Theoretical v/s Actual Cost of Sales in Hospitality Industry
Inventory management and food cost control are crucial for profitability of restaurants/hotels/cafes. But often, the methods used to track them are based on incomplete information, which can be expensive. F&B and Hospitality business today are measuring and controlling their cost of sales for better performance review and specially after the Pandemic.
To decide how a Hospitality business is managing cost of sales or food costs, it’s evident to know Theoretical Cost of Sales and their Actual Cost of Sales.
Theoretical Cost of Sales can be termed as the ‘perfect cost of sales’ or what is called a recipe cost. It is based on current inventory costs of all ingredients for the meals/drinks sold, and assuming perfect portions with no wastage, breakage, theft and shrinkage. While Actual Cost of Sales is actually the costs incurred by the business in said period of time with terms to ingredients for food/drinks sold.
Ideal situation for any F&B business or Hospitality business would be where their actual cost of sales would either match or come close to their theoretical cost of sales. If there is any discrepancy or gap between these two, then its termed as Variance. Variance usually occurs whenever there is-
- Wastage of resources
- Portions of meals/drinks
- Unrecorded sales entries
- Error in stock take
If your variance is not acceptable or close enough to the logic, then it affects your profit margins. A slight deviation is generally acceptable but a major one needs your attention.
To help Restaurants/Hotels and Cafes with variances in actual cost of sales and their theoretical cost of sales, we at Horizon Biz Consultancy assist in finding the cause of variance in the same and assist in multiple ways to curb the same.
Our 3 steps process to bridge the gap between theoretical and actual cost of sales involves-
- Determining theoretical cost of sales and actual cost of sales for the business keeping in mind the geography, target audience and type of cuisine the said business is involved with.
- Stock taking for all the ingredients and raw materials purchased. Inventory management helps in keeping a track of all the items produced as per the standard recipes.
- Variance analysis helps in finding any discrepancies in the actual and theoretical cost and thereby curing it through minimizing the wastage, breakage, shrinkage or avoiding theft of the said materials or goods.
Having all this information on hand, together we can troubleshoot the root causes of variances and achieve the goal of matching the actual cost of sales with the theoretical cost of sales.
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