Explaining actual vs. theoretical food cost variance
March 13, 2018 food operations management
Your restaurant can add millions of dollars to its bottom line by measuring and controlling your food cost variance.
Restaurant inventory management and food cost control are at the heart of profitability for multi-unit restaurant and foodservice operations. But often, the methods used to track them are based on incomplete information, which can be extremely costly.
Watch this video:
Exploring Actual vs. Theoretical Food Cost Variance will allow companies to understand what's at stake in terms of profitability. Watch the above video. Now, let’s look at two locations of a fast-casual restaurant chain as an example:
- Betty's @ Austin Food Costs = 32.1% of Sales
- Betty's @ Houston Food Costs = 32.8% of Sales
Winning at managing food costs
At many companies, the managers of both restaurants might get some coaching from their GM about cost control. But in fact we don’t know how well either manager controls their food costs unless we take into account:
- The local costs for all ingredients in each restaurant
- The menu mix for each restaurant
When evaluating food cost performance, you may overlook these two factors. However, they can cause wide swings in food costs as a percentage of sales.
If you're a restaurant GM selling lots of the low-margin specials your boss told you to promote (affecting your menu mix), your food costs will be a higher percentage of sales. So does that mean you're doing a bad job? Maybe the produce in your region is subject to price drops due to over-supply issues, and your costs are down. Does that mean you're performing at a high level?
"Theoretically," what should a restaurant's food costs be?
To gauge how an operator is managing food costs, the key to first understand the restaurant's Theoretical Food Cost. This is what a restaurant’s food costs should be, based on current inventory costs of all ingredients for the meals sold, and assuming perfect portions, no breakage, and no shrinkage.
Once you know a restaurant’s theoretical food cost, you can compare it to its Actual Food Cost, which is the actual cost of all the food that the restaurant used for a given period.
The mark of truly great food cost control is how closely a restaurant’s actual costs approaches its theoretical costs; an exact match would mean its portioning perfectly, and have no breakage or shrinkage. The difference between the two is the true measure of efficiency in food cost control; it’s called the Actual vs. Theoretical Variance and reducing it to its lowest possible point is the goal.
Now the "Actual" Story
Back to our video example…
BETTY'S @ AUSTIN FOOD COSTS = 32.1% OF SALES
- ACTUAL FOOD COST = 32.1 % OF SALES
- THEORETICAL FOOD COST = 29.5% OF SALES
- This means Austin's Variance from Theoretical Cost is 2.6% of sales.
BETTY'S @ HOUSTON FOOD COSTS = 32.8% OF SALES
- ACTUAL FOOD COST = 32.8 % OF SALES
- THEORETICAL FOOD COST = 31.9% OF SALES
- This means Houston's Variance from Theoretical Cost is only .9% of sales.
Houston is doing a far better job managing its food costs, as breakage, shrinkage, and portioning mistakes amount to only 0.9% of sales, while the Austin location's at 2.6% of sales!
The Loss Multiplier: If each restaurant does $1,000,000 per year in sales, then Austin's extra 1.7% of costs amounts to lost profits of $17,000. Ouch! What if the chain has 24 restaurants and ½ of them are worse than that? That’s at least 12 x 17,000 = $204,000 in lost profits -- and in many companies it could go completely undetected due to the sole focus on actual costs.
Fixing the Real Problems
The surest way to drive profit dollars to the bottom line is to identify the biggest “profit leaks” in an operation, find where they’re occurring, determine their root causes, and then put fixes in place (i.e. more frequent inventories of those items, contract compliance checks, etc.) It doesn’t require selling even one more meal… you simply keep more of the profits from each meal already being sold.
To begin, once the overall variance from theoretical cost is known, the best practice for reducing it requires identifying the individual ingredients with the largest variances by dollar volume, and analyzing their use to spot waste, theft, or overcharges. In a typical operation with hundreds of items in inventory, it can be a daunting task.
The investigation begins with the store that has the highest variance for each spotlighted item. For example, if chicken breasts represent the greatest dollar variance from ideal theoretical cost company-wide, and a restaurant in Albany, NY shows the greatest dollar variance of all stores, the investigation would start in Albany and center on:
- Proper receiving to ensure inventory amounts are accurate.
- Proper invoicing to ensure costs are correct.
- Proper usage in preparing recipes.
- Proper portioning.
- Proper tracking of waste.
- Identifying the reasons for inventory adjustments.
What Tools are Required?
The accurate measurement of Actual and Theoretical food costs requires the following for every store and commissary in your company:
- Accurate local market pricing for all ingredients.
- Accurate beginning and ending inventory counts to determine usage.
- Accurate ingredient amounts specified for all recipes.
- A system for accurately recording waste
- A system for capturing, in real time, recipes sold and their associated ingredients’ costs (and for depleting from inventory the individual ingredients).
Having all of this information on demand, so you can troubleshoot food cost issues in real time, requires processing a mind-boggling amount of data, which is best accomplished with a back office enterprise software system designed to do so.