Inventory costing is one of the most critical cost control and performance management processes in a restaurant. It can also be either highly profitable or disastrous for a restaurant depending on how it is done. There are many different methods for inventory costing in both restaurants, including cost center, group pricing, and direct costing. The best method for any particular business depends on its unique circumstances and the type of inventory being tracked.
Best costing method to be used in a restaurant:
- Direct-Costing Method
One of the most popular inventory costing methods is direct costing. In a direct-costing system, each item in inventory has its own cost. It is true even if multiple items have identical costs. It is not uncommon for restaurants using this method to have thousands of items – with each item having its own cost associated with it.
- Group Pricing
Group pricing keeps track of groups of items that have similar costs. For example, if there are meat and vegetable dishes on the menu, it is just as efficient to track the total cost for a group of similar items as to track the cost for individual items.
- Cost-Centers
Cost-centers are another standard inventory costing method. In this method, costs are assigned based on where an item or service was purchased or produced. Product costs are used to calculate the total cost of purchased items and the total cost for food made in-house. For example, if a dinner entree is estimated to cost $20 in the kitchen and $15 in the dining area, it is common to have both costs calculated. In this case, a restaurant would pay $10 for expenses at each location.
- Group Costing
Group costing is similar to group pricing except that it considers labor as well as material and other direct costs. This method is fair to both the kitchen and dining area, but it can be challenging to implement. Since labor rates vary depending on the day, a restaurant may have to use higher overall dining area costs to avoid paying too much during peak hours.
- Standard Costing
Standard costing is just like direct costing, except it requires that every item follows a formula for calculating its cost.
- Stocked-Costing Method
A stocked-costing system works like standard costing but with the addition of the cost of inventory on hand. This method is popular among restaurants because it is fairer than direct costing and more accurate than group pricing.
- Residual-Inventory Method
The residual-inventory method allows restaurants to take a percentage of their inventory and account for it as a loss. For example, if an item is estimated to cost $1 per pound, but the restaurant has 20 pounds of it on hand, a loss of $20 is calculated. The residual-inventory method may be the best inventory costing system for most restaurants since many different food items must be accounted for differently in calculating cost.
Inventory costing is a necessary process that helps control inventory, track costs, and make pricing decisions. There are many different methods for tracking costs, but the best method depends on each restaurant’s unique circumstances. To choose the best inventory costing method, restaurants must first determine what is most important to them in cost control, such as high accuracy or low labor cost for accounting. Once restaurants have identified their priorities, it is possible to use a system that suits both the needs of management and employees.
