Final answer:
An error in the physical inventory or inventory value can affect an operation’s food cost percentage. If there is an overestimation, it can lead to a higher food cost percentage, while an underestimation can lead to a lower food cost percentage.
Step-by-step explanation:
An error in the physical inventory or inventory value can affect an operation’s food cost percentage in several ways. Firstly, if there is an overestimation of the physical inventory or inventory value, it can lead to a higher food cost percentage. This is because the cost of goods sold (COGS) will be lower than the actual value, resulting in a higher food cost percentage. Conversely, if there is an underestimation of the physical inventory or inventory value, it can lead to a lower food cost percentage. This is because the COGS will be higher than the actual value, resulting in a lower food cost percentage.
Let's say a restaurant has $10,000 worth of inventory, but due to an error, it is recorded as $12,000. The cost of goods sold for a given period is $5,000. If we use the incorrect inventory value, the food cost percentage would be 50% (COGS of $5,000 divided by incorrect inventory value of $12,000). However, if we use the correct inventory value of $10,000, the food cost percentage would be 50% (COGS of $5,000 divided by correct inventory value of $10,000).