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Sunday, September 19, 2010

Production Food Cost

Most restaurants purchase raw ingredients and produce and sell finished menu items. Our management accounting should be structured in a manner similar to a manufacturing operation. The wait staff should be considered the sales force. They meet the customers and help them order a delicious meal.

We find a beehive of activity on or near the production line in most restaurants. The wait staff wants to rapidly fill orders and the production staff handles orders as efficiently as possible given the equipment constraints and staff levels.

Unlike most manufacturers, a majority of food service managers do not track work in progress and finished goods inventory. Our finished goods are immediately delivered to the dining room.

The terms batch recipe, sub-recipe or prep recipe are used to describe the items produced ahead of the meal period. These items are available to the line cooks and are used to produce more complex menu items. Common prep items are sauces, dressings, stocks, casseroles and other items which take longer than the typical meal cycle to produce. Butchering, produce cleaning and other prep activities convert raw ingredients into portioned items and salad mixes.

Food service operators need clear policies to handle these inventory valuation issues. Inventory valuation is important since the cost of goods sold depends on consistent treatment to determine beginning and ending inventory values.

There are many different accounting policies employed by major food service companies. One of the largest hotel management companies in the world does not use food inventory in their balance sheet and income statements. Food cost reflects all food received from their suppliers each period. Other companies do not value any work in progress inventory. These operators use a prep cooler and management's goal is to minimize the amount of food in this zone.

Due to the increase in report complexity, we often miss the opportunity to evaluate the true cost of batch recipe production. The key reason for tracking batch recipe production, including the cost of direct labor, is the ability to compare the total cost with the available packaged goods.

Salad mixes using romaine lettuce are very popular. For many companies, the value added by cleaning and trimming the vegetables and heads of lettuce does not justify the cost increase. The packaged salad mixes offer a high quality alternative with very low labor costs.

Operators are trying to manage relatively high production costs. Salad production involves many hidden costs: transportation of unusable trim, water used to clean vegetables (often left running during the prep), garbage removal to discard the unusual trim, and higher volatility in market costs. The direct labor is not completely hidden but may be cloudy when the workers handling prep also work in other stations.

So what? Why should anyone care about these issues?

The cost of meat and seafood requiring butchering and vegetables requiring prep may be over 50% of your cost of goods sold. You may have significant hidden profit buried in your operation. The amount of hidden profit may justify a quarterly study comparing prep vs. direct purchase on several key items. If you have a policy of producing everything from scratch, you need reports which allow you to monitor production.

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