In last week's article Food Cost Basics , I outlined the traditional formula for calculating food cost percentage. At the heart of the formula you will find the simple food cost calculation: FC=(BI+P-EI). Twisting this formula slightly, we find food cost equal to our purchases plus or minus the change in inventory value:
FC=P+(BI-EI).
As your period of time increases between inventories, the purchases will become more dominant than the inventory change . On the other hand, inventory change is a huge factor in operations with daily inventory counts.
In my college days, I worked for a major fast food operation and my duties included a daily inventory of all food, beverages and paper products. We calculated a daily food cost percentage. Whenever my costs were out of line, I reviewed the inventory valuations carefully. Often, the variance could be traced to a low cost item incorrectly extended by a high price. There were many times a pricey item was extended at a fraction of the cost. Once these corrections were made it was possible to see the true picture of results.
Many operators have many more items than the 120 I tracked each day. Also, I doubt their managers are paid $160 each week and scheduled 7 days a week for 10 hours a day. Casual dining concepts often require inventories with over 1,000 items. The daily inventory calculation would be cost prohibitive.
Let's examine the formula in finer detail. The total food cost is equal to the sum of the individual item food costs. If you have 800 items to count, the food cost formula could be expressed as follows:
So for each item in your inventory, you add beginning inventory to purchases and subtract ending inventory. Your total food cost figure is the sum of all these numbers.
If you run these numbers on a spreadsheet, I recommend you sort the matrix in descending order using the extension column. Count the inventory every day for the top 10 items on the page. Calculate the cost of these 10 items each day. I believe you will find the cost of these 10 items (as a percent of sales) will provide you with answers to many of your food cost issues. You may want to increase the number of items tracked to 25 if you have a very diverse menu.
When the accounting department tells you the percentage is up two tenths in the past month, you will know why the cost increased. Analyze the major items and move beyond basic cost calculation.
