Cost Allocation

Question 1

Cost allocation for proportional

Answer 1

Total costs divided by total sales multiply by portion price

Question 2

Cost allocation for semi- proportional

Answer 2

Fixed cost divided by covers plus variable percentage times price

Question 3

Cost allocation for Fixed

Answer 3

get per cover to get $ and then divide by price to get percentage

Question 4

How do three pricing approaches differ?

Answer 4

Factor Method * Most common
* Factor is established based on desired food cost percentage target
Price = ( Portion Cost )/(Target Food Cost %)
Note: “Portion Cost” means FOOD * Disadvantages
– Not every item should be marked up by same proportion (steak vs. coffee)
– Does not reflect differing labor costs between items

Prime Cost Method
* Uses both raw product costs (portion
cost) AND labor costs
* Uses avg. labor cost per cover to reflects cost of labor (denoted below by ”< >”)
Price = (Portion Cost + <Labor>) / (Target Food Cost % + Labor Cost %)</Labor>

MODIFIED Actual-Cost Method
* Accounts for all costs associated with the
production of the food
* Also factors in desired profit margin in the price for each menu item
* Allows some costs to have “fixed” (“< >”) AND a “proportional” component
Price = (Portion Cost + <Labor> + <Fixed> + <Occ.>)/(100% - (Variable Cost % + Target Profit %))</Occ.></Fixed></Labor>