Palawan State University

College of Community Resources Development

Quezon, Campus
Quezon, Palawan
S.Y. 2021-2022

FOOD AND BEVERAGE COST CONTROL

MODULE 1
TABLE OF CONTENTS

 Professional Foodservice Manager

 PROFIT: The Reward for Service
 Getting Started
 The Role of the Food and Beverage Manager

INTRODUCTION
Any business trying to sell a product is likely going to incur costs in order to get that product sold.
Careful and methodical control of costs helps a restaurant operator set accurate menu prices and is
crucial for operational success and profitability.

Learning Outcomes
At the end of this module students should be able to:

 Determine the importance of the food beverage cost control and understanding its
specific application.
 Apply the knowledge on food preparation.

Managing Revenue and Expense

 Palawan State University
College of Community Resources Development
Quezon, Campus
Quezon, Palawan
S.Y. 2021-2022

This chapter provides an overview of the nature and scope. In order to understand how
accounts for cost, and how to control them, several important functions of hospitality
accounting are introduced here, including communication, expense, revenue and forecasting.

A. Professional Food service Manager

There is no doubt that to be a successful food service manager you must be a talented individual.
Consider, for a moment, your role in the operation of an ongoing profitable facility. As a food service
manager, you are both a manufacturer and a retailer.
A professional food service manager is unique because all of the functions of product sales, from item
conceptualization to product delivery, are in the hands of the same individual.
As a manager, you are in charge of securing raw materials, producing a product, and selling it all
under the same roof. Few other managers are required to have the breadth of skills that effective food
service operators must have. Because food service operators are in the service sector of business,
many aspects of management are more difficult for them than for their manufacturing or retailing
management counterparts.
A food service manager is one of the few types of managers who actually have contact with the
ultimate customer. This is not true of the manager of a tire factory or automobile production line.
These individuals produce a product, but they do not sell it to the person who will actually use their
product. In a like manner, grocery store or computer store managers will sell their product lines, but
they have had no role in actually producing their goods. The face-to-face guest contact in the
hospitality industry requires that you assume the responsibility of standing behind your own work and
that of your staff, in a one-on-one situation with the ultimate consumer, or end user of your products
and services.
TASK Food Service Manufacturing Retail Manager
Manager Manager
Secure raw materials Yes No No

Manufacture product Yes No No

Distribute to end-user Yes No No

Market to end-user Yes No No

Reconcile problems Yes No No
with end- user

Profit: The Reward for Service

There is an inherent problem in the study of cost control or, more accurately, cost management. The
simple fact is that management’s primary responsibility is to deliver a quality product or service to the
guest, at a price mutually agreeable to both parties. In addition, the quality must be such that the
consumer, or end user of the product or service, feels that excellent value was received for the money
spent on the transaction. When this level of service is achieved, the business will prosper. If
management focuses on controlling costs more than servicing guests, problems will certainly surface.
 Palawan State University
College of Community Resources Development
Quezon, Campus
Quezon, Palawan
S.Y. 2021-2022

The food products, labor, and equipment needed to

sell $5 million worth of food is likely to be greater
than that required to produce a smaller amount of
revenue. Remember, if there are fewer guests, there
are likely to be fewer costs, but fewer profits as
well! When management attempts to reduce costs,
with no regard for the impact on the balance
between managing costs and guest satisfaction, the
business will surely suffer. In addition, efforts to
reduce costs that result in unsafe conditions for
guests or employees are never wise.
Managers who, for example, neglect to spend the money to salt and shovel a snowy restaurant
entrance area may find that they spend thousands more dollars defending themselves in a lawsuit
brought by an individual who slipped and fell on the ice. As an effective manager, the question to be
considered is not whether costs are high or low. The question is whether costs are too high or too low,
given management’s view of the value it hopes to deliver to the guest and the goals of the foodservice
operation’s owners.

Revenue - Expenses = Profit

When you manage your facility, you will receive revenue, the money you take in, and you
will incur expenses, the cost of the items required to operate the business. The dollars that
remain after all expenses have been paid represent your profit.
Revenue - Desired Profit = Ideal Expense
Ideal expense, in this case, is defined as management’s view of the correct or appropriate
amount of expense necessary to generate a given quantity of revenue. Desired profit is
defined as the profit that the owner wants to achieve on that predicted quantity of revenue.
Revenue

To some degree, you can manage your revenue levels. Revenue dollars are the result of units sold.
These units may consist of individual menu items, lunches, dinners, drinks, or any other item
produced by your operation. Revenue varies with both the number of guests frequenting your business
and the amount of money spent by each guest.
You can increase revenue by increasing the number of guests you serve, by increasing the amount
each guest spends, or by a combination of both approaches. Adding seating or drive-through
windows, extending operating hours, and building additional foodservice units are all examples of
management’s efforts to increase the number of guests choosing to come to the restaurant or
foodservice operation.
Suggestive selling by service staff, creative menu pricing techniques, as well as discounts for very
large purchases are all examples of efforts to increase the amount of money each guest spends. It is
the opinion of the authors that management’s primary task is to take the steps necessary to bring
guests to the foodservice operation. This is true because the profit formula begins with revenue.
Experienced foodservice operators know that increasing revenue through adding guests, suggestive
selling, or possibly raising menu prices is an extremely effective way of increasing overall
profitability, but only if effective cost management systems are in place.
 Palawan State University
College of Community Resources Development
Quezon, Campus
Quezon, Palawan
S.Y. 2021-2022

Expenses
Cost- also referred to expenses, describes the sum of all
the money paid out for goods and services during a given
period time.

FOOD COSTS
Food costs are the costs associated with actually producing the menu items a guest selects. They
include the expense of meats, dairy, fruits, vegetables, and other categories of food items produced by
the foodservice operation. When computing food costs, many operators include the cost of minor
paper and plastic items, such as the paper wrappers used to wrap sandwiches. In most cases, food
costs will make up the largest or second largest expense category you must learn to manage.
BEVERAGE COSTS
Beverage costs are those related to the sale of alcoholic beverages. It is interesting to note that it is
common practice in the hospitality industry to consider beverage costs of a nonalcoholic nature as an
expense in the food cost category. Thus, milk, tea, coffee, carbonated beverages, and other
nonalcoholic beverage items are not generally considered a beverage cost. Alcoholic beverages
accounted for in the beverage cost category include beer, wine, and liquor. This category may also
include the costs of ingredients necessary to produce these drinks, such as cherries, lemons, olives,
limes, mixers like carbonated beverages and juices, and other items commonly used in the production
and service of alcoholic beverages.
LABOR COSTS
Labor costs include the cost of all employees necessary to run the business. This expense category
would also include the amount of any taxes you are required to pay when you have employees on
your payroll. Some operators find it helpful to include the cost of management in this category. Others
prefer to place the cost of managers in the category of other expenses. In most operations labor costs
are an operator’s highest cost, or they are second only to food costs in total dollars spent. If
management is included as a labor cost, then this category will frequently be even larger than the food
cost category.
Question: who/what is being referred to labor? Why is labor costs considered operator’s highest cost
in food service operation?

OTHER EXPENSES
Other expenses include all expenses that are neither food, nor beverage, nor labor. Examples include
franchise fees, utilities, rent, linen, and such items as china, glassware, kitchen knives, and pots and
pans. While this expense category is sometimes incorrectly referred to as “minor expenses,” your
ability to successfully control this expense area is especially critical to the overall profitability of your
foodservice unit.
 Palawan State University
College of Community Resources Development
Quezon, Campus
Quezon, Palawan
S.Y. 2021-2022
Getting Started
Percent Review
Percent
Form 1% 10% 100%
Common 1% 10% 100%
Fraction 1/100 10/100 100/100
Decimal .01 .10 1.0

Revenue - Expense = Profit

P1,600 - P1,200 = P400

Revenue - Desired Profit = Ideal Expense
P1,600 - P500 = P1,100
Expenses/ Revenue = Expenses %
P1,200/ P1,600 = 0.75 or 75%
Profit/ Revenue = Profit %
P400/ P1600 = 25%
Desired Profit
P500 Desired Profit/ P1,600 Revenue = 31.25% Desired Profit
Revenue - (Food and Beverage Cost + Labor Cost + Other Expenses) = Profit
The Role of the Food and Beverage Manager
To carry out the four major activities- communications, cost control, revenue enhancement, and
forecasting to achieve desired financial results for the company.
Communication – is the ongoing process of exchanging information between different departments
and people both within and outside an organization.
Cost – also referred to expenses, describes the sum of all the money paid out for goods and services
during a given period time; these are the goods and services used in obtaining revenue. These costs
must be managed and accounted for; a process known as cost control. On the hand, when revenue
beats costs, it is called profit.
General Cost Scheme
Production Costs – costs that are incurred to make a
product, like a chicken entrée’, are called production or
manufacturing costs.
Three main category of Production costs
Direct materials – consist of the raw material inputs
that became an integral part of a finished product and
can easily be traced to it. Ex. Raw chicken breast is a
direct material for making a chicken entrée’.
 Palawan State University
College of Community Resources Development
Quezon, Campus
Quezon, Palawan
S.Y. 2021-2022

1. Direct labor – consists of that portion of the labor costs that can be easily
traced to a product such as the cook’s hourly payroll cost.
2. Production Overhead – consists of all production costs other than direct
materials and direct labor. Ex., includes equipment maintenance and facility
heating costs.

 Prime vs. conversion costs – prime cost consists of direct materials plus direct
labor. Conversion costs consist of direct labor plus production overhead.

 Non-production costs – food service operations incur many other costs in addition
to production costs. For financial reporting purposes, most these other costs are
typically classified as selling (marketing) costs and administrative costs. These
two are incurred in almost all food service operations.

1. Marketing costs – includes the cost of making sales, taking the customer
orders and delivering the product to the customers. These costs are also
referred to as order- getting and order- filling costs in hotel and resort
settings that offer food and beverage services.
2. Administrative costs – these costs include all executive, organizational and
clerical costs that are not classified as production or marketing costs.

Revenue – money received by a business minus returns and discounts in a given period of time.
Revenue Enhancement
If a business is to succeed or even just survive, revenue must be great enough to pay for the cost of
goods sold and other expenses and to provide sufficient net income. There are two factors at play
here, revenue and expenses. Generally, increasing revenue means consistently delivering the products
and services your customer wants at the right price, at the right time. Increasing the revenue suggests
growth, whereas decreasing the revenue indicates the possibility of decreased profits and other
financial problems in the future. Income Statement, managers consider this the most important
financial report because its purpose is to measure whether or not the business achieved its primary
objective of making an acceptable profit.
Cost- effective Initiatives – this is use to rectify cost inefficiencies or to minimize costs while
maximizing the profit. It will weigh the advantage and disadvantages alternative methods and select
those that will advance the company’s objectives.
Forecasting – is the process of estimating or predicting future expenses and revenues. Involves
predicting a company’s future performance. It is an integral part of the planning process, particularly
when the forecast is used as a basis for the budget preparation.

Types of forecasting, statistical method or by estimation, customer expectation,

executive opinion.

Statistical or estimation – commonly used in food

service industry. This approach to forecasting, while
benefiting from historical data analysis, is relatively
 Palawan State University
College of Community Resources Development
Quezon, Campus
Quezon, Palawan
S.Y. 2021-2022

subjective. It presumes that the

forecaster’s experience, knowledge of the restaurant, judgment, intuition is sufficient for developing
meaningful and reliable forecast.

Customer expectation – management collects and judges’ information from customer surveys to
arrive at a forecast; however, this method incorporates customers’ expectation of their needs and
external factors as the basis for forecasting. While it has the advantage of promptly recognizing
changes in customer expectations, this technique is difficult to use in markets whose customers are
numerous, transient or not easily identified. Ex. Meals every morning as expected by customers:
pancake, fried eggs, fried rice, etc. customers such as elderly, adults, teens, children.

Executive opinion – combining and averaging top executive’s views. Executives from different
department such as sales, food and beverage, accounting, purchasing and culinary in order to get
the benefit of broad experience and opinion.

The primary disadvantage of forecasting techniques that employ estimates is that they cannot be
verified or assessed objectively until after the fact.

Revenue Forecast (predicting revenue)

Hotel occupancy is added to the forecast because, in a hotel restaurant, guests are the number –
one source of food and beverage business. By incorporating the occupancy levels of the whole
property and combining this with knowledge of group and catering functions, a manager can assess
the number of available guests.

The hotel has several meeting rooms, including banquet spaces that could set up to 2000 guest
guests for catering events. Currently, the number of registered guests is 1,500, half of these have
previous breakfast engagement in one of the hotel banquets rooms. There are no catering events
scheduled for dinner. Therefore, the number of available guests a manager can anticipate is 750 for
breakfast, 750 for lunch and 1500 for dinner.
Inventory management and Valuation
It is vital that the manager supervise inventory procedures because they directly affect profit, cash
flow, production levels, and customer service. He must provide input in reorder frequencies (frequent
list of orders from suppliers/ continues), economical order quantities, and the quantities required to
meet desired customer service levels. Vendors must be able to assure consistent availability of the
products to meet demands. It is measured in terms of available cash flow, decreased theft, reduced
cost and reduced waste. Failures can be categorized as misappropriation – buying too much, too little
or incorrect stocks, incorrect valuation, which refers to placing a lower or higher value on inventory
than it is actually worth.

Example: change in Menu offerings, like combo meals that is not in actual menu, sales mix
(changing side dishes for grilled menus), this leave material surpluses because product needs have
changed.
 Palawan State University
College of Community Resources Development
Quezon, Campus
Quezon, Palawan
S.Y. 2021-2022
Proper inventory is needed in food and
beverage accountancy.
High inventory turnover ratio a figure calculated to shoe how quick the company is using the
product, indicating they not buying too much stocks. Low ratio means he opposite, the company is
buying too much and sinking its cash into expense.

Learning Activities/Exercises
 Palawan State University
College of Community Resources Development
Quezon, Campus
Quezon, Palawan
S.Y. 2021-2022

Answer the following questions in a

separate sheet of paper. Once done, you can submit it thru messenger. Don’t forget to write
your name.

Direction: Answer the following brief but concise. Use separate sheet for answering each
question given in this module.

1. Explain the work of a professional manager.

2. Explain what is REVENUE?
3. How does forecast affect the revenue?
4. How important it is to have good communication in the company?

RUBRICS FOR ESSAY

CRITERIA POINTS
Content (Relevance of Topic) 5pts
Organization (Unity of thought, flow of discussion) 5pts
TOTAL: 10 Points

REFERENCE

Lea R. Dopson
David K. Hayes
Jack E. Miller
Clement Ojugo