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Tuesday, December 16, 2008

Hot Food Cost Topic

I just received a phone call yesterday from a reader of my blog regarding employee meals. She asked me how employee meals should be handled with respect to food cost calculations. I eventually gave her my answer. Before I directly answered the question, I mentioned my concerns about emphasis on allocation issues.

Generally, I believe there should be a clear policy for each company. There is no absolute method for accounting for employee meals. In the long run, you will have a lower overall food cost result if your focus is on popular menu items and the raw ingredients used in their preparation.

To clarify her position, I asked if she was the owner or a manager. She is a manager and is trying to help with the food cost calculations. Once an organization decides to reward employees based on their performance, it is very important for the performance monitor (in this case food cost %) to be well understood. If the kitchen gets credit for each employee meal served, this credit should be known in advance and applied consistently each month. Bringing up employee meals in a review of a poor monthly performance is a big mistake.

In most operations, the impact of fluctuations in the cost of employee meals should be minor. We used an example in our call to illustrate the point. This operation has weekly sales of $17,000 and 3 employees are offered free meals. I said the impact of feeding these 3 employees each week is at most $50. Many operators use a figure of between $3 and $4 per employee per shift for meals. If we have a bad week, maybe the cost would go up $50 over a normal week.

For every 1% of sales, we have $170 in this company. It is unlikely the employee meal results would help much in explaining a food cost % which is 3% over budget. Look elsewhere for your solution.

In general, all one-time discussions of cost allocations have very little long run impact. Employee meals will tend to have a higher impact during slower periods. If you run a seasonal operation, you can expect the food consumed by your staff to account for a bigger share of all food consumed. Regardless, I believe a combined food and direct labor cost over 65% is indicative of danger in our industry. Any operation with over 2/3 of their sales consumed by prime costs should work hard to lower these costs.

My answer to the caller: Your allocation for employee meals should be clear and should not have a major impact on results. If the same factor is used every period, the employee meal issue will no longer be a hot topic. Consistency is the key to success.

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