COST ANALYSIS AND CONTROL
5.3 THE STANDARD FOOD COST
Food cost is simply the amount of food and beverage inventory used in serving customers. Restaurant managers can develop their sys- tem to pinpoint how much inventory they should use in operations by developing good inventory control system. Many successful restaurant businesses separate their inventories into subcategories. Breaking down inventories as below helps practitioners pinpoint how much they are spending on specifi c items or groups of inventory:
Bakery, Dessert, Coffee, and Tea (other drink), Dairy, Dry (canned or bottled included), Meat (frozen and fresh), Poultry, Produce, Seafood, etc.
The standard food cost can be determined by developing the standard recipe of each menu item and by recording the price of each items as well. The details of this approach will be provided with an imaginary list of menu items with their standard costs presented in Table 5.1.
Table 5-01 Menu Items and Cost Structure
Menu Item Menu Price Standard Cost Ideal Cost %
Appetizer item A $ 6.00 $ 2.25 37.50%
Appetizer item B $ 8.00 $ 3.45 43.13%
Drink item A $ 4.00 $ 0.85 21.25%
Drink item B $ 5.00 $ 1.25 25.00%
Entrée item A $18.00 $ 6.50 36.11%
Entrée item B $24.00 $ 8.50 35.42%
Dessert item A $ 7.50 $ 2.25 30.00%
Dessert item B $ 9.50 $ 3.25 34.21%
Alcoholic item A $ 5.00 $ 1.25 25.00%
Alcoholic item B $ 7.00 $ 1.75 25.00%
Table 5.1 shows the list of menu items of R&B Grill with the price and the standard cost of each item. Restaurateurs must develop their standard recipe and the cost of each menu item. According to the infor- mation on the table, if one (1) of the Appetizer Item A was sold, the revenues must be $6.00 and the ideal food cost for the item must be
$2.25, which is 37.5% of the revenue. To use this type of framework, it is important that the cost of each item must be adjusted periodically as the market conditions change. Of course, the menu price may be adjusted when necessary. This is how the ideal cost can be estimated in the beginning but it is not suffi cient yet. There are additional sets of nec- essary information that must be obtained from the operating results. It is the operators’ responsibility to create effective record-keeping systems to accumulate operating information such as the customer counts, the number of individual menu items sold, the records of employees’ work- ing hours, to name only a few. Table 5.2 presents the summary of R&B Grill’s operating results of the sales mix and the ideal costs during the second accounting period (Y-1). Explanation of the details is provided under the table.
Table 5-02 Sales Mix and Ideal Food Cost %
Menu Menu
Price Standard
Cost Ideal
Cost % Order
(%) Per Capita
Spending Ideal Cost * Appetizer item A $ 6.00 $ 2.25 37.50% 2.00% $ 0.12 $ 0.05 Appetizer item B $ 8.00 $ 3.45 43.13% 4.00% $ 0.32 $ 0.14 Drink item A $ 4.00 $ 0.85 21.25% 36.00% $ 1.44 $ 0.31 Drink item B $ 5.00 $ 1.25 25.00% 46.00% $ 2.30 $ 0.58 Entrée item A $18.00 $ 6.50 36.11% 48.00% $ 8.64 $ 3.12 Entrée item B $24.00 $ 8.50 35.42% 38.00% $ 9.12 $ 3.23 Dessert item A $ 7.50 $ 2.25 30.00% 4.00% $ 0.30 $ 0.09 Dessert item B $ 9.50 $ 3.25 34.21% 6.00% $ 0.57 $ 0.20 Alcoholic item A $ 5.00 $ 1.25 25.00% 32.00% $ 1.60 $ 0.40 Alcoholic item B $ 7.00 $ 1.75 25.00% 36.00% $ 2.52 $ 0.63
Total 252.00% $ 26.93 $ 8.73
Total Number of Customers served: 53,650 Ideal Cost % 32.41%
*The Total of Ideal Cost is presented in rounded amount to the nearest cent. Because of the rounding effect, the total amount may be off by 2 cents.
The fi rst three columns from the left are identical to the Table 5.1.
They are individual menu items, their prices and the standard costs esti- mated from the standard recipe. The next column that says “Order (%)”
shows the percentage of each item ordered by customers during the accounting period of Y-1. Throughout the year, R&B Grill served 53,560 customers as presented on the bottom part of the table. This information must be made available for reliable analyses. The records in the Order (%) column indicate that the 2% of the 53,560 customers have ordered the “Appetizer item A,” 4% of them ordered “Appetizer item B,” and so forth. The bottom line in the column says 252.00% in total. This means that one customer, on average, ordered 2.52 items while dining at R&B Grill. It is easily conceivable that customers usually order multiple items from the menu at a restaurant. The next column (Per Capita Spending) is the average amount spent by each customer on individual menu items.
The 2.0% on the fi rst line in the Order (%) for “Appetizer item A” means that 2% of the entire customers have ordered the item during the year (Y-1). Then, the percentage of the order, which is 2% in this case, is multiplied to the Price of the item to calculate the Per Capita Spending on this item. The result is $0.12. This indicates that the average cus- tomer has spent $0.12 on the Appetizer item A. Other items can be calcu- lated the same way. When all the amounts of “Per Capital Spending” are added, it equals $26.93. This is the Average Check Price. Restaurateurs usually divide the total revenues (that is $1,444,795 in our example) by their customer counts (which is 53,650) to obtain this information. This simple method is easy to apply, but it does not show the breakdowns of menu mix. The method introduced above provides better information with more details by showing how the revenues are composed.
Using the same concept, multiply the amount of standard cost to the order (%) to determine the ideal cost of each item sold and add up to fi nd out the ideal cost of the revenues per person. The total of the ideal cost of serving one customer turned out $8.73 when the average check price (per capita spending) is $26.93. The ideal cost percentage in this struc- ture becomes 32.4% as presented on the last line of the table. It must be pointed out that the Ideal Cost on Table 5.2 is calculated by the Excel Spreadsheet. It rounded individual costs to the nearest cent. In this pro- cess, a few items were presented with slightly higher in their Ideal Costs.
If individual costs are added up manually, it may be $8.75. This book will use $8.73 for analysis and projection purposes.
This standard cost percentage can be compared with the actual out- come of the operations on the Income Statement. R&B Grill’s Income Statement shows its cost of sales was $484,300 for the year of Y-1, which is 33.5% of the revenues (of $1,444,795). Although the actual cost per- centage of 33.5% is higher than the ideal cost percentage (32.4%), it is considered relatively good for a full-service restaurant compared with several national chains. This will be explained later in the book. When the labor cost is added to this, the prime costs took only 61.3%. This result looks very good according to the rule of thumb on the prime cost percentage (67%). However, more in-depth analysis with the ideal cost presented on Table 5.2 indicates that R&B Grill’s cost control could improve at least a little further.
Although this approach allows operators to identify specifi c discrep- ancies between the ideal food cost and the actual spending, it must be remembered that the actual cost is spent on a variety of items in large volume. The purchase cost of individual items may change in different seasons, which will cause uncontrollable deviation in the cost-control activities. For this reason, the average amount of the Cost of Sales must be used for an accounting period like a year. In addition, the sales mix also is the determinant of the ideal cost. If items with high cost are sold dominantly, the ideal cost percentage will change accordingly. This is why management must have a good record keeping system to obtain nec- essary operating data.