Food Costing 101

Have you been running your restaurant, and while consistently turning over covers, your profits don’t seem to be increasing? One of the first areas to look at is your food costing. The content of this article will cover what food costing is, how to calculate your restaurant’s food cost, and how you can use your actual food cost vs. theoretical food cost to hone your operations into an even more well oiled machine than ever before.

What is Food Costing?

Food costing is just as it sounds; it’s the process of determining the total cost of your food, or at least the food that has been sold. Sounds pretty straightforward, right? The process to arrive at your final food cost percentage is straightforward too.

Step 1: Recipe costing

Recipe costing is the process of taking your recipes and pricing them out by their individual ingredients. By doing this, you’ll be able to find the cost of your recipes assuming your yields are accurate and there is no wastage, and have the ability to track price fluctuations on an ingredient basis.

Food Costing

Based on the above graphic, we see that the breakdown is as follows (for simplicity sake, condiments have been combined, and actualized values removed):

  • Bun: $0.52
  • Burger Patty: $1.05
  • Onion: $0.01
  • Lettuce: $0.12
  • Tomato: $0.07
  • Cheese: $0.25
  • Potatoes: $0.20
  • Ketchup and Mustard: $0.05

This gives a total food cost of $2.27 for this burger. It is important to note that this does not take labor or overhead costs into account, and menu pricing should not be based solely off of food cost.

We know that a 100% yield with zero wastage is unattainable, but this give a goal for you to try and reach. Now that we know how to calculate the food cost for individual recipes, we’ll go ahead and calculate the TOTAL theoretical food cost.

Step 2: Calculating your theoretical food cost

In order to do this properly, you must decide on a specific time period to use when calculating both your theoretical and actual food costs. This is important as it allows you analyze your costs, find variances, and ultimately locate the sources of waste and areas of your operation that can be fine tuned.

We can calculate an overall total theoretical food cost by taking the total cost of each recipe and multiplying it by the number of times that specific menu item was ordered, and then sum these numbers together. This number, for tracking purposes, can also be calculated on an ingredient basis; we find this by taking the cost of the individual ingredients and multiplying those by the number of times the recipes have been ordered, and then summing the final numbers to arrive at a total theoretical food cost per ingredient. Remember, this number assumes that the maximum yield was attained, and there was no wastage.

Now that the theoretical food cost has been calculated, we can move forward with calculating the actual food cost.

Step 3: Calculating your actual food cost

In order to conduct an accurate analysis of your theoretical food cost vs. your actual food cost, you’ll need to have two common elements: a common time period to measure within, and the same measuring method, whether that be by ingredients or the overall cost of full recipes. Of course, measuring and comparing by ingredients will give you much more accurate and effective information, but it’s understandable that you may be limited by time or labor constraints.

In order to calculate the actual food cost, we’ll use the following equation:

Actual Food Cost = Beginning Food Inventory + Food Purchases – Ending Inventory

This equation can be used for either individual ingredients or using your full recipe for an overall total food cost. By following this equation, you’ll need to add food purchases to the inventory taken at the beginning of your chosen time period. There are two ways for you to keep track of your purchases if you’re tracking them manually (we’ll discuss automated methods later!):  you can keep a running total by adding invoices or receipts to your totals, saving a lot of time, or wait until the end of the period and try to find your receipts and invoices to add together. You’ll also need to take both and beginning and ending inventory, or you’ll only have the purchases and not the amount used.

If we take a beginning inventory of $10,000, make purchases of $25,000, and take an ending inventory of $15,000, the equation would be as follows:

Actual Food Cost = $10,000 + $25,000 – $15,000
= $20,000

Keep in mind that doing this on a total inventory scale, and not an ingredient by ingredient basis, only shows if you have a variance overall. The only way to find WHERE your variances lie is by doing this for each and every ingredient you have.

How to fine tune your operations by analyzing your food cost

By now you should have an understand of food costing and the impact it can have on the rest of your operations, but how do you use this information you’ve gathered?

If there are specific ingredients showing a variance trending in the same direction, you may have an issue with one specific dish, or you may have a larger issue at hand. This could consist of the way your prep is handled, or how your storage locations are maintained, or even how your operations are laid out.

When the actual food cost is GREATER than the theoretical

When the variance is your actual being greater than your theoretical, this can be attributed to a number of different sources; however, one of the most prominent sources is waste. This can come from not following prep instructions, a lack of proper training (professional, not necessarily of that within your business!), lack of attention, or a number of other reasons. 

To track waste, you’ll want to keep waste logs. These should detail what was being thrown out, and why it was being thrown out. We have provided a free template for your waste logs here. These waste logs are not meant to be done to be accusatory, but to locate the source of waste before it gets out of control. Waste logs can also be complemented with prep instructions and recipe cards that give employees a reference point in order to create consistency in product quality, yields, portion size, and ultimately results in a shrinking of the variance.

If these do not help, we recommend looking to your storage areas such as walk-ins and freezers, as well as dry storage. Ensure they are working properly and maintenance is up-to-date, as a malfunctioning unit can affect the quality and shelf life of many ingredients, leading to waste in potentially large quantities if not used promptly. This also goes for humidity; you may not realize how humid your storage areas are, but excess humidity for dry goods such as flour, can change their physical texture and degrade the quality leading to not only a subpar product, or if bad enough, being thrown out entirely.

Now, what happens if the actual is less than the theoretical?

When the actual food cost is LESS than the theoretical

While the most common instance is your actual food cost being higher than your theoretical, there are cases where your actual food cost is lower than your theoretical. Sounds great, right?

This lower food cost is not always a good thing, as it means your portion sizes may be smaller, or not all of the required ingredients are making it onto the plate. Customers may not notice yet, but over time the fluctuating portion sizes will be noticed. In addition to this, if you’re ordering based on the demand of products, you’ll have additional product, leading to increased waste over time. If you’re ordering product to be used in accordance with prep instructions, they should be used properly and in the designated amounts.

How do you go about fixing such an issue? The only way to ensure product is being prepared as intended is to examine training processes and reviews or spot checks. By creating adequate training procedures, staff start out learning the proper way, and to make sure it continues being prepared the right way is to perform random spot checks during service to ensure standards are being upheld.

Where do you go from here

Getting your food costing under control is one of the most important aspects to not only inventory management, but restaurant management in general. Tracking the information you uncover to the source of the issues allow you to not only fix the issues, but also understand why they arose, and ultimately change your operations, and you should see your variances get smaller and smaller. 

Implementing restaurant management software with food costing features

It’s understandable that some restaurants may not have the labor capacity or the time to continually update recipe costs and keep track of receipts and invoices in a timely manner. By implementing restaurant management software that has food costing features, you’ll be able to automate many of the processes and calculations, ensuring you’re able to get back to managing the rest of your restaurant. Our software, Optimum Control, updates recipe costing automatically when invoices are imported from suppliers, or entered manually, and provides you with actual vs. theoretical reporting. 

By actively tracking your food costing and variances, and making changes to your operations, you should begin to see your profits trending upwards.