7 Chapter 7- Monthly Cost of Sales

In this chapter, we distinguish between the cost of food sold and the cost of food consumed. We take for granted all the free or discounted meals we eat when working at food & beverage establishments. But those meals cost the operator money. The government allows operators to deduct the cost of employee meals. But more importantly, the cost of those meals, with little or no revenue received, can dramatically affect food costs. In this chapter, we will explore various techniques for assigning the actual cost of those meals and other deductions and transfers to where they belong.

Additionally, we will explore other additions and subtractions to the monthly cost of sales, such as transfers, promotion, gratis, steward sales

Cost of Food Sold (COGS):

• Focuses on the direct cost of ingredients used in items sold to customers.
• Represents the value of inventory that is depleted through sales.
• Calculating both the food cost percentage and the beverage cost percentage, which are key performance metrics for F&B businesses, is crucial.

Cost of Food Consumed:

• Takes a broader view, encompassing all food and ingredient costs within a specific period.
• Includes not only ingredients used for sales but also:
• Food wasted due to spoilage or preparation errors.
• Employee meals.
• Promotions
• Food products for promotional purposes
• Charity events
• Wedding promotion shows
• Comped Meals
• Gratis
• Steward sales

Why the difference matters:

• COGS directly impacts your profitability from sales.
• The cost of food consumed helps you understand overall food usage and identify areas for potential cost savings (e.g., reducing waste). But, more importantly,

In essence:

• COGS is a narrower measure focused on ingredients used for sales.
• The cost of food consumed is a broader measure of all food used during a period.

A food & beverage business can deduct employee-free meals provided in a cafeteria during work hours under specific conditions set by the IRS. Here is how it works:

The “De Minimis Fringe” Benefit:

The IRS allows businesses to deduct the cost of these meals as a “de minimis fringe” benefit, meaning that the benefit is so small and infrequent that it is not considered taxable income for the employee or a significant expense for the company.

Here are the critical requirements for this deduction:

• Convenience of the Employer: The meals must be primarily for the employer’s benefit, not the employees. They should be offered during work hours, making it easier for employees to stay on-site and productive.

• More Than Half Rule: If the cafeteria serves more than half of the employees on a non-discriminatory basis (meaning all employees have access regardless of position), then all meals provided there are considered for the employer’s convenience.

• De Minimis Value: The meals themselves should be considered a small benefit. There is no strict dollar limit, but the overall cost needs to be reasonable.

Benefits and Considerations:

• Tax-Free for Employees: Free meals that meet these criteria are not considered taxable income for the employees.

• Record Keeping: While no recordkeeping requirement exists for de minimis fringes, keeping track of costs for tax purposes is good practice.

• Highly Compensated Employees: For highly compensated employees (as defined by the IRS), there is an additional test to ensure the meals are available to everyone equally.

Alternatives and Considerations:

• Meal Stipend Programs: Some companies offer a fixed amount of money per meal as part of a meal stipend program. This will allow for more flexibility but still provide some cost control (potentially less deductible for the company).

• Track Overall Costs: You can track the total cost of a meal program without going into individual meal details, simplifying record keeping, but it does not offer a full tax benefit.

Consulting a Tax Advisor: If you have a complex situation or doubts, it is always best to consult a tax advisor or accountant familiar with current regulations on employee benefits and deductions.

Food and beverage businesses use four methods to calculate the cost of employee meals. Once a food and beverage operation determines the dollar amount of feeding employees, it can subtract that amount from the food cost and put it into the employee benefits expense of the labor cost component of the income statement. When a business provides meals to its employees, the price of the meals is an employee benefit.

The Cost of Separate Issues

Separate issues are food requisitioned from the storeroom. This method works well when a food and beverage operation has an employee cafeteria, as you might find in a large hotel or resort. When the kitchen requisitions food from the storeroom, the food is treated like a purchase.

The employee cafeteria kitchen area takes all the food they started with (beginning inventory) + everything they requisitioned to feed employees, minus whatever they had left for employee meals at the end of the month (Ending Inventory).

It is common, especially in more extensive food & beverage operations, to transfer products from one department or cost center to another. For instance, the cost of food items such as lemons and limes used to make alcoholic drinks are transferred out of the food inventory (food cost) and transferred to the bar inventory (beverage cost) to produce beverages that generate beverage sales. When the kitchen uses alcohol to create menu items to generate food sales, the cost of the alcohol is transferred from beverage inventory (beverage cost) to food inventory (food cost).  

Gratis to the bar is another transfer from food inventory (food cost) to beverage inventory (beverage cost). Gratis to the bar are those food items such as salty snacks or complimentary appetizers provided to bar patrons to help generate beverage sales. The food cost was transferred to the beverage department since these items were not used to create food sales but instead beverage sales. 

Transfers also take place for promotional events. If this month a food and beverage operation donated $2000 of food to a charity fundraiser, or if the business participated in a wedding promotion where they provided food samples for free to the participants of the show, we used $2,000 worth of food for marketing purposes, and not food sales. The cost of all this food is transferred from food cost and goes into marketing, marketing, and promotions on the income statement.