Foundations of cost control by daniel traster chapter06

• Sales prices for a dish must cover the item’s food cost plus extra to help cover all other non-food costs.. Combined total cost per portion and direct labor cost needed to prepare a d

Menu Pricing Methods

• Multiple approaches, all valid.

• Sales prices for a dish must cover the item’s food cost plus extra to help cover all other non-food costs.

• Contribution Margin = the portion of a dish’s sales price that is left after the item’s cost per portion is covered.

Calculating Menu Price Using Food Cost Percent

FC

SP x FC%

Food Cost Percent Method

• Food Cost = Cost per portion from recipe spreadsheet

• Industry FC% often ranges 20-40%, but most operate in the low to mid 30’s

• Selecting the right FC% is the biggest challenge

Overhead-Contribution Method

• CM% = Contribution Margin %

• CM% = (overhead + profit) ÷ sales

• FC% = 100% - CM% (here, CM% is in % form)

• SP = FC ÷ FC% (in decimal form)

The overhead-contribution method uses budgets and historical data to

determine overhead and profit costs and then FC%

Texas Restaurant Association (TRA)

Method

• FC% = 100% - overhead % - profit %

• Low-profit entrées and high-profit other categories

• Higher profit on slow-moving items

The TRA method is similar to the overhead-contribution, but profit percent (and

thus FC%) can vary by menu category or even by menu item

Calculating Menu Prices Using Prime Costs

Prime cost definitions:

1. Combined total cost of food, beverage, and labor cost (bird’s eye

perspective)

2. Combined total cost per portion and direct labor cost needed to prepare a

dish (single portion perspective)

Direct Labor Cost is determined by observing staff productivity and

factoring employee hourly wage rates

Prime Cost Method

Prime Cost = Food Cost + Direct Labor Cost

Sales Price = Prime Cost X Price Factor

Price factor may start off randomly, but it gets refined with historical

data

Example 6c

Prime Cost = $1.92 + $1.65

= $3.57 Sales Price = $3.57 X 3.1

= $11.07

A restaurant uses a price factor of 3.1 Chicken roulade costs $1.92 per portion with a direct labor cost of $1.65 Determine sales price using the prime cost method.

Actual Pricing Method

Price Divisor = 100% - (Variable Cost % + Fixed Cost % + Profit %)

Sales Price = Prime Cost ÷ Price Divisor

Uses budget percents to determine price divisor to apply to dish’s prime cost.

Gross Profit Pricing Method

Gross profit per customer = gross profit over a period ÷ customers over that period

Sales Price =

Gross profit is money made from sales after food and beverage are deducted (like

contribution margin, but it refers to total sales over a period of time)

Why Use Gross Profit Method

• Appropriate with low-cost items that are similar in costs to each other – like a coffee shop

• Because gross profit per customer is added (not multiplied), sales prices

remain in a narrow range for items that only vary in cost by a few pennies but may be quite different percentage-wise ($0.20 vs $0.40)

Base-Price Method

1. Determine desired sales price

2. FC = SP X FC%

3. Modify recipe to hit FC target

Base-price method starts with sales price and works backward to create target

food cost per portion It is often used in corporate cafeterias and fast food (think:

$0.99 menu)

Matching Competitors’ Prices

Keeps sales prices competitive, but…

• Risky because you don’t know the competitors’ costs and special arrangements.

• Family businesses may use free labor from family members.

• Large operations may get cheap purveyor prices for buying in bulk

• You may not be able to afford to sell at their prices.

Choosing the Best Pricing Method

There is no best method for everyone!

Prime cost methods work well when preparation time for dishes varies greatly.

Base price approach is best when a price point is required to remain competitive.

Food cost percent methods are easy to use and work well when all dishes

have similar direct labor costs and food costs are not below 20%

Factors that Impact Final Menu Pricing

• Competition (studied through a competitive analysis)

• Price Sensitivity of a product

• Perceived Value

• Product Differentiation – how greatly a product differs from similar competitor products

Psychological Pricing

• Guests are most comfortable with prices ending in: $0.00, $0.25, $0.45, $0.49,

$0.50, $0.75, $0.95, or $0.99.

• Whole dollars suggest luxury.

• Prices ending in “9” suggest a deal.

• Prices ending in “5” or “0” suggest good value but not “cheap.”

• In most cases, calculated prices are rounded up to the nearest “comfortable” price.

Controlling Total Food Cost and Sales

• Tracking actual food cost as a percent of sales helps a manager spot unexpected loss.

• Food cost for a month must account for more than just food purchases:

―Food and beverage purchases are tracked separately

―Inventory in storage is valued by physical count at the start and end of each period

Controlling Total Food Cost (cont.)

• Employee meals are valued and shifted to labor cost as they are employee perks.

• Promotions (giving away food for marketing purposes) is assigned to

marketing, not food cost.

Transfers move ingredients from one department to another “Transfer in” adds

to the food cost; “transfer out” deducts the value from the food cost.

• Transfers can occur between restaurants in a larger hotel or campus or

between a kitchen and bar

Controlling Total Food Cost (cont.)

Steward Sales are sales of ingredients from a purveyor to an employee using the

restaurant as a middleman

Grease Sales are monies raised by selling grease or animal fat to another

company

Cost of Food Sold Formula

Preliminary Cost of Food Sold = Opening Inventory + Purchases – Closing Inventory

Cost of Food Sold = Preliminary Cost of Food

Example 6f

A hotel restaurant has the following data.

What is the cost of food sold for this restaurant?

Total Sales and Food Cost Percent

• Total Sales (food sales) = total money charged to customers for the food they purchase

―Beverages tracked separately

• Standard Food Cost Percent = budgeted FC% used to determine menu prices

• Actual Food Cost Percent = actual FC% calculated from cost of food sold and sales

• Often a variance between actual and stand FC% because of menu price

rounding, theft, waste, spoilage, fluctuation in purveyor pricing, or guests who leave without paying

FC-FC%-Sales Graphic Formula

FC

FC% x Sales

FC% Variance

• Managers should try to keep actual and standard FC% as close as possible

• High FC% translates to lower profit

Reasons and Solutions for FC% Variance

Below Budget FC%

• Below budget FC% is only good if it comes from better pricing and efficiency.

• May signal reduction of quality or quantity standards.

• Reduced standards = fewer customers and less revenue.

• Variances are red flags that require investigation to see if standards are being met, where the problem lies, or if the variance is good news.

Controlling Revenue

• POS tracks which server is responsible for uncollected monies.

• Only managers should be able to remove an item from a guest check.

• Managers can require all cash to go through a single cashier.

Point of Sales (POS) Systems control revenue by assigning all food ordered from

the kitchen to a guest and server

Controlling Revenue with a POS

• Computer-less businesses should use duplicate check pads with one check going to the table and the duplicate copy going to the kitchen.

• Managers can reconcile kitchen and cashier checks to confirm they match and none are missing.

• Checks can be reviewed for addition errors too.