Chapter 3 Cost Control

1. Chapter 3 Cost Control

2. Cost Control Overview Cost control is a business’s efforts to manage how much it spends. • Cost is the price an operation pays out in the purchasing and preparation of its products or the providing of its service. • 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. 3.1 Chapter 3 | Cost Control

3. Types of Costs • A successful restaurant or foodservice operation needs to manage and control many costs. • 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. 3.1 Chapter 3 | Cost Control

4. 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. • 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. 3.1 Chapter 3 | Cost Control

5. 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. 3.1 Chapter 3 | Cost Control

6. 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. • If used effectively, technology can help in running an operation more efficiently and helping to reduce and effectively control costs. 3.1 Chapter 3 | Cost Control

7. Steps in Controlling Food Costs Food costs must be controlled during all seven stages of the food flow process: • Purchasing • Receiving • Storage • Issuing • Preparation • Cooking (production) • Service (sale) 3.2 Chapter 3 | Cost Control

8. 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 3.2 Chapter 3 | Cost Control

9. Determining FoodCost 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. 3.2 Chapter 3 | Cost Control

10. Establishing StandardPortion 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. 3.2 Chapter 3 | Cost Control

11. As-purchased versusEdible-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. 3.2 Chapter 3 | Cost Control

12. 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. 3.2 Chapter 3 | Cost Control

13. 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. 3.2 Chapter 3 | Cost Control

14. Monitoring ProductionVolume 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. 3.2 Chapter 3 | Cost Control

15. 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. 3.2 Chapter 3 | Cost Control

16. Labor • 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. • Four primary factors affect labor costs: • Business volume • Employee turnover • Quality standards • Operational standards • Scheduling depends greatly on how much revenue an operation is bringing in and how much revenue an operation expects to bring in. 3.3 Chapter 3 | Cost Control

17. Quality Standards forPurchasing 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. 3.4 Chapter 3 | Cost Control

18. Quality Standardsfor 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. 3.4 Chapter 3 | Cost Control

19. 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. 3.4 Chapter 3 | Cost Control

20. Quality Standardsfor 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. 3.4 Chapter 3 | Cost Control

21. Chapter 7 Marketing

22. Marketing Overview A market is a group of people who desire the product or service provided by a business. Marketing is the process of communicating a business’s message to its market. • Marketing includes determining what products and services to offer, how to position them in the marketplace, how to promote them to potential buyers, how to price them so people will buy them, and how to get the goods to these buyers. 7.1 Chapter 7 | Marketing

23. Basic Marketing Concepts • The marketing mix is the combination of all the factors that go into creating, developing, and selling a product. • A new model is called the contemporary marketing mix, which consists of three primary elements: • The product-service mix consists of all of the food and services offered to customers. • The presentation mix consists of all the elements that make the operation look unique. • The communication mix includes all of the ways an operation actively tries to reach, or communicate, with its desired customers. • A successful operation needs to keep up with consumer, or market trends. 7.1 Chapter 7 | Marketing

24. Marketing Plan A marketing plan is a list of steps an operation must take to sell a product or service to a specific market. • Every marketing plan has five main components: • Research the market • Establish objectives • Develop a market strategy • Implement an action plan • Evaluate/modify the action plan as needed 7.1 Chapter 7 | Marketing

25. SWOT To do a SWOT analysis (also called a situation assessment), identify an operation’s Strengths, Weaknesses, Opportunities, and Threats. • Strengths: List all of the strengths of the operation; areas where it excels. • Weaknesses: Identify the operation’s shortcomings. • Opportunities: These are areas where the operation could either increase revenues or decrease costs. • Threats: These are the factors outside the operation that could decrease revenues or increase costs. 7.1 Chapter 7 | Marketing

26. Market Research Methods • There are four basic methods marketers use to gather research: • In the experimental method, an operation might try out a product for a limited time or with a limited group of people. • The observational method involves observing how customers react in a natural setting toward a product. • With the survey method, a marketer gathers information using questionnaires. • Sampling involves testing a product with a specific, small group of people, sometimes called a focus group. 7.2 Chapter 7 | Marketing

27. Market Segmentation • The target market is comprised of the people an operation intends to pursue as customers. • Every operation should be customer driven by satisfying the wants and needs of the customer. • Mass marketing treats everyone in the market as having the same needs and wants, while target marketing treats people as different from each other and tries to make a focused appeal to a distinct group of customers. • Market segmentation is when marketers break down a large market into smaller groups of similar individuals that make up that market. 7.2 Chapter 7 | Marketing

28. Ways to Segment a Market • There are four basic ways to segment a market: • Demographic segmentation looks at the personal makeup of individuals in a given location. • Geographic segmentation includes such factors as where consumers live, where they work, and what kind of transportation they use to get around. • Segmenting a market by product usage can also shed light on how best to serve a community. • Lifestyle segmentation looks at the activities, hobbies, interests, and opinions of a given target market. • A value proposition is a statement of the value an operation’s target customers will experience when they purchase its products and services. 7.2 Chapter 7 | Marketing

29. Creating a Market Identity • Positioning is creating a clear, specific identity for both a product and the operation within the marketplace. In the restaurant and foodservice industry, it is all about standing out in a crowd. • Positioning consists of three steps: • Identify possible ways to differentiate the operation within the market and create a unique identity. • Select the right mix of differentiating aspects. • Communicate the chosen identity to a specific target market. 7.2 Chapter 7 | Marketing

30. Ways to Differentiatean Operation • To differentiate an operation from its competitors and create a unique identity, managers can look at the following: • Product: The first and most obvious way to position an operation in the market is through the product it offers. • Physical appearance/aesthetics: Use the actual physical space of an operation to create an image. • Location: Location can play a big part in creating an identity. • Image: Finally, image is yet another way to differentiate an operation. • Marketers and managers have to select the right mix to position an operation properly. • Managers and marketers must clearly communicate an operation’s chosen identity in the market. 7.2 Chapter 7 | Marketing

31. Market Communications • The ways an operation communicates with its market is called the promotional mix: • Advertising: Paying to present or promote an operation’s products, services, or identity. • Sales promotions: Limited, or short-term, incentives to entice customers to patronize an operation. • Personal selling: Always key to an operation’s financial success, but well-trained service staff can also go a long way in communicating an operation’s message. • Public relations (PR): The process by which an operation interacts with the community at large. • Direct marketing: Making a concerted effort to connect directly with a certain segment of the market. 7.2 Chapter 7 | Marketing

32. Types of Sales Promotions • Types of Sales Promotions: • Special pricing • Frequent shopper program • Premiums • Special events • Samples • Contests and sweepstakes • Typical promotional materials: • Signage • Flyers • Premiums • Carryout and door hanger menus • Apparel and branded merchandise • Point-of-purchase (POP) materials • Merchandising materials • Direct mail • Email 7.2 Chapter 7 | Marketing

33. Public Relations:Engaging the Community • Publicity is the attention an operation receives. • One way to get good publicity is by engaging in the affairs of the community. • Community relations involve interacting with the people in the local area to create awareness of and trust for an operation. • Once marketers have identified community relations opportunities that align with their marketing plans, they can think about how to become involved in a way that generates good publicity. • Media relations are the relationships that marketers maintain with media outlets. 7.2 Chapter 7 | Marketing

34. Menu Overview • There may be no stronger marketing tool for a restaurant than its menu. • The menu functions in two ways: planning and communication purposes. • The basic function of the menu is to tell customers what the operation has to offer. The menu also presents an opportunity to distinguish its items from those of the competition. • The menu may be an operation’s best sales tool. It can greatly influence what customers decide to order. • The menu also helps create the image or identity of an operation. The items listed on a menu say a lot about an operation, but so does the way the menu is laid out. 7.3 Chapter 7 | Marketing

35. Types of Menus Understanding the different types is a good first step in determining or identifying an operation’s goals and function in the marketplace. • À la carte menu: This menu prices each item separately. • Du jour menu:Du jour is a French term that means “of the day,” so it simply lists the menu items that are available on a particular day. • Cyclical menu: With this type of menu, chefs or managers change menu items after a certain period of time. • Limited menu: There are typically only a few items offered on a limited menu. 7.3 Chapter 7 | Marketing

36. More Menus • Fixed menu: This menu offers the same items every day. • California menu: This menu lists all meals available at any time of day. • Prix fixe menu: This is the opposite of an à la carte menu in that it offers multiple menu items at one price. • Table d’hôte menu: This menu is similar to a prix fixe menu in that it bundles various elements of the menu into one package. 7.3 Chapter 7 | Marketing

37. Organizing a Menu • Most menus organize foods according to the order in which they are usually eaten. • Variations in these categories depend on what an operation offers and the image management wants to promote. • Prepare foods within a major classification using a variety of cooking methods. • Chefs or managers can divide entrées by categories. • Maintain balance in the choice of vegetables, sauces, and potatoes used to complement entrées. • The number of desserts on the menu depends on customers’ tastes and past sales. 7.3 Chapter 7 | Marketing

38. Creating the Menu • Managers and chefs must take into account these elements in the planning phase of menus: • Physical layout: Planners must take the physical layout, or space, of the operation into account when they design a menu. • Personnel: Planners must consider the qualifications of the staff of an operation. • Ingredients: Managers and chefs want to create a menu that best reflects fresh, seasonal ingredients. • Wants and needs of target market: Managers must address the wants and needs of the market, not their personal preferences. • Expectations of target market: These must be met once the operation is established and continues over time. • Profit margin: Planners must create the menu with profitability in mind throughout the entire process. 7.3 Chapter 7 | Marketing

39. Designing a Menu • Well-designed menus are pleasing to read, easy to understand, and clearly express the identity and character of the operation as a whole: • Medium: Managers must take into account the material on which the operation’s menu is printed or displayed. • Layout: How the menu is categorized and sequenced also adds to the identity of an operation. • Color: The colors chosen by an operation help create its identity. • Font: A font can highlight certain elements on the menu, drawing customers’ attention. • Art: The art selected for a menu can say a lot about an operation. 7.3 Chapter 7 | Marketing

40. Pricing the Menu • Pricing the menu is a critical process: it provides information to customers and it determines profitability. • The price of items on a menu also points to the market category of the restaurant, indicating quality of the food, level of service, atmosphere to expect, and so on. • Management needs to make sure that pricing aligns with the goals of the operation and the skill level of the staff. • Price also determines profitability, which is the amount of money remaining for an operation after expenses, or costs, are paid. This difference is also called the margin. • The price of a menu item must account for all of the costs involved in producing that item for the customer. Then, management must build in profit. 7.3 Chapter 7 | Marketing

41. Menu Pricing Methods • Food percentage method: Set the percentage of menu price that the food cost must be, and then calculate the price that will provide this percentage: Item food cost ÷ Food cost percentage = Menu price • Contribution margin method: This method works for à la carte menu items and menu items that comprise a meal. There are two steps to the formula: (Total nonfood cost + Target profit) ÷ Number of customers = Contribution margin Contribution margin + Food cost = Menu price • Straight markup pricing: With this method, managers mark up the costs according to a formula to obtain the selling price. 7.3 Chapter 7 | Marketing

42. More Menu Pricing Methods • Average check method:With this method, managers divide the total revenue by the number of seats, average seat turnover, and days open in one year. The result is an average check amount, which gives managers an idea of the price range of items on the menu. • Set dollar amount markup:This method adds a fixed dollar amount to the food cost of an item. The food cost and the dollar amount of the markup must be known: Food cost + Markup = Menu price • The markup is calculated based on the following: Profit per menu item + Labor cost per menu item + Operating cost per menu item = Markup 7.3 Chapter 7 | Marketing

43. Menu Pricing Methods (Cont.) • Set percentage increase method:With this method, managers calculate the markup for the set dollar amount markup for one or several menu items. Then, they determine what the percentage markup is in comparison to the items’ food costs: Food cost × Percentage = Markup Markup ÷ Food cost = Percentage 7.3 Chapter 7 | Marketing

44. Analyzing Menu Sales • It is crucial to the success of an operation that managers analyze how well items on the menu are performing. • The sales volume of a menu item is the number of times the item is sold in a time period. • Conducting a sales mix analysis helps managers maximize profits. A sales mix analysis is an analysis of the popularity and the profitability of a group of menu items. • Menu engineering is systematically breaking down a menu’s components to analyze which items are making money and which items are selling. 7.3 Chapter 7 | Marketing

45. Using Menu Item Classifications • Stars: These items are both popular and profitable. For the most part, stars should be left alone. • Plow Horses: These items are popular but less profitable. These items are often an important reason for a restaurant’s popularity. Because they are less profitable, one solution may be to increase their price. • Puzzles: These items are unpopular but very profitable. One of the best solutions to helping out a puzzle is to decrease its price. • Dogs: These items are unpopular and unprofitable. Eliminate all dog items if possible. Replace them with more popular items. 7.3 Chapter 7 | Marketing