Review Mid Term & Homework
Chapters 9 & 10
Last Homework Assignment
of Food & Beverage
Upon completion of this unit, each student will be
Understand how operational budgets are to be
Understand the various types of operational
Forecast foodservice revenues and guest counts.
Forecast foodservice operating expenses.
Prepare an operating budget utilizing historical
Calculate food cost, food cost percentage and
inventory turn over.
Determine a capital budget based on
operational needs and prioritization.
Perform various cost benefit analysis methods
for fixed assets.
Budgets will help you better manage your
They are a valuable tool used to help
forecast/predict your revenues, estimate your
expenses and insure that your profits meet
Remember Profit is not just what is left over,
you must plan ahead and treat profit as an
“expense” in order to keep your restaurant a
The primary need is for a 1 year Operating
Budget that is detailed on a monthly basis and
addresses items on the Income Statement.
This is a detailed plan that outlines estimated
revenues, expenses and profits – rolled up for
Accountability and responsibility can be
assigned to managers for each department to
achieve the budgeted revenue, expense and
Capital Budget- A budget that relates to the
acquisition of equipment, land, property
improvements and other fixed assets.
Cash Budget- A budget that estimates cash
receipts and disbursements during a specified
Departmental Budget- A budget that estimates
revenue and allocated expenses for a specific
department within the restaurant
Master Budget- A budget that combines
operating, capital, and cash budgets for each
specific department within the restaurant
Control- As managers our job is to organize,
direct and manage all financial aspects of our
business to assure we are meeting the overall
profit goals of the business and to do this we
use the budget as our plan or “blueprint”.
5 Step Management Process:
1) Establish Standards
2) Assess Actual Operating Results
3) Compare Standard Revenues and Expenses
with Actual Revenues and Expenses to
determine causes of differences.
4) Take Corrective Action if needed.
5) Evaluate the Results of the Corrective Action
1st Step: Determine Expected Revenues
2nd Step: Determine Profit Requirements
3rd Step: Estimate Expenses to be incurred
Usually the Owner or Manager in a smaller
operation has the responsibility of setting the
In Large operations it is usually a collaborative
effort amongst the various departments.
Can also be dictated to you from a headquarters
with targets pre-determined.
Past sales can help identify trends
New competition, road construction, remodeling
Inflation, people spend less money (demand lower
prices), yet your costs are increasing.
Food, Beverage and other revenues should be
Revenues projected in the budget are used for:
Providing required profits
Paying necessary expenses
Many Managers assess expense levels after
revenue is estimated, profit is then what is “left
Instead you should figure first what you want
your profit to be, then see where the expenses
have to be in order to make your profit.
Fixed Costs – Based on your contracts or givens.
Variable Costs – Expenses that change in direct
proportion to the related revenue.
Food and Beverage costs are variable costs and
typically follow an increase or decrease in the
adjoining revenue category.
Usually these expenses are measured, forecasted,
budgeted as a percentage of sales (i.e. 32% Food
cost – 28% Beverage Cost) and according to the
Mark up method - variable expenses are
budgeted by the same amount of increase or
decrease that sales are projected to change
Ex: If Sales are expected to ↑ 5% and last years
food cost was $425,000, we would increase the
budgeted food cost by 5% to $462,250.
The problem with this approach is that , if
$425,000 was too high for food cost, you are
perpetuating this problem by budgeting from
that as a base.
Another method: Current percentage
This method budgets expenses based on what the
current percentages are for cost categories.
Ex: If food costs ran 34% for last year, next year
we budget food costs at 34% of the new
budgeted sales forecast.
This method also carries the same possible
deficiencies of the current year forward into the
planning for the upcoming year.
Final method: Zero – based budgeting
This method starts from a zero expense level for every
category and through justification arrives at a new
budgeted cost. MUCH more accurate, however,
requires a tremendous amount of time.
Most commonly used for overhead expenses
categories such as repair and maintenance,
office supplies, etc.
The difference between budgeted and actual
amounts in any revenue or expense account.
Analysis should be undertaken when this
difference exceeds a pre-established amount
Corrective Action needs to be taken quickly to
make the appropriate adjustments.
Budget Re-forecasting- The process by which
revenue and expense data in an operating
budget are revised to reflect current economic
To Reduce Implement These Corrective Actions
Food Cost Reduce portion size
Replace food with more cost-effective ingredients
Feature items with higher profit margins
Raise menu prices
Food Waste Monitor portion control
Monitor food storage and rotation
Monitor food ordering
Improve order communication to reduce production errors
Inventory Cost Order appropriate quantities-avoid having too much or too
little in storage
Labor Cost Reduce # of employees on schedule
Ask employees to end their shifts early
Schedule cross trained staff (server/cashier/host)
Capital Budget does not include day-to-day
operating expenses and does not roll up into an
operations P&L (FFEs’)
What type of costs are included in capital
Steps in the Capital Budget Process
1. Assess the Capital Needs
2. Evaluate the Identified Needs
3. Prioritize & Justify the List of Needs
Step 1: Assess Capital Needs
Safety, regulatory or code issues should be
Aesthetic needs that will impact sales
should be considered
Operational needs that will impact
productivity should be considered
Step 2: Evaluate Identified Needs
Conduct a cost/benefit analysis to include Return on
Rate of Return
Income or savings ÷ Net Amount = Rate
generated by project invested in project of return
Net cash outlay ÷ Annual net income = Payback
for project or savings for project period
Step 3: Prioritize and Justify the List of Items
Highest priority must be given to the following:
Items that pose a safety risk either to customers or
employees, i.e. broken equipment, frayed carpet, etc.
Items that cause the operation to fall beneath local
codes (fire, health, etc.)
Final review and approval of Capital Budgets
usually falls to the owners, CEO, COO, etc.
Write the Operating Budget for Roger’s for
January through March from the data
As managers our prime costs are the most
controllable: food (beverage) and labor
Food costs must be understood and managed
and we have multiple tools to help us
accomplish this task
Must understand how we get our food cost
Must understand how we get our food cost percent
Must understand what is our standard
Figuring food cost percentage
Food cost ÷ Sales = Food cost percentage
A process that provides the Manager with
information about a menu item’s profitability
and popularity to aid menu planning, design
and pricing decisions.
The menu is not just a piece of paper in the
restaurant. It is THE most important piece of
paper in the restaurant. It not only tells your
guests what you have to offer, it sets the tone
for your profitability.
Three Critical Tools to begin the Menu
Determining the current market cost for the quantity of
ingredients needed to produce one portion of a menu
Consistent Recipe Use
If your staff isn’t trained how to use and follow the
recipes, then having recipes or pre-costing will do you
Menu Engineering emphasizes the
“Contribution Margin”, in other words what
does each item contribute to pay for fixed costs
and the bottom line?
Formula: food item sales – food item cost
Takes into account the “Menu Sales Mix” (what
percentage of sales each item represents)
It separates menu items into categories based
on popularity and profitability.
Menu Number Pop Food Selling Item Total Total Men
Item Sold Index % Cost Price CM Cost Sales CM
Strip Steak 145 23.4 $7.50 $23.65 $16.15 $1087.50 $3429.25 $234
Ginger 116 18.7 $5.20 $18.00 $12.80 $603.20 $2088.00 $148
Duck 21 3.3 $7.30 $21.50 $14.20 $153.30 $451.50 $29
Lamb 11 1.8 $6.90 $22.00 $15.10 $75.90 $242.05 $16
Pork Loin 45 7.3 $6.30 $20.50 $14.20 $283.50 $922.50 $63
Vegetarian 50 8.2 $3.80 $16.50 $12.70 $190.00 $825.00 $63
Veal Steak 120 19.4 $6.35 $20.85 $14.50 $762.00 $2502.00 $174
Steak 111 17.9 $7.75 $24.75 $17.00 $860.25 $2747.25 $188
619 100% $4015.65 $13207.55 $919
Average 77.38 12.5% 30.4% $1
Menu Item Pop Category CM Category
Strip Steak H H Star
Ginger Shrimp H L Plow Horse
Duck Breast L L Dog
Lamb Chops L H Puzzle
Pork Loin L L Dog
Burrito L L Dog
Veal Steak H L Plow Horse
Steak Diane H H Star
In large operations there is often a purchasing
department. This is where all ordering and
receiving is handled.
Various departments request (requisition)
items needed, and requisitions are given to the
Accounting dept. to make sure everything is
accurately billed and accounted for.
Collusion- A secret agreement between two or
more persons to defraud the restaurant.
Food cost is typically calculated on a monthly
However if it can be calculated daily for even
tighter controls. This is especially necessary if
there is a problem.
Inventory- Too high of inventory opens you up
to more theft and waste. Too low, obviously
you are not able to serve your customers what
FIFO- First in, First Out- The most common
method of accounting for inventory.
This method assumes that products are
withdrawn from inventory in the order in
which they were received and entered into
storage. Value of inventory is based on the
most recent price of product.
LIFO is the opposite. Last in, First out. This
way the value of the inventory is represented
by the unit cost of items in inventory the
longest (oldest price first).
Actual Cost- Considers the actual price paid for
each product in inventory.
Weighted Average- Considers the quantity of
each product purchased and then the inventory
value is based on the average price weighted
by the quantity purchased.
Physical Inventory- taking an actual physical
count and valuation on hand at the close of the
Inventories should not be completed by the
person responsible for ordering, because the
purpose of the inventory is to confirm the
quantity of product that should be in
Perpetual Inventory- Allows a running balance
to be kept of the quantity of items in stock at
any point in time.
Inventory Turnover Rate- the number of times
in a given accounting period that inventory is
converted into revenue. This “inventory
turnover rate” measures the rate at which
inventory is turned into food or beverage costs
required to generate food or beverage revenue.
Issuing- The process of removing food or
beverage from inventory and moving them
into production cycles.
Accurate inventory is necessary to calculate an
accurate food cost.
If the inventory isn’t counted correctly, costed
correctly, or calculated correctly you will not
have a true picture of how well your restaurant
Consistency in the month to month inventory
is important. Consistent counting, rounding,
Beginning Inventory + Purchases –
Ending Inventory = Cost of Goods Sold
Beginning Inventory $9,500
+ Purchases $16,500
- Ending Inventory $8,000
= Total Cost $18,000
Products costs (Food and Beverage) and labor
costs, which represents the two LARGEST
expenses of almost every restaurant.
Prime cost is often used to weigh the option of
making an item from scratch or purchasing it
ready to use.
Read Chapters 11-12
Complete Roger’s Operating Budget
Make recommendations for Alex’s Ale
and Grill capital improvement process.