How To Calculate Food Cost | 5 mins read

A Guide on How to Calculate Food Cost

a guide on how to calculate food cost 1618432381 5534
Hanh Truong

By Hanh Truong

Introduction to Food Cost

Cost management is a crucial component of running a restaurant. Along with rent, utilities, and marketing, restaurateurs spend most of their profits on their food and beverage inventory. According to industry statistics, the average eatery allocates 20-40% of its revenue to food. Therefore, restaurant owners need to understand how to calculate food cost. By actively tracking this cost, management teams can improve their menu prices, save money, and make smarter business decisions.

How to Calculate Food Cost

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Food cost refers to the ratio of ingredient cost to revenue produced from food sales. Typically, this metric is measured as a percentage. Restaurant management teams will generally calculate their food cost percentage to gain insight into their business's profitability.

Calculating food costs is important because it enables managers to establish advantageous menu prices. This is helpful for all types of food service businesses, from a large-scale bar to a start-up food truck. It also ensures accurate bookkeeping, as executives proactively track their sales and spending.

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Food Cost Calculator

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To effectively pinpoint food costs for a restaurant business, management teams can use the food cost formula.

  • Food Cost = (Beginning Inventory + Purchases - Ending Inventory) / Food Sales x 100
Restaurants can follow these key steps to properly use the formula.

  1. Calculate Inventory Usage
Inventory usage refers to how many ingredients and food supplies the restaurant used for a given period. Managers can find this metric by solving the first part of the food cost formula. This involves conducting an inventory count at the beginning of a period and tracking new purchases. Restaurants will also need to quantify their stock levels at the end of the period.

For example, an eatery began its month with $10,000 of ingredients. Throughout the month, they made $4,000 in inventory replenishment purchases. By the end of the month, they have $11,000 in inventory. After plugging these values into the formula, the calculations would be the following.

  • Inventory Usage = Beginning Inventory + Purchases - Ending Inventory
  • Inventory Usage = 10,000 + 4,000 - 11,000
  • Inventory Usage = 14,000 - 11,000
  • Inventory Usage = 3,000

This means the eatery used $3,000 worth of ingredients and food supplies for the month.

2. Identify Total Food Sales
Next, managers need to find their total food sales. A point-of-sale (POS) system will typically have a data analytics feature that will provide this information. Modern POS software platforms will have weekly, monthly, and yearly sales data reports. Management can also calculate their sales by manually multiplying the number of products sold to its menu price.

For example, the eatery sold 60 plates of steak for $55 in one month. According to calculations, their sales for the dish would be $3,300. The restaurant should do this calculation for all their products and add them together to find their total sales.

3. Plug Into the Food Cost Formula
At this final stage, restaurant management teams will have gathered all the necessary metrics. This means they can plug the values into the food cost formula. Following the previous example, the eatery determined that they made $5,000 in total sales for the month. Their calculations would look like the following.

  • Food Cost = (Beginning Inventory + Purchases - Ending Inventory) / Food Sales x 100
  • Food Cost = 3,000 (Inventory Usage) / 5,000 (Food Sales) x 100
  • Food Cost = 0.6 x 100
  • Food Cost = 60%
The establishment's food cost is 60%, meaning the company spends about 60% of profits on food and beverages.

Actual Vs. Ideal Food Cost

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When using the food cost formula, the resulting percentage is considered the restaurant's actual food cost. This is because the calculations are based on accurate and real sales and inventory data. Many restaurants, however, will find their ideal food cost to gain better insight into their financial standing.

Ideal food cost is a theoretical measurement that does not use real-time information. It also does not reflect inventory losses, such as theft, food waste, shrinkage, or spoilage. Essentially, the ideal food cost is what a restaurant's food cost should be in a perfect world.

To find ideal food costs, managers must determine how much they spend to make each menu item. Then, multiply this cost by the number of food sales in a given period. Finally, add the ideal cost of each menu offering to find the ideal food cost for the time period.

Restaurant accountants and leaders should find their ideal food cost and compare it to their actual food costs. This will highlight whether or not the company is achieving profit goals. In the case that their actual costs are high, they can strategize new ways to lower their spending.

Tips to Lower Food Costs

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The following are best practices that restaurant executives can implement to reduce their food spending.

1. Increase Menu Pricing - Restaurants can slowly increase their menu pricing to offset food costs. Managers should be transparent about their price increases to avoid dissatisfying customers.

2. Innovate the Recipe - If certain ingredients are causing food costs to rise, restaurant managers should consider changing the recipe. This entails removing an ingredient or substituting it with a less expensive alternative.

3. Reduce Portion Sizes - If certain dishes often have large amounts of leftovers, the eatery should reduce the portion size. This will allow kitchen staff to use fewer ingredients and will minimize food waste, which is sustainable in the long run.

4. Choose Cost-Efficient Vendors - Businesses should do their due diligence and find vendors that are within their spending budgets. Managers should conduct industry research, as well, to identify the best market price for ingredients.

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Key Takeaways to Food Cost

  • Food cost refers to how much a restaurant spends on its food and beverage inventory.
  • Foodservice businesses of all sizes should be proactive in determining their food cost because they can gain insight into their profit margins and menu prices.
  • To find food costs, managers should use the food cost percentage formula. They should then use this value and compare it to their ideal food cost to gauge their financial standing.
  • If food costs are high, restaurants should consider cost-cutting best practices, such as increasing menu prices and changing dish recipes.

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