What is Food Cost Variance & How To Control It
- August 29, 2023
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Nouhad Es-Said
In a post Pandemic era, with the escalation of supply chain expenses and the shift in consumer behavior from dine-in to delivery, along with the challenges of fluctuating ingredient prices, restaurants find their profit margins no longer as favorable as before. For restaurants striving to boost revenue, effective management of inventory, meticulous control of food costs, and addressing food cost variance has now become pivotal for overall profitability.
With this, one metric in particular has grown in importance : the food cost variance – a powerful metric to closely track and reduce your food cost – represented by the difference between a restaurant’s actual food cost percentage and its theoretical one.
But the factors that affect a food cost variance are numerous, and reducing one’s food cost variance isn’t free of challenges : from portioning inaccuracies to errors in inputting data, and from staying on top of supplier prices to recording waste accurately, keeping a food cost variance low isn’t a walk in the park. And that’s why we’re here!
In this article, you’ll be guided through strategies and techniques to ensure your restaurant’s food cost variance remains in check, consequently leading to reduced costs stemming from this variance.
Table of Contents :
1. What Is A Restaurant’s Food Cost Variance, & How Do You Calculate It ?
Managing food cost variance helps in maximising your profits and ensuring the budget is allocated for selling specific menu items over a certain period of time is in check. Food cost variance shows how effectively your restaurant maximises the return on your spend and sales.
The food cost variance is the difference between a restaurant’s actual food cost percentage and its theoretical food cost percentage. It is used as an indicator of how efficient a restaurant is at controlling food costs. In other words, food cost variance is the difference between the actual cost of ingredients used in the menu items sold, and the theoretical costs of the ingredients that were expected to be used in those menu items.
Here’s how to calculate it :
1. Calculate your theoretical food cost
This is the sum of the costs of all ingredients a restaurant expects its chef to use for all menu items sold over a period of time. In other words, the expected or theoretical cost of the ingredients used in menu items sold.
2. Calculate your theoretical food cost percentage
This is the ratio of your theoretical cost and your revenue for that period of time (pssst… forgot what food cost percentages were about and how to calculate them ? Refresh your memory by reading our article How To Calculate Food Cost Percentages with formulas and examples).
3. Calculate your actual food cost
Your actual cost is the difference between the actual stock value at the end of the period, and the sum of the opening stock value at the beginning of the period and all your purchases made during that period.
4. Calculate your actual food cost percentage
The ratio of your actual food cost and your revenue for that period of time
5. Calculate your variance percentage
Calculate the difference between your actual food cost percentage and your theoretical food cost percentage
In the case of Anthony’s Shawarma Joint, his variance was a positive variance of 7.5%.
Yep, you read that right ! That’s a positive variance, meaning that his actual food cost exceeded his theoretical one. In some instances, a variance can be negative, whereby the theoretical food cost exceeds the actual one.
Let dig deeper into this :
2. Positive vs. Negative Variance
Normally, a restaurant anticipates a positive variance, indicating that the actual food cost exceeds the theoretical food cost. Nevertheless, there are instances where a negative variance occurs, implying that the actual food cost falls below the theoretical one.
Examples of a situation in which a restaurant’s theoretical food cost exceeds the actual food cost can shed light on the impact : suppose a restaurant expects to use a specific quantity of high-cost ingredients in a particular dish based on its recipes and portion sizes. However, due to unforeseen factors like more efficient portioning or substituting ingredients, the actual usage turns out to be lower. In this scenario, the theoretical food cost was projected to be higher than the actual expenditure. The impact here is that the restaurant experiences improved profit margins as costs are lower than expected, leading to better financial performance.
Similarly, if a restaurant purchases ingredients at a lower cost due to bulk discounts or seasonal promotions, the theoretical food cost could be higher than the actual cost incurred. This again translates to enhanced profitability as expenses are minimized beyond initial projections.
3. Top 10 Most Common Reasons For Restaurant Variance
If a restaurant has a theoretical food cost of 24% and an actual food cost of 27%, it will have a food cost variance of 3%. With $100,000 of monthly revenue, this 3% variance is the equivalent of $3,000 of uncontrolled stock, or unaccounted-for stock.
It is therefore key to understand the factors that affect your variance, and consequently your profitability.
These are the top 10 common reasons for restaurant variance :
1. Recipe inaccuracy
A recipe outlines the precise quantities of each ingredient required to prepare a dish. Any inaccuracies, discrepancies, or outdated information in the recipe can lead to differences between the theoretical and actual usage of ingredients. Some ingredients lose weight or volume during cooking, processing, or preparation due to factors like evaporation, trimming, or cooking losses. If the recipe doesn’t account for these yield variations, the actual cost of the dish can deviate from the theoretical estimate.
2. Ingredient substitutions in a recipe
Sometimes, chefs might need to substitute ingredients due to availability or quality issues. Substituting an ingredient by purchasing it from a different supplier, or by using another similar ingredient available in your inventory, without ensuring we are actually substituting the ingredient in the recipe management system (if you have one), will lead to an inaccurate theoretical cost as your inventory will not deplete the correct ingredients from your inventory once this recipe is cooked or sold.
3. Recipe portioning
If the ingredients used while cooking a recipe are inaccurately larger than what my recipe specifies, it leads to higher ingredient usage. This means you’re using more ingredients per dish than anticipated, driving up the actual food cost compared to the theoretical cost.
4. Ingredient receiving
Mistakes during ingredient receiving can lead to discrepancies in inventory levels and subsequently impact both theoretical and actual food cost. These mistakes often arise from incorrectly converting the ingredient’s package size into the ingredient’s base unit of measurement in your inventory
5. Keeping your supplier’s prices updated
Not accurately reflecting changes of your supplier prices can lead to variance. When your suppliers raise their prices, the cost you pay for ingredients also increases. If you continue to work with the old, lower prices, the cost calculations for your dishes will be inaccurate. If you use an inventory management system, it will assume lower costs for the ingredients, leading to a mismatch between the theoretical food cost and the actual food cost.
6. Tastings, cook offs, comps, and free of charge of items
Comps (complimentary items), tastings, and cook-offs can impact your restaurant’s variance if they are not accurately recorded in your inventory management system. These practices involve real costs associated with ingredients, preparation, and service. If these costs are not accurately tracked and accounted for, they can lead to discrepancies between theoretical food cost and actual food cost.
7. Staff and management meals
Similarly, meals, provided to restaurant managers or staff, can impact variance. These meals also involve costs related to ingredients, preparation, and service. If the expenses for management meals are not properly recorded, it can lead to discrepancies between the theoretical food cost and actual food cost.
8. Human errors, mostly when running inventory without a system
Running restaurant inventory manually without a software that can capture data accurately increases the risk of human errors, inconsistencies, and delayed data. This can lead to inaccuracies in ingredient quantities, ingredient units of measurement, ingredient costs, and variances between theoretical food cost and actual food cost. In contrast, using an accurate automated inventory management system ensures precise data capture, real-time tracking, consistency, timely reporting, and efficient analysis. This minimizes errors, enhances variance management, and empowers informed decision-making for optimal financial performance
9. Accurate stock count
Because stock counting takes a lot of time and effort, most restaurants do it only once a month. But if you make a small mistake when counting how much of each ingredient you have, it can lead to big problems. The tricky part is that how things are packaged in the storage room might be different from how we measure them. This can easily cause mistakes. Getting the stock count wrong will definitely impact your variance and cause disparities between theoretical cost of food and actual cost of food.
10. Theft
Lastly, theft can also lead to a variance and discrepancy between your actual and theoretical food costs. Although theft is the hardest one to manage, it is the most common reason for variance in restaurants. Having strong controls and an inventory management system that is reliable will aid in reducing variance due to theft.
4. 7 Tips To Help You Reduce Restaurant Variance
1. Create strong operating procedures (SOPs) for your back-of-house
Having strong SOPs will help your staff record inventory accurately. Whether it comes to food preparation, wastage recording, recipe building, every staff member in your back of house (link to back-of-house article here) should have a role in feeding your inventory management system with accurate data.
2. For multi branch operation, create approval workflows for your back-of-house staff
Implementing approval workflows for your back-of-house staff is crucial. Tasks such as recipe adjustments, supplier price changes, wastage recording, stock count adjustments, and invoice receiving directly affect your theoretical food cost. By establishing approval workflows, alerts, and notifications, you can ensure that accurate data is consistently entered into the inventory management system. Approval workflows provide a structured process where changes and actions require authorization from a Manager. This not only helps maintain data integrity but also allows for thorough oversight, and allows Managers or Owners to also track theft.
3. Create regular training for your staff
Training your restaurant staff is crucial for reducing variance. Proper training reduces errors, ensures consistent practices, prevents wastage, and improves inventory management. Trained staff work efficiently, identify variance causes, make informed decisions, and contribute to cost control. They adapt well to situations, enhance accountability, and collectively help streamline operations for reduced variance and improved profitability.
Separately, training on how to use the inventory management system is as important, to ensure staff understand the impact every event created on the inventory management system has on theoretical cost, in turn, on variance
4. Control theft
To minimize variance resulting from theft in your restaurant, beyond implementing controls in your inventory software, consider these strategies:
a. Staff Retention: Lower staff turnover through competitive wages, positive work environment, and growth opportunities. As a result, there are fewer unfamiliar faces, which encourages accountability and might discourage theft.
b. Spot Checks and Regular Counts: Conduct surprise spot checks and weekly inventory counts to discourage theft and keep staff vigilant. Frequent monitoring can uncover discrepancies early on. Provide your staff with an efficient method to conduct stock counts, such as stock counting on a mobile or a tablet, which can significantly reduce the time it takes to stock count.
c. Clear Staff Meal Policy: Establish a transparent policy for staff meals, ensuring fair distribution and discouraging misuse of ingredients.
d. Departmental Accountability: Hold each department responsible for any unexplained variance. This encourages teamwork and shared responsibility, discouraging theft and misuse.
e. Financial Consequences: Communicate that unjustified variance could lead to salary deductions. This emphasises on the importance of accurate practices.
f. Video Security System: Install a video security system to monitor areas prone to theft. Visible cameras serve as a deterrent, and footage can aid in identifying culprits if theft occurs.
5. Automate your Inventory Management Software:
a. Precision: Automated systems eliminate human errors in data entry and calculations, ensuring that inventory records are accurate. This precision reduces discrepancies between theoretical and actual values, ensuring that the correct data is captured into the system.
b. Real-time Updates: Automated systems provide real-time visibility into inventory levels, preventing overstocking and understocking. This real-time data minimizes variance caused by inaccurate stock levels.
c. Consistency: Automated systems enforce consistent recording practices, reducing variations that arise from manual data entry. This consistency leads to more accurate inventory figures.
d. Timely Tracking: With automated updates after each transaction, you can address issues promptly, minimizing the impact of discrepancies on your inventory and costs.
e. Data Analysis: Automated systems offer analytical tools to identify trends, consumption patterns, and discrepancies. This empowers you to proactively manage variance and optimize operations.
f. Integrations: Automated systems integrate with other systems like POS and food suppliers, streamlining data flow and reducing errors in capturing data.
g. Wastage Management: Accurate tracking of ingredient usage and wastage helps you identify areas for improvement, reducing variance that typically stems from wastage.
h. Efficiency: Automated systems save time compared to manual methods, allowing staff to focus on customer service instead of extensive inventory counting.
6. Use an Inventory Management Software that is available on mobile
Utilizing a mobile-compatible inventory management software offers notable advantages. Data entry in the back-of-house can be both time-intensive and susceptible to errors. However, employing software accessible on mobile devices enables your staff to input data conveniently and in real-time during their shifts. This facilitates accurate and efficient tracking of inventory, minimizing the likelihood of mistakes while streamlining the overall inventory management process.
7. Control recipe portioning
a. Use an inventory management system that gives your staff access to a mobile friendly cook book. This should include accurate ingredient measurements, and step by step cooking procedures.
b. Train your kitchen staff on the importance of accurate positioning. Provide hands on training sessions to demonstrate proper portioning techniques
c. Equip your team with proper portioning tools such as measure cups, scales, and scoops. These tools facilitate consistent portioning and reduce guesswork.
d. Use an inventory management system with portion tracking capabilities. This can hel you track ingredient usage based on portion sizes, specially when it comes to batch, or semi finished recipes.
5. Conclusion
In the evolving landscape of post-pandemic dining, mastering the art of managing food costs has become paramount for restaurants aiming to thrive. Central to this endeavor is understanding and controlling food cost variance—a crucial metric that illuminates the efficiency of cost management. From the intricacies of calculating variance to the nuances of positive and negative deviations, this article has delved into the core of the matter.
Remember, reducing food cost variance isn’t a solitary task; it’s a symphony of accurate recipes, meticulous inventory management, diligent staff training, and the power of innovative technology. By implementing the strategies discussed here, you’re well-equipped to steer your restaurant towards optimized operations, enhanced profitability, and a consistently exceptional dining experience. As you embark on this journey, embrace the challenge, for conquering food cost variance is not only a financial triumph but a testament to your culinary prowess and business acumen.
6. About Supy
Supy is the data-driven restaurant inventory management software built to help restaurants cut costs. This is done thanks to a best-in-class back-of-house software that covers the entirety of a restaurant’s operations, namely inventory, procurement, menu engineering, analytics, and more. Used by the leading F&B businesses, Supy has become a reference in inventory software, and has produced astonishing results when it comes to the reduction of variance. The automated alerts and notification, the interconnected modules, the ability to measure, monitor, and investigate data are some of the profit-making features that have given our software the success it has seen.
