HA355 : The Class : Financial Statement : Cost Accounting : Lesson2-4-1

Food Cost Accounting Systems

 

Budget-Income Statement
Sales
Food	3,300
Beverage	1,105
Total sales	4,405
Cost of Sales
Food	1,320
Beverage	331
Total cost of sales	1,651
Gross Profit	2,753

The above comes from the income statement we looked in Module 2, Topic 2. The issue of cost accounting deals with the recording of cost of sales, management reports analyzing these costs and controls used by management to monitor food and beverage costs. In this topic we will restrict our lesson to food costs. Beverage costs will be discussed in Module 4, Topic 4.

 

Food cost of sales is calculate as follows:
Value of opening inventory	$     425.00
Add Purchases	1,263.00
Total Inventory available	1,688.00
Less Closing Inventory	50.00
Value of food consumed during period	1,338.00
Less Value of employee meals and other adjustments	18.00
Cost of Food Sold During Period	$   1,320.00
Food Sales	$   3,300.00

As can be noted from the above calculation it is important to determine the cost of food used for employee meals since this amount is deducted from the cost of food consumed in order to arrive at the cost of sales amount.

Cost of Sales Percent

CostofSales =

CostofSales      Sales

=

1,320 3,300

=

40.0%

The food cost of sales percent is a useful ratio for monitoring food cost. The ratio is calculated by dividing food cost by food sales. In the above example the a restaurant has food cost of 40 percent. If management considers this a reasonable percent, they can then use it to monitor actual food costs. Management can also use the percent as a standard to develop menu selling prices (see the factor method module 1, topic 2).

Food Cost Accounting History

In the past, food cost accountants spent most of their effort in analyzing historic sales and costs data. They were not readily able to analyze of food costs by menu item. Today food cost accountants concentrate on forecasted, as well as historic, data. They use computer and software systems to produce sophisticated food cost analysis. Food cost accountants need to be able to analyze food costs by individual menu items in order to evaluate menu sales and help in the development of menu sales prices. They need to answer questions such as: which menu items are popular and what is their profitability? With accurate and sophisticated cost data, food cost accountants can produce more accurate and meaningful sales forecasts.

Factory Cost Accounting versus Food Cost Accounting

A kitchen is a type of factory. However there are significant differences between cost accounting for food costs and factory costs. In a factory cost accounting setting, finished product costs can be determined from its cost components, with allocations made for materials, labor and overhead. In addition, factories have long production runs with relatively few items and products are usually produced for inventory, rather than for immediate sales. In the kitchen, on the other hand, cooks have to prepare many items to order. Production runs are short and are completed in a short period of time. Food is perishable and must be served rapidly, rather than produced for inventory. Management cannot use clearance sales or price reductions to move excess production, nor can excess production be added to inventory. Foods must be purchased, prepared, and consumed within a few hours, which does not allow time for the preparation of elaborate cost records.

Daily Cost Control

Under traditional accounting methods, the cost of sales amount is computed once a month at the time the monthly income statement is prepared. To properly control food costs management needs to monitor cost numbers on a weekly, or better yet, daily basis. To determine an accurate daily cost of food sold the following items need to be determined:

• Direct purchases, which are food products shipped directly to the kitchen for consumption on a daily basis. Indirect purchases are shipped to stores. The kitchen makes requisitions from stores as needed.
• The total of direct purchases and requisitions equals cost of food consumed by the restaurant.
• Cost of food consumed amount is then adjusted for employee meals and food transfers with other departments (such as the bar), to arrive at the final food cost of sales amount.

 

Day	Stores Purchases	Direct Puchases	Cost of Food Consumed		Sales		Cost of Food %
			Today	Month to Date	Today	Month to Date	Today	Month to Date
1	-	163	163	163	1,880	1,880	8.7%	8.7%
2	-	146	146	309	18,58	3,738	7.9%	8.3%
3	-	163	163	472	1,999	5,737	8.2%	8.2%
4	-	161	161	633	1,867	7,604	8.6%	8.3%
5	1,689	158	1,847	2,480	1,879	9,483	98.3%	26.2%
6	-	48	48	2,528	612	10,095	7.8%	25.0%
7	-	137	137	2,665	1,629	11,724	8.4%	22.7%
8	-	159	159	2,824	1,948	13,672	8.2%	20.7%
9	-	176	176	3,000	2,065	15,737	8.5%	19.1%
10	1,338	176	1,514	4,514	2,135	17,872	70.9%	25.3%
11	-	158	158	4,672	1,981	19,853	8.0%	23.5%
12	-	178	178	4,850	2,022	21,875	8.8%	22.2%
13	1,812	47	1,859	6,709	624	22,499	297.9%	29.8%
14	-	120	120	6,829	1,481	23,980	8.1%	28.5%
15	-	170	170	6,999	1,891	25,919	8.8%	27.0%
16	-	191	191	7,190	2,072	28,054	8.9%	25.6%
17	-	165	165	7,335	2,142	30,039	8.3%	24.5%
18	1,671	148	1,819	9,174	1,908	31,947	95.3%	28.7%
19	-	166	166	9,340	2,094	34,041	7.9%	27.4%
20	-	49	49	9,389	641	34,682	7.6%	27.1%
21	-	124	124	9,513	1,481	36,163	8.4%	26.3%
22	-	146	146	9,659	1,891	38,054	7.7%	25.4%
23	1,331	159	1,490	11,149	2,072	40,126	71.9%	27.8%
24	-	170	170	11,319	2,142	42,268	7.9%	26.8%
25	-	160	160	11,479	2,016	44,284	7.9%	25.9%
26	1,776	157	1,933	13,412	1,924	46,208	100.5%	29.0%
27	-	56	56	13,468	631	46,839	8.9%	28.8%
28	-	113	113	13,581	1,373	48,212	8.2%	28.2%
29	-	152	152	13,733	1,899	50,111	8.0%	27.4%
30	-	155	155	13,888	2,023	52,134	7.7%	26.6%
31	1,293	155	1,448	15,336	2,024	54,158	71.5%	28.3%
	$ 10,910	$ 4,426	$15,336		$ 54,158		28.3%

(Note if you wish you can download the above schedule to see the relationships among the numbers:simple.xls)

As you can review the above schedule you can see that the daily cost of sales percents are quite erratic, ranging from single digit percents in some cases to over 100 percent in others. The month to date ratios start to appear a little more normal from about the 23rd day and onward.

By pricing out the cost of requisitions from the storeroom, we can produce a more accurate picture of daily food cost. We will learn how to cost out storeroom requisitions later in Module 4, Topic 3. The Summary of Food Cost and Sales method, using the same information from in the above example produces the following results:

 

Day	Opening Inventory	Stores Purchases	Food Storeroom Requisitions	Direct Puchases	Cost of Food Consumed		Sales		Cost of Food %
					Today	Month to Date	Today	Month to Date	Today	Month to Date
1	3,500	-	410	163	573	573	1,880	1,880	30.5%	30.5%
2	3,090	-	425	146	571	1,144	18,58	3,738	30.7%	30.6%
3	2,655	-	450	163	613	1,757	1,999	5,737	30.7%	30.6%
4	2,215	-	404	161	565	2,322	1,867	7,604	30.3%	30.5%
5	1,811	1,689	409	158	567	2,889	1,879	9,483	30.2%	30.5%
6	3,091	-	131	48	179	3,068	612	10,095	29.2%	30.4%
7	2,960	-	357	137	494	3,562	1,629	11,724	30.3%	30.4%
8	2,603	-	405	159	564	4,126	1,948	13,672	29.0%	30.2%
9	2,198	-	445	176	621	4,747	2,065	15,737	30.1%	30.2%
10	1,753	1,338	459	176	635	5,382	2,135	17,872	29.7%	30.1%
11	2,632	-	456	158	614	5,996	1,981	19,853	31.2%	30.2%
12	2,176	-	452	178	630	6,626	2,022	21,875	31.2%	30.3%
13	1,724	1,812	136	47	183	6,809	624	22,499	29.3%	30.3%
14	3,400	-	337	120	457	7,266	1,481	23,980	30.9%	30.3%
15	3,062	-	438	170	608	7,874	1,891	25,919	31.4%	30.4%
16	2,625	-	479	191	670	8,544	2,072	28,054	31.4%	30.5%
17	2,146	-	417	165	582	9,126	2,142	30,039	29.3%	30.4%
18	1,729	1,671	427	148	575	9,701	1,908	31,947	30.1%	30.4%
19	2,973	-	440	166	606	10,307	2,094	34,041	28.9%	30.3%
20	2,533	-	136	49	185	10,492	641	34,682	28.9%	30.3%
21	2,397	-	331	124	455	10,947	1,481	36,163	30.7%	30.3%
22	2,066	-	424	146	570	11,517	1,891	38,054	30.1%	30.3%
23	1,642	1,331	446	159	605	12,122	2,072	40,126	29.2%	30.2%
24	2,527	-	447	170	617	12,739	2,142	42,268	28.8%	30.1%
25	2,080	-	459	160	619	13,358	2,016	44,284	30.7%	30.2%
26	1,621	1,776	410	157	567	13,925	1,924	46,208	29.5%	30.1%
27	2,987	-	140	56	196	14,121	631	46,839	31.1%	30.1%
28	2,847	-	310	113	423	14,544	1,373	48,212	30.8%	30.2%
29	2,537	-	416	152	568	15,112	1,899	50,111	29.9%	30.2%
30	2,121	-	427	155	582	15,694	2,023	52,134	28.8%	30.1%
31	1,694	1,293	424	155	579	16,273	2,024	54,158	28.6%	30.0%
	2,563	$ 10,910	$ 11,847	$ 4,426	$16,273		$ 54,158		30.0%

(Note if you wish you download the above schedule to see the relationships among the numbers: summary.xls)

In reviewing the above schedule you should note daily food cost and percents are more stable. This is due to the substitution of requisitions from the storeroom in place storeroom purchases for the computation of food cost consumed. The "summary of "food costs and sales" food cost accounting system is more accurate than the simple cost accounting system since it is based on direct purchases and requisitions from inventory. The system also provides an estimate of the daily closing food inventory balance. With this system management can monitor daily food costs to determine if they are higher or lower than standards. It can also highlight excessive inventory balances.

The totals on this schedule tie directly into the month end calculation of cost of food sales which is part of the income statement:

 

Cost of Sales:
Beginning inventory	$         3,500
Add Purchases (store room and direct)	15,336
Food Available for Sale	18,836
Less Ending Inventory	2,563
Cost of Food Consumed	16,273
Less Employee Meals	285
Cost of Sales	$       15,988

The monthly calculation includes an adjustment for employee meals. The employee adjustment could be calculated on a daily basis and be included in the daily calculations on the summary schedule.

Standard Cost Accounting System

Another costs accounting method that is used to control food cost is a standard cost accounting system. Under a standard cost system, costs are estimated for each menu item on the restaurant's menu which are calculated from the standardized recipes used to produce the particular menu item. Typically a menu item standard cost does not include allowances for waste, spoilage, or other losses; consequently standard costs are usually lower than actual costs. A factor can be added to compensate for these additional costs. Under a standard cost system, total cost of food is determined by multiplying the number of meal sales for each menu item by its standard cost; the resulting amounts are then totaled up to produce the standard cost of food sold. The computed standard cost is then compared to actual cost, and a variance is computed. The size of the variance is an indication of how well the restaurant's cost controls are working.

Lets look at the standard cost accounting method by continuing with our example. In the following schedule, we have summarized sales information from the restaurant's point of sales (POS) system

 

Menu	Cost per Meal	Projected Sales Meals	Cost per Menu Item	Factor
				Price	Sales
Chicken	$     2.40	$     1,056	$    2,534	$   8.33	$   8,800
Steak	$     3.90	737	2,534	13.33	9,827
Lobster	$     5.95	318	1,892	20.00	6,360
Hamburger	$     1.75	1,319	2,308	5.83	7,694
Pizza	$     2.40	1,317	3,161	8.33	10,975
Pasta	$     1.95	686	1,337	6.67	4,570
Fish	$     3.70	475	1,756	12.50	5,932
Total		$     5,907	$  15,863		$  54,158
Sales					$  54,158
Cost of Sales				29.3%	15,873
Gross Profit					$  38,296

The total sales of $54,158 agree with the total sales on the daily summary sheet, which is one of the benefits of a POS system. The POS system also provides, by menu item, the number of meals sold. Applying the unit standard cost for each menu item gives the standard cost for that menu item. For example the chicken dinner's cost would be:

$2.40 X 1,056 meals = $2,531.

Variance:   Stores Requisitions $    11,847  Direct Purchases 4,426  Less Employee Meals          (285)      Total Documented Food Cost 15,988  Food Cost at Standard       15,863      Variance Gain/(Loss) (125)

The concept of inventory variance accounting relates to the use of standard cost accounting. The total standard cost is compared to the actual cost and the difference is designated as a "variance." Management can use uses the variance to monitor food cost. A large unfavorable amount may be indicative of poor food cost controls. A favorable variance, on the other hand, may be other types of problems such as short portions. The variance in our example of $125 is small (0.8% of standard cost) and should not bother management. Management should monitor the variance on a daily basis to make sure it is not out of line.

Month end inventory

At the end of the month management must take a physical inventory in order to close the accounting books. Most restaurant take physical inventories on a weekly or daily basis as a cost control measure. The results of the physical should be compared to the inventory value predicted by the daily summary schedule. Any difference is designated inventory gain or loss. Large discrepancies should be investigated for control problem or even theft. Assume that the physical inventory in our example was $2,490. An inventory loss of $73 is calculated as follows:

Inventory Reconcillation:       Beginning Inventory $      3,500       Add Store Room Purchases 10,910       Less Stores Requisitions     (11,847)   Ending Inventory per Summary 2,563   Ending Inventory per Physical         2,490   Inventory Gain/(Loss) $        (73)

With the information at hand the cost of sales for the income statement can be calculated:

Cost of Sales for Income Statement       Beginning Inventory $      3,500   Add Purchases (store room and direct)       15,336   Food Available for Sale 18,836   Less Ending Inventory (per physical)         2,490   Cost of Food Consumed 16,346   Less Employee Meals            285   Cost of Sales $    16,061

It is also customary to reconcile the standard cost of sales to actual cost of sales:

Cost of Sales Reconcillation   Food Cost at Standard $    15,863   Inventory Loss 73   Variance Loss            125   Cost of Sales $    16,061

(Note if you wish you can download the excel file to see the above calculations and their relationship to the summary schedule and the standard cost schedule: Schedules)

Go back to Topic 4: Food Cost Accounting Systems

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