Variance reports help cost accountants identify unprofitable production and service activities. If your dinner house served a 1 pound steak for $30 and the meat costs $6 and sides run another $1.50, your margin is $22.50. That’s a profit margin of 75%.

Meat prices vary over time and the 1 pound steak can go as low as $4.50 and as high as $7.50. This rate variance has a huge impact on your profits. At $4.50 per pound, marginal profit soars to $24 or 80%. It gets tough to pay the rent for your high profile location when higher priced meat hits the loading dock. Your margin drops to $21 or 70% at the $7.50 per pound level.

In this example, our standard price per pound is $6. If our example steak accounted for 40% of dinner business, how do we measure the impact of a price increase? Using this standard rate, we will run a cost of sales of 25% on this menu item. A $1.50 rise in the cost per pound will run the cost of sales up to 30%. Since this 5% increase has a 40% impact value, this one ingredient – a 1 pound steak – is responsible for a 2% increase in the overall food cost.

Rate variances on key items have a major impact on your results. These variances may be difficult to control. Major steak chains use futures and options to reduce the risk. Minimum future requirements eliminate this option for most operators.

The industry has become focused on the usage variance since the degree of control is higher. If you sell 1,000 of these steaks a week and you closely track usage, you may experience a usage variance of 10%. Instead of using 1,000 pounds of steak, you needed 1,100 pounds. At the $6 standard cost per pound, the usage variance costs $600. Repeat this performance for 50 straight weeks and you’ll be missing $30,000 of profit. Your food cost percentage for the steak will soar by 2%. Looking at the entire food cost percentage, this unfavorable variance has a 0.8% impact.

Imagine a week with the same usage variance combined with the big rate variance. The impact of serving the $7.50 per pound meat and an extra 100 steaks is $2,250. The extra steaks cost $750 and the extra $1.50 per pound on the 1,000 standard is $1,500.

Companies using variance reports wisely tend to eliminate usage problems faster. These same companies isolate key items and develop an effective purchasing strategy. Their competitors tend to run rambling meetings when food cost numbers are high. Inventory counts and extensions become their focus. In the long run, you won’t solve a usage variance or a price variance through inventory value manipulation.

Joe Dunbar
Dunbar Associates
(703) 425-6052
(202) 315-3664 eFax
jdunbar401<A-T>aol.com
www.joedunbar.com

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Variance reports help cost accountants identify unprofitable production and service activities. If your dinner house served a 1 pound steak for $30 and the meat costs $6 and sides run another $1.50, your margin is $22.50. That’s a profit margin of 75%.

Meat prices vary over time and the 1 pound steak can go as low as $4.50 and as high as $7.50. This rate variance has a huge impact on your profits. At $4.50 per pound, marginal profit soars to $24 or 80%. It gets tough to pay the rent for your high profile location when higher priced meat hits the loading dock. Your margin drops to $21 or 70% at the $7.50 per pound level.

In this example, our standard price per pound is $6. If our example steak accounted for 40% of dinner business, how do we measure the impact of a price increase? Using this standard rate, we will run a cost of sales of 25% on this menu item. A $1.50 rise in the cost per pound will run the cost of sales up to 30%. Since this 5% increase has a 40% impact value, this one ingredient – a 1 pound steak – is responsible for a 2% increase in the overall food cost.

Rate variances on key items have a major impact on your results. These variances may be difficult to control. Major steak chains use futures and options to reduce the risk. Minimum future requirements eliminate this option for most operators.

The industry has become focused on the usage variance since the degree of control is higher. If you sell 1,000 of these steaks a week and you closely track usage, you may experience a usage variance of 10%. Instead of using 1,000 pounds of steak, you needed 1,100 pounds. At the $6 standard cost per pound, the usage variance costs $600. Repeat this performance for 50 straight weeks and you’ll be missing $30,000 of profit. Your food cost percentage for the steak will soar by 2%. Looking at the entire food cost percentage, this unfavorable variance has a 0.8% impact.

Imagine a week with the same usage variance combined with the big rate variance. The impact of serving the $7.50 per pound meat and an extra 100 steaks is $2,250. The extra steaks cost $750 and the extra $1.50 per pound on the 1,000 standard is $1,500.

Companies using variance reports wisely tend to eliminate usage problems faster. These same companies isolate key items and develop an effective purchasing strategy. Their competitors tend to run rambling meetings when food cost numbers are high. Inventory counts and extensions become their focus. In the long run, you won’t solve a usage variance or a price variance through inventory value manipulation.

Joe Dunbar
(800) 949-3295
www.joedunbar.com

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In the last 15 years, I have worked on over 200 projects to determine ideal usage and ideal menu item prices. In candor, most firms lack the proper operations information to explore the ideal cost issue. While the technology has completely transformed the reporting environment, the lack of standard recipes, standard yields and standard production information is widespread.

At the very least, every operator should know the portion sizes for all top menu items. I always say: “Pretend you just hired me as a line cook. Where do I go to study the portion guidelines for the really popular stuff?” A surprising number of managers answer: “You need to ask the people your working with for the guidelines.” Leaving key portion size information to informal word-of-mouth communication is a mistake.

Take your top 25 purchased items. For each item, create a yield sheet as follows:

Cost of purchased weight:
As purchased weight:
Primary purpose yield:
Secondary purpose yield:
Trim yield:
Bones yield:
Unusable weight:

The cost for both the primary purpose yield and secondary purpose yield depends on your ability to make use of the trim and bones. If you have no use for either trim or bones, do not give a dollar credit in the analysis. A conservative model would also give a zero credit for these weights. A more aggressive model would assign a credit for the trim and bones based on the actual cost of buying each from the butcher. Do not assign a credit for trim and bones using straight weight calculations.

Costing the primary purpose yield and the secondary purpose yield is at the heart of this analysis.

I was in the local Costco today and boneless ribsteaks were selling for $7.49 per pound. Recently, I had purchased a bonein rib roast for $4.99 per pound. My best guess on the trim level of both cuts made me happy I had made the buy at $4.99. The bonein roast looked like it was cut from a 109C and the boneless steaks looked like they were cut from a 110. The difference in weight is a ratio of 80% usable on the bonein. If you want a perfect 112 ribeye, 50% loss from a 110 is possible and you would pay up to $9.98 in my example.

Since I paid $21 for my 3-rib roast and I cut three thick rib steaks, my cost of $7 per steak was a second check. In deed, the steaks at Costco would have cost me $8.25 each.

Early in my consulting practice, I worked with a fantastic person with formal butcher training and lots of experience. He bought beef rib after carefully studying the various market options from 3 suppliers. His typical spec was 109D or “exports” as they are called. Occasionally, he would buy the 109 or 110. In his operation, he served both prime rib and rib steaks so he often purchased more than one cut. His butcher shop had all the proper equipment.

Some of the decisions he made would produce a savings of 10% to 12% for the same menu item during the same week. Since these menu items accounted for over 20% of his weekend business, these decisions put him at a big advantage to his competition. He always passed along the savings to his customers in the prime rib since this was a market priced special on his menu (offered only on the busiest nights).

In the years following this project, I observed many restaurants offering prime rib and rib steaks. Many operators offered prime rib on slow nights, bought the meat from a single supplier and always bought the same cut. Seeing the unserved leftovers in their walkins was my first red flag. The lack of serious yield analysis was the second red flag. Finally, the majority had no clue what the gross margin was on these very high cost menu items. It was no wonder they called for help.

An operation with poor forecasts, no formal yield data and a complete lack of competitive bidding in place can easily pay twice as much to serve the same menu item. The great reports now available show the variances clearly. Ironically, the majority of operators using an ideal usage report look at super high variance ingredients with suspicion. “This can’t be right!” “What is this telling me?” and “How can you believe this stuff?” are common replies.

Joe Dunbar
Dunbar Associates
(703) 425-6052
(202) 315-3664 eFax
jdunbar401@aol.com
www.joedunbar.com

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Too much attention is placed on inventory accuracy. Most people miss the finer points of determining their food cost percentage. Clearly, the sales figure which dominates the formula should take center stage. A very close second is the purchases figure. The inventory obsessed need to take a different view.

Many hotels and restaurants count monthly (or every four weeks) and I see too much emphasis on inventory valuation. The impact of inventory change depends on the time period. Monthly values should be reasonable given the day of week and time of year. The change in the inventory value (i.e. beginning minus ending) hardly matters once a period of 90 days is considered.

Inventory is very important in a weekly analysis and all important in a daily calculation. If you’re researching a problem and perform daily calculations you need to be very exact.

The wonderful POS systems available today from the best companies provide a bundle of sales analysis. My favorites are check average and covers by meal period. I break down sales using a simple matrix with a row for each meal period and columns for covers, check average and sales.

On the purchases side, I break down the purchase data using a larger matrix with rows for each key item and grouped data for low impact items by category. The columns include units, average cost and total cost.

For the inventory, I prefer a simple inventory change figure. One number is fine. Simply subtract the current period’s value from the previous period’s value. The net value should be a reasonable and consistent estimate. Don’t count WIP inventory one period and eliminate the figure the next period.

Some quick checks on inventory value by location and category will provide enough information to locate the flour extended by case price when the count team used pounds. Perform a simple analytical review and correct major errors.

Many operators give no credit for highly perishable items like bread, fresh fish and other items specific to the operation. This helps to avoid over buying since the items are expensed immediately.

Inventory valuation should not be the reason for a good or bad food cost percentage in any given period. Any operation which runs a hi-low pattern or a low-low-hi pattern has a far greater problem. These patterns typically point out cost control weaknesses. Someone is trying to hide the truth. I have seen plenty of inventory extensions with a spice valued at $1,000 plus. The people presenting these reports may be both incompetent and dishonest.

Look long and hard at sales trends by meal period. Some operations run lunch menus with higher implicit costs. If the lunch/ dinner ratio changes, the food cost will be impacted. Extremely high or low counts will have a major impact as well.

Most of the real action will be in purchases since the money you spend with your suppliers is your cost. Highlight dramatic price changes on any key item. Look for flaws in your ordering strategy. Compare figures from one period to the next and over the long term.

If you focus on sales and purchases, food cost percentage surprises will be fewer and more positive.

Joe Dunbar
Dunbar Associates
(703) 425-6052
(202) 315-3664 eFax
jdunbar401@aol.com
www.joedunbar.com

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