Food Costing

The foremost objective of any food service establishment is to provide quality food and to be profitable at the same time. Food costs play a vital role in determining the profitability of the establishment. The chefs and managers of the establishment are responsible to control food costs to ensure profit.

Food cost may be defined as the cost of material used in producing the food sold.

The main objectives of food costing are:

☆To analyse income and expenditure

☆To ascertain the price

☆To ascertain the food cost of particular item on the menu.

☆To ascertain the total expenditure on food over a period of time.

☆To control cost, price, profit margins and provide information for formulating an effective pricing

☆To disclose faulty purchasing and inefficient storing

☆To prevent pilferage and wastage.

☆To ensure customer satisfactions.

☆To bring cost-consciousness among the employees.

☆To reduce cost and improve quality.

☆To provide cost estimates to manager for developing budgets.

☆To assist manager in making control decision and

☆To evaluate pricing and establish future pricing.

Calculation of Food Cost

The formula to calculate food cost is

1. Food Cost = Opening inventory + Purchases — Closing inventory

The value of the inventory can be obtained from monthly stock takings.

2. Food Cost Percent = Food cost/ Food sale

A profitable establishment typically has a 20-30 percent food cost percentage. The food costs in any catering establishment may vary between 40-60 percent of total sales.

3. Q – Factor

A Q – factor is the cost of items that is needed in addition in the production and service of a dish. The common Q- factors are salt, pepper, sugar, sauce, ketch-up, other accompaniments and also the waste that ends up from over production. Q – factor add up to 10 percent to the food cost.

Cost components

In a food service establishment three types of costs are involved. They are

1. Material costs
2. Employee costs and
3. Overhead costs

Material costs

Material costs include raw foods and other and other ingredients that make up a dish. Materials fall under two categories namely,

☆Direct materials

☆Indirect materials

The direct materials are the items used in production and service of a dish. Indirect materials are used in production process, but not related directly to the prepared dish. Linen, kitchen clothes, cleaning materials are some of the indirect materials. It is necessary to consider both direct and indirect materials while calculating food cost.

Employee costs

Employee cost is the next cost component. It encompasses the remuneration of employees and the benefits rendered to them like food, lodging, uniforms, insurance, incentives, pension, bonus, medical benefits, overtime work and others.

Overhead costs

Overhead cost, the third component of cost is the operational cost not related to the material and labour cost. It includes rent, fuel, depreciation, selling costs, travelling expenses, insurance, legal fees, telephone bills, taxes, accounting fees. Along with these components, the behaviour cost should be considered.

Behaviour of cost

Cost behaviour is the sensitivity of costs to the changes in volume of sales. The three main types of costs according to cost behaviour are

☆Fixed costs

☆Variable costs

☆Semi – fixed or semi – variable or mixed costs

Fixed costs

Fixed costs do not vary with the volume of sales, within a relevant range. Rent, property taxes, insurance premiums are some fixed costs. However fixed costs might change over time, normally after a long term.

Variable costs

Variable costs vary directly in proportion with the volume of sales. These include food costs, beverage costs.

Semi – fixed / Semi – variable/ Mixed  costs

These costs vary with the volume of sales, but not proportionately. They have both fixed and variable components. Telephone expenses, fuel costs, laundry, cost of cleaning materials fall under this category.

Break-Even Point

Break-even point can be defined as a point where total costs and total sales are equal. It indicates the point where there is neither profit nor loss. The establishment just ‘breaks even’. The target of calculating the break-even point is to find out the minimum production of units that must be exceeded for an establishment to be profitable. Break-even point is reached when,

Sales = Labour+overhead + food costs

To calculate cost of each menu

☆List all ingredients required to prepare each dish.

☆Obtain the prices of all ingredients from invoice.

☆Calculate the food cost.

☆Fix the selling price for the product.

A certain percentage of gross profit / kitchen profit is added to the food cost of each dish in order to determine the selling price. Constant surveillance must be kept on the food cost. If the food cost percentage shows unusual variance, this could be investigated and immediate corrective action should be taken.

Ways of controlling cost

☆All purchase must be controlled.

☆Details of all merchandise received must be recorded, as and when issued.

☆Production-ingredient amount must be checked before preparation.

☆Any overproduction of food must be checked and if possible, reuse in the best and most economical way Check the sales.

☆An efficient system of cash control must be maintained.

☆Total daily wage cost must be recorded.

☆A weekly summary of all the relevant details must be prepared.

☆Profit and loss account of the food service operation should be prepared.