Because food and beverages account for a large part of a restaurant’s costs, chefs and restaurant owners alike keep close tabs on food costs and food cost percentages. They use those numbers to price their menus accurately, look for waste and inefficiencies, and pinpoint ingredients and vendors that are draining their budgets.There are several numbers chefs and restaurateurs look at when calculating food costs, and many calculations they run through.

In this article, we’ll cover different angles from which to tackle food costing and how it can help you increase your profit margin.

How Chefs Calculate Food Cost

Chefs and restaurant owners keep a close eye on food costs using a number of formulas. Each calculation captures a different perspective on the money spent on food and beverages, which helps them pinpoint areas for cost reduction, improved efficiency, or menu revisions.

Here are the primary formulas chefs and restaurant owners use to keep food costs where they should be.

Food Cost Percentage

The average food cost percentage for restaurants runs between 28 and 32 percent. A number in this range is your ideal food cost percentage.

Your theoretical and actual food costs may not match your ideal food cost. By calculating actual and theoretical food cost, and looking at the variance between the two, you can make changes to restaurant procedures and menu pricing that will get you closer to your ideal food cost.

Theoretical food cost percentage is simply the total cost per dish divided by total sales per dish.

(total cost per dish / total sales per dish) x 100 = Theoretical Food Cost Percentage

Your actual food cost percentage will differ depending on the price of goods in a given period, the amount of waste or spoilage in the kitchen, or the kinds of menu items sold in that period.

To calculate actual food cost, start with your beginning inventory and purchases within a given period. Subtract your ending inventory and then divide that by your total sales and multiply by 100.

Actual Food Cost Percentage = ((Beginning Inventory + Purchases – Ending Inventory) ÷ Food Sales) x 100

Comparing the theoretical food cost percentage to the actual food cost percentages gives you your variance, or the gap between what you were supposed to have spent versus what you actually spent.

Calculating Food Cost Variance

To calculate variance, subtract actual food cost from theoretical food cost. If there’s a large variance, make sure you accounted for all inventory, sales, and deliveries, and that you entered all numbers correctly. A large variance can indicate an issue that needs fixing, such as spoiled stocktake, waste, or even theft.

A small variance means that your restaurant has minimum waste and correct portioning.

Plate Cost

If you want to know which menu items are making the most profit and which are not, you’ll need to break your food cost percentage down by plate.

To do that, add up the total cost of food to make each dish. Then, divide that by the menu price of that dish and multiply by 100.

(Total Food Cost Per Dish ÷ Menu Price) x 100 = Food Cost Percentage Per Plate

Like your total food cost percentage, your cost per plate should hover around 30 percent. You can use that number to help you price out your menu items.

But before you increase the price of a dish with a higher percentage, calculate the variance between ideal food cost and actual food cost. If there’s a discrepancy, find out why and fix the problem. That way, you can lower your cost without overcharging your customers.

Prime Cost

Prime cost is the total amount of the COGS plus labor cost. If you know your prime cost, you can calculate prime cost as a percentage of your sales, which, in turn, can help you set menu prices and control the cost of food and labor.

Add your total COGS for a period to your total labor costs to get your prime cost. Then, divide that by the total sales reported in your POS system. That will give you your prime cost percentage.

Prime Cost ÷ Total Sales = Prime Cost as a Percentage of Your Sales

A good prime cost percentage falls between 55 and 60 percent. If it’s higher than that, it’s time to reevaluate your food and labor costs and look at menu prices to make sure you’re charging enough.

A prime cost percentage lower than 55 percent indicates that you may be charging too much for your menu items or are not offering enough compensation to employees.

Linear Programming

Restaurants use linear programming to determine how much of a menu item they can make based on ingredient availability and cost per plate and still make the most profit.

If, for example, the restaurant is storing less basil than usual, linear programming will determine how many pesto dishes the chefs can make with what they have. It can also determine, if the cost of basil goes up, how much they could make at the current price to stay within budget and turn a profit.

Take into consideration your budget, constraints, and price per plate. You can then determine how much you can make and how much you need to charge to make a profit.

How to Calculate Restaurant Food Cost for Profit Margin

We all know that restaurant profit margins are razor thin. The average full-service restaurant profit margin is somewhere between 3 and 5 percent, while a fast-food restaurant’s profit margins stand between 6 and 9 percent.

To keep profit margins from shrinking, chefs and restaurant owners have to be strategic in their menu pricing, and keep their food costs as low as possible without sacrificing quality.

To calculate your gross profit margin, subtract your total cost of goods sold from your selling price, then divide that by the selling price.

(Selling Price - Total COGS) ÷ Selling Price = Gross Profit Margin

This formula will give you your actual gross profit margin. Your ideal gross profit margin is your target. Increase prices or adjust your menu items to hit that ideal profit.

Although you can raise prices, it may not be the best strategy. Assess your menu items and determine which ones are turning a profit and which are not. Eliminate unpopular items that have a high plate cost percentage. Place unpopular items with a low plate cost in a more visible spot on the menu, or market them more aggressively. And finally, raise prices on popular items with a higher plate cost.

How to Lower Restaurant Food Costs

After doing the math, you may find your food costs are too high. If that’s the case, there are cost control measures you can put in place to reign in your spending.

Lean Inventory

Lean inventory refers to the practice of keeping only as much stocktake as you need to meet demand. It reduces waste by eliminating over-ordering and cutting down on the amount of food that would otherwise spoil or expire.

Reducing Waste to Cut Food Costs

Train your staff to keep an accurate waste log by recording spills, misfires, and mis-cooked meals as soon as they happen. Keep food scraps in a designated container, and then record the waste regularly.

Finally, record comped meals, spoiled stocktake, and missing food as soon as they are reported.

By accounting for every bit of food that doesn’t end up on a diner’s plate, you can get a clear picture of your actual food costs, the cost of all the food that comes through your door.

Keeping a Regular Inventory

Having a complete and up-to-date knowledge of what’s in your stocktake helps you calculate an accurate food cost.

Recipe Book

A digital recipe book, such as MarketMan’s Cookbook Feature, lets you build recipes to create consistent menu items and control portioning. With recipes built and stored in MarketMan, chefs can run food cost variance reports that helps them understand how much of a gap there is between actual and theoretical food cost.

How Technology Can Help Chefs With Food Costing

We’ve shown you the formulas you can use to figure out food cost percentages, profit margin, cost per plate, and even menu pricing. But working through all that math is time-consuming, and leaves a lot of room for error.

Fortunately, there are tech solutions that can help your chef easily do all of their food costing. An inventory management software solution will help you:

• Keep track of food and vendor prices
• Keep regular inventory via a mobile device
• Automate ordering that includes alerts when stock runs low
• Keep track of food costs by storing invoices electronically and populating tracking metrics
• Regulate portioning through recipes kept in its Cookbook Feature
• Determine the price of each dish using a recipe cost calculator
• Track food waste through a digital food waste log

Food costing calculations are essential to any restaurant, and can mean the difference between a successful or unsuccessful fiscal period. Run through these numbers frequently, or better yet, use a tool that can help you keep tabs on your food costing efficiently and accurately.

MarketMan's restaurant inventory management software is designed to automate inventory control, reduce food costs, and optimize all back-of-house activities. By eliminating manual processes, MarketMan empowers restaurateurs to work smarter, reduce waste, and gain insights for improved profitability. Take the guesswork out of restaurant management—book a demo today to experience how MarketMan can elevate your operations!