F&B inventory and wastage

Burying abnormal spoilage inside cost of sales hides operational failures (equipment breakdowns, poor forecasting) from management and masks true gross margin, while overstated inventory carrying values on near-expiry stock overstate assets and understate expenses in the period the loss actually occurred.

Is wastage tracked and coded by cause (spoilage, over-production, prep loss, staff meals, comps) rather than lumped into a single cost-of-sales variance? Is the count frequency appropriate given the shelf life of the items involved? Is any wastage rate materially above the entity's own historical benchmark, and if so, has management investigated why?

1. Establish a normal wastage benchmark by category (prep loss, portioning, staff meals, comps, routine spoilage) based on historical experience and industry norms.
2. At each period-end (or more frequently, given shelf life), compare actual wastage to the benchmark.
3. Treat wastage within the normal benchmark as an inherent cost of producing inventory, absorb it into cost of sales.
4. Identify wastage above the benchmark or arising from an identifiable abnormal event (equipment failure, gross overproduction, theft) and expense it separately as an abnormal loss, not as inventory cost.
5. Perform a lower-of-cost-and-NRV test at each reporting date, and more frequently for high-risk/near-expiry items, comparing carrying cost to expected selling price less costs to sell (or expected disposal recovery, which may be nil).
6. Write down inventory immediately when NRV falls below cost; reverse write-downs in a later period only if NRV recovers and the item is still on hand.

Measure inventory at the lower of cost (using a consistent cost formula, weighted average is most common for F&B given commingled perishable stock; FIFO where batches are tracked) and net realizable value. For near-expiry items, estimate NRV as the discounted selling price expected (e.g., end-of-day markdown) less remaining costs to sell, or nil if the item will be discarded or used for staff meals with no recoverable value. Abnormal wastage is measured at the cost of the inventory destroyed/lost (not its selling price) and expensed in the period identified. Reassess the normal wastage benchmark periodically using rolling historical data so it remains a meaningful cutoff.

Disclose the inventory cost formula used (weighted average/FIFO); disclose the amount of inventory recognized as an expense (cost of sales) during the period; disclose the amount and nature of any write-downs to net realizable value recognized as an expense, and reversals if any; disclose separately, where material, abnormal wastage/loss amounts and their cause; disclose the accounting policy distinguishing normal from abnormal wastage.

• Not distinguishing normal from abnormal wastage, which buries operational inefficiencies inside cost of sales and hides them from management
• conducting stock counts too infrequently given short shelf life, leading to unreliable wastage and NRV figures
• failing to write down near-expiry or slow-moving perishable stock to NRV before it is actually discarded
• using a single blended wastage rate across dissimilar outlets or menu categories instead of category-specific benchmarks
• recognizing wastage on a cash/disposal basis rather than when the loss is identified.