What are Prime Costs?
The Prime Costs in a restaurant include food, beverages, and labor. The Prime Costs for a restaurant should be between 63% and 68% of sales. Restaurants that usually only buy enough inventory to return to par levels can expect food and beverage costs to be consistently the same percentage of sales each period. Monitoring Prime Costs is very important since these expenses are such a large part of total expenses. We recommend that a restaurant monitor these expenses on a weekly basis. See our blog “The Importance of Weekly Reports in Quick Service Restaurants.”
How do I Analyze the Prime Costs in my Restaurant?
- Determine whether Prime Costs are within range (63%-68% of sales)
- Compare food and beverage cost percentages to the target and to the prior week
- Investigate an increase or decrease in food and beverage costs from the target or prior week of 2% or more
- Compare scheduled hours to actual hours
Some Explanations for Increased Food and Beverage Costs
- Purchases greater than par level – Neither the basic nor advanced weekly profit and loss reports consider the change between beginning and ending inventory. Instead, weekly purchases are used to estimate the cost of sales.
- Supplier cost increases – Cost increases can be due to seasonal price fluctuations imposed by vendors or general inflation. Seasonal cost fluctuations can be considered using an average cost or, alternatively, the highest expected cost. An inflation factor can be included in the menu pricing calculation to compensate for the effects of inflation. When using either of these two methods, the cost percentage will still fluctuate, but the variance will be expected. Managers can isolate the source of cost increases by comparing recent purchase prices of high volume ingredients with the food costs used to calculate menu prices.
- Over-portioning – Over-portioning is a relatively easy problem to correct and can be identified by observing team members preparing meals. In most cases, the problem can be traced to employees who are not aware of or may have forgotten the standard portion sizes. Individual training sessions can usually remedy this problem.
- Waste – Waste usually results when meals are carelessly prepared by inexperienced people and can again be identified by observing kitchen operations. Restaurant operators can also examine the contents of garbage cans for excessive amounts of food that might indicate waste or spoilage. Some restaurants have been able to reduce their trash removal costs by having local farmers pick up their waste for livestock feed.
- Spoilage – Although some spoilage is inevitable, an unusually high amount may indicate that the inventory levels are too high and par levels need to be adjusted. Spoilage can also occur if team members aren’t arranging the storage area so that the old inventory gets used first. Regular inventory counts are an effective way to identify slow moving and poorly arranged inventory items.
- Theft – Restaurants are particularly susceptible to theft, but is often difficult to confirm without a significant amount of investigation. Therefore, the possibility of theft should only be pursued when other possible reasons have been ruled out.
Comparing Scheduled Hours to Actual Hours
Scheduled hours can be recorded in the weekly profit and loss report when the schedule is prepared and actual hours can be posted at the end of each day. The manager should question any variances between the actual and scheduled hours. Read more about this in our blog “Efficient Scheduling of Employees in Quick Service Restaurants.”
If you have any questions or would like some help with your monthly accounting for your restaurant, please give us a call. We have extensive experience working with quick service restaurants and love to see them succeed!
Michael Allen, CPA
Allen & Company, PC
(770) 428-6229 (T)
(770) 425-5481 (F)
Allen & Company, PC - a CPA firm serving Kennesaw, Marietta, Acworth, Woodstock and north Atlanta. Providing accounting, financial statement audit, taxation, and advisory services for individuals and businesses. Experienced working with franchised businesses.