WEEK 11:
Foodservice Cost Control
Learning Outcome
At the end of class, students should be
able to understand:
Types of cost
Prime cost
Importance of cost control
Introduction
The control process affects every part
of the foodservice operation
Foodservice operation is a business
The operation must emphasize on
budgets, cost accounting, bills and
profits
Introduction
Cost is a term often used interchangeably
with expenses
Cost also referred to as expenses,
describes the sum of all money paid out for
goods and services during a given period of
time
These are the goods and services used in
obtaining revenue
Understanding costs and how they behave
is critical in the foodservice operation
In most foodservice establishments,
manager in charge of operation’s cost
control process
Regardless the type of operation, the
manager need to fully understand all the
costs associated with running the
business
Managers must monitor and control
costs on a daily basis sometimes on an
hourly or minutes –by-minutes basis
Fixed Costs
Those costs that remain the same
regardless of sales volume
Example of fixed costs is insurance
Once the insurance policies have been
negotiated, the cost remains the same
throughout the term of the policy
For example, if the cost of insuring the
business is RM1000 per month, it will
remains the sales until the policy ends
Variable Costs
Variable costs increase and decrease in
direct proportion to sales
For example food cost
As sales increase, more food is purchased
to replenish inventory
As sales decrease, less food is purchased
If adequate controls are in place and there
is little waste or theft, the amount of food
used is in direct proportion to sales
Semi Variable Costs
Semi variable costs increase and decrease
as sales increase and decrease but not in
direct proportion
They made up of both fixed costs and
variable costs
Management is normally paid a salary that
remains the same regardless of the
operation’s sales volume
Manager’s salary is a fixed cost
Semi Variable Costs
Non manager staff are paid hourly wages
and are scheduled according to anticipated
sales
As the cost of hourly staff increases as sales
increase and decrease as sales decrease
If proper scheduling is used, the cost will
increase and decrease in direct proportion
to sales
Labor is a semi variable cost because there
is fixed cost component and variable cost
component
PRIME COST
The two largest costs that management
has to control
Food cost and labor cost
The rule of thumb: PRIME COSTS
SHOULD NOT EXCEED 65 % OF SALES
If a restaurant has a high food cost, it
must have a low labor cost
Although controlling prime cost is a major
responsibility for manager, a word of
caution is needed
Controls are important but not to the
point of interfering with one of the
primary objectives of restaurant which is
to build sales
Sometimes controls slow production or
service
A control should not more than what is
intended to control
FOOD COST
Food cost is the ratio of a restaurant's cost of
ingredients (food inventory) and the revenue
that those ingredients generate when the menu
items are sold (food sales)
Food costing is important to know as it has a
direct effect on the profitability of a restaurant
To run a profitable restaurant, most owners
and restaurateurs keep food costs between
28% to 35%
LABOR COST
• The cost of labor is the sum of all wages paid to
employees, as well as the cost of employee
benefits and payroll taxes paid by an employer
• Restaurateurs commonly aim to keep labor
costs between 20% and 30%
• However, a full-service, white-tablecloth
restaurant will likely have a higher labor cost
percentage than a casual dining restaurant, since
they employ more staff to provide a higher level
of service
FORMULA
FOOD COST / FOOD SALES = FOOD COST %
BEVERAGE COST/ BEVERAGE SALES = BEVERAGE COST %
LABOR COST / TOTAL SALES = LABOR COST %
Two basic types of
foodservice operation
Those that operate at a LOW MARGIN OF
PROFIT per item served and depend on
relatively high business volume
Those that operate at a relatively HIGH
MARGIN OF PROFIT per item and therefore
do not require such high business volume
Cost analysis for typical low-margin
restaurant
Cost of food and beverage 40%
Labor cost 20%
Other controllable and non 30%
controllable
Profit before income taxes 10%
Total 100%
Cost analysis for typical high-margin
restaurant
Cost of food and beverages 25%
Labor cost 35%
Other controllable and non 30%
controllable cost
Profit before income taxes 10%
Total 100%
Low Margin category
Restaurants that depend principally on
convenience foods – the so called fast food
or quick service operations
This is because the menu prices are low but
the food cost percent tends to be high
However, they hire unskilled worker, pay low
wages and keep the number of worker at a
minimum
This makes it possible for them to offset high
food cost percent with low labor cost and
low labor cost percent
High margin category
Restaurant tend to depend less on convenience
foods
Cater to customers who prefer fresh foods and
more personal service
This type of food preparation and service usually
requires a greater number of personnel who are
more highly skilled and often better paid
This tend to keep the cost of labor higher
However, the food cost percent tend to be lower
due to higher menu prices and foods are
purchased in a raw form less expensive than pre
portioned convenience item
Conclusion
It is important that low margin restaurant
require greater numbers of customers to
achieve a given dollar volume of sales
For high margin restaurant, partly because
of higher menu prices fewer customers are
required to reach a given dollar volume
But, in general it is possible to achieve a
profit with fewer customers if menu prices
are high
Importance of Cost Controls
To ensure profitability for an organization
To manage labor
To manage inventory
Without controls in place there are limited
opportunities or a business to make profit
To minimize problems and to achieve goals
To have proper budgeting
To minimize waste
