Calculating how much the food you sell costs you to sell is a very important practice in running a profitable restaurant. Knowledge is power, and knowing your food cost compared to your sales and your ideal food cost is very empowering information. By figuring your food cost percentage, you have an early warning system to alert you to potential theft and waste.
Before we get into the process for calculating food cost, it’s good to talk about how often this should be done. I suggest calculating your food costs at the end of every week. If you happen to have a cost control issue, it’s best to know as close to the time the occurrence happened as possible. The farther you get away from an occurrence that caused a cost problem, the harder it is to determine what that occurrence was.
You are going to need to track a few pieces of information to calculate your food costs. You will need to know:
- How much is my starting inventory for the period I am evaluating?
- How much is my ending inventory for the period I am evaluating?
- How much food did I purchase during that period?
This is all the information necessary to calculate actual food costs for any given period. How long that period is depends on you. As I said, I suggest evaluating food costs every week.
In addition to knowing your actual food costs, you’ll need a couple other pieces of information to compare the actual food cost to:
- What is your ideal food cost for the period being evaluated? (we’ll discuss how to calculate ideal food cost also)
- What are your total sales for the period being evaluated? (you’ll also need to track your sales by item to calculate your ideal food cost)
Now let’s go one step at a time to get these powerful pieces of information.
Calculating actual food costs
Calculating your actual food cost starts by taking an inventory of all your food items at the same time every week. Choose one time as the starting and ending time for all your reporting for that week. I suggest ending your reporting after the end of business on Sunday, but before the beginning of business on Monday. Inventory levels are usually at their lowest on Sunday, so inventory takes less time to count and calculate.
The inventory that you take every week will serve as the starting inventory for the week to follow, but also the ending inventory for the week that is concluding. It will be used in both capacities to calculate food costs depending on whether the calculations are for the past week or the coming week. By counting your inventory, and using a spreadsheet to multiply out the value of all your items on hand, you will come up with a dollar amount that shows you how many dollars in inventory you have on hand.
This starting inventory is the beginning to the food cost equation. The equation looks like this:
starting inventory + purchases - ending inventory = cost of food for period
By taking a physical count of all your food on hand, you’ll have the starting inventory and the ending inventory parts to this equation. From there, you simply have to track your purchases within that time period. For this number, you’ll use dollar amounts from invoices received in the period being evaluated. It does not matter to the equation when that food is actually paid for.
Start with an inventory you took on the Sunday before a week started. Add all the dollar amounts for food received during that week. Subtract the amount of your inventory counted on the following Sunday. The resulting number is the cost of goods sold, or food cost, for the week.
Calculating ideal food costs
Ideal food costs are the amount of money the food you sold during a given period should have cost you. Compare your ideal food cost to your actual food cost to help you identify when there is a breakdown in your system. If your actual food cost goes up for a period, your ideal food cost should go up too. If it doesn’t, then you’ve just identified a problem, possibly theft or waste. If your ideal food cost does rise with your actual food cost, then you know your food cost is high not because your staff did something wrong, but because of the sales mix of your menu items for the period. This is important to know, because most high food cost menu items also contribute more gross profit dollars to your bottom line, so a high food cost for that period is not be a bad thing. The only way to know whether it is bad or good, is to compare it to your ideal food cost.
Here are the equations to figure your ideal food cost:
recipe cost for menu item × number of item sold = ideal cost for item
ideal cost for all items added together = ideal food cost
In a perfect world, your ideal food cost should match your actual food cost exactly. Since it’s impossible to perfectly measure every piece of food, or track every piece of waste, you will see some variance between your actual and ideal food costs. You have to decide how large a variance is acceptable. I believe you should expect to keep your actual and ideal costs within .5% of each other. Variances larger than this tend to point to problems in your system. These problems could include theft, waste, under-portioning, over-portioning, poor prep procedures, bad food receiving procedures, or other problems.
What we haven’t covered yet is the “percentage” part of food costs. I’m sure you’ve noticed that other restaurateurs express their food costs in a percentage. I also suggested your ideal and actual food costs stay within .5% of each other.
Food cost percentages
A food cost percentage is an expression of what your food cost you to serve compared to the sales you made during the period you’re evaluating.
The simple formula for figuring this percentage is:
actual food cost ÷ total food sales = actual food cost percentage
ideal food cost ÷ total food sales = ideal food cost percentage
The resulting percentage is the percent of your sales that go to pay for the food you sold, whether it’s actual or ideal. These percentage make it easy for you to compare your actual and ideal costs to each other, but also make it easy to compare food costs from different weeks, months, quarters or years to each other.
I hope this explanation helped you learn how to calculate your food costs. Calculate them every week, along with your ideal costs, and you’ll find that the extra attention you are paying to your costs will open your eyes to many opportunities to save money in your restaurant or food service.
Brandon O’Dell
O’Dell Restaurant Consulting
www.bodellconsulting.com
blog.bodellconsulting.com
brandon@bodellconsulting.com
Office: (888) 571-9068
9 responses so far ↓
1 LA WANDA // Jun 11, 2008 at 11:25 am
VERY INFORMATIVE.
2 alberto // Jun 24, 2008 at 4:52 pm
How about overhead/ops expenses. A/C, gas, electricity, water etc. How are they calculated and how do they become part of the food transofrmation cost
3 admin // Jun 26, 2008 at 10:37 am
Great question Alberto. Failing to consider overhead costs when pricing a menu is the fatal flaw that many operators make, and one of the biggest contributors to the high failure rate of restaurants in my opinion.
By pricing menus based simply on food costs, owners and chefs are ignoring the other 70% (more or less) of their financial picture.
The truth is, as far as pricing is concerned, food cost percentages shouldn’t even be a consideration. Cost percentages are management tools, not pricing tools. Cost dollars on the other hand ARE part of the pricing process, but not the primary consideration.
A good pricing formula is one that factors in not only the cost of the food, but the cost of serving each customer. I refer to this cost as the needed gross profit per person. This is the amount of money you need to collect from every person who walks through your door to cover all your overhead in addition to your profit. Only by considering both
Product cost
+
Needed gross profit
can you expect to make money.
This method, tempered with market research to make sure you’re staying within your market’s price points, will give you pricing that you can feel confident is correct, fair, and will promote increasing average purchases.
4 Ryan's Restaurant Marketing // Aug 11, 2008 at 1:56 pm
A very informative and detailed article. But there are so many other things to consider, like employee wages, advertising if you get it, etc. Great tips and advice though.
5 Michael Fietsam // Oct 27, 2008 at 2:18 pm
Great explaination of food costs and how they are figured. What I find is that most restauranteurs do not truly take into consideration the actual plate costs of a menu item prior to pricing it on their menu. They also don’t look at the ratio of sales per menu item. I find that many fall into the trap that they want a specific food cost percentage and so they mark their menu items accordingly. When evaluating menu pricing while consulting, I often make recommendations based on the popularity of the item sold and the profitability of the menu item. What really matters is the profit to the bottom line. For instance a steak dinner that has a food cost of $9.00 and is sold for $22.50 has a food cost of 40%. A pasta dish that has a food cost of $2.84 and is sold for $18.95 has a food cost of 15%. The bottom line profit of the steak is $13.50 and the bottom line profit of the pasta is $16.11. The restauranteur is making more profit on the pasta but often asks the server to push the steak so that the guest check will be higher. This is the same with alcohol sales. The restauranteur often asks the server/bartender to upsell to a premium brand of alcohol, but doesn’t usually price the premium brand high enough to generate more bottom line profit. So remember, when figuring food costs you must take into consideration many factors not just how much food you have onhand at the beginning of the week and then how much is left at the end of the week.
6 mike // Mar 29, 2009 at 3:14 am
here’s one for you.
i recently started as a sous chef at this joint. we’re owned by a LARGE manufacturing company, and we’re under an umbrella with a golf course, hotel, etc.
since being here, our food cost has risen from low 33.X to over 35.5%.
the fella i replaced had been here for three years. when he trained me on our inventory, he said ” you just copy the cost column from the new month to the old and update the amount.”
NOTHING, as far as i can tell, had it’s cost changed on the inventory sheets. and we’re talking about 900+ lines of items and over 35k in inventory.
so when i started, i started grabbing all of my invoices for the month and updating costs of EVERYTHING i ordered for the last month. i also started re-calculating the cost of certain items that we make in bulk (ie - 30 gallons of tomato sauce) that hadn’t been adjusted. i know, b/c the only paper copy of anything he had saved was from the lady that was here before they hired him in 2004.
you’d be shocked how many of the prices were still the same from 04 to 08 when i started.
anywho, most things, as you an assume, had increased in price.
BUT they haven’t had a menu price increase in the nearly 12 years they’ve been open.
my boss is on my case every day, concerned we’re throwing away everything we get in, or someone is walking out with striploins, ribeyes, psmos, etc.
i’m trying to tell him that since the cost of our groceries has risen, and we’re selling food for the same price as yeas gone by, and sales are DOWN and we’re running a labor cost through the roof, that of course, the food cost is going to go up.
i went through and compared prices of items in 04 to now, and we’re talking increase in prices of 25-75% on MOST items.
he is convinced i can’t do simple math, but refuses to do these inventories with me, or even audit me if he thinks my counts are off.
HOW do you handle something like that?
i’m learning along the way, but have a general understanding of food cost…they hammered that home in culinary school years ago.
he even made the comment that “the inventory doesn’t have that much to do with how the accounting department figures our food costs.”
*i’m shaking my head*
he says they ran a 30.X % food cost for years, and then when i started it shot through the roof.
i’m trying to explain to him, if i come in, and your inventory gets a shot in the arm and is accurate, the price we’re selling items for is the same as before i started, and food sales are marginally down from last year, or course our food cost is going to go up.
but it’s getting me nowhere fast but unhappy with this job.
any questions/comments/input would be appreciated.
7 admin // Mar 29, 2009 at 4:57 am
Thanks for sharing your experience Mike.
You might be in a no-win situation. Your boss doesn’t sound like he understands the food cost on the P&L if he says the inventory doesn’t have much to do with that number. The inventory has everything to do with that number. It’s the starting point and ending point.
If the inventory item values were not updated for a long period of time, then you should have seen a fairly large decrease in your food cost after the first month you adjusted the inventory item values. Did this happen?
The food cost percentage being high by itself doesn’t necessarily mean there is even a problem. If the food cost is high because of an unusually high sales mix of high cost, high gross profit menu items, then not only would the food cost be high, but the gross profit used to pay everything else would be high too. This would be evidenced by a lowering of some of your other key costs in relation to sales, such as labor.
There could be some validity to your bosses suspicions about theft. You have to have a system in place to detect theft and waste. Calculating “ideal food costs”, as it is explained above, will do that. A low or high food cost means nothing unless you know what your ideal food cost should have been. If you start a sytem to calculate your ideal food cost, keep updating your prices on your inventory and keep figuring your actual food cost, you can then compare the two weekly until everything is under control.
Even though your boss may not completely understand food costs, you should be able to make him understand ideal food costs. After a couple months of comparing ideal and actual food costs, he should begin to see that the high cost is not due to theft or waste (if it really isn’t). Your ideal and actual food costs should vary by less than 1% ideally. The closer, the better. The difference between the two is either theft, waste, or miscalculation.
8 cynthia // May 25, 2009 at 9:42 pm
I am the accountant for a restaurant. The new chef and I are having a difference of opinion on what constitutes a “food item” that should be included on the monthly inventory. I think anything that goes on the plate should be included in inventory. We garnish with orchids and serve our burgers with squeeze bottles of ketchup/mustard on the table. I think orchids and squeeze bottles of condiments are food items. What is your opinion. Thank you.
9 admin // May 26, 2009 at 12:57 am
Your chef needs to know that it is not his decision what gets included into his cost of goods sold. It is the federal tax authority’s decision.
All food stuffs that are purchased tax-free, including salt and pepper shakers, fry oil, condiments and every other edible ingredient, have to be included in your cost of goods sold. The only reason you are not charged sales tax on your purchase of these items is because the federal and state government realizes you are purchasing them for resale, and goods purchased for resale are not subject to sales tax because they are taxed when they are resold.
Because the items you mentioned as well as all other foodstuffs are not taxed when you purchase them, they must be recorded in your cost of goods sold for your tax records. Anything that is included in your cost of goods sold must be inventoried if you are taking inventory.
Items that do not have to be included in your cost of goods sold that you pay sales tax on even though you might buy them from the same vendor as your food include paper goods, chemical goods, equipment and anything other than food. These items can have their own expense line, though some quick service restaurants do include paper goods in their cost of goods sold.
The chef’s recipes should include every food item, included the oil he uses in the pan or for frying, and any condiments, rolls, butter, etc. that the guests are offered. Every entree item’s recipe worksheet should have a line for these costs. The way to average what you spend on these items is to add up all these purchases for a period, say a month, then divide that by how many entrees you sold in that month. This will yield a cost per entree that needs to be included in the recipe.
The chef is concerned that including these items that he sees he is not getting sales on, will increase his cost of goods sold. If he is being bonused based on his ability to maintain a certain cost percentage, then he is being incentivized to do exactly what he is doing, look for ways to decrease a percentage. If that is the case, this policy is hurting not only the chef, but the business as well.
The business needs a procedure for calculating an “ideal” cost of goods sold in addition to the “actual” cost of goods sold that is already being done. The chefs performance can then be judged based on how close the actual cost of goods sold is to the ideal cost of goods sold. Only then can you know if the chef is doing a good job. Simply trying to keep a cost percentage number down isn’t helping. Often, a high cost percentage is the result of the restaurant selling more high cost items, such as steaks, than normal. At first glance, this higher food cost would look like a bad thing, but in reality, that higher food cost is the result of something that is also delivering a high gross profit because there is also a higher dollar markup on that steak to go along with the higher food cost percentage.
By incentivizing the chef to keep the food cost percentage low, you encourage he and other employees to offer and sell lower cost items that also deliver lower gross and net profits. That’s bad for the bottom line.
I suggest providing the chef, and the owner(s) with not only our correspondence, but also a couple other articles of mine, including the following:
How do I figure my food cost (The article we’re on right now which details the procedures for calculating ideal food cost)
and
Pricing food: Why you’re doing it wrong and how to fix it
Incomplete inventory procedures and incorrect pricing procedures are usually the rule in most food services, not the exception. Most restaurants do it wrong. This then gets passed on as employees leave for other food services.
I do offer telephone consultations to help train owners and managers on proper procedures. If I can be of assistance, please let me know. The first 30-minute telephone consultation is free.
Brandon O’Dell
O’Dell Restaurant Consulting
(888) 571-9068
brandon@bodellconsulting.com
http://www.bodellconsulting.com
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