A Closer Look at Food Cost
2
OH 2-1
2-1
 Controlling Foodservice Costs
Chapter Learning Objectives
OH 2-2

Calculate food cost.

Calculate food cost percentage.

Explain the effect that changes in food cost and
sales have on food cost percentage.
Food Cost
 The actual dollar value of the food used in a
foodservice operation
 Often referred to as “cost of food sold”
OH 2-3
Food Cost continued
 Includes the cost of food sold to customers
 Also includes the value of food that is given
away, wasted, or even stolen
OH 2-4
Theft Increases Food Cost
 Employee theft can
be difficult to
prevent, but its
control is vitally
important to
ensuring profitability.
OH 2-5
Reductions from Cost of Food
 Employee meals
 The actual cost of the food served to
employees is subtracted from cost of food.
 Complimentary (“Comp”) meals
 The actual cost of the food that is given away
(not its selling price) is subtracted from cost
of food.
OH 2-6
Reductions from Cost of Food continued
 Grease sales
 Payments from sales of used oil or grease, bones,
and fat scraps are subtracted from food cost.
 Transfers to other units
 If an operation has more than one unit, transfers
TO another unit are subtracted from food cost.
 Transfers INTO a unit are added to its food cost.
OH 2-7
Bar Transfers
 Food to Bar Transfers
 The value of items transferred to the bar for making
drinks is subtracted from food cost.
 Typical products transferred to the bar include
nonalcoholic beverages, fruits, vegetables, spices,
juices, and dairy products.
OH 2-8
Bar Transfers continued
 In a busy bar, the
amount of food that is
transferred from the
kitchen to the bar can
be significant.
OH 2-9
The Food Cost Formula
Opening inventory
+
Purchases
Total food available
–
Closing inventory
Cost of food sold
OH 2-10
The Food Cost Formula in Use
Opening inventory
+
Purchases
$5,000
+
Total food available
–
Closing inventory
Cost of food sold
OH 2-11
$30,000
$35,000
–
$4,000
$31,000
Physical Inventory
To accurately calculate cost of food sold, managers
must take a physical inventory.
OH 2-12
Food Cost Formula Definitions
 Opening inventory
 Dollar value of the physical inventory at the beginning of an
accounting period
 Purchases
 Dollar value of all food purchased (less any appropriate
subtractions) during the accounting period
 Closing inventory
 Dollar value of the physical inventory counted at end of the
accounting period
OH 2-13
The Food Cost Percentage Formula
Food cost ÷
OH 2-14
Sales
=
Food cost percentage
The Food Cost Percentage Formula in Use
Food cost ÷
$7,000
OH 2-15
÷
Sales =
$25,000 =
Food cost
percentage
0.28 or 28.0%
Two Ways to Make a Decimal Conversion
Method One
Method Two
 Move the decimal
 Multiply by 100.
 .35 = 35%
 0.35 x 100 = 35%
two places to the
right.
OH 2-16
Food Cost Percentage
 Allows managers in one restaurant to compare
their food usage efficiency to that of previous
time periods
 Can be used to compare the food usage
efficiency of one restaurant to another
 Allows comparison to the restaurant’s budgeted
food cost percentage or other standard
OH 2-17
Food Cost Percentage continued
 Is the proportion of the restaurant’s sales that is
used to pay for food
 Means “out of each dollar”
 A 35% food cost percentage means that “out of
each dollar” of sales, the restaurant pays $0.35
for food.
 Must be controlled by management
OH 2-18
Costs and Sales Affect Food Cost Percentage
 Food cost is a variable cost, so it should
increase when sales increase and decrease
when sales decrease.
 If controls and standards are in place, food cost
will go up and down in direct proportion to sales.
 If controls and standards are not in place, it
will not!
OH 2-19
How Costs and Sales Affect
Food Cost Percentage
 A food cost percentage is computed using
both a food cost (the numerator) and sales
(the denominator).
 An equal percentage increase (or decrease) in
each of these will result in an unchanged food
cost percentage.
OH 2-20
Ten Percent Increase in Sales and
Cost of Food
 Original cost of food
$1,000
 Original sales
$3,000
 Food cost percentage
33%
With 10% increase in sales and food cost
 New cost of food
$1,100
 New sales
$3,300
 Food cost percentage
OH 2-21
33%
Ten Percent Decrease in Sales and
Cost of Food
 Original cost of food
$1,000
 Original sales
$3,000
 Food cost percentage
33%
With a 10% decrease in sales and food cost
 New cost of food
$ 900
 New sales
$2,700
 Food cost percentage
OH 2-22
33%
The ABCs of Food Cost Percentage (A/B = C)
 Where:
A = Food Cost
B = Sales
C = Food Cost Percentage
1. If A stays the same, and B increases,
C decreases.
2. If A stays the same and B decreases,
C increases.
OH 2-23
ABCs of Food Cost Percentage (A/B = C)
continued
3. If A decreases, and B stays the same,
C decreases.
4. If A increases, and B stays the same,
C increases.
5. If A increases at the same proportional rate that
B increases, C stays the same.
OH 2-24
Food Cost Percentage
 Should be controlled
 Should not be allowed to fall far below the
restaurant’s standard
OH 2-25
Food Cost Percentage continued
 If food cost
percentages are
allowed to drop below
the restaurant’s
standards, the guests’
perceptions of value
may be negatively
affected.
OH 2-26
How Would You Answer
the Following Questions?
OH 2-27
1.
The cost of employee meals should be
(subtracted/added) to the cost of food before
computing a food cost percentage.
2.
A restaurant’s food cost percentage should increase
when sales increase and decrease when sales
decrease. (True/False)
3.
Which best describes food cost as an expense?
A. It is fixed
B. It is semivariable
C. It is variable
D. It is noncontrollable
4.
A manager’s job is to reduce the food cost
percentage as much a possible. (True/False)
Key Term Review
 Closing inventory
 Opening inventory
 Food cost
 Purchases
 Food cost percentage  Total food available
 Inventory
OH 2-28
Chapter Learning Objectives—
What Did You Learn?
OH 2-29

Calculate food cost

Calculate food cost percentage

Explain the effect that cost and sales have on
food cost percentage