Food Cost Basics

Food Cost Basics By Joe D u n ba r Several people have emailed me in t he past f ew mont hs asking how t o calculat e t heir f ood cost percent age. In addit ion, many people have asked me f or an indust ry benchmark f or f ood cost percent age. While t he f ood cost f ormula is st raight f orward, it may be impossible t o arrive at a t rue indust ry benchmark percent age. There are f ar t oo many indust ry segment s wit h unique cost charact erist ics. Let's start with the basic food cost percentage formula: FC% = (BI+P-EI)/ S FC%: Food Cost Percentage BI: Beginning Food Inventory P: Purchases EI: Ending Food Inventory S: Food Sales It is absolut ely necessary t o use t he same dat es f or sales and purchase act ivit y. You need t o t ake t he invent ory af t er all sales act ivit y has ceased (eit her lat e at night or early in t he morning). There should be no deliveries during your invent ory. Everyone has a personal pref erence f or valuing t he invent ory. Tradit ionally, f ood service managers used t he most recent cost paid f or each it em t o value t he ending invent ory. Most people st ill f ollow t his met hod which closely approximat es FIFO. If you are concerned about t he f reshness of any f ood in st orage, I'd recommend a zero value. For example, st ale bread is not wort h t he same as a f resh loaf (but it can be used in st uf f ing and French Toast ). Regarding f ood cost percent age benchmarks, t ry t o get a f eel f or t he indust ry segment closest t o your business model. There are public companies in almost every segment . In general, t he f ast er t he service t he lower t he f ood cost percent age. QSR operat ors experience f ood cost f igures below 30% and f our st ar f ine dining operat ors t ypically approach 40%. Operat ions in urban areas run lower f ood cost percent ages t o allow f or t he higher rent s. If you raise your selling prices t o cover higher occupancy cost s, you should see your percent age dip. Many f amily run businesses operat e in premises wit h no rent and no mort gage. Alt hough I learned f ood cost percent ages should st ay below 35%, I have seen many successf ul f amily run businesses run above t his number. Food Cost - Beyond Basic By Joe D u n ba r In last week's art icle Food Cost Basics , I out lined t he t radit ional f ormula f or calculat ing f ood cost percent age. At t he heart of t he f ormula you will f ind t he simple f ood cost calculat ion: FC=P+(BI-EI). Twist ing t his f ormula slight ly, we f ind f ood cost equal t o our purchases plus or minus t he change in invent ory value: FC=P+(BI-EI). As your period of t ime increases bet ween invent ories, t he purchases will become more dominant t han t he invent ory change. On t he ot her hand, invent ory change is a huge f act or in operat ions wit h daily invent ory count s. In my college days, I worked f or a maj or f ast f ood operat ion and my dut ies included a daily invent ory of all f ood, beverages and paper product s. We calculat ed a daily f ood cost percent age. Whenever my cost s were out of line, I reviewed t he invent ory valuat ions caref ully. Of t en, t he variance could be t raced t o a low cost it em incorrect ly ext ended by a high price. There were many t imes a pricey it em was ext ended at a f ract ion of t he cost . Once t hese correct ions were made it was possible t o see t he t rue pict ure of result s. Many operat ors have many more it ems t han t he 120 I t racked each day. Also, I doubt t heir managers are paid $160 each week and scheduled 7 days a week f or 10 hours a day. Casual dining concept s of t en require invent ories wit h over 1, 000 it ems. The daily invent ory calculat ion would be cost prohibit ive. Let 's examine t he f ormula in f iner det ail. The t ot al f ood cost is equal t o t he sum of t he individual it em f ood cost s. If you have 800 it ems t o count , t he f ood cost f ormula could be expressed as f ollows: So f or each it em in your invent ory, you add beginning invent ory t o purchases and subt ract ending invent ory. Your t ot al f ood cost f igure is t he sum of all t hese numbers. If you run t hese numbers on a spreadsheet , I recommend you sort t he mat rix in descending order using t he ext ension column. Count t he invent ory every day f or t he t op 10 it ems on t he page. Calculat e t he cost of t hese 10 it ems each day. I believe you will f ind t he cost of t hese 10 it ems (as a percent of sales) will provide you wit h answers t o many of your f ood cost issues. You may want t o increase t he number of it ems t racked t o 25 if you have a very diverse menu. When t he account ing depart ment t ells you t he percent age is up t wo t ent hs in t he past mont h, you will know why t he cost increased. Analyze t he maj or it ems and move beyond basic cost calculat ion. Effective Food Cost Control I t is very im port ant t o use clear, properly prepared report s t o analyze food cost result s. Oft en, t he report s becom e t he focal point due t o errors and om issions. Once t he report has lost credibilit y, a m eaningful discussion of operat ional issues is difficult . A properly prepared food cost report should have a brief sum m ary at t he t op of t he page. Basic operat ing st at ist ics should be highlight ed. We need t o know t he period of t im e ( week, m ont h, quart er or year) and t he ending dat e. Operat ing result s should include t he period sales and purchases, beginning and ending invent ory values, food cost and t he food cost percent age. Support ing t he sum m ary inform at ion, you should include a recap of purchases, invent ories and cost of sales by cat egory ( e.g. m eat , seafood, produce, et c.) . I prefer t o show t hese cat egory t ot als as a percent age of t ot al food cost rat her t han as a percent age of sales. This report sect ion should highlight how we spend our purchase dollar. Finally, a com parison wit h previous periods is very helpful. Budget com parisons are useful as well if t he budget s were t hought fully prepared. Try t o put t he current period in cont ext . Show how well t he perform ance was com pared t o ot her benchm ark periods ( e.g. previous m ont h, last year, current year budget , et c.) . The com parison sect ion should show in which direct ion t he operat ion is headed. Support ing t he m anagem ent sum m ary page, insight s and concerns regarding specific com ponent s need t o be report ed. For exam ple, if t here was significant wast e due t o spoilage of produce, t he purchasing m anager can concent rat e on ordering fewer cases ( or split t ing cases if necessary) . Rising prices of gas and corn has im pact ed t he cost of m any com m odit ies. Calculat e t he im pact of your m eat and dairy price increases on net profit s. Bring any ot her significant findings t o m anagem ent 's at t ent ion. Joe Dunbar Dunbar Associat es P.O. Box 579 Fairfax, VA 22038- 0579 800- 949- 3295 ht t p:/ / w w w .j oe dunba r .com j du n ba r 4 0 1 @a ol.com