What is a food cost and why do you need it?

If you are opening a restaurant (or any Food and Beverage outlet where food is for sale), you will always incur costs for the production of the food:  how you work out what to sell the food for will help to determine if your restaurant is profitable or not. You can determine your FOOD COST as the percentage of the total of your restaurant sales that are spent on food products.  This percentage should come in around 28-35% in order for your restaurant to start making money or show a profit.

However, when you add food cost and labour costs together, as well as overheads and other incidentals, the figure can be significantly high (50-75%) so you want to ensure that your food costs don’t come in above 35%…or you will be losing money. By checking your food costs on a monthly/regular basis, you can easily find trends in popular dishes, product fluctuations and specific food price changes.

How do you work out your food cost?

Here is a very simple and recognised formula:

Food Cost % = (Beginning Inventory + Purchases – Ending Inventory) / Food Sales

1. Take a physical count of the stock you have in your kitchen. e.g. Opening stock is worth R20 000
2. Add your new stock purchases: If you already have stock in the kitchen and you also purchased additional stock during the week, you should add the two together by combining the closing stock for last week with the purchases for this week. e.g. new purchases were R4000 so total would be R24000
3. Subtract your ending inventory, after all sales for the period are complete. e.g sales for the period are R18 000 so R24 000- R18 000 = R6000
4. Divide the value by the amount of sales e.g. so if your food sales for the week were R18500, you divide R6000 into R18500 and your food cost is: 0, 32%. That means you spent 0.32 cents for every rand in sales or 32% cost of food.

Factors to consider when taking actual food cost:

You should do your stock takes either at the end of the day or the beginning of the day. Accurate stock takes cannot be made whilst items are being sold or delivered. Also, if the cost of something has changed (for example you have two chickens that were bought at two different prices), use the most recent unit price.

Factors that can influence your food cost percentage:

• Incorrect opening stock take and / or closing stock take or stock transfers
• Incorrect purchases
• Incorrect meal portioning
• Your measuring scales could be out
• Wasting food / spoilage
• Not ringing up sales or ring up sales incorrectly
• Short deliveries or stock returns
• Theft of stock
• Your sales prices are too low

What is the difference between theoretical food cost and actual food cost?

Theoretical Food Cost is what you would like your food cost to be, in a perfect world. Theoretical costs don’t take into account theft, waste etc

The theoretical food cost is calculated like this:

• Theoretical Cost of Goods Sold = (Item A Food Cost x Units of A sold) + (Item B Food Cost x Units of B sold) + (and so on)
• Theoretical Food Cost (as a percentage) = Theoretical Cost of Goods Sold / Food Sales

Aside from working out the differences between actual and theoretical food costs, remember that they will never match, but the importance of working out both is this: you are looking for variances or discrepancies in the two. If the variance is too large, you may need to investigate further.

Image Credits:

1. http://www.wikihow.com/
2. http://www.livelenz.com/