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How to Calculate Food Cost in 2024 (The Ultimate Guide with Examples)

Updated on January 24, 2024, 77 days ago 10 minute read
Author : Saif Alnasur
Reviewed by : Nezar Kadhem
Updated : January 24, 2024 10 min read
Author : Saif Alnasur
Reviewed by : Nezar Kadhem
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Contents

Whether you're putting together a menu for your newly opened restaurant, trying to budget for weekly expenditures, or thinking about implementing menu engineering practices, calculating your food cost percentage is one of the most essential pieces of information you can possess as a restaurant owner/operator.

This metric alone will instantly show you how much of your revenue you're spending on ingredients and food supplies. It forms the basis of proper restaurant accounting.

Food costing allows you to not only gauge how well your restaurant is doing in comparison to your competition, but also helps you distinguish between dishes that are bringing in the most profit and dishes that are actually losing money for your business.

This article will take you through an in-depth explanation of what food cost is as well as how to accurately calculate food cost and, more importantly, food cost percentage at your restaurant.

If you want to get straight to our free-to-use food cost calculator, click the link below to download it right now, or:

Follow these steps to calculate your food cost percentage

  • Step 1: Break up each dish into its ingredients
  • Step 2: Calculate the cost of each dish
  • Step 3: Figure out your fixed food cost calculations, per meal served
  • Step 4: Calculate what percentage of your menu price comes from food
  • Step 5: Determine the target food-cost

Free Excel Food Cost Calculator The easiest way to calculate and manage food cost at your restaurant. Download Now

Key Takeaways

  • Food cost percentage helps you determine which menu items are most profitable and where to optimize on the cost of ingredients.
  • Your ideal food cost percentage can also help you identify your ideal menu item price to maximize revenue.
  • To ensure financial success at your restaurant you need to be constantly monitoring budgets and costs. It's not a one time exercise.

What is restaurant food cost?

At its core, food cost is simply the total cost of goods incurred by your restaurant on food after taking into consideration all external and implicit costs. Food cost is used by restaurant operators to determine how much money they make back on the sale of a dish compared to how much it costs to make that dish.

Four chefs working in a big kitchen at service time (1)

Food costs should take everything from fixed overheads such as labor and electricity to individual ingredient costs into consideration. Food cost helps restaurant operators better understand the profitability of their menu items, and make decisions based on that knowledge.

Setting yourself up for food costing success

As a restaurant operator, financial planning might not be what initially drew you to the industry, but it'll be what helps maintain business longevity. Budgeting in particular is essential for your restaurant's success. Many operators assume its a one and done kind of task, that only needs to be performed at brand inception or part of putting together a restaurant business plan - but that's far from the truth.

Monitoring your restaurant's financials regularly before you set out to calculate food cost percentage is essential. Using a standard restaurant POS system or table management software that integrates with a POS system, should be enough for most restaurants to setup a starting point.

If you're a little less tech savvy and want to go about doing this manually - you're going to need to keep track of a few metrics on your own:

  • Monitor all your figures meticulously. Understanding your prime cost, the relationship between your sales and expenses, is crucial.

  • Establish your accounting timeframe. While the standard for many restaurants is a four-week period, choose a duration that aligns best with your business needs.

  • Establish financial objectives. Budgets should not merely mirror your restaurant's financial status but should serve as navigational tools guiding your restaurant towards optimal efficiency.

  • Prioritize a weekly operational budget. While overarching financial assessments are vital, a more detailed operational view is beneficial. This approach aids in easier expense tracking due to its smaller, more manageable scale.

Once you have the prior tips in mind, you can start your journey towards calculating your restaurant food cost.

What is food cost percentage? 

Food cost percentage represents what portion of your money you spend on buying food and beverage supplies at your restaurant. There are multiple methods to calculate your restaurant's food cost percentage.

  • Food cost percentage per dish. This metric is an itemized breakdown of food cost percentage per individual dish. This helps when auditing your menu and deciding which dishes yield high profitability and which dishes could be improved/optimized.

  • Total food cost percentage. This top level metric helps set a benchmark for your restaurant. It looks at the cost of all your food supplies compared to your total food sales/revenue generated over a certain period of time.

Utilize food cost data to manage your overall food expenses effectively and identify opportunities for adjusting prices on certain dishes.

Why is food cost percentage important?

As a restaurant owner, profitability is probably your number one priority. We often gauge a restaurant's success by how profitable it is. Ultimately that is all that matters.

In the restaurant industry, your main method of increasing profits is through selling food. It only makes sense to understand the food cost of every dish on your menu to assess which dishes are profitable and which aren't.

Despite its importance, food costing is often not taken seriously by restaurant operators.

This could be because of the assumption that food costing is a difficult process, or because food cost isn't as tangible a cost to your business as rent and labor. Regardless, assigning value to food cost is one of the quickest methods to get to profitability.

Food costing isn't only limited to small restaurant chains. It is an industry-standard that even the biggest global restaurants put into practice.

Let's take Burger King as an example; Burger King sells around 16.7 million burgers per day. If Burger King doesn't optimize their food costs down to one cent, they are losing $167,000 per day, or $61 million a year.

Obviously, the same applies for smaller restaurants too. If you run a moderately successful independent restaurant that seats about 100 customers per day you are looking at losing $30,000-$50,000 per year when your food costs aren't optimized.

Benefits of knowing your food cost percentage

There are several reasons why you need to calculate food cost percentage at your restaurant, but it should only take a few to convince you to start.

  1. It allows you to know which menu items are profitable and which aren't, preventing you from missing out on any opportunities to make more money.
  2. When you know which items are more profitable, you can design your menu and pricing around your food cost (this is actually a strategy most restaurants use).
  3. Understand how each ingredient affects your profit margins. If there is a sudden spike in the cost of beef, you will be prepared to adjust prices accordingly to protect your profit.
  4. Most importantly, it allows you to set a standard food cost percentage across the board, and eliminate any menu item that costs too much (or find a way to bring the food cost down).

What is a good food cost percentage?

If you're looking to maintain profitability at your restaurant, you should aim to keep food cost between 28 and 35% of your total revenue. While this is a good benchmark to set for yourself, it's important to remember that there is no one size fits all when it comes to food cost percentages, it can vary from one restaurant to another.

Let's take an example of a fast food chain and a high end steakhouse. The fast food chain could get away with 28% food cost percentage because it's products are typically cheaper to buy in bulk, while the steakhouse might need to maintain somewhere closer to 35% because of higher cost of goods.

How to calculate food cost percentage

Before you begin calculating your food cost percentage, you'll need to have a few metrics at hand.

  • Total food sales. The total value of your sales for the time range you are measuring.

  • Beginning inventory value. The total value of your inventory at the start of the time range you are measuring.

  • Purchases. The total value of all your purchases during the time range you are measuring.

  • Ending inventory. The total value of your inventory at the end of the time range you are measuring.

The food cost percentage formula

To determine your food cost percentage, begin by combining the value of your initial food inventory, and purchases, then deduct the value of your ending inventory from this total. Then, divide this figure by your total food sales.

food cost percentage formula

Example food cost percentage calculation

With the formula above, let's look at how "Pizza kitchen & cafe" would calculate their food cost percentage.

  • Total food sales: $12,500

  • Beginning inventory value: $13,250

  • Purchases: $4,400

  • Ending inventory value: $12,200

Food cost percentage = (13,250 + 4,400) – 12,200/ 12,500

Food cost percentage = 0.436 or 43.6%

This means that Pizza kitchen & cafe spends 43.6% of their revenue towards paying for ingredients. This number is well above the industry standard of 28-35%, which indicates that Pizza kitchen & cafe should definitely look at either their ingredients or menu pricing.

Free Excel Food Cost Calculator The easiest way to calculate and manage food cost at your restaurant. Download Now

Just to be sure though, Pizza kitchen & cafe should calculate their ideal food cost percentage and compare it to their actual food cost percentage.

What is an ideal food cost percentage?

In many full-service and quick-service restaurants, the ideal food cost percentage ranges from 28 to 32 percent on average. Of course, there isn't a precise target food cost percentage; it varies depending on the food served and the restaurant's operating expenses.

You must calculate your ideal food cost percentage to determine what is best for your restaurant.

How to calculate ideal food cost percentage

Before you set out to calculate your ideal food cost percentage, you'll need to values:

  • Total food cost

  • Total food sales

Let's use the same value as the previous example for Pizza kitchen & cafe's total food sales, which would mean their total food sales were $12,500 and let's say their total food cost was $3,500. To calculate ideal food cost percentage, you'll need to divide total food costs by total food sales.

Ideal food cost percentage formula

Total food cost percentage = 3,500/12,500 = 0.28 or 28%

Based on this formula, Pizza kitchen cafe's ideal food cost percentage is 28% and their current food cost percentage is 43.6% which means they are missing out on 15.6% more revenue.

What should Pizza kitchen & cafe do next?

With ideal food cost percentage at hand, Pizza kitchen and cafe now has a few options to try to lower their actual food cost percentage.

  • Try to find cheaper suppliers for their ingredients and supplies

  • Change their menu prices

  • Alter the serving size of each dish

Let's take a look at how Pizza kitchen & cafe would go about changing their menu prices to increase revenue.

Before we do that though, we'll need to calculate something called "Food cost per serving".

What is food cost per serving?

Before you can set out to calculate your ideal menu prices to maximize revenue, you'll need to know how much it cost to make a specific dish, more precisely, one serving.

How do you calculate food cost per serving?

To calculate your food cost per serving, you'll need to first find the total cost of each individual ingredient that goes into making that serving.

Food cost per serving formula

Example of food cost per serving calculation

Going back to the example of Pizza kitchen & cafe, let's say they would like to determine the food cost per serving of their highly ordered vegetable pizza. The dish contains a variety of ingredients at varying prices per serving. They typically order their ingredients in bulk to save money, and so the numbers below are after Pizza kitchen & cafe has calculated each cost.

Pizza Dough

  • Flour: 300 grams (estimated cost: $0.20)
  • Yeast: 7 grams (estimated cost: $0.05)
  • Water: 200 milliliters

Pizza Sauce

  • Tomato Sauce: 200 grams (estimated cost: $0.25)
  • Olive Oil: 15 milliliters (estimated cost: $0.10)
  • Garlic: 2 cloves, minced (estimated cost: $0.05)
  • Salt: 1 teaspoon
  • Pepper: 1/2 teaspoon
  • Italian Seasoning: 1 teaspoon

Vegetable Toppings

  • Bell Peppers (Assorted Colors): 100 grams, sliced (estimated cost: $0.50)
  • Red Onion: 50 grams, sliced (estimated cost: $0.15)
  • Mushrooms: 75 grams, sliced (estimated cost: $0.30)
  • Black Olives: 50 grams, sliced (estimated cost: $0.20)
  • Spinach: 50 grams (estimated cost: $0.30)

Cheese

  • Mozzarella Cheese: 150 grams, shredded (estimated cost: $0.75)

Estimated total cost for ingredients (excluding water): $3.10

This means that Pizza kitchen & cafe's food cost per serving of their famous vegetable pizza is $3.10.

How to calculate ideal menu prices?

Now that we know it costs Pizza kitchen & cafe $3.10 to make one vegetable pizza and their food cost percentage is 43.6%, that makes their current menu price $7.11. But what should they charge so that they can bring down their food cost percentage to the ideal amount of 28%.

That's where the ideal menu item price formula below comes into play.

Ideal menu item price formula

This would mean Pizza kitchen & cafe's ideal price per vegetable pizza should be 3.10/0.28 = $11.07. Based off this calculation, Pizza kitchen & cafe could be charging an extra $3.96.

That doesn't seem like much extra at first glance, but when you take that over the entire year where they sell 50 of these pizzas per day, thats an extra $72,270! And thats just off one dish. If Pizza kitchen & cafe did the same calculation for each of their dishes, they could be making upwards of an extra million per year.

Potential outcomes of menu price changes

It should be habit at your restaurant to track menu prices and subsequent sales so that its easier to make any changes that arise when food cost fluctuates. In the example of Pizza kitchen & cafe above, there are two outcomes based on changing the price per pizza from $7 to $11:

  • Pizzas continue to sell as previously or even increase

  • Pizza sales drop

Let's take a look at each outcome.

Outcome 1: Pizza sales continue as usual

If the menu price change has had no effect on demand, this could indicate that Pizza kitchen & cafe's customer base could handle even higher prices. As a restaurant operator you just want to be careful to not exceed your competitors pricing. A good way to keep tabs on what your competitors are doing to avoid this happening is to perform a restaurant competitor SWOT analysis.

Outcome 2: Pizza sales decline

If the menu price change was followed by a decline in sales for a particular item, this might indicate that you've set it too high for your customers. The issue here is that reducing the price might dip back into your potential revenue - so you want to be careful and try to maybe reduce portion sizes or negotiate lower pricing with vendors.

How to lower food cost?

So now that you have a grasp on food costing and its importance, how do you optimize it?

We've listed a few simple strategies to help you lower your food cost and keep it there to prevent overspending where you don't have to.

  • Increase the number of carbs on your menu. Carb-heavy dishes tend to be a lot cheaper than protein-based plates.

  • Design your menu to highlight the most profitable menu items.

  • Play around with portion sizes until you get the food cost percentage you are looking for.

  • Increase menu prices slightly to compensate for higher food cost dishes.

Download free food cost calculator

To make things easier for you, we have put together a free food cost calculator excel sheet that can streamline the entire process.

Free Food Cost Calculator

The Excel sheet not only allows you to calculate the food cost per item, but to also add important details such as pictures, notes, and allergy information about each dish.

Save yourself countless hours and download our easy-to-use food cost calculator now.

Free Excel Food Cost Calculator The easiest way to calculate and manage food cost at your restaurant. Download Now

Frequently Asked Questions about Restaurant food cost

How do you calculate food costs?

To calculate food cost percentage, add your initial inventory to the sum of all your purchases and then subtract the final inventory value from the total. Finally, divide the result by total food sales.

What is food cost percentage?

Food cost ratio is the ratio of the amount of money a restaurant spends on food and beverage ingredients (food inventory) to the revenue generated when these ingredients are sold as menu items (food sales). It is expressed as a percentage of total revenue from food sales. 

What is actual food cost?

Actual food cost is the cost of all food actually consumed in the restaurant during the same period. Actual food costs account for situations such as incomplete portions, accidental waste, improper billing, or employee theft. 

What is a good food cost ratio?

In many full-service and quick-service restaurants, the ideal food cost percentage ranges from 28 to 35 percent on average.

How do I figure out how much to charge for food?

To figure out how much to charge for food at your restaurant, you need to use the "Ideal menu item price" formula - which divides the cost per serving by your ideal food cost percentage. This gives you a great starting point when menu pricing - provided you continue to monitor sales after any price change to ensure you haven't eaten into your own sales.

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