Monthly food costs are determined by taking a monthly physical inventory of food stock, evaluating the inventory, and then adjusting the valuation to more accurately reflect the cost of food consumed.
The basic formula to determine the cost of food in a month is:
Cost of food = Opening inventory + Purchases – Closing inventory
For example, if opening inventory is $10 000 and purchases amount to $7500, and the closing inventory (which is also the beginning inventory for the next month) is $9000, then the basic cost of food is:
cost of food = opening inventory + purchases – closing inventory
= $10 000 + $7500 – $9000
= $17 500 – $9000
= $8500
The value of the inventory is the critical component in deriving an accurate cost figure from the basic formula given above.
The information needed to accurately assess the value of inventory is obtained from daily receiving reports (that is, purchases), perpetual inventory cards (that is, inventory records that indicate what is in storage and what supplies have been removed from storage at the request of the kitchen), and by doing a physical inventory.
Adjusting (Credits and Transfers) the Evaluation of Food Costs
Some food inventory is used for purposes other than generating direct sales. For example, if employees are fed or are given a significant discount, the food cost for these meals is usually subtracted from the total found by the basic food cost formula. The cost of employee meals should not be ignored, but it might better be considered a labour cost and not a true food cost.
Promotional expenses are also subtracted from the basic cost of food figure. These include “2 for 1 specials,” coupon discounts, and other promotions. The deduction made, remember, is not the menu price but the actual cost of the food to the operation. Again, this expense cannot be ignored, but should be included as a different type of operating expense.
Food Cost Report
A monthly food cost report is often required by management. The basic form of the food cost report tends to be a comparison of food cost percentages. Percentages are used instead of actual net food cost as such costs vary according to sales. Percentage food cost tends to remain constant regardless of sales.
Food cost percentages
Food cost percentages are computed by using the following equation:
food cost percentage = net food cost/food sales
For example, if net food costs are $5500 and food sales were $13 700, then
food cost percentage = net food cost/food sales
= $5500/$13 700
= 0.401
= 40%
The food cost report often compares the current month’s results with the food cost percentage of the previous month or the cost percentage of the same month a year ago (Figure 14). Management can then decide if monthly food costs are under control.
Date |
Food Costs |
Food Sales |
Food Cost Percentage |
Last month |
$8000 |
$32 000 |
25.0% |
Previous month |
$8500 |
$30 000 |
28.3% |
Same month last year |
$9500 |
$31 000 |
30.6% |