31/07/2008. Objective. Monitoring Foodservice Operations I Monthly Inventory & Food Cost. Introduction. Introduction.

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1 Monitoring Foodservice Operations I Monthly Inventory & Food Cost Objective By the end of this course you will be able to: Explain the importance of monitoring a foodservice operation to assess monthly performance Describe the procedure for taking physical inventory at the end of the month List and explain 3 ways to assign unit costs to a food inventory Calculate cost of food consumed & cost of food sold Distinguish Opening and Closing inventories Prepare a simple monthly food cost report Calculate Inventory Turnover Introduction At the beginning of this course I shared with you the 4 steps of the control process: 1. Establishing Standards and standard procedures for operations 2. Train all individuals to follow established Standards and SOPs 3. Monitor Performance and compare actual performance with established Standards 4. Take appropriate action to correct deviations from Standards Introduction Thus having addressed the establishment of Standards and SOPs over the critical phases of Food service operation, we turn to an examination of Step 3: Monitoring the operation as a whole We will describe the procedures determining monthly food cost and cost percent and explain how these figures can be useful in assessing whether the operation is meeting its goals Here are the steps to take in order to do so Taking the Physical Inventory A universally accepted practice Closes the accounting period The purpose is to monitor how well control measures have worked It requires counting the actual number of units on hand of each item in stock, and recording that number Monthly Inventory Storeroom Inventory Example, Exercise 8.1 CC6 1

2 Valuating the Physical Inventory The challenge in valuating the physical inventory is to assign the unit value for each item, because all purchases may not have been made at the same price. (Prices may change several times during a month) There are several ways to assign values to units of products in a physical inventory: 5 ways of Valuating the Physical Inventory Actual purchase price Method First-in, First-out Method Weighted-average purchase price method Latest purchase price method Last-in, First-out Method Let s look at our Tomatoes crushed # 10 Basis to illustrate the different methods Inventory records for the month of July 2008 reveals the following: Opening inventory on the 1st of the month: 10 $9.98 = $ Purchased on the 7 th of July 24 $9.70 = $ Purchased on the 16 th of July 24 $9.60 = $ Purchased on the 26 th of July Total Value of Purchases $ Value of opening inventory $ Total value of purchases + $ Value of Total number of units available $ Basis to illustrate the different methods A physical inventory on the 31 st of the month showed that 20 cans remain in stock. From this information, one can deduce that 50 cans were consumed during the month as follow: Opening inventory 10 cans $ Purchases during the month : 60 cans + $ = Total available: 70 cans = $ Closing inventory 20 cans still available = Units consumed: 50 cans no longer available Actual Purchase Price Method Perhaps the most reasonable unit value to assign to the items in the closing inventory (the actual price method) only possible if cans are marked with price! Remember, we are attempting to determine the value of the 20 cans still in stock 4 $9.98 = $ $9.60 = $ = $ First-in, First-out Method (Latest Prices) An alternative Procedure is to assume that stock has been rotated properly during the period, so that units consumed were the first to be placed on the shelf. no need to mark cans with prices 8 $9.60 = $ = $ CC6 2

3 The Weighted-Average Purchase Price Method If there is no assurance that stock has been properly rotated and if large quantities of goods are involved, this method offers a reasonable alternative. Multiplying the number of units in the opening inventory and in each subsequent purchase by their specific purchase prices, adding these values to determine a grand total for all units together, and then dividing this grand total by the total number of unit The Weighted-Average Purchase Price Method Total cans available / total value= Weightedaverage value: 70 cans available/ $ = $9.66 The Value of the closing inventory is therefore: $9.66 = $ Other 2 Methods Latest Purchase Price Method (Most recent price) A simpler, faster and more widely used approach to value the closing inventory $9.45 = $ Last-in, First-out Method (Earliest prices) Sometimes used to minimize the cost of the inventory, therefore maximizing consumption and minimizing profit (to decrease income tax ) 10 $9.98 = $ $9.70 = $ = $ Comparison of the 5 methods To illustrate: Value based on Actual purchase price Method $ Value based on First-in, First-out Method $ Value based on Weighted-average purchase price method $ Value based on Latest purchase price method $ Value based on Last-in, First-out Method $ Monthly Food Cost Determination The Cost of Food sold of any month is determined by means of the following formula: Opening Inventory + Purchase. = Total Available - Closing inventory = Cost of Food Adjustments to Cost of Food Issued Transfers Steward Sales Gratis to Bars Promotion expenses CC6 3

4 Determining Cost of Food Consumed Opening Inventory + Purchase. = Total Available - Closing inventory = Cost of Issued + Transfers from other units + Cooking liquors - Transfers to other units - Food to bar (directs) - Steward sales - Promotion expenses. = Cost of Food consumed Determining Cost of Employee Meals There are several techniques for determining the cost of employees meals. Cost of Separate issues (separate canteen) Prescribed amount per meal (a $ figure per meal is allocated for employee meals) Prescribed amount per period (a fixed amount is credited to Food Cost for employee meals) Sales value multiplied by cost percent (when the employees orders from a menu but do not pay for their meals, we used the standard FC% of this total to credit to food cost) Determining Cost of Food Sold Exercise: Download Exercises 8.1 & 8.2 Complete the storeroom inventory valuations and obtain a total inventory figure using the form on exercise 8.1 Obtain a cost of food sold on exercise 8.2 using the following information on next slide: For exercise 8.2 Opening inventory: $5, Purchases: $24, Cooking Liquor: $ Food to Bar: $75.60 Steward Sales: $ Promotions Expenses: $87.30 Cost of Employees meals: $1, Reports to Managers Once cost of food sold and food cost percentage have been calculated, they are normally reported to management. Each operation has its own format, but usually, figures are compared with previous year figures and budgeted figures Usually, managers prefer to have more frequent and timely reports than monthly reading to make corrective action before it s too late. The Monthly Report Sample: July this year July last year Food $63, $65, Sales Net Cost of $22, $21, Food Sold FC% 36.00% 32.99% CC6 4

5 Inventory Turnover To evaluate the adequacy of a food inventory is to calculate how often that inventory has been used and replenished during an accounting period: Average Inventory = Opening Inventory + Closing Inventory 2 Inventory Turnover =. Food Cost. Average Inventory In most F&B operation, an amount sufficient to last one or two weeks is considered normal and you can use that range as a guideline. Inventory Turnover Exercise: Calculate the Inventory Turnover from the following: Opening Inventory: $9,010 Closing Inventory : $9,356 Food Cost : $21,584 Chapter Essentials We have seen The importance of monitoring a foodservice operation to assess monthly performance The procedure for taking physical inventory at the end of the month 3 ways to assign unit costs to a food inventory The calculation of cost of food consumed & cost of food sold Distinguished Opening and Closing inventories The monthly food cost report Calculated the Inventory Turnover CC6 5