La Consolacion College Tanauan A member of the

Unified La Consolacion College

– South Luzon

Food and Beverage Cost Control System

F&BCOST_2020

Module I

Unit 1

(1 Week)

Introduction to Cost Control

Introduction

This course unit presents the overview of the systems and operations involve
in controlling the cost in a specific restaurant operation. It deals also with the manager’s
role in controlling the cost and the importance of the maintenance of food cost
percentage in the progress of a restaurant operations.

Learning Outcomes

Upon the completion of this unit, the students can:

• Analyze the different types of cost in the restaurant operation.

• Explain the cost control process used to reduce the operational cost of the
restaurant.

Assigned Reading
Students will be assigned to read/access the following printed reading
materials/internet sources:

1. Cost Control, Analyzing the Cost Control System in Food and Beverage
Industry

Okay, Let us all begin with the question, “why would a successful
manager need to understand the importance of controlling details?”

Restaurant Management, involves thousand details, and each of these

details can affect the over-all performance of the operation. This is
especially true in the area of controlling costs. It is truly one of the most
important functions of restaurant management.

A. Mabini Avenue, Tanauan City, Batangas, Philippines www.lcctanauan.edu.ph (043) 778-1020

 La Consolacion College Tanauan A member of the
Unified La Consolacion College
– South Luzon

Restaurant Management, involves thousand details, and each of these

details can affect the over-all performance of the operation. This is
especially true in the area of controlling costs. It is truly one of the most
important functions of restaurant management.

A we go along dealing with the restaurant operations and monitoring

and managing its costs, it is very important for you to understand that in
most restaurant or foodservice operations, manager take personal
charge of an operation’s cost control process; however, the size and
scope of an operation will determine the extent to which its manager
exercise direct control or delegate that responsibility to other staff.
Regardless of the type of operation you manage whether in the near
future you will be assigned in service area or back office maybe, in
order for you to be effective, you must fully understand all the costs
associated with running the business. Cost control is not something
that can be done once and only followed up with occasionally.

If Costs get out of your line as managers, the profitability of a restaurant

could be seriously jeopardized.

Managers must monitor and control costs on a daily basis, sometimes

even on an hourly or minute-by-minute for you to secure everything.

Cost Control
Management First: Controlling Food Service Cost, 2nd edition (2012), , 2-15

What is food cost control?

Cost control is the ongoing practice of taking measures to reduce business

expenses as a way to increase profits. Food cost control specifically, is
identifying and reducing the cost of food and beverages at your restaurant.

Put simply, the objective of food cost control is to find a way to maximize your
gains by minimizing your costs. The process of managing costs is ongoing—it’s
not a onetime exercise that you complete and put a bow on, it’s more of a state of
mind that you bring to your day to day. Food costs change, as does your menu,
your sales, your guests and so many other factors affecting food cost control.
There are tons of variables that go into food cost control, including (but not limited
to):

A. Mabini Avenue, Tanauan City, Batangas, Philippines www.lcctanauan.edu.ph (043) 778-1020

 La Consolacion College Tanauan A member of the
Unified La Consolacion College
– South Luzon

• Kitchen organization
• Employee training
• Standardized recipes and procedures
• Menu costing
• Portion control
• Production forecasting
• Overproduction
• Improper cooking
• Ordering
• Inventory
• Theft
• Waste
• Purchasing analysis
• Sales
• Service

The first big step in practicing food cost control is understanding your overall food
cost percentage. Before we dive in to calculations, here’s an important takeaway
when it comes to food cost percentage: it only measures your profit from your
food inventory. It is different from your gross profit margin, which takes into
account things like:
• Labor costs
• Overhead from capital investments (equipment, etc.)
• Marketing
• Maintenance
• Food costs

The Importance of Controls

In every area of a restaurant or foodservice operation, controls are an important

part of making a profit. A control is a method of exercising some amount of power
over events or situations in order to achieve a particular result. At every stage of
operations, controls need to be established to prevent problems and achieve the
goals of the organization. Cost controls start with the menu and continue on
through purchasing, receiving, storage, production, and finally, service. Without
controls in place, an operation has no way of determining and evaluating whether
the operation is profitable or meeting its budget. Controlling and reducing costs
are desirable trends for ensuring the ongoing financial health of an operation.
People often use various controls to regulate their actions in daily life. For
example, many people regulate the amount of fatty food they eat to achieve a
desired healthy state of being, and when people are in the process of watching
what they eat, limitations or restrictions become part of the method to achieve
that desired state. Similarly, companies often create policies and procedures that

A. Mabini Avenue, Tanauan City, Batangas, Philippines www.lcctanauan.edu.ph (043) 778-1020

 La Consolacion College Tanauan A member of the
Unified La Consolacion College
– South Luzon

govern how employees behave. In these examples, there are consequences

associated with choosing not to follow the established regulations. If someone
eats too much fatty food, he or she might develop various health-related illnesses;
if a person does not follow policies at work, there is the chance that he or she will
be reprimanded or terminated.

Cost Control Standards

So how do you know if the cost controls in place are achieving the
desired results?

The actual results must be checked against a standard. A standard is a measure

that is established to compare levels of attainment for a goal or a measure of
adequacy. Standards are levels of excellence against which results are
evaluated. People use standards in their daily lives, usually without even thinking
about it. They buy one brand of gas over another because that brand meets their
standard. They vacuum the carpet because they have a standard for cleanliness.
Restaurant operations also have standards. In the restaurant and foodservice
industry, managers, employees, and suppliers are expected to meet the
standards set by management. Standards cover the entire spectrum of the
business-sales, quality, quantity, production, service, employment, and so on.
Standards are an integral part of the process of controlling costs. When
management sets standards for costs, they do so with the understanding that
those standards will produce a profit for the business. Cost control standards
direct managers in every aspect of restaurant management and operations, from
initial menu planning all the way through to purchasing, receiving, storing,
production, service, scheduling staff, and cash handling. Cost standards vary
from one type of operation to another. Even within chain operations, the cost
standards might vary from region to region. Consider that in some operations-
such as restaurants, catering companies, and hotels -the intent is to make a profit,
while in other foodservice operations-such as hospitals, nursing homes, schools,
and prisons-the objective is to meet budget. Whether the intent of the business
is to make money or to stay within budget, costs must be controlled. The standard
is the regulating force behind controlling costs. It is the responsibility of
management to understand the standards for the operation and then determine
ways to control various factors to maintain or exceed the standards. Ideally, if
standards are consistently met, the restaurant will be profitable.

A. Mabini Avenue, Tanauan City, Batangas, Philippines www.lcctanauan.edu.ph (043) 778-1020

 La Consolacion College Tanauan A member of the
Unified La Consolacion College
– South Luzon

Types of Costs

Okay, so lets talk about the costs

Many different types of costs are involved when running a restaurant or

foodservice operation. They can be classified in different ways. The most
common classifications are controllable and noncontrollable costs, and
fixed, variable, and semi-variable costs. The reason for classifying costs
is to differentiate between the ones that management can and cannot
control. Identifying and understanding different types of costs helps
managers interpret cost-related information and make control- related
decisions.

➢ Controllable and Noncontrollable Costs

One method of classifying costs is to categorize them as either controllable
costs or noncontrollable costs. Controllable costs are those costs that
management can directly control. Noncontrollable costs are those costs
over which management has little or no control.

Controllable Costs

An example of a controllable cost is food cost. Management can control

this cost by using standardized recipes or exercising standard procedures
for portion control, menu listing, and pricing or by one of several other
restraints. For example, if the price of chicken increases and no action is
taken, the restaurants food cost will increase. At this point, management
can either raise the selling of all chicken entrees, reduce portions,
reposition the items on the menu, or eliminate chicken from the menu
altogether. By taking action, management has controlled the increased
cost or chicken, resulting in no increase in the restaurant’s food cost.

Another example of a controllable cost is labor cost. By changing the

number of hours an employee works, a manager can affect labor costs.
For example, it a restaurant s sales drop, and no action is taken, payroll
cost as a percentage of sales increases. By reducing the number of hours
worked by employees, this percentage could be brought back into line.

It should be pointed out, however, that n exercising these options,

management must always be careful not to alienate customers. If the
selling price of chicken entrees is increased too much, or too many hours

A. Mabini Avenue, Tanauan City, Batangas, Philippines www.lcctanauan.edu.ph (043) 778-1020

 La Consolacion College Tanauan A member of the
Unified La Consolacion College
– South Luzon

are trimmed off the schedule, resulting in poor service, Customers could
be driven to the competition.

Noncontrollable Costs

An example of a noncontrollable cost is insurance. Once an insurance

policy has been negotiated, management has no control over the cost of
that policy. Another example is license fees. Management has no control
over the rate charged for bar or occupation licenses. A third example is the
operation s lease or mortgage. Once signed, management has virtually no
control over this cost.

➢ Fixed, Variable, and Semi-variable Costs

Fixed, variable, or semi-variable costs are based on each costs

relationship to sales volume. In other words, does a cost increase or
decrease as sales increase or decrease or does the cost remain the same
regardless of sales volume?

Fixed costs

Fixed costs are those costs that remain the same regardless of sales
volume. Insurance is an example of a fixed cost. As previously stated, once
the insurance policies have been negotiated, the cost remains the same
throughout the term of the policy. For example, if the cost of insuring the
business is ₱56,000 per month, it will remain at ₱56,000 every month. If
the restaurant has sales of ₱560,000 one month ₱1, 120,000 the next
month, and ₱840,000 the following month, the insurance cost remains the
same at ₱56,000 per month. It does not change when restaurant sales
change

Variable costs

Variable costs increase and decrease in direct proportion to sales. Food

cost is one example. As sales increase, more food is purchased to
replenish inventory, and as sales decrease, less food is purchased. If
adequate controls are in place and there is little waste or theft, the amount
of food used is in direct proportion to sales.

A. Mabini Avenue, Tanauan City, Batangas, Philippines www.lcctanauan.edu.ph (043) 778-1020

 La Consolacion College Tanauan A member of the
Unified La Consolacion College
– South Luzon

Semi-variable costs

Semi-variable costs increase and decrease as sales increase and

decrease but not in direct proportion. They are made up of both fixed costs
and variable costs. Labor cost is an example. (See Exhibit lb.)
Management is normally paid a salary that remains the same regardless
of the operation's sales volume. If the general manager and the chef are
collectively paid $120,000 per year, they will receive that amount
regardless of whether the restaurant brings in $1,000,000 or $1,300,000
per year. Thus, managements salary is a fixed cost. On the other hand,
staff such as the waitstaff and line cooks are paid hourly wages and are
scheduled according to anticipated sales. As a result, the cost of hourly
staff increases as sales increase and decreases as sales decrease. If
proper scheduling is used, the cost will increase and decrease in direct
proportion to sales. Putting this all together, labor is a semi-variable cost
because there is a fixed cost component (management's salary) and a
variable cost component (hourly staff wages). The 1st graph in Exhibit 1
shows how variable costs change in direct relationship to sales volume.
The 2nd graph shows that although semi- variable costs also change with
sales volume, they do not change in direct relationship with sales.

Exhibit 1

160
140
120
100
80 Sales
60 Costs
40
20
0
1st Q 2nd Q 3rd Q 4th Q

VARIABLE COST

A. Mabini Avenue, Tanauan City, Batangas, Philippines www.lcctanauan.edu.ph (043) 778-1020

 La Consolacion College Tanauan A member of the
Unified La Consolacion College
– South Luzon

100
90
80
70
60
50 Sales
40 Costs
30
20
10
0
1st Q 2nd Q 3rd Q 4th Q

SEMI-VARIABLE COST

Clearly, there is some crossover in classifying costs. Variable and semi-

variable costs are usually controllable costs. Fixed costs are typically
noncontrollable costs. While there are some exceptions to this, for the
most part it is true.

➢ Prime Cost
The two largest costs that management has to control are food cost and labor
cost. Together they are known as the prime cost-the two highest costs in the
operation.

The rule of thumb regarding prime cost is that it should not exceed 65 percent of
sales. Thus, if a restaurant has a high food cost, it must have a low labor cost.
For example, a steakhouse could run a 43 percent food cost and a 20 percent
labor cost, while a quick-service operation could run a 25 percent food cost and
a 35 percent labor cost. Either way, the prime cost is below 65 percent.

Although controlling prime cost is a major responsibility for managers, a word of

caution is needed. Sometimes management, in their zeal to control things,
carries controlling costs too far. Controls are important, but not to the point of
interfering with one of the primary objectives of the restaurant, which is to build
sales. Sometimes controls slow down production or service. When this happens,

A. Mabini Avenue, Tanauan City, Batangas, Philippines www.lcctanauan.edu.ph (043) 778-1020

 La Consolacion College Tanauan A member of the
Unified La Consolacion College
– South Luzon

it is time to review the control and change it so that service (and ultimately sales)
will not suffer.

Another point to remember is cost. A control should not cost more than
what it is intended to control. If a few customers in a quick-service
operation were taking a handful of mustard packets, it would not be cost
effective to hire a security guard to watch over the condiment stand.
While this illustration is extreme, management sometimes overreacts
and ends up overcontrolling a situation to their own detriment.

➢ The Cost Control Process

Taking action to reduce operating costs requires understanding which
costs might be unnecessary and deciding what can be done to
eliminate them. At the same time, any controls implemented must
ensure continuation of the operation's standard levels for safety,
sanitation, and customer service. With experience, managers learn to
quickly spot cost-related concerns in their operations.

A. Mabini Avenue, Tanauan City, Batangas, Philippines www.lcctanauan.edu.ph (043) 778-1020

 La Consolacion College Tanauan A member of the
Unified La Consolacion College
– South Luzon

1. Collect Accurate Sales

and Cost Data

Historical sales information is just as important to cost control as it 1s to other

management functions. The relationship between sales and the costs that
were incurred to achieve those actual sales is often proportional, and many
foodservice costs change depending on sales volume. In order to know
whether costs are within an appropriate range, it is imperative to start with
accurate sales information.

Sales should be tracked for diff. periods, including yearly, monthly, weekly,
daily, meal period, and even hourly.
Yearly and monthly data are used for budgeting and income
statement purposes.
Weekly and daily sales data are used for purchasing and scheduling
Daily and meal period data are also used for scheduling and
production planning.

An INCOME STATEMENT is a report showing sales, costs, and the profit

or loss of a business. It also shows whether an operation made or lost
money during the report’s time period. The income statement, also called
the profit and loss report- a valuable tool.

Sample Abbreviated Income Statement

Abbreviated Income Statement

For the period 10/1/2019 to 10/31/2019
Sales……………………………………………P 1,450,000.00
Cost of Food sold………………………………… 493,000.00
Gross profit……………………… ……… ….P 957,000.00
Labor Expense……………………………… P 420,500.00
Other controllable expenses…………………… 93,000.00
Noncontrollable expenses……………………… 330,000.00
Total expenses……………… ………………P 843,500.00

Profit P 113,500.00

A. Mabini Avenue, Tanauan City, Batangas, Philippines www.lcctanauan.edu.ph (043) 778-1020

 La Consolacion College Tanauan A member of the
Unified La Consolacion College
– South Luzon

• Sales is the value or amount the restaurant has taken in for food.
• Cost of food sold shows the dollar amount spent on that food. It is the
opening inventory plus purchases, minus the ending inventory.
• Gross profit is the amount of money made on the cost of food. It is
figured by subtracting the cost of food sold from sales.
• Labor expense is the payroll for hourly employees and salaried
management. It also includes insurance and/or Medicare payments
and employee benefit costs (sick days, holidays, health insurance,
etc.).
• Other controllable expenses include such items as paper and
leaning supplies.
• Noncontrollable expenses cover such items as rent and utilities.
• Total expenses include labor, controllable, and noncontrollable
expenses.
• Profit is what remains after all expenses are paid. It is figured by
subtracting total expenses from gross profit or by subtracting total
expenses and food cost from sales. Sales must exceed costs for an
operation to stay profitable. Conversely, an operation experiences a
loss when its expenses are greater than its sales.

2. Monitor and Analyze Sales

and Costs
Once actual sales and costs are calculated, these figures are monitored and
compared to budgeted amounts, operational standards, and historical
information to identify any variances. This should be done on a regular
basis. It is a good way to check how your operation is running and to prevent
future problems by catching them early.

Every item on the budget should be checked against actual figures, and the
difference should be noted. This is called a line item review (as illustrated
below)

Sample Line Item Review

Budget Item Budgeted Actual Difference % Difference

Food Sales P 100,000.00 P 90,000.00 P10,000.00 10%

A. Mabini Avenue, Tanauan City, Batangas, Philippines www.lcctanauan.edu.ph (043) 778-1020

 La Consolacion College Tanauan A member of the
Unified La Consolacion College
– South Luzon

3. Take Corrective Action

as Appropriate.

Over time, even small changes in costs can add up to significant losses.
When costs are out of line, the cause should be investigated.

If the budget and actual values do not match, they must be analyzed to see
what might have gone wrong. If there is a variance, action should be taken
to correct it.

As soon as the cause for variance is identified, the manager should take
steps to correct the problem, or corrective actions.

Corrective actions can only be done to affect controllable costs.

Sample Corrective Actions for Cost Control

To Reduce Implement These Corrective Actions

Food Cost • Reduce portion size.

• Replace food item with a more cost-effective ingredient.
• Feature items with higher profit margins.
• Raise menu prices.

Food Waste • Monitor portion control.

• Monitor food storage and rotation.
• Monitor food ordering.
• Improve communication to reduce production errors.

Inventory • Order appropriate quantities-avoid having too much or too

Cost little in the storage.

Labor Cost • Reduce number of employees in schedule.

• Ask employees to end their shifts early.
• Schedule cross-trained staff (for example,
server/cashier/hostess).

A. Mabini Avenue, Tanauan City, Batangas, Philippines www.lcctanauan.edu.ph (043) 778-1020

 La Consolacion College Tanauan A member of the
Unified La Consolacion College
– South Luzon

In conclusion, in most restaurant or foodservice operations, managers take personal

charge of an operation's cost control process; however, the size and scope of an
operation will determine the extent to which its managers exercise direct control or
delegate that responsibility to other staff. If costs get out of line, the profitability of a
restaurant could be seriously jeopardized.

At every stage of operations, controls need to be set up to prevent problems and to

achieve the goals of the organization. Cost controls start with the menu and continue
on through purchasing to receiving, storage, production, and finally, service. Without
controls in place, an operation has no way of determining and evaluating whether
the operation is profitable or meeting its budget. Controlling and reducing costs are
both desirable trends for ensuring the ongoing financial health of an operation.

A standard is a measure that is established to compare levels of attainment tor a goal

or a measure of adequacy. In the restaurant and foodservice industry, managers,
employees, and suppliers are expected to meet the standards set by management.
Standards cover the entire spectrum of the restaurant business. Cost standards vary
from one type of operation to another, Costs can be classified in different ways. In
the restaurant and foodservice industry, the most common classifications are
controllable and noncontrollable costs, as well as fixed, variable, and semi-variable
costs. The reason for classifying costs is to differentiate between the ones that
management can control and those that cannot De controlled. Identifying and
understanding these different types of costs help managers interpret cost-related
information and make control-related decisions.

Controllable costs are those costs that management can directly control.
Noncontrollable costs are those costs over which management has little or no
control. Fixed costs are those costs that remain the same regardless of sales volume,
while variable costs increase or decrease in direct proportion to increases or
decreases in sales volume. Conversely, semi-variable costs increase and decrease
as sales increase and decrease, but not in direct proportion. Semi-variable costs are
made up of both fixed costs and variable costs. The two largest costs that
management has to control are food cost and labor cost. Together they are known
as the prime cost, because these are the two highest costs in the operation.

With experience, managers learn to quickly spot cost-related concerns in their

operations. The best way to tell at a glance how an operation is performing is by
reading its income statement. Once actual sales and costs are calculated, these
figures are monitored1 and compared to budgeted amounts, operational standards,
and historical information in order to identify any variances. When costs are
determined to be out of line, the cause should be investigated, and if there is a
variance, management should take action to correct the problem causing the
variance.

A. Mabini Avenue, Tanauan City, Batangas, Philippines www.lcctanauan.edu.ph (043) 778-1020

 La Consolacion College Tanauan A member of the
Unified La Consolacion College
– South Luzon

Key Terms

Control Controllable cost Income statement

Corrective action Labor expense
Cost of food sold Fixed cost
Line item review Loss
Noncontrollable cost Profit Sales
Semi-variable cost Standard

Enrichment for Further Learning

Importance of Standard Food and Beverage Cost
https://study.com/academy/lesson/standard-food-beverage-costs-types-
importance.html

Restaurant Times Article on Food Costing

https://www.posist.com/restaurant-times/resources/beginners-guide-food-
beverage-control-restaurants.html

F&B Cost Control Sysytem

https://www.youtube.com/watch?v=Fg3sKc_k2Jg

Strategies and Techniques in Food Costing

https://www.youtube.com/watch?v=1_hbOUAlqwE

References:

• NRAEF ManagementFirst (2017). Controlling Foodservice Cost.

Competency Guide. National Restaurant Association Educational
Foundation
• Velasquez L. (2021). Food and Beverage and Labor Cost control. Edric
Publishing House.

A. Mabini Avenue, Tanauan City, Batangas, Philippines www.lcctanauan.edu.ph (043) 778-1020