Theoretical Cost and Usage - FAQs

Overview:

We are often asked how are the theoretical cost of sales and the theoretical usage from sales calculated in COGS-Well.  Or, what happens to the theoretical reporting if I change a Recipe Item throughout a reporting period?  COGS-Well calculates the theoretical usage from sales a little differently than we calculate the theoretical cost of sales so each method is explained below. 

The Theoretical Usage from Sales Calculation:

Theoretical usage for every ingredient (Inventory or Combined Item) is calculated and stored each time a sales mix is imported from your POS. Your sales mix is typically imported once per day. : Theoretical usage from sales is used in reports such as the "Inventory Usage Variance" and the "Item Theoretical Usage". 

1. The formula starts by importing the sales mix from your POS system. 
2. It then looks at the number of times each Sales Item was sold and the recipes for each Sales Item.   
3. It next looks at the ingredients for each Sales Item recipe (and at each Recipe Item that is used as an ingredient in a Sales Item), along with the portion size for each ingredient (called the Recipe Unit quantity In COGS-Well).  
4. The formula then factors in each ingredient's yield (if yields are being utilized) to determine how much of the ingredient will theoretically be used each time that Recipe Item is sold. For example, if a recipe for a Sirloin Steak Sales Item has 10 weighted ounces of a Sirloin Inventory Item, and the yield is 70% for the Sirloin Inventory Item, then each time the Recipe Item is sold, 14.29 weighted ounces of the Sirloin Inventory Item is theoretically used (10 divided by 70%).
5. Next, the theoretical usage for each ingredient (Inventory or Combined Item) is calculated based on the number of times each Sales Item was sold. For example, if the Sales Item Sirloin Steak was sold 100 times, and the theoretical usage of the Sirloin Inventory Item (factored for yield) is 14.29 ounces, then the theoretical usage for the Sirloin Inventory Item is 1429 ounces (14.29 X 100) or 81.31 pounds.  
6. The theoretical usage for each ingredient (Inventory or Combined Item) is then stored in your COGS-Well database. Normally, this storage occurs daily because the sales mix is imported from the POS once per day. 
7. For theoretical usage reporting, when the starting and ending report dates are selected, COGS-Well will total and report each ingredient's theoretical usage based on the stored theoretical usage totals that fall within the report's date range. 
8. If you change the ingredients in a Recipe Item, and if Recipe Versioning is used, the theoretical usage calculations over a reporting period will use the recipe version that was in effect for each day in the selected date range for the report. If an ingredient was used in an earlier version of a Recipe Item and later removed, it will still show up on the reports. Please click this link for more information on Recipe Item Versioning. 
9. If you discover an error for an ingredient in a recipe and you fix it without creating a new recipe version,  COGS-Well will know to recalculate the theoretical usage for that ingredient using the current recipe. Recipe ingredient changes that are made without using Recipe Versioning are treated by COGS-Well as errors in the recipe that have been corrected.   

The Theoretical Cost of Sales Calculation:

The Theoretical Cost of Sales for each Sales Item is calculated when you run a report that utilizes the theoretical cost of sales such as the "Theoretical Cost of Sales", "Theoretical Profit from Sales", or the "Menu Engineering" report. 

1. The formula starts the same way as it does for theoretical usage from sales by importing the sales mix from your POS system, looking at the recipe for each sales item, looking at the ingredients in each recipe, and adjusting for ingredient yields (if yields are utilized). 
2. The formula then calculates a theoretical cost for each Sales Item using your choice of either the "Effective Cost" or the "Weighted Average Cost" for its ingredients. Effective Cost uses the cost for an Inventory Item from the last time you purchased it. The Weighted Average Cost uses the weighted average cost of an Inventory Item over the date range you selected for the report.  Please click this link for more information on Effective and Weighted Average costs.  
3. The formula then multiplies the theoretical cost for each Sales Item by the total number of times it was sold, to determine a theoretical cost for each Sales Item and all Sales Items combined, for the selected date range of the report.  Most reports will be subtotaled by Sales Department, Category, and Group.  
4. For the theoretical cost of sales reporting, if Recipe Items are changed, and if Recipe Versioning is used, the theoretical cost calculations will use the recipe version that was in effect for each day in the selected date range for the report. For example, if margarine was substituted for butter in the middle of the reporting period, and if a new recipe version was created, COGS-Well will report the theoretical cost using butter for the days that have the butter recipe version and using margarine for the days that have the butter recipe version. Please click this link for more information on Recipe Item Versioning.
5. If you discover an error for an ingredient in a recipe and you fix it without creating a new recipe version,  COGS-Well will recalculate the theoretical cost for that Recipe Item using the current recipe. Recipe ingredient changes that are made without using Recipe Versioning are treated by COGS-Well as errors in the recipe that have been corrected. 
6. Theoretical costs are frequently shown as a percentage of sales. The percentage is calculated by dividing a Recipe Item's Cost by its sales price. Or, by dividing the theoretical cost for a Category or Group by the revenue from that Group or Category.  Please keep in mind that the sales figures used for these calculations are coming from your sales mix and therefore may not reflect adjustments that you make to the sales figures you utilize for your financial reporting. 
7. The reports that utilize the theoretical cost of sales each have a drop-down on the report parameters display that enables you to select Effective Cost or Weighted Average Cost when you run the report over your selected date range. We recommend using the Weighted Average. Please click this link for more information on Effective and Weighted Average costs.   

Variance Analysis:

Theoretical cost and usage can be compared to actual cost and usage to determine any variances. Please review this Cost and Usage Variance article if you would like to know more.