Actual vs. Theoretical Food Cost 101
We all know that tracking food costs is a must, allowing you to quickly identify supplier price changes, maintain accurate prime costs, and identify cost trends to make better business decisions. But for some operators, it’s important to go beyond simple food cost calculations and start tracking actual vs. theoretical food cost.
An understanding of actual vs. theoretical costs can drive down costs and boost profits, while providing a picture of your restaurant’s financial health and efficiency. Read on to learn more about the difference between these two costs, what actual vs. theoretical food cost variance is, and how to calculate and track variance using the right software.
Actual vs. Theoretical Food Cost: What Is the Difference?
Theoretical food cost is what your food costs should be for a period based simply on what you sold and the cost of those items according to the latest ingredient prices. It assumes zero breakage, shrinkage, or wastage.
To arrive at accurate theoretical food costs, you need:
- Accurate recipes that account for everything that goes into a dish
- The most recent ingredient prices for accurate recipe costs
- Exact sales figures you can obtain from a POS such as Toast
Actual food costs are your real food costs for a period based on what you sold and after you’ve factored in the product used, wastage, breakage, and shrinkage. Actual food cost will always be higher than theoretical food cost, as it includes more than just the cost of menu items.
Understanding Actual vs. Theoretical Food Cost Variance
The difference between actual and theoretical food cost is known as food cost variance, which is caused by several factors:
- Theft, or shrinkage, which is often more prevalent in restaurants that don’t have proper restaurant inventory management controls and systems.
- Food waste due to spoilage, miscalculated portions, food spillage, and refires. To learn more about these four factors that cause restaurant food waste and how you can track and reduce it, read this post.
- Inventory and accounting errors because of data input mistakes, e.g., your accountant recording the wrong ingredient price when capturing an invoice.
- Unaccounted for items, e.g., ketchup, fryer oil, and bread.
Food cost variance is a measure of how efficient a restaurant is at managing its food costs. A lower variance means the restaurant is more efficient at controlling costs.
This means that a restaurant with a higher actual food cost may still be more efficient at managing costs than a restaurant with a lower food cost as long as its food cost variance is lower. For example, if Jamie’s restaurant has an actual food cost of 33% and a theoretical food cost of 32%, their food cost variance is 1%. If Alex’s restaurant has an actual food cost of 32% and a theoretical food cost of 29%, Alex’s food cost variance of 3% – three times as much as Jamie’s!
Alex’s restaurant has more wastage, shrinkage, and/or spoilage than Jamie’s so, despite having a lower actual food cost, Alex is not as good at managing food costs.
How to Track Actual vs. Theoretical Food Cost Variance
To arrive at theoretical and actual food cost numbers, you must:
- Account for all purchases
- Take inventory counts
- Cost your recipes
- Track food waste
You can use manual methods to arrive at all these numbers. For example, you can cost your recipes, update stock sheets, and track food waste in Excel spreadsheets. For instance, tracking food waste requires that you simply create a sheet with columns for the waste ingredient, date, time, and employee on shift. You can then use that info to identify patterns, e.g., whether more waste occurs when a specific employee is working.
But these methods take time, are error-prone, and can cost you money. The better approach is to use the software that eliminates manual data entry, reduces mistakes, applies automation, and saves you heaps of time.
How Understanding Your Food Cost Variance Can Help You
Simply knowing your restaurant’s food cost variance is only half the battle. Once you determine your food cost variance, it’s time to focus your attention on identifying and improving inefficiencies. For example, if you know over portioning is a big issue, you could focus on using the correct recipe yields. Similarly, if lots of food is becoming spoiled, you may need to concentrate on ordering to par.
Determining the “why” can be tricky. Not only are there several factors that can cause variance, but there are many moving parts to running a restaurant that require your attention daily. Luckily, the right food cost and restaurant inventory management software provides visibility at a menu item level to help you pinpoint what’s causing the variance.
Using Software to Track Actual vs. Theoretical Food Cost Variance
Software makes it easy to track purchases, take inventory, cost recipes, and track food waste.
Request a demo with one of our Product Specialists to see how you can combine xtraCHEF with Toast to calculate actual and theoretical food costs and reduce variance.