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Monday, June 18, 2007

Food Cost - Beyond Basic

In last week's article Food Cost Basics , I outlined the traditional formula for calculating food cost percentage. At the heart of the formula you will find the simple food cost calculation: FC=(BI+P-EI). Twisting this formula slightly, we find food cost equal to our purchases plus or minus the change in inventory value:
FC=P+(BI-EI).

As your period of time increases between inventories, the purchases will become more dominant than the inventory change . On the other hand, inventory change is a huge factor in operations with daily inventory counts.

In my college days, I worked for a major fast food operation and my duties included a daily inventory of all food, beverages and paper products. We calculated a daily food cost percentage. Whenever my costs were out of line, I reviewed the inventory valuations carefully. Often, the variance could be traced to a low cost item incorrectly extended by a high price. There were many times a pricey item was extended at a fraction of the cost. Once these corrections were made it was possible to see the true picture of results.

Many operators have many more items than the 120 I tracked each day. Also, I doubt their managers are paid $160 each week and scheduled 7 days a week for 10 hours a day. Casual dining concepts often require inventories with over 1,000 items. The daily inventory calculation would be cost prohibitive.

Let's examine the formula in finer detail. The total food cost is equal to the sum of the individual item food costs. If you have 800 items to count, the food cost formula could be expressed as follows:
FC=∑n=1800 (BIn+Pn-EIn)

So for each item in your inventory, you add beginning inventory to purchases and subtract ending inventory. Your total food cost figure is the sum of all these numbers.

If you run these numbers on a spreadsheet, I recommend you sort the matrix in descending order using the extension column. Count the inventory every day for the top 10 items on the page. Calculate the cost of these 10 items each day. I believe you will find the cost of these 10 items (as a percent of sales) will provide you with answers to many of your food cost issues. You may want to increase the number of items tracked to 25 if you have a very diverse menu.

When the accounting department tells you the percentage is up two tenths in the past month, you will know why the cost increased. Analyze the major items and move beyond basic cost calculation.

18 comments:

Anonymous said...

If thoses Top 10 itemps are keep locked, do we still have to count the on regular day base ?

Joe Dunbar said...

Yes. We are talking about your highest volume items. Even with lock and key, you can get shorted on a delivery or too much stock removed during production and/or meal periods.

patrick said...

Hi Joe,

Our food costs have risen over the last few months. In addition, the sales have dropped simultaneously as we approached our low season. combined with the recent increase in food prices, it doesn't look good for the future. I have tried to explain to my boss the impact that a drop in sales has on food cost but he doesn't seem to understand, or want to. do you have any articles that I can research that will give me detail of factors that contribute to high food cost. I perform a weekly menu engineering exercise and my potential cost is normally about 3% lower than my actual due to wastage, free guest condiments and free bread on the guest tables.
I hope you can help.
Many thanks
Patrick

Joe Dunbar said...

Thanks for the question Patrick! I may run it with a new article this month. Although the previous article wasn't exactly on point, you may want to read the post http://foodcostcontrol.blogspot.com/2006/04/seasonal-operations-profit-analysis_01.html which focuses on making money in the peak season. Its common to see rising costs as volume declines due to normal linear patterns. The fixed costs have a much bigger impact in low season. This is an excellent time to attack food cost issues because there is no volume to hide behind.

Joe

Patrick said...

Thanks Joe! I will look out for the article. If I may, I would like to elaborate on a challenge I had with one of our stores..perhaps other readers experienced the same thing. The actual food cost came in at 42% and the sales mix as per the menu engineering came in at 36.2. I took the monetary value of the difference between the two, and deducted wastage, and free consumables and was still left with a variance. I now only assume that this stock has either not been charged through the point of sales or has been stolen. any ideas?

Joe Dunbar said...

We're moving away from the basic blog stuff at this point. You very well could have a theft issue.

Before accusing someone of theft, we'd have to have a rock solid menu engineering model and lots of other information.

Besides theft, you should check employee meals, waste, buffet and brunch consumption, and other factors which would have a different impact between high season and low season. Yields may vary on meats, produce and seafood.

If we assume the ME model is rock solid, you have a tremendous variance (16% of cost). Something chronic is wrong and these type of issues often hit the front page when sales volume declines.

ami library said...

hi joe
greetings of the day
I just went through ur articles and found them interesting.
We just had opened a coffee shop in delhi and it is not running well.
we haven't any formats of cah iflow, financial statements, food cost and other such keepable datas.
as the ales r down and the wastages r going high so suggest me how could I make thee formats to enhance my profitabilty.
Kindly revert me ack on amiteshsingh210@gmail.com

thanks
Amitesh

Joe Dunbar said...

Amitesh,
There are some terrific low cost accounting programs like QuickBooks which have all the reports you need.

Joe

Anonymous said...

How do you arrive at a final food cost percentage when you are asked to provide just the food cost?

Joe Dunbar said...

First you find the food cost. If you want to calculate the cost as a percentage of sales, divide the result by the sales.

Anonymous said...

Can you tell me the industry standard for credit/return percents? Chef wants credit for 2.6% of a case. Should I ask for credit as it seems like a waste of payroll to mess with $1.26 credit.

Joe Dunbar said...

I tend to agree with you re the small credit. What does it accomplish?

Anonymous said...

I am wanting to become a culinary manager at my job, but one of the main things my district manager wants me to do is get a handle on food cost. I work very closely with my culinary manager now but he seems not to understand a lot about food cost to me. I have ideas on how to get it down to the goal we want to be at but I am not sure on how to run it across to my DM, because he wants me to be able to come up with the numbers and have a plan and not just explaining my ideas to him. I am really wanting to know if you can give me some advice as to the steps I should take in doing this.

Joe Dunbar said...

Anonymous,
You need to become a part of the team if you are ever to make a difference. In my presentations, I always stress food cost control is a team sport.

One of the best ways to get involved is to volunteer to take and extend inventories. Its really the only way to get a handle for the way food is used.

Many people only count the inventory monthly. You should try it weekly until you start to notice patterns. Notice the smells, visualize fresh vs. spoiled, check for discoloration, slime, and other signs of poor storage.

Find out where leftovers are stored.

Once you gain acceptance, move into the purchasing function. The actual cost of food varies depending on how you buy it. Although it helps to understand optimal ordering quantity calculations, try to keep everything simple. Effective purchasing can result in tremendous food cost reductions.

Good Luck!

Anonymous said...

Hi what is the allowable food Cost percentage in a Casual Dining restaurant? Thanks

Joe Dunbar said...

Hi Anonymous,
The true answer to your question: it varies from operation to operation.

In practice, the allowable food cost percentage is typically around 1.5% above the ideal cost. The ideal cost is the % which was used in budgets, menu item pricing and other planning activities. Ideal food cost will definitely vary from location to location.

A rural, family owned restaurant may wish to raise their food cost % if they own the building and they want to promote value. They may do this by using a conspicuously larger portion size in their signature menu item.

On the other hand, an urban location with a high occupancy cost may need to stay below 25%
just to break even.

Thanks for the question!

Joe

Ben said...

Joe-

Great blog- I enjoy reading your insightful responses to the comments. I do have a question of my own.

Is it uncommon to have one dish on your menu with an unusually high food cost >50%? On a test menu one of my chefs priced me an item that is around 60%. The market doesn't dictate a sales price increase so i'm stuck in that respect. I rather not include this item on my menu than to cut corners and cheapen the menu item.

The only way i could justify such a menu item is if other items on the menu normalized the food costs to the normal ~30% rate.

Would you comment on this situation?

Thanks Joe!

Joe Dunbar said...

Most menus have a few items with a high cost % and these items are often very popular.

Lots of reasons for these menu items including: great gross profit in $ terms; fear of raising prices; ignorance of recipe costs, promotional lost leaders, etc.

Non-alcoholic beverages were traditionally part of food cost in many operations. Bottled water changed the landscape and then the recession killed bottled water sales.

The changes in beverage consumption adds pressure to the operators trying to normalize their food cost %.

Although I wouldn't double the price to hit 30%, I'd definitely raise the selling price.

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