Accounting Impact on Cost Control

There are significant differences between financial accounting and management accounting goals. Financial accounting depends on accurate and consistent inventory valuations. Both methods require perfect purchase cutoffs. I consider the cutoff of purchasing activity to be the highest priority.

I am amused at operators who go to great lengths in valuing inventory items (3 places to the right of the decimal point) and also allow deliveries during the inventory count. My early career inventory work involved an inventory count during an active delivery time of day. The food cost percentage was sky high. An entire shipment of meat was included in purchases and excluded in the inventory counts.

Since the operation had shifted into meal service, the recently received meat was being consumed in meal production. The solution used by management involved adding the meat purchases to the inventory counts on the sheets. OK So why bother with increased accuracy on the average purchase price of a case or pound when you are careless with the actual count you use in your valuation? This is more common than many people realize.

A liquor thief used to begin his counts early in his shift while the dinner meal was in progress. All he had left at the end of the meal was the partial bottles in the main bar area. His Excel sheets were a complete joke. He had a count of 30 bottles on an item. I asked where the cases were and he said he meant to put 3 bottles. Since the company paid no attention to specific bottles, an error like this would allow him to steal 2 full cases undetected by the "inventory control" report.

At some time, usually once a year at year end, the higher ranking accountants enter the inventory fray and beat up the team on average purchase costs and a selection of inventory counts. They recommend 2 people on every month end count and careful price look-ups for average purchase prices.

Most theft occurs in central storage and in the top consumption areas: kitchen and main bar. In operations where the menu items are placed in service area storage for self-service, late shift over production is a often undetected form of theft. Good managers should take a count one hour before closing and a second count 10 minutes before closing time. If your count went up, you have a possible theft problem.

If your operation takes a truly accurate inventory only once a year, you are possibly burning 3 to 5 percent of sales in theft and waste (conservative estimate).

Some people purchase software systems to track perpetual inventory. Accurate beginning inventory counts are required in any perpetual calculation. Purchases must be entered immediately upon receipt if you need shift based reports.

A powerful cost accounting report may be produced weekly. Accurate counts taken during periods when deliveries are prohibited and the kitchen is closed are the key. Valuing these accurate counts should be consistent. If you use the last price paid, look up this cost. Software solutions may automatically use the last cost. Some of the more sophisticated solutions use average cost or FIFO.

If you follow this straight forward approach, your annual financial inventory valuation will be a snap.

Accounting Question

Hi Joe,

I've been reading your FoodCostWhiz blog and have to say I really enjoy and find it very informative, particularly as the bulk of my experience is in QSR. I'm hoping you can settle a disagreement I am having.
A back of house software vendor that I have been dealing with for a long time has decided to rename their "Food Cost" calculations and reports as "Cost of Goods". They tell me that the two names are interchangeable, but I am not sure if I agree.
In my experience, Food Cost is based on working out the cost of a recipe, whereas Cost of Goods is simply the value of purchases. They go hand in hand, but are not the same. Am I off base here?

How would define the terms Food Cost and Cost of Goods?

Regards,

Brett

Thanks for the question Brett. Simply stated, Food Cost is part of Cost of Goods Sold. I consider the Cost of Goods Sold category as all items which go into the production of menu items and beverages. In a QSR operation, the Cost of Goods Sold would logically include paper used to wrap the menu items. All items on the table in a sit down restaurant would be included in Cost of Goods Sold.

To recap Cost of Goods Sold, I would include food, beverages, table supplies and packaging supplies for take out and delivery. I would exclude linen, cleaning supplies, and other supplies which do not vary directly with sales. The proper category for these items would be Direct Operating Expenses.

Food Cost is a part of Cost of Goods Sold but it is NOT the same as Cost of Goods Sold.

A Bigger Divisor Helps Your FC %

Don't overlook sales when reviewing your food cost results. There are several important reasons to scrutinize the divisor in the formula as much as the net purchases total. Your sales figure depends on covers, check average, promotions, coupons, discounts and lost revenue.

Lost revenue is related to menu items your service staff can serve a guest with no order entered in your POS system. Typical examples include slices of cake or pie, small pastries, coffee, tea, cocoa, soup, rolls and ice cream. Less common items include modifiers normally ordered through the POS system which have a small charge to the guest.

A second source of lost revenue involves unauthorized voids and price adjustments. I remember working with a family restaurant with a special price for ice cream sundaes for dinner patrons. Anyone visiting the restaurant for dinner was offered a sundae for 99 cents. After reviewing several POS data tables, I noticed late shift changes on many $3.99 items to $0.99. These patrons did not have dinner. They all paid cash. Their orders were changed from the full charge for the sundae to the dinner special price.

My annual estimate for this activity was $10,000. As you can imagine, these changes had to be made by a manager. The wait staff did not have the authority to amend closed checks. If the managers on shift were pocketing cash, you can be 100% confident the wait staff felt comfortable serving items not ordered through the POS system.

Chronic lost revenue won't show up in check averages. If this theft has been going on for years, the check averages will be consistent.