I.

Lesson 6: Controlling Food Cost in Storage and Issuing

II. Introduction

It is clearly in the operator’s best financial interest to take all the necessary steps
to prevent unplanned cost before the foods are sold to customers. These
unplanned costs. These unplanned costs normally develop fromSpoilage, Waste
and Pilferage. Storing Control Establishing Standards and Standard Procedures
for Storing.

The standards established for storing foods should address FIVE principal
concerns:
1. Conditions of facilities and equipment,
2. Arrangement of foods,
3. Location of facilities,
4. Security of storage areas,
5. Dating and stored foods.
While it is important to ensure that the restaurant or foodservice operation
receives the correct food products at the correct price, the manager’s
responsibility for controlling food costs does not end there. Managers should
prevent additional food costs due to spoilage, theft, or out-of-control inventory.
This module explores some of the ways a manager can properly control food
storage and inventory, as well as how to price inventory and determine inventory
turnover.

III. Learning Objectives

At the end of the lesson, you should be able to:

LO1. Describe Food storage techniques used to control theft.

LO2. Explain the FIFO method of stock rotation.
LO3. Describe the proper method of taking inventory
LO4. Describe the various methods of inventory pricing.
LO5. Calculate inventory turnover rate and inventory value.
LO6. Compare physical inventory to perpetual inventory, or theoretical
inventory.
LO7. Calculate a daily Food cost.

IV. Lesson Proper

Controlling Food Costs Using Proper Storage Techniques

Food product and food inventory represent equivalent money to your operation.
An existing stock in your freezer, storage or warehouse represents a selling price
to the operation and an amount that can be a revenue when sold to a customer.
If for some reason these stocks disappear, the potential revenue is also lost and
your operation has already incurred the cost of purchasing that stock.
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Given that spoilage and lack of security can reduce the profits of an operation, it
is critical to implement processes that minimize or eliminate the potential for
these two factors to occur.

Controlling Spoilage
Spoilage is one of the biggest causes of loss in the storeroom next to theft. While
theft is difficult to control, spoilage is fairly easy to manage. Consider that
spoilage is most often caused by carelessness and by not following correct
procedure or standards to protect the integrity of the product.
The three principle causes of spoilage are:
1. Improper stock rotation
2. Time and Temperature abuse
3. Inadequate Sanitation practices

Stock Rotation FIFO

FIFO Product Rotation. FIFO (First-IN, First-OUT) is a basic rule of product
rotation that protects product quality and freshness. Rotate foods so the first
products displayed (IN) are the first products sold (OUT) to minimize spoilage
and waste. Every product has a code date. Using FIFO helps guarantee that the
inventory is turned over in a proper manner. Another method of stock rotation is
the LILO method, Last In Last Out, in which the last item received is the last item
to be used.

The success of the FIFO method relies on two people: the receiving clerk and the
person using the product.
Steps for Receiving

 Step 1 Delivery person brings products to receiving area.

 Step 2 Check products against the purchase order.
 Step 3 Check products against purchase specifications.
 Step 4 Check delivery quantity against the invoice and the purchase order.
 Step 5 Match invoice prices to purchase order prices.
 Step 6 If everything matches correctly, sign the invoice.
 Step 7 Put delivered products in proper storage areas.
 Step 8 Process paperwork in keeping with the operations standard
operating policies and procedures.

Management needs to keep constant vigil in the storeroom, coolers, and freezers
to ensure that proper rotation is being followed. If proper rotation does not occur,
eventually the older items—perishable in particular will have to be thrown out
because their quality no longer meets company standards. When this happens,
food cost increases and profit decreases.

Time and Temperature Control

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The moment fruits and vegetables are harvested, they begin to deteriorating. As
soon as meat and poultry are processed and fish and seafoods are harvested
from the water, they begin to decline.

Some products deteriorate more quickly than others, and these products must be
given special attention. During storage, some products must be given special
attention. During storage, some products while perfectly good in taste and
texture, will shrink. Shrinkage as what we have discussed in Module 3 causes
yield loss, which increases food costs. Because of product deterioration, time is
not on the side of food products.

Temperature abuse are a common cause for spoilage that eventually will lead to
increase in food cost. To prevent this, let us do a quick review of the way
temperature abuse happens and how to prevent it or correct it.

Figure 6.1
Keep hot foods hot - All food being kept warm has to hold at a minimum of
135°F.

Reheating - Code says you are required to reheat soups, mashed potatoes,
casserole etc. to 165°F with-in two hours. During hot holding and reheating,
stirring and covering food will help ensure proper heating.

Prevention – set a timer for 1 ½ hours. If your product is not 165°F or very close,
you have given yourself 30 minutes to turn up the heat and get it 165°F in time.

Correction – You check the mashed potatoes after service and they are 110°F.
If it has not exceeded four hours on the steam table, rapid reheat to 165°F for a
minimum of 15 seconds.

Keep cold foods cold – All potentially hazardous foods must be held 41°F
or less.

Cooling -Code says you need to cool your product from 135°F to 71°F in 2 hours
and 70°F to 41°F in an additional four hours. You have a total of six hours to cool
your product.

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Prevention – Use proper cooling guidelines; use ice wands, ice baths, or shallow
pans. Do not put hot or warm food in containers deeper than 2 inches in a cooler
overnight and expect them to cool. I frequently throw away food because of this
practice.

Correction - If the total cooling time has not exceeded four hours, then it does
not have to be discarded, but it must be reheated to 165°F for at least 15
seconds. If the food cooling time has exceeded four hours the product must be
thrown away.

Figure 6.2

Food Handling Temperature

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 Figure 6.3

Sanitation Practices

Product safety and quality are highly dependent on sanitation, as improper

sanitation will result in reduced shelf life and increased loss due to spoilage.
Sanitation is a prerequisite to HACCP and is intended to reduce the incidence of
microbiological, chemical and physical hazards in the food manufacturing
environment. The most effective sanitation program can be nullified if employees
do not follow Good Manufacturing Practices (GMPs), thus creating contamination
conditions. Conversely, strong sanitation programs, incorporating multiple
interventions and integrated with other critical food safety systems, will enhance
overall product safety. This article will introduce the basic needs for effective
sanitation and provide basic operational guidelines pertaining to sanitation
practices and sanitation employee expectations for properly cleaning a food
plant, its equipment, utensils and structure.

The sanitation department depends on structure to be effective. This begins with

a strong sanitation supervisor or manager; someone with good leadership
attributes, technical skills and problem-solving ability. It continues with the
selection, hiring and training of sanitarians who implement the sanitation process.
How can Sanitation be made the most important department in the plant? Start
by hiring a staff that is physically able to do the job, that can work the hours
required, and that can handle the conditions (wet and involving chemicals).

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Proper Sanitation Is Key

 Store foods away from walls and at least six

inches above the floor.
 Store dry goods in airtight containers.
 Walls and floors should be nonporous and easily
cleaned.
 Rotate stock to minimize spoilage.
 Organize products so they are easily found.
 Label shelves and sealed food containers.
 Include use by dates and name labels for all
stored products.

Storeroom Organization
A well-organized storeroom is an asset to any restaurant or foodservice
operation and can help with reducing spoilage and theft. Every time in storage
should have a specific place and it should always be in that place.

Importance of Store-Keeping:
The cost of materials is one of the largest elements of cost. Proper storing of
materials is very important to prevent losses from damage, pilferage and
deterioration in quality of materials. The stores must, therefore, be properly
organized and equipped for the handling oIdeal stock levels must be maintained
for every item of raw material so that the production departments get their
required quantity of materials in time, and excessive working capital is not
unnecessarily locked up in overstocking. Moreover, overstocking enhances the
cost of production. However, the store department should be under the control of
a technically qualified Store Officer.

Functions of a Store-Keeper:
The Store keeper is a responsible person and should be placed in a high position
in the management hierarchy since he has to control the stores from every point
of view. He is expected to help the cost department for its effective functioning
of raw materials.

His duties and responsibilities are:

 To receive the materials from receiving department.
 To maintain proper records of stores.
 To make arrangement for proper storage of materials and finished goods.
 To issue materials to production departments against proper and
authorized requisition
 To keep an eye on different stock levels and issue purchase requisition to
the purchase department in time.
 To report on waste, scrap and obsolete stock.
 To prevent unauthorized persons from entering the stores.

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  Periodic comparison of physical stocks and book figures and to reconcile
the discrepancies, if any.
 To keep stores clean, tidy.
 To make suitable arrangement for maintenance and preservation of the
materials during storage.
 To take back surplus materials returned from departments or shops.

The above functions of the Store-keeper demonstrate that store-keeping is an

important factor and can make a substantial contribution to the efficient
operations of a business unit.

Store-keeping includes the following activities:

 Efficient and speedy issue of materials and tools to production
departments which is absolutely necessary for increased production.
 Receipt of materials from goods reception and from production
departments.
 Organizing storage in logical sequences so as to ensure that all items can
be identified precisely and storage space is used economically and
effectively.
 Organizing stock checks either on a continuous or a periodic basis so as
to be able to provide accurate stock figures when required.
 Protecting materials from damage and deterioration.
 Securing the stores from pilfering, theft and fire.

Organization of Stores:
In a large organization the management is faced with the problem of adopting the
type of organization of store:
Types of Stores:
a) Central Store.
b) Central Store with sub-stores.
c) Independent stores situated in various departments.

Advantages of Stores:
a. It is economical because there is economy in floor space, office
overheads, stationery etc.
b. It ensures better control and supervision because of availability of
specialized knowledge and experience of stores staff.
c. Better lay-out is possible.
d. It facilitates inventory checks.
e. The amount of capital invested in stock is minimized.
f. Since all stores are located in one place, it becomes convenient to
control the physical stock balances more effectively.
g. Concise reports on scrap, obsolete stocks can be prepared
regularly.
h. Better security arrangement can be made.

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Disadvantages:
a. It takes time to deliver materials to production departments if store
is situated at some distance from many departments. So it causes
inconvenience and delay.
b. There is a greater risk of loss by fire because of concentration of all
types of materials in one place.
c. There is increased transportation cost.
d. Breakdowns in transport in central store may cause production
stoppage leading to increased cost.
e. Administration becomes too complicated in a very large store.

Store Layout:
As we have seen in our previous discussion that store plays an important role in
the efficient and effective management of factory, the layout of store should be
carefully and judiciously planned to ensure maximum efficiency.
The stores department should conveniently be located so that it can receive
materials from the suppliers and issue materials to production department
without making much delay. It must have easy access to any part of the factory
to minimize expense. So, it is desirable that store should be located centrally to
discharge its responsibilities efficiently.

In large factories having many departments the store cannot be situated in a

place from where materials can conveniently be delivered and at the same time
its location shall be near the receiving department. So, it is necessary to set up
sub-stores situated conveniently to serve a particular part of the organization.
The layout of the stores department requires thoughtful considerations. Racks,
bins, shelves etc. must be arranged for easy access. There must be enough
provision for open space for the passage of trucks. Special arrangement should
be made for the storage of materials which are affected by atmospheric
conditions.
Heavy and bulky goods which cannot be kept in racks or bins are to be kept on
floor. In that case, the area of the floor where these materials are to be kept
should be marked with white lines indicating the area kept reserved for storing
those materials.

Centralized Stores:
A large factory may choose to have subsidiary stores within productive
departments. This facilitates the spontaneous supply of materials required by the
production department. It is very difficult to take a decision on whether a factory
should have subsidiary stores or a centralized store. Before taking a decision the
advantages of a centralized store must be taken into consideration.

Advantages of a Centralized Store:

1. Purchase order can be placed for the total requirements of the firm and
the larger order results in cost savings.
2. As there are many small stocks, the total buffer stock is much higher
which leads to:
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 (a) Less capital investment in Stocks;
(b) Less space taken up;
(c) Less danger of obsolescence and deterioration; and
(d) Less time taken for checking stock balances.
3. Better supervision is possible for using specialized skills and equipment.
4. Administration cost relating to stock recording is less.
5. Better layout of Stores is possible which results in efficiency in stock
control.
6. Absence of any worker does not affect the work since staff become
acquainted with different types of stores.
7. Better security arrangements can be made.

Disadvantages of Centralized Stores: 

The centralized storage of materials suffers from the following
disadvantages:
1. It involves increased transportation costs.
2. It causes inconvenience and delay in supply of materials as the production
departments have to obtain supply from the store situated at a distance.
3. More frequent movements of small quantities of materials may increase
costs and cause production control problems.
4. Greater risks of loss by fire.

Controlling Security and Theft

Whether an operation feeds thousands of people a day or 500 a week, theft will
be a problem the foodservice director face sooner or later.

Figure 6.4

Foodservice directors are often placed in the difficult position of playing Big
Brother not only to the customers they serve but also the employees they rely on
each day. They must construct this careful balance, where a security policy that
is too loose can give way to rampant theft while one that is too restrictive can
breed mistrust and resentment among staff.

One of the more effective techniques against employee theft is accurate food
forecasting and food waste monitoring. You can’t figure out who is stealing food,
but you can tell whether food is going missing by measuring how much product
you forecast, how much you sold and how much waste there was. The problem
of employees stealing has been much more significant than theft by customers.

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Food in its raw state is much more desirable because there is much more you
can do with it,” he says. So it’s a more significant area of concern.

Employee theft is something that most restaurant owners encounter at one time
or another. No matter how well you think you know your employees there is
always a possibility of theft. Employee theft in restaurants takes many forms,
including giving away free food and drinks to customers without authorization,
stealing customer’s credit card information, and stealing food or alcohol for
themselves.
Many employees only steal because they know they can and their chances of
getting caught are slim. If employees know you have a system in place to trace
theft, then most will respect that and not try to steal.

Controlling Theft

 Keep storage areas locked whenever practical.

 Establish a par stock per shift system for key ingredients.
 Issue secondary sets of keys on an as-needed basis only.
 Restrict delivery drivers from access to storage areas or walk-ins.

Large foodservice operations may use a requisition system to help control theft-
related losses

Inventory control

A number of operators have stepped up the managing of their inventories in

order to better detect discrepancies that could indicate theft. 
Theft is a really significant problem, but without having eyes on it we didn’t know
where to start,” says Tony Geraci, executive director of nutrition services for
Shelby County Unified School District, in Tennessee. “The first step was to
identify what we had, what we didn’t have, where it was supposed to be and then
put in a system of measurement that we could really account for things.”

Keeping the storerooms organized and labeled properly is not only important in
spoilage and theft prevention but also in the inventory process. The restaurant or
foodservice manager needs to know how much product is on hand to support the
operation’s menu offerings. In other words, the manager needs to know the
operation’s inventory. An Inventory is an itemized list of goods and products, their
on-hand quantity, and their dollar value. With a known inventory, a restaurant or
foodservice manager can calculate the cost of food sold as well as the inventory
turnover rate.

Inventory Types

 Physical inventory
o Is an actual physical count and valuation of all items on hand.
o It is usually taken at the end of an accounting period.

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  Perpetual inventory.
o A theoretical count based on goods received and issued.
o It tries to eliminate the need for frequent counting by adding to the
inventory when goods are received and by subtracting from the
inventory when requisition of issues occurs.

Recording the Inventory

Inventory should be taken periodically, corresponding with the frequency of the
income statement. In most operations, this is monthly. Some operations take
inventory on a daily, weekly, monthly and annually. Regardless of when you take
inventory, or whether you are recording a physical inventory or keeping perpetual
inventory, an important point to remember is to built uniformity into your process
by weighing or counting items consistently, using a consistent inventory pricing
method and taking it at a consistent time of day.

Inventory Breakdown. Is a method of categorizing the operation’s food and

supplies. In some restaurant or foodservice operations, inventory is taken of all
goods in the kitchen without regard to breakdown.

Figure 6.5

Inventory Pricing
Determining the worth of the inventory is an important next step because the
value of the inventory is reported on the operation’s income statement. There are
methods of valuing items.

FIFO – The latest price for the item is recorded. The most widely used pricing
method in the restaurant and foodservice industry for 2 reasons.
1. It is the easiest and quickest way to cost an inventory because
management will use the latest invoice to research the price.
2. It tells the management what product in storage is worth in today’s market.
In this method, the latest price paid for the product is the one that is
recorded in the price column on the inventory sheet.

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Example: If a case of green beans purchased at the start of the period cost
P20.00 per case but a case bought towards the end of the period cost P21.00,
when inventoried, both cases would be priced at P21.00

LIFO- The oldest price paid for the item is used. The opposite of the FIFO pricing
method.

Example: In the green bean example given above, the product price would be
recorded as P20.00 per case on the inventory sheet instead of the latest price of
P21.00

Average Price- A composite of all prices paid is averaged and used

Example: In the green bean example, assume that 5 cases were on hand at the
beginning of the period at a cost of P19.00 per case, and that 5 cases were
purchased at P20.00 per case and 5 cases at P21.oo per case. The average
price would be P20.00 per unit. This si calculated as follows:

Calculate the cost of food available in inventory

Opening Inventory 5 cases @P19.00 P 95.00
Purchases 5 cases @P20.00 P100.00
5 cases @P21.00 P105.00
P205.00 P205.00
Cost of Foods Available P300.00

Calculate Number of units available:

Number of Units available for sale:
Opening Inventory + Purchases = Units available for sale
5 cases + 10 Cases = 15 Cases

Calculate Inventory price per unit

Inventory price per unit:
Cost of food available = Inventory price per unit
Number of units available

P300.00 = P20.00
15 Cases

It should be readily apparent that this method is not widely used in the food
service industry. Because of the multiplicity of items in inventory, this method is
too time consuming to be practical.

Actual Price- The actual price is listed on the inventory for all items. Also known
as the specific unit cost method. Each inventory item is valued at its original
purchase price
Example:
4 cans @ $2.35 = $ 9.40
12 cans @ $2.30= $27.60
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 4 cans @ $2.60 = $10.40
20 cans= $47.40

Inventory Turnover. Is a measure of how quickly an item in storage is used. It

is an important number for management to monitor. An operation with a high
inventory turnover rate may not have adequate supplies on hand to produce all of
the items listed on the menu at all times. On the other hand, an operation wit low
turnover rate will have excess cash tied up and will also have a higher spoilage
rate, which will contribute to a high food cost.

Figuring inventory turnover is a two-step process.

1. Determine average inventory

Opening Inventory + Closing Inventory = Average Inventory
2
P8,500 + P10,750 = P9,625
2
2. Use the average inventory to get the inventory turnover rate

Cost of food sold = Inventory Turnover rate

Average Inventory

P10,200 = 1.06 Inventory turnover rate

P9,625
An inventory turnover rate of 1.06 means that the inventory turned over once
during the period. It can be calculated for any period: weekly, monthly, quarterly
of annually.

V. Summary of the Lesson

Goods in storage are as vulnerable to loss as in any other stage of the process
for purchasing to service. The two main causes of loss in storage are spoilage
and theft. Managers must secure the storage all the time. In addition, goods must
be rotated properly, kept at the correct temperature, and turned over frequently to
prevent spoilage.
Knowing how to control and prevent storage problems and understanding why
storage controls are an integral part of the inventory process are vital to the
success of any restaurant or foodservice manager.

VI. Supplementary Readings and Materials

Video/PPT Presentation will be provided by the Instructor

VII. Self-Progress Test/Comments

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 A. Calculating Average Price
1. Opening Inventory for frozen corn is 2 cases at P24.00 per case. During
the period, 4 cases were purchased at P25.00 per case and 6 cases at
P28.00 per case. What is the average price per case?
2. Opening Inventory for peas is 5 cases at P18.00 per case. During the
period, 3 cases were purchased at P21.00 per case and 4 cases at
P22.00 per case. What is the average price per case?
3. Opening inventory for tomato paste is 3 cases at P11.00 per case. During
the period, 5 cases were purchased at P14.00 per case. What is the
average price per case?
B. Calculating Inventory Turnover Rate
1. Opening Inventory P20,150
Closing inventory P18,950
Cost of food sold P24,300
What is the inventory turnover rate?
2. Opening Inventory P12,750
Closing Inventory P10.500
Cost of food sold P14,050
What is the inventory turnover rate?
3. Opening Inventory P27,850
Closing Inventory P24,350
Cost of food sold P32,100
What is the inventory turnover rate?

VIII. References

ManageFirst: Controlling Foodservice Costs 2nd Edition 2013 Pearson

https://answersdrive.com/what-is-the-fifo-method-of-stock-rotation-7782064
https://www.chefsconnection.org/post/60300607075/food-code-101-hot-and-cold-
holding-temperature
https://www.foodsafetymagazine.com/magazine-archive1/februarymarch-2007/
sanitation-best-practices/
https://www.powershow.com/view4/5afe90-OWRjM/Controlling_Food_Costs_in_
Receiving_Storage_and_Issuing_powerpoint_ppt_presentation.
https://www.accountingnotes.net/cost-accounting/materials/store-keeping-
importance-functions-and-organization/4543
https://www.foodservicedirector.com/operations/theft-foodservice
ttps://www.academia.edu/5166378/Receiving_Storage_and_Inventory_Control_i
n_Foodservice_Systems

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