Standard cost accounting in foodservice operations

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Cost accounting relates the expenditure of a food service organization to its food and beverage sales. Cost accounts, while they can be directly related to financial accounts, are concerned with the detailed make up of cost in identifiable output for purposes of pricing, budgeting, control of food and beverage production and service, purchasing and control of food and beverage materials, and control of labor expenditure, rather than the overall financial results of the foodservice operation.

In a standard cost system, the following accounts are always recorded at budgeted cost: food and beverage held in inventory, finished food and beverage inventory, and cost of food and beverage sold. Hence, if actual costs exceed budgeted costs the variance is unfavorable, while if actual costs are less than budgeted costs, the variance is said to be favorable. The calculation and entry of variances can be as follows:

1. Direct food and beverage materials variance equals actual direct food and beverage materials cost minus budgeted direct food and beverage materials cost.

2. Direct food and beverage materials quantity variance equals (actual quantity minus stan dard quantity) times standard cost.

3. Direct food and beverage materials price variance equals (standard price minus actual price) times actual quantity.

4. Show the journal entry to record the direct food and beverage materials variances.

5. Direct labor cost variance equals actual direct labor cost minus standard direct labor cost.

6. Direct labor time variance equals (actual hours minus standard hours) times standard rate.

7. Direct labor rate variance equals (actual cost per hour minus standard cost per hour) times actual hours.

8. Show the journal entry to record the direct labor variances.

9. Foodservice overhead variance equals actual foodservice overhead costs minus budgeted foodservice overhead costs.

10. Show the journal entry to record the foodservice overhead variance.

11. Show the entries to complete the standard cost accounting cycle, e.g., to record finished food and beverage goods or to record cost of food and beverage sold. Variance accounts are closed to the Cost of Goods Sold account.

Standard cost accounting has its opponents. Like most other business enterprises, foodservice operators aspire to run lean and efficient operations; however, in order to identify how lean a foodservice operation is or must be, the foodservice manager’s reporting needs to move away from cost accounting, which has over the years evolved to measure profitability across a range of food and beverage products or outlets within a foodservice organization. For example, in a batch and serve production environment such as some quick service restaurants, cost accounting tracks food and beverage inventory transactions as large batches of food and beverage goods move from the production process to the production/service process. It identifies the value added to these food and beverage materials and attempts to quantify budgeted rates as to how much labor and over head should be absorbed into the financial statement, recording unfavorable variances when production is underutilized. There are instances, for example, in large catering operations, where overproduction occurs in response to underutilized production, and this is what a leaner approach to run foodservice operations attempts to eradicate. As the organization becomes more lean and cost efficient, one can say that it should produce food reasonably closely to its occupancy or customer demand. Food production areas, which complete and serve all food in production batches, can greatly reduce inventory to the quantities of food and beverage moving through production and service to customers. In such a case, complex tracking and valuation mechanisms may no longer be necessary. Even though one has to have an inventory valuation, this can be done in a much simpler way. Once the food service operation becomes lean, the inventory of food and beverage and non food and beverage products can be reduced to their most optimum levels, which greatly reduces the need for tracking transactions. In addition, cost accounting does not always clearly show the tangible benefits of lean strategies such as improved production and labor planning, additional production capacity, better cash flow, and reduced storage space.

Reference

Epstein, M. J. (1978). The Effect of Scientific Management on the Development of the Standard Cost System. Manchester, (NH): Ayer Company Publishing.

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