Food Cost | 10 mins read

Food Cost- How to Calculate Food Cost Percentage

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Hanh Truong

By Hanh Truong

Introduction to Food Cost

With the right menu prices, restaurants can generate enough profits to thrive and grow. But since demand and supply consistently fluctuate, restaurant owners need to be diligent with their prices. According to reports from the Bureau of Labor Statistics, menu prices increased by 3.7% from 2020 to 2021. This can be attributed to supply chain disruptions and shifts in consumption caused by the COVID-19 pandemic.

However, it is important that restaurants do not overinflate their prices because customers may lose interest in paying for the item. To find the right pricing for each offering on the menu, management teams need to understand their food cost. By identifying their expenses, they can find a balance between covering costs and keeping customers.

What is Food Cost?

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Food cost is the ratio of ingredient costs and the revenue that the restaurant generates from those ingredients. Essentially, it is determined by comparing food inventory expenses to food sales. Generally, restaurant owners refer to their food costs to identify appropriate and profitable prices for their menu dishes. Some restaurateurs will calculate their Cost of Goods Sold (COGS), instead. With COGS, managers must measure the total costs of creating a dish, including the napkin, garnishes, and seasonings.

Restaurant owners need to understand their food costs because it provides insight into their profitability. According to 2019 statistics, 52% of restaurant executives stated that operating expenses and food costs were their top concerns. To run an efficient and successful eatery, managers need to monitor their spending and ensure they are generating revenue.

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Food Cost Per Serving Formula Explained

Also known as food cost per menu item, food cost per serving refers to the cost of ingredients for one dish. To find the cost per serving, restaurant managers need to find the sum of all ingredients for one serving.

  • Food Cost Per Serving = Sum of Ingredient Costs for 1 Dish
The following is an example of how to uncover a restaurant's cost per dish.

Example of How to Find the Food Cost Per Serving

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Consider, for example, a New York steakhouse and their specialty prime rib. The dish contains a 10-ounce prime rib, 1 potato, 3 tablespoons of sauce, and 5 stalks of asparagus. Typically, the costs for these ingredients can be broken down as follows.

  • Prime rib costs $1.50 per ounce = $15 (for 10 ounce)
  • Potato costs $0.30 for one = $0.30 (for one)
  • Sauce costs $0.10 per tablespoon = $0.30 (for 3 tablespoons)
  • Asparagus costs $0.25 for one stalk = $1.25 (for 5 stalks)
To find the food cost per serving, managers must add each of the ingredient costs together.

  • Cost per serving = $15 + $0.30 + $0.30 +$1.25
  • Cost per serving = $16.85
This means the ingredients used to cook and serve the specialty prime rib cost $16.85.

What is Food Cost Percentage and Why is it Important?

Food cost percentage is a number value that restaurants calculate to identify how much money they are spending on inventory. The average food cost percentage that full-service and quick-service restaurants often aim for is 28-32%. Full-service eateries refer to establishments where food is brought directly to a dining guest's table. Quick-service restaurants are known as fast-casual eateries and typically provide counter-service or drive-through service.

Calculating food cost percentages is a great way for restaurant management teams to track their spending and profits. The value can be calculated by dividing the Cost of Goods Sold of the dish by its total revenue or sales. The food cost percentage also helps managers determine whether an individual menu item is profitable.

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Importance of Food Cost Percentage

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Finding food cost percentages is important because it enables restaurants to optimize their profits. The ratio provides visibility into new ways that eateries can maximize their earnings and safeguard their bottom line. The following are other key factors of finding food cost percentage.

  • Make Smarter Spending Decisions - By understanding the costs of making each dish, restaurateurs can ensure they are purchasing ingredients at the best value.
  • Promote the Right Menu Items - The food cost percentage will highlight which menu items generate the most profits. Restaurants can then use this information to their advantage and promote these items on the menu. They can also create marketing campaigns and promotions that center around these dishes. This will help boost profit margins and sales for the product.
  • Experiment with New Recipes - Restaurant owners can craft new recipes or innovate their existing dishes based on their food cost percentages. By staying within budgets, restaurants can safely experiment and make new dishes that will guarantee profit maximization.

Good Food Cost Percentage

Generally, good food cost percentages will vary for each establishment, depending on its location, consumer base, and offerings. Overhead and operating expenses, such as rent and utilities, also impact food costs. However, many restaurant operators and owners will try to maintain between 28-32% of revenue. This is the average food cost percentage for most restaurants.

Restaurant owners should do their due diligence and calculate their food costs to ensure their bottom line is protected. By identifying an eatery's exact food cost percentage, owners can determine the best prices for their menus.

How to Calculate Food Cost Percentage

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To effectively calculate food cost percentage, managers should follow these steps.

1. Create a List of Ingredients - To begin, restaurant owners or managers need to list all of the ingredients and food supplies they received at the start of the week.

2. Note the Sum of the Starting Inventory - List the dollar value of each ingredient and food supply, as well. Then, add them all together.

3. Track Purchases - Restaurant staff should make note of any inventory replenishments throughout the week.

4. Do Inventory at the End of the Week - At the end of the week, managers should take inventory of all their ingredients and supplies again. They should make note of the dollar value and total sum of inventory.

5. Find the Total Food Sales - Restaurants with a modern point-of-sale (POS) system can find their total food sales per shift using the data analytics feature.

6. Use the Food Cost Percentage Formula - Finally, to find the food cost percentage, managers must take the sum of the beginning inventory and add any additional purchases made throughout the week, and then subtract it to the ending inventory. The total from this is then divided by food sales.

The Food Cost Percentage Formula

To find the food cost percentage, restaurants can use the following formula.

  • ((Beginning Inventory + Purchases) - Ending Inventory) / Total Food Sales
Eatery operators and owners can effectively use this formula by finding each of the individual values. The following is an example of how to use the food cost percentage formula.

Example of How to Use the Food Cost Percentage Formula

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Take, for example, an ice cream shop that creates its products in-house. For the start of week 1, they have an inventory of cream, flavoring, and assorted toppings. The sum of their starting inventory is $11,000. Throughout the week, they experience more sales than expected for their strawberry ice cream. The manager puts in an order on Wednesday to refill their strawberry toppings, which amounted to $6,000.

At the end of week 1, the ending inventory is $15,000. According to the shop's POS system, their total food sales were $8,000. With these values, the ice cream shop manager can plug into the food cost percentage formula. The following are the calculations.

  • Food cost percentage = ((11,000 + 6,000) - 15,000) / 8,000
  • Food cost percentage = 17,000 - 15,000 / 8,000
  • Food cost percentage = 2,000 / 8,000
  • Food cost percentage = 0.25 or 25%
This means that the ice cream shop's food cost percentage is 25%. Essentially, 25% of their revenue is allocated towards paying for ice cream ingredients.

How to Calculate the Ideal Food Cost Percentage

To gain better insight into spending, restaurants can compare their actual food cost to their ideal food cost. To find the ideal food cost, management teams can use the following formula.

  • Ideal Food Cost Percentage = Total Food Costs / Total Food Sales
For example, if the ice cream shop's total food costs were $2,000 and their total food sales were $8,000, their ideal food cost percentage would be 25%. Since the store's actual food cost is 25%, this means they are on track and are spending as expected.

How to Optimize Food Cost Percentage

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In the case that a restaurant's actual costs are higher than the ideal value, owners should find ways to maximize their profit margins. The following are some best practices to optimizing food cost percentage.

  • Raise Menu Prices - Adjusting menu prices will help restaurants generate more profit. However, this should be done carefully because raising prices too high can cause customers to be dissatisfied. Eateries should also be transparent with their guests and explain why their prices are increasing.
  • Find Less Expensive Vendors - Restaurant management teams should research different vendors and find one that can offer goods within a profitable price range.
  • Reduce Portion Sizes - Sometimes, food costs are high because restaurants are using too many ingredients at once. Take notice of dishes that come back half-eaten and try to reduce the size. This will reduce ingredient costs and minimize food waste, as well.
  • Use Carbs - Carbohydrates, such as potatoes and pasta, can be purchased at a low price. Owners can create recipes based on these ingredients and stock them in bulk.
  • Be Cautious of Freebies - Complimentary bread, butter, and other amenities can increase food costs, especially if the restaurant already has a high food cost percentage.
  • Be Strategic With Promotions - Promotions, such as discounts, loyalty programs, and sales should be used sparingly to prevent missed profits.
  • Change the Menu Based on Seasons - Depending on the season, certain food items and products will be more expensive. This is apparent with seafood, fruits, and vegetables. Restaurant menus can be regularly updated to reflect new seasons. This way, menu items will only include ingredients that are in season. Not only will this lower food costs, but customers will be able to enjoy dishes that are trending and popular.

How to Engineer Your Menu With Food Cost Percentage

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By calculating and understanding food cost percentages, restaurants can effectively engineer their menu and pricing. For example, operators and managers can identify the most profitable dishes on their menu. They can then highlight these items by placing them prominently on the menu or by promoting them in advertisements. Customers will see these items and will be more likely to order them. This will boost sales and increase the restaurant's profits.

Additionally, the food cost percentage will provide visibility into menu items that are least profitable. Business owners can then strategize new ways to improve the performance of these dishes. They can also decide to lower the menu pricing, innovate the recipe, or remove it from the menu entirely. This will help the eatery cut costs and safeguard its bottom line.

Conclusion to Food Cost

  • Food cost refers to the ratio of ingredient cost and the revenue that is generated from sales. Identifying this value enables restaurant owners to determine their profitability.
  • Food cost can be calculated using the food cost percentage formula. To gain better insight into a restaurant's financial standing, managers should uncover their ideal food cost percentage and compare.
  • To optimize food costs, restaurants can follow various best practices, such as adjusting menu prices, employing promotions, and reducing portion sizes
  • By effectively finding and using the food cost percentage, restaurants can engineer their menu and prices to maximize profit margins.

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