I am under the impression that there are many people operating food businesses who do not calculate their product costs on an item-by-item basis. While I don’t have any hard cold statistics to confirm this impression (yet), I’m pretty sure it’s the case.
Many people enter into the food business because of their love of food, their fantastic recipes, or because they are phenomenal cooks.
It would be unusual to hear about someone getting into the food business because they adore management accounting.
For some reason, this lack of attention to monitoring product costs seems to be particularly noticeable in the food and beverage sector.
The reasons I hear most often from food people who don’t know how much it costs to produce their products can be paraphrased as follows:
- I don’t have time (my food business keeps me very busy).
- My accountant does it for me every year.
- My business is too small to calculate costs. I tried – but it’s too complicated.
Nevertheless, knowing your costs is vital to the success of your food business. The information will enable you to determine which products generate the highest profits and, in some cases, identify products that sell at a loss. Another positive outcome is the ability to anticipate the effects of your vendors’ price increases. Your product costs should be a factor when setting prices.
(Coming up: Refuting reasons for not knowing product costs.)