Foundations of cost control by daniel traster chapter06

chapter Calculating Sales Price and Food Cost Class Name Instructor Name Date, Semester Foundations of Cost Control Daniel Traster 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 SP = FC ÷ FC% 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 Example 6a What is the sales price for a veal entrée with a cost per portion of $5.71, if the restaurant targets a food cost percent of 30.2%? SP = FC ÷ FC% = $5.71 ÷ 0.302 = $18.91 Overhead-Contribution Method The overhead-contribution method uses budgets and historical data to determine overhead and profit costs and then FC% • CM% = Contribution Margin % CM% = (overhead + profit) ữ sales • FC% = 100% - CM% (here, CM% is in % form) SP = FC ữ FC% (in decimal form) Example 6b A restaurant has overhead of $710,000 and wants profit of $47,000 from forecast sales of $1,000,000 Using overhead-contribution method, determine FC% and sales price for grouper with a cost per portion of $5.28 CM% = ($710,000 + $47,000) ÷ $1,000,000 = 75.7% FC% = 100% - 75.7% = 24.3% SP = $5.28 ÷ 0.243 = $21.79 Texas Restaurant Association (TRA) Method 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 • FC% = 100% - overhead % - profit % • Low-profit entrées and high-profit other categories • Higher profit on slow-moving items SP = FC ữ FC% Calculating Menu Prices Using Prime Costs Prime cost definitions: Combined total cost of food, beverage, and labor cost (bird’s eye perspective) 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 10 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 20 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 21 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 22 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 23 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 24 Cost of Food Sold Formula Preliminary Cost of Food Sold = Opening Inventory + Purchases – Closing Inventory Cost of Food Sold = Preliminary Cost of Food + Transfers In And/or - Transfers Out - Employee Meals - Promotions and Write-Offs - Steward Sales - Grease Sales 25 Example 6f A hotel restaurant has the following data What is the cost of food sold for this restaurant? • • • • • • • • • food purchases = $73,000 opening inventory = $41,000 closing inventory = $44,000 transfers in = $1,200 transfers out = $250 employee meals = $2,850 promotions and write-offs = $460 steward sales = $180 grease sales = $30 26 Example 6f (cont.) Preliminary Cost of Food =$41,000 + $73,000 - $44,000 = $70,000 Cost of Food Sold = $70,000 + $1,200 - $250 - $2,850 - $460 - $180 - $30 = $67,430 27 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 28 FC-FC%-Sales Graphic Formula FC FC% x Sales 29 FC% Variance • Managers should try to keep actual and standard FC% as close as possible • High FC% translates to lower profit 30 Reasons and Solutions for FC% Variance 31 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 32 Controlling Revenue Point of Sales (POS) Systems control revenue by assigning all food ordered from the kitchen to a guest and server • 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 33 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 34 ... fat to another company 24 Cost of Food Sold Formula Preliminary Cost of Food Sold = Opening Inventory + Purchases – Closing Inventory Cost of Food Sold = Preliminary Cost of Food + Transfers In... Prices Using Prime Costs Prime cost definitions: Combined total cost of food, beverage, and labor cost (bird’s eye perspective) Combined total cost per portion and direct labor cost needed to prepare... 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