Restaurant Food Costs: Your Complete Guide
Food costs are one of the most significant factors of a restaurant’s success. Knowing your restaurant food costs helps with menu pricing, affects prime costs, and plays an integral part in remaining profitable.
Food cost management is particularly important during a recession or economic downturn, as many restaurant owners are finding right now. Every penny counts, and you must find ways to maximize profits at every corner.
But managing restaurant food costs can be challenging. Manually calculating food costs is a painstaking, time-consuming process that must be done regularly to ensure costs accurately reflect changing market rates.
The good news? Managing restaurant food costs doesn’t have to be complicated. You just need to understand how to simplify the calculations required and the food cost controls that can be implemented. This guide covers all these factors—and more!
What’s in The Restaurant Food Costs Guide?
In Part One, you’ll get a refresher on restaurant food cost basics, including the restaurant food cost definitions, the importance of restaurant food cost, and simple formulas for calculating food cost. In Part Two, you’ll learn what a good food cost percentage is and start crunching some food cost numbers. Finally, in Part Three, you’ll learn about food cost controls—and how recipe management software can help.
Feel free to jump ahead to the sections that you’re most interested in!
Part 1: Master Restaurant Food Cost Basics
- What Is Restaurant Food Cost?
- What Is Restaurant Food Cost Percentage?
- What’s the Difference Between Food Cost and Prime Cost?
- Why Is Knowing Food Cost Important?
Part 2: Calculate Restaurant Food Costs
Part 3: Implement Food Cost Controls
- Strategies to Control Food Costs
Part 1: Master Restaurant Food Cost Basics
Read this section to master the basics of restaurant food costs, including what they are, why they’re important, and how to find the difference between food cost and prime cost.
What Is Restaurant Food Cost?
At a very basic level, restaurant food cost is the total combined cost of a restaurant’s food. However, finding that cost is a little more complicated than that.
When restaurants talk about food cost, they’re usually talking about two types: plate cost and period cost.
Plate cost, also known as portion or recipe cost, is the total cost of a dish before margins are added. Calculating plate cost involves listing out and costing out all of the individual ingredients that go into a single dish.
Period cost, on the other hand, is the total food cost over a specific period, like a week, month, or year. In order to calculate period cost, you’ll need to use the cost of goods sold (COGS) ratio.
Want to know more about COGS? Find more information in this blog post.
What Is Restaurant Food Cost Percentage?
Most restaurateurs will express plate and period costs as a percentage rather than raw numbers. This is known as a restaurant’s food cost percentage.
It’s calculated by either taking the total costs for a specific period and dividing it by the total sales for the same period (e.g., the period cost) or the cost price of a menu item and dividing it by the sales price (e.g., the plate cost)—and then multiplying the ratio by 100.
What’s the Difference Between Food Cost and Prime Cost?
Food cost is not the same as prime cost. However, food costs are used to calculate prime costs, so it’s important for them to be as accurate as possible.
Prime cost is the combined sum of your products and labor. Products would include food, beer, liquor, other beverages, and any other items for sale at the restaurant. Labor costs include salaries, hourly wages, taxes, and any employee benefits you may offer.
Interested in learning more about how to calculate prime cost? Go here!
Why Is Knowing Food Cost Important?
Food costs are one of the largest expenses for restaurants. For your restaurant to be successful, knowing and controlling food costs is absolutely essential.
Food cost is a key factor when pricing your menu. Though perceived value and market demand are also considerations, the actual food costs are really what determine where a price should be set to make margin on any given menu item. Overall, plate costs and the restaurant’s food cost percentage goal should be used to determine menu pricing.
Restaurant food costs also determine overall prime costs. Food and labor costs are controllable, “prime” expenses, which means that you or restaurant management have direct control over their influence on profits—or losses. As such, restaurants must track their food costs to be able to determine what should be more tightly controlled for profitability.
Finally, knowing food costs can help you achieve cost targets. Tracking how plate or period costs change over time gives you insight into how food cost is trending and gives you valuable information about the need to increase prices or implement various food cost controls. Keep reading for more on that later!
Part 2: Calculate Restaurant Food Costs
Now that you have a solid handle on restaurant food cost basics, let’s look at how to calculate food cost for specific recipes and periods. You’ll also learn how to determine the right food cost percentage for your restaurant (hint: it doesn’t involve looking at average restaurant food cost percentages!).
How to Calculate Plate Cost
If you’ve ever spent time building menus, you know how arduous plate cost calculations can be.
Calculating the cost of one plate begins with a standardized recipe that lists every last ingredient used in the item. If you operate a scratch kitchen, this would also include the prep ingredients for items like breads, condiments, and sauces.
Each of the ingredients should not only have a quantity documented along with its unit of measurement, but also their exact weights. This ensures consistency as the recipe is reproduced many times, and also guarantees a more accurate plate cost.
Once the recipe’s ingredients have been documented, usually restaurateurs or chefs create a spreadsheet to input all of the relevant data about the ingredients they’re working with on that menu item. Everything from the ingredient purchase unit of measurement to the yield that purchased unit gives the kitchen to the individual serving units and the costs of those units are kept in this spreadsheet.
As you can imagine, this is where the complications of plate costing arise. Every single measurement and calculation for every ingredient in a menu item needs to be done accurately for correct pricing. If just one small thing is off, you aren’t actually tracking correct food and prime costs in a controlled way.
When the serving unit cost of each ingredient has been calculated, the plate cost can be determined by finding the sum of all of those unit costs.
From there, the food cost percentage for the plate can be determined with this formula:
For specific guidance on calculating plate cost and to see it in practice with an example, visit our article, How to Calculate Plate Cost.
Interested in an easier way to calculate plate cost—that can actually be done automatically over time? Keep reading, or skip ahead to Part 4!
How to Calculate Period Cost
Calculating restaurant food cost for a specific period is much more straightforward than calculating plate cost, but still requires some work.
To find period cost, you’ll need to use the COGS formula:
(Beginning Inventory + Purchases) – Ending Inventory = Food Cost
For example, if July’s beginning inventory is $11,000, purchases are $4,000, and the ending inventory is $6,000, then the total food cost in that period is $9,000.
($11,000 + $4,000) – $6,000 = $9,000
Knowing your COGS will tell you how much you spend on food to produce your menu items and how effectively you’re controlling restaurant food costs. Consider also using the COGS formula to calculate the period cost for other restaurant categories, like beer and wine.
Next, you’ll gather food or sales revenue data from the same period in which you’ve calculated COGS. Checking your POS system, like Toast, for this information should be very simple. For the sake of this example, we’ll assume July’s sales were $30,000.
Finally, period food cost percentage can be calculated using this formula:
By using the same example above, the restaurant’s period cost for July would be 30%: ($9,000 / $30,000) x 100 = 30%
What Is a Good Food Cost Percentage?
Have you ever searched for food cost percentages from your competition? Talked to your peers about the industry about what their food cost goals are? Or even just used general restaurant accounting advice to look for a range that you could work toward?
Comparisons certainly offer a ballpark range to help you determine if you’re drastically over or under “normal” food cost. But the reality of the situation is that a good food cost percentage for one restaurant might not be the same for another.
Each restaurant is unique, so your food cost percentage should be a reflection of your reality. Use your target food cost percentage or your maximum allowable food cost (MFC) to benchmark where you stand.
The MFC is the food cost number that you shouldn’t surpass if you want to meet your restaurant’s business goals. Go above your MFC, and you won’t be nearly as profitable as you planned to be.
Calculate your MFC with this formula:
Let’s continue with the previous example. You already know your period cost for July is 33%—but is that good or bad for business?
By empowering yourself with an MFC, you can much more easily determine if you’re on the right path or if food costs need to be controlled more closely.
Part 3: Implement Restaurant Food Cost Controls
Now that you know how to calculate your restaurant food costs and identify how to determine if your food cost percentage is on track for your profit goals, you can put controls in place that help you get—or maintain—that percentage where you want it to be.
Strategies to Control Food Costs
There are many ways that you can control food costs at your restaurants. Use these strategies to help you contain or reduce food costs to maximize margin!
Monitor Vendor Price Changes
Your vendors frequently change their prices based on the seasonality of items as well as the demand. These fluctuations can seem very minimal from week to week, but can add up to a lot of money over time.
Tracking price changes will also help you determine if your plate costs need to be recalibrated—which, as you know, can make all the difference in if you hit your target food cost percentage.
Make a habit of tracking those variances. By gathering data, you’re collecting important information that can help you see if vendors are consistent or change prices frequently, and gives you more negotiating power for net pricing.
Cultivate Additional Relationships
In tracking your existing vendor’s invoices, you may discover that prices fluctuate so wildly that they’re impossible to predict, or that your vendor is frequently changing prices seemingly with no rhyme or reason.
Because of this possibility, you should have several vendors on hand. Expand your sources, and compare their bid sheets against each other—and your pre-existing vendors. You not only open yourself up to having more choices, but you also open the door to negotiate food costs down even further by pitting vendors against each other for your business.
Manage Restaurant Inventory with an Iron Fist
Taking inventory is never exciting; it’s yet another time-consuming process that takes you away from creating delicious plates and a hospitable environment. However, restaurant inventory management can make or break food costs.
How many times have you ordered from vendors and wound up throwing half of the perishables away by the end of the week because you ordered more than what you could store or sell? And what about the occasions when inventory was incorrect or off, and you were forced to buy smaller quantities at a higher price—or even send a staff member to a local grocery to pick up an emergency supply?
Poor inventory management can lead to food waste and higher food costs, so it’s vital to do it with an iron fist. By doubling down on inventory control, you’re taking better control of food costs, too.
Use these quick tips to master your restaurant’s inventory:
- Check all incoming orders against their invoices to ensure the correct weight, quantity, and quantity arrived. Note where there are discrepancies so you can get credited by your vendor.
- Take inventory as frequently as possible in order to know what’s on hand so you don’t over- or under-order and better understand your COGS.
- Instruct chefs and prep cooks to use the First In, First Out (FIFO) method, meaning that the oldest ingredients in the kitchen should always be used first. This will help eliminate food waste.
- In a rough financial spot? Squeeze everything you can out of existing inventory and vendor agreements to run an even tighter ship.
Waste Not, Want Not
According to the USDA, about 30-40% of the United States’ food supply becomes food waste. In 2010, this was an estimated $161 billion in losses! The numbers are staggering. It’s a significant amount of food—and therefore money—that literally gets thrown away each year.
Reducing food waste in your restaurant also reduces food cost. Some restaurants have been able to implement zero waste policies, but it’s rare. More realistically, you can implement a Waste Not, Want Not policy for the kitchen.
Produce and protein scraps should be collected and frozen to make flavorful stocks and soups. Bread that hasn’t been served at the end of a shift can be repurposed for tomorrow’s croutons. Stray berries and fruits can be made into jams and jellies.
Encourage the kitchen to repurpose food waste. It’s a win-win: you’re offering them an opportunity to get creative with the craft they love, while reducing your food costs.
Write It In The Rulebook
Don’t let your efforts in reducing food cost get derailed by the rest of your staff! Make reducing food cost a restaurant policy, and ensure your staff understands exactly what that means and what they can do to help.
We already know what this looks like in the kitchen. For front of house or service staff, it could mean things like only offering each table one piece of bread per person and carefully watching beverage refills.
You may even decide to incentivize employees who have helped you reach target food costs. If you’re ready to go down this route, download our eBook, How to Structure Bonuses at Restaurants! We provide templates for bonus structures for your ease—including one based on cost control.
Watch Portion Sizes
There’s something comforting about seeing a huge plate of piping hot food coming out of a kitchen. But how do you feel when you see half of that food make its way back to the kitchen to be thrown out at the end of a meal?
Be mindful of the portion sizes at your restaurant to control food cost and waste. If a significant number of plates are being cleared with food still on them, it could be a sign that you’re serving too much (or that the food isn’t up to snuff, which we won’t dive into today).
You may also ask trusted regulars or send surveys to confirmed diners to gather opinions on serving sizes. You may be tempted to continue offering larger portions so customers can take leftovers home, but remember—those to-go containers cost money, too!
Eliminate Bottlenecks with Automation
You can implement all of the above suggestions to control food costs at your restaurant, but it doesn’t eliminate the time it takes to continuously update plate costs or compare vendor prices.
Enter automation! Restaurant technology is available that automatically uploads and codes incoming invoices from vendors, so ingredient prices and how they change over time get tracked without manual intervention. Automating the various ways in which food costs are tracked gives you more accurate data—with much fewer complicated calculations.
The software solutions can be so sophisticated that they also automatically calculate plate costs at any given time based on the data gathered from vendor invoices. Plus, as Sidewall Pizza Company discovered, automation paired with a drag and drop recipe interface gave them much more room for experimentation and finding more margin on menu items.
For more information about how recipe automation software can improve food cost management, read The Benefits of Recipe Management Software.
Not quite ready to go full steam ahead with a software solution to control food costs? Try xtraCASH! It’s a free food cost management tool that also offers cash back on food, disposable, and beverage purchases through manufacturer rebates. All you have to do is upload vendor invoices in order to gain instant insights into food spending habits and ingredient-level price changes.
Part 4: Invest in Restaurant Food Cost Management
We can’t promise that food cost management will ever be fun. But, if you familiarize yourself with this guide and implement the advice inside, it will definitely become easier.
The most important takeaway from all of this? Restaurant food cost management can be complicated, but software solutions like xtraCHEF offer the data that’s needed so you can stay profitable.
Our Recipe Management feature is used by thousands of operators across the country because it incorporates ingredient density, prime costs, and line item invoice data into every recipe calculation for the most accurate plate costs possible.
xtraCHEF also offers Inventory Management to accurately capture inventory values and eliminate food waste; Purchasing and Order Management to schedule orders with vendors, track your order history, and ensure you never over- or under-order; and AP Management that automatically codes invoices, powering the other features of our platform.
When you’re ready to invest in a restaurant food cost management solution, xtraCHEF will be here and happy to help you make your target food cost percentages a reality!
Nick Darlington is a B2B writer who conceives, writes and produces engaging blog posts and lead magnets for technology companies. When he’s not writing for clients, he’s blogging at WriteWorldwide. See how he can help your business by visiting his site and scheduling a no-string attached call.