Chapter 3

Cost Control

© Copyright 2011 by the National Restaurant Association Educational Foundation (NRAEF)

and published by Pearson Education, Inc. All rights reserved.
 Cost Control Overview
Cost control is a business’s efforts to manage how much it spends.

 Every business needs to make more money than it

spends in order to survive. That is, its sales, or revenue,
have to be higher than its costs.
 Revenue is the income from sales before expenses, or
costs, are subtracted.
 Cost is the price an operation pays
out in the purchasing and
preparation of its products or the
providing of its service.

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 Types of Costs
 A successful restaurant or foodservice operation needs to
manage and control many costs.
 Food costs, beverage costs, and labor costs each have
components that are related to sales levels.
 Variable or semi-variable costs can change based on
sales. These are controllable costs because the
operation has a certain amount of control in how it spends
on these aspects of the operation.
 Overhead cost is a fixed or non-controllable cost,
meaning it needs to be paid regardless of whether the
operation is making or losing money.
 Fixed costs do not change based on the operation’s sales.

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 Operating Budgets
An operating budget is a financial plan for a
specific period of time.
 A forecast is a prediction of sales levels or costs that will occur
during a specific time period.
 Most forecasting techniques rely on having accurate historical
data for the operation.
 The most common foodservice revenue forecasting techniques
are based on the number of customers and average sales per
customer.
 A sales history is a record of the number of portions of every
item sold on a menu.
 Most operations can run historical sales and production reports
from their point-of-sale (POS) systems.

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 Profit-and-Loss Report
A profit-and-loss report (P&L) is a compilation of
sales and cost information for a specific period of time.

 A P&L shows whether an operation has made or lost

money during the time period covered by the report.
 The P&L, or income statement, helps managers gauge an
operation’s profitability as well as compare actual results to
expected goals.
 A P&L also helps management determine areas where
adjustments must be made to bring business operations in
line with established financial goals.
 For an operation to be profitable, sales must exceed costs.

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 Cost-Control Tools
 Advances in technology have drastically increased the
number of options available to operations in controlling
costs.
 Software programs can be used to complete the
calculations required in cost planning, controlling sales,
controlling inventory, and focusing on the menu.
 Computer software can easily provide better access to
information, more accurate and convenient collection of
information, and improved analysis of that information.
 If used effectively, technology can help in running an
operation more efficiently and helping to reduce and
effectively control costs.

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 Steps in Controlling Food Costs
Food costs must be controlled during all seven stages of the food flow
process:

1. Purchasing
2. Receiving
3. Storage
4. Issuing
5. Preparation
6. Cooking (production)
7. Service (sale)

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 Determining Food Cost
Food cost is the actual dollar value of the food used by an operation
during a certain period.
 Food cost includes the cost of food sold, given away, wasted,
spoiled, incorrectly prepared, overportioned, overproduced, or
pilfered.
 Inventory is the dollar value of a food product in storage and can
be expressed in terms of units, values, or both:
 Opening inventory is the physical inventory at the beginning of a
given period.
 The closing inventory is the inventory at the end of a given period.
 The formula for obtaining an actual food cost accurately is:
(Opening inventory + Purchases = Total food available) – Closing
inventory = Total food cost

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 Determining Food
Cost Percentage
Total food cost percentage is the relationship between sales and the
cost of food to achieve those sales.

 Analyze food cost percentage by comparing it to company

standards, historical costs, or even industry standards.
 To determine the percentage, divide the total food cost by
the sales:
Total food cost ÷ Sales = Food cost percentage
 Food cost is a variable cost: It should increase or decrease
in direct proportion to an increase or decrease in sales if all
of the standards and food controls are followed correctly.

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 Establishing Standard
Portion Costs
 Most every operation has standardized recipes that are
followed every time a menu item is prepared.
 For every standardized recipe, an operation should
establish a standard portion cost, which is the exact
amount that one serving, or portion, of a food item
should cost when prepared according to the item’s
standardized recipe.
 A recipe cost card is a tool used to calculate the
standard portion cost for a menu item.
 As with the standardized recipe, a recipe cost card
should exist for every multiple-ingredient item listed on
the menu.

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 As-purchased versus
Edible-portion Costs
 The as-purchased (AP) method is used to cost an
ingredient at the purchase price before any trim or waste is
taken into account.
 In the AP method, all ingredient quantities are listed on the
standardized recipe in the form in which they are
purchased.
 The edible-portion (EP) method is used to cost an
ingredient after trimming and removing waste, so that only
the usable portion of the item is reflected.
 Using the EP method to cost an ingredient, the quantity is
listed on the standardized recipe using only the edible
portion of that particular ingredient.

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 Recipe Yields
A recipe yield is the process of determining the number of portions
that a recipe produces.

 To determine how many portions a recipe yields, calculate

the total volume of the recipe either by weight or by
volume, depending on how the portion size is calculated.
 Understanding recipe yields is one of the keys to
successful food preparation and controlling food costs. The
measurements given in recipes must be followed exactly.
 Once a yield is known and properly followed, it’s easier to
increase or decrease the size of the recipe based upon the
operation’s changing needs.

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Controlling Portion Sizes
 Controlling portions is very important for a restaurant to
meet its standard food cost.
 Tools that are essential for accurate portion control include:
 Scoops
 Ladles
 Serving spoons
 Serving dishes
 Ramekins, bowls, cups, and so on
 Portion scales
 Another mechanism for ensuring that portions are the right
size is to proportion any item that can be preportioned
before serving.

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 Monitoring Production
Volume and Cost
 When restaurants produce too much, food cost goes up;
produce too little, and sales are lost.
 A food production chart shows how much product
should be produced by the kitchen during a given meal
period.
 A well-structured chart can ensure product quality, avoid
product shortages, and minimize waste, spoilage, theft,
energy costs, and administrative costs.
 Sales history is critical in helping management forecast
how many portions of each menu item to produce on a
given day.
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 Menu Pricing
 The menu is the primary sales tool in most restaurant and
foodservice operations.
 There are a number of methods for menu pricing:
 A contribution margin is the portion of dollars that a particular
menu item contributes to overall profits. To use the contribution
margin method, an operation must know the portion costs for each
item sold.
 In the straight markup pricing method, multiply raw food costs by
a predetermined fraction.
 With the average check method, the total revenue is divided by the
number of seats, average seat turnover, and days open in one year.
 The food cost percentage is equal to the food cost divided by food
sales.

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 Budgeting Labor Costs
 Labor is a semivariable, controllable cost. Labor costs are
tied to sales, but not directly.
 Most operations have both full-time and part-time staff.
 Operations must be aware of the fluctuations in their sales
so as to have just the right amount of staff on hand to
handle customers efficiently,
 It is an important part of the management function to make
sure that payroll cost is in line with the budgeted standard.
 Ideal labor cost is the standard the restaurant uses to
budget for staffing needs; it represents what management
predicts will happen.

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 Labor Cost Factors
 Business volume, or the amount of sales an operation is
doing for a given time period, impacts labor costs.
 Employee turnover is the number of employees hired to
fill one position in a year’s time.
 Quality standards also affect labor cost. Quality standards
are the specifications of the operation with regard to
products and service.
 A restaurant or foodservice operation must meet
operational standards. If an employee does not prepare a
product that meets the operation’s standards, the item
must be redone. This costs money, in terms of wasted
product and lost productivity.

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 Scheduling
 A master schedule is a template that shows the number of
people needed in each position to run the restaurant or
foodservice operation for a given time period.
 To make the best estimates for a reasonable master
schedule, it also needs to consider current trends.
 After determining the anticipated sales, management
determines the payroll dollars, which are the number of
dollars available for payroll for a scheduling period.
 A crew schedule is a chart that shows employees’ names
and the days and times they are to work.
 A contingency plan helps an operation remain efficient
and productive even during adverse conditions.
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 Quality Standards for
Purchasing and Receiving
 Purchasing: Prior to ordering, receiving, and storing
quality products, consider where the products were grown
or produced.
 Those with purchasing responsibility should seek suppliers
who are considered to be ethical, reliable, and financially
stable.
 Receiving: Once purchase orders have been made, the
next step is to receive the item in the most efficient, safe,
and effective way possible.
 Well-defined receiving procedures ensure that an operation
receives only the products that meet its established
standards for quality and quantity.

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 Quality Standards
for Storing
 Storing: It’s critical that operations create quality
standards for proper storage.
 Monitor perishable food daily to preserve its quality.
 Some food items have manufacturer’s recommendations
for storing the product.
 Store food with proper labels, and rotate all products in
storage following the FIFO (first in, first out) system.
 In addition to checking the food in the storage facilities,
the storage facilities themselves should be checked
regularly to make sure they are clean and functioning
properly and efficiently.

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 Quality Standards for Food
Production and Service
 Standard-portion sizes, standardized recipes, and
standard-portion costs are all food-production standards.
 It is important that managers ensure that standards are
met throughout the foodservice cycle.
 It is important that operations have quality assurance
measures in place right up to the service stage of the
food-flow process.
 The key to identifying deviations from standard recipes
and presentations is regular monitoring and the
understanding by the staff that it is the responsibility of
everyone in the establishment to ensure quality.

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 Quality Standards
for Inventory
 Taking physical inventory means counting and recording the
number of each item in the storeroom.
 Closely monitor inventory to ensure that products are ordered
as they are needed.
 Carefully monitoring inventory also helps ensure that no
product goes to waste. Minimizing waste keeps costs down
and sales up.
 Determine actual food costs by opening and closing
inventories for a given period.
 Use the latest purchase price (FIFO), actual purchase price,
weighted average purchase price, or last in, first out (LIFO)
method to determine the value of the closing inventory.

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