficult for even the most aggressive CPA firm to allow the period-end purchases to be ignored in determining inventory valuation. There is currently a big discussion involving elimination of LIFO valuations. LIFO is effectively banned in England for inventory valuation.

By presenting purchases according to GAAP, many restaurants will improve their food cost figures and present better reports to the executives. I recommend valuing ending inventory based on FIFO. In addition, a prudent reserve for spoilage should be calculated and used as an offset to the asset value on the balance sheet.

Your month end inventories should not be altered with WIP figures which can't be substantiated. A fully cooked prime rib roast which wasn't served the previous night should not be valued highly. Freezer burn could lower the value of lobster tails, shrimp, fin fish and meat. Don't value items which may only be used in a soup the same as those received fresh the same day.

Inventory valuation should be consistent from period to period. The value should be conservatively calculated. Counts should be accurate and the counting day should be delivery free if possible. It is best to use count personnel who have no role in purchasing and production.

Expensive items should be counted frequently. The month end accounting cutoff should produce few surprises on your top 25 items (often the top 25 items will account for over 50% of annual purchases). Daily counts on these key items will eliminate most inventory errors and will improve ordering and usage results.

Spend a lot of time designing count sheets for the freezers. No mathematical calculations should be performed while shivering count teams go through the shelves. The sheets should include every possible way to count the critical inventory items. Shrimp 16-20 may be on the sheet as case, box, pound, tray (for pre-portioned menu items) and portion. Just enter the counts and present the F&B controller with the sheets. Standard ratios should be used for portions.

Spend more time in the freezer than you do estimating the amount of dry spices in the containers. Some chefs expense spices and keep expensive saffron under lock and key. Check dates on any package with a date. Don't do this every month in the dry storage. Make a rotation schedule for these items. I've seen expiration dates more than a year past on some dry stock.

Count the stock early in the morning if possible. I am totally against the beer guzzling crew waiting for the door to close on the final customers before racing through the counts. Unfortunately, this happens too often.

Finally, if you want your inventory valuation to have more meaning you should count all stock weekly (on Monday morning). Consistently calculated weekly inventories will help you focus on chronic cost issues like over buying and over portioning and keep discussion of inventory errors from the management meetings.


NABBOU said...

Dear All

I would like to thank you for your total support to many curious in how to calculate their food cost .
Is there away to introduce you all my support and knowlege in calculating F . C in the inflight sector.
awaiting for your answer
Nabil Bouraoui

Joe Dunbar said...

Hi Nabbou,

The short answer is to use the number of passenger meals as your base. Budget a food cost per passenger meal. Use the budget cost per passenger meal to multiply by the number of passenger meals.

Compare the total food cost to the product of passenger meals times the budgeted cost per meal.

Restaurant Data Pros

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