We’re deep into the cutthroat margin era of the food industry. Restaurants, meal kits, corporate caterers—we’re all feeling the squeeze, and mastery of food costs has never been more crucial to running a sustainable business.
In this article, we’ll dive deep into food costing formulas, calculations, and percentages you must know as a food business leader if you want to build a profitable business. Drawing from our industry experience, we'll guide you through the complex yet rewarding world of food cost calculation and management, discussing things like:
- How to cost your recipes and menus, the easy way
- Why savvy operators take the time to compare ‘actual’ and ‘theoretical’ costs
- Understanding key percentages and what they mean for your business health
We'll show you how embracing this data can revolutionize your operations, enhance your profitability, and keep you competitive in a rapidly evolving marketplace.
Ready to master your food costs? Let's get started.
🧮 Looking for a simple to use food cost calculator? We built a free one here.
The Language of Food Costing
Firstly, let’s demystify some of the jargon around food costing. When we talk about food costs, we're primarily referring to the total cost of all the ingredients used to prepare a dish or a meal. Calculating that total cost, however, isn’t as straightforward as it might sound, so there are a few key terms you need to keep in mind as we move forward.
- Food Cost: The total cost of all ingredients used in a dish and that make it on the final plate. Please note that it doesn't typically include other expenses like labor, overheads, or wastage.
- Theoretical Food Cost: This is the ideal cost of your food, assuming no waste, theft, or spoilage. It's what your food cost would be in an ideal world, and it's often used as a benchmark to compare with your actual food cost.
- Actual Food Cost: This is the real-world food cost, what you actually used at the end of the day. This measurement accounts for food waste created during the cooking, theft, spoilage, and other variables that indicate you used more food than you theoretically planned. It’s an accurate picture of the real cost of food in your kitchen.
- Food Cost Percentage: This is a calculation used to determine the proportion of total restaurant sales spent on raw ingredients. The food cost percentage formula is typically: Food Cost / Total Sales = Food Cost Percentage.
Understanding these terms is a good starting point, but what does an ideal food cost look like? While it can vary depending on the type of restaurant and the specific dish, a common target for food cost percentages in the restaurant industry is around 28-35%. This means that if you're running a restaurant and spend more than 35% of your total food sales, you might struggle to cover other expenses and make a profit.
However, remember that these figures are industry averages and the ideal food cost for your business could be higher or lower depending on your pricing strategy, business model, portion sizes, etc. We suggest comparing yourself against other companies in your vertical for the most accurate benchmarking.
Also Read: 6 Things To Look For In Food Costing Software
How To Calculate Food Costs: Two Methods
Now that we've clarified some key terms, let's explore different methods of calculating food costs. These two methods arrive at the same outcome, but by two different routes, each better suited to different settings and business models.
The Plate Cost Method
The plate cost method calculates the cost of each ingredient used in a dish to determine its total cost. This method is best suited for settings where a la carte items or dishes with a fixed set of ingredients are prepared and served, like restaurants.
Start by listing all the ingredients used in a dish and the quantity of each. Then, calculate the cost of each ingredient per dish. Add up these costs to get the total plate cost.
While most “food cost” calculations stop at the ingredients, some who use the Plate Cost Method suggest including labor and overhead costs as well to get a true cost to produce each individual plate. These include wages for chefs and kitchen staff, utilities, equipment maintenance, and more. It’s really up to you how you would like to track your costs.
Also Read: Food Cost Is King In The Food Industry, So Why Is It So Hard To Figure Out?
The Recipe Cost Method
The recipe cost method takes the entire cost to produce a recipe, then divides it by the number of servings the recipe produces. For each recipe, add up the cost of all ingredients used, then divide by the number of servings the recipe yields to find the cost per serving.
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This method is ideal for dishes that are made in large batches, like soups or casseroles, or in settings where everything is produced at scale, like meal prep companies or non-commercial foodservice providers.
Also Read: Recipe Costing vs Menu Costing: What's The Difference?
Actual vs Theoretical Food Costing
Think back to the definition of ‘actual’ and ‘theoretical’ food costs. Theoretical costs are what you write down on pen and paper during planning and projections. Actual costs are what actually happens in the kitchen after all the waste, spoilage, and theft.
Understanding both theoretical and actual food costs is crucial to effectively managing your restaurant's financial health, because it gives you a clear sense of two things:
- What the lowest possible (theoretical) food costs are
- What the real food costs are
The number between is your ‘food cost variance’. You want to find ways to lower that variance to get your food costs as tight as can be (your margins will thank you).
Calculating Your Actual Food Costs
To calculate your actual food costs over a certain period (like a week or a month), you need to follow these steps:
- Beginning Inventory: Add up the cost of your existing inventory. This should include all food items that you have in stock. This is the start of the calculation period.
- Purchases: Add the cost of any additional food items purchased during the period.
- Ending Inventory: At the end of the period, run another inventory count to determine the cost of food items remaining.
The formula to calculate actual food cost is:
(Beginning Inventory + Purchases) - Ending Inventory = Actual Food Cost
This calculation gives you the total cost of all food items that were used during the period, whether they were served to customers, wasted, or lost to theft or spoilage.
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In this example, the theoretical food cost percentage is calculated by dividing the total food cost ($4000) by the total sales ($13000), which gives a food cost percentage of 30.8%.
The actual food cost, on the other hand, takes into account waste, spoilage, and theft. This is the case of potatoes that went bad in storage. It’s the marinara sauce you prepared, but didn’t sell. It’s the onions a new employee threw too much in the garbage. So the adjusted food cost is $4600 ($4000 original cost plus $600 waste). Dividing this by the total sales ($13000) gives an actual food cost percentage of 35.4%.
This difference of 4.6 percentage points might seem small, but it can have a significant impact on the profitability of a restaurant. In this example, it represents $600 of lost income due to waste, spoilage, and theft. By identifying and reducing these losses, you can lower your food cost percentages, profit more on each dish sold, and do better for yourself, your team, and your customers.
Also Read: Actual vs. Theoretical Food Costing: Why Accuracy Is Essential
Keeping Your Food Cost Percentages in Check
Accurate and consistent monitoring of food cost percentages is essential to the financial health of your food business. Here's a closer look at how to do it:
Regularly Reviewing Food Cost Reports
Food costing is hard. It can take ages to collect vendor data, input it into a spreadsheet with your recipes, and add up all the costs. However, it’s a deeply important step to managing your profitability that you need to set aside time for.
Regular analysis of food cost reports can help identify trends, catch issues before they become larger problems, and highlight areas for improvement. This may include frequent comparison of actual to theoretical costs, vendor price changes, and wastage patterns.
We suggest running food cost calculations every 2-4 weeks for most businesses. But if you’re a caterer, meal prep company, or another food business that runs set menus, we suggest knowing your numbers on a weekly basis.
Also Read: Culinary OS: Explaining The New Push For A Universal Operating System
Implementing Changes Based on Analysis
If you’ve reviewed your food cost data, and you’ve determined that your food cost percentage is higher than is sustainable (for example, 35% actual vs 30% goal), it’s time to make some changes to your menu to realign those costs with your goals. This could include things like:
- Negotiating with vendors to lower costs on key ingredients
- Finding substitutes for ingredients that are experience cost rises
- Tweaking portion sizes or recipes to keep costs lower
- Altering menu item mix to ensure food costs even out across all recipes
- Changing menu prices to reflect the reality of costs
- Finding practices or employees that generate unnecessary waste
- Ordering more or less food to better align with demand and create less excess
Costs are always changing, so don’t expect menu adjustments to be one-and-done. This is an ongoing process of aligning your menu with the realities of food costs, and should be done at regular intervals.
Recommended Tech and Tools to Automate Food Costing
Most food companies use custom-built spreadsheets to cost food, track profit margins, and make recipe or menu adjustments. While this works in theory, it’s a very manual and time-consuming process—and most companies don’t actually go through the costing process nearly as often as they should (every six months, rather than every two weeks!).
With changes in food costs like we’re seeing, that’s a recipe for losing control of your costs and operating on thinner and thinner margins (a common story among food businesses these days).
That’s why we built Galley, a recipe-first culinary operating system that connects your vendors, recipes, and menus for real-time, always-accurate food costs.
If you want all of these food cost calculations happening automatically, hands-off in the background so that you can always see your costs and profit margins, use a tool like Galley.
Galley is uniquely built for the food industry, helping enterprise-level food businesses master their food costs and production. We’re helping meal kit companies, growing restaurant chains, contract foodservice providers, and others take unrivaled control of their costs and margins to focus their business on profitability.
If you’re ready to add your recipes and see how much Galley can improve your business, schedule a demo today.
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