Food Costing 101: A Comprehensive Guide
We’re all feeling the money squeeze in foodservice today. The need to master costs has never been more crucial for running a successful and sustainable business.
Food-cost calculation and management are complex, for sure, but, if done right, they can reap big rewards. Some of the questions that make it so daunting include: How can you cost your recipes and menus easily? Why do savvy operators take the time to compare “actual” and “theoretical” costs? What are the “key percentages” and what do they mean for the health of your business?
The answers to these and other questions can be found in the data. Understanding and using food data can revolutionize your operation, enhance your profitability, and keep you competitive in an ever more challenging market.
The Language of Food Costing
When we talk about food costing, 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 simple or straightforward. Here are a few of the key terms and definitions:
Food Cost: The total cost of all ingredients used in a dish and make it to the plate. This does not typically include expenses such as labor, overhead, or waste.
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. This measurement accounts for food waste created during the cooking, theft, spoilage, and other variables that separate it from theoretically planned. It’s the accurate picture of the cost of food coming out of your kitchen.
Food-Cost Percentage: This calculates the percentage of total restaurant sales spent on raw ingredients. The food cost percentage formula is typically:
Food Cost / Total Sales = Food Cost Percentage.
While it can vary depending on the type of restaurant and/or specific dish, a common target for food-cost percentage is 28 to 35 percent. If your operation is spending more than 35 percent of your total sales on the food, you might not be profitable.
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.
Two Methods to Calculate Food Cost
These two food-costing methods arrive at the same answer but via different routes, and each is better suited to certain business models.
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 in which a la carte items or dishes with a fixed set of ingredients are prepared and served, such as in restaurants.
Start by listing all the ingredients and quantities of each ingredient used in a dish. Then, calculate the cost of each ingredient per dish. Add these costs to get the total plate cost.
While most food cost calculations stop at the ingredients, some using the Plate Cost Method suggest including labor and overhead costs to get a true picture of what’s involved with each plate. This would mean adding in wages for chefs and kitchen staff, utilities costs, equipment maintenance, and other operational items. In the end, it’s really up to you to decide how to best track these costs for your operation.
The Recipe Cost Method takes the full cost to produce a full recipe, then divides it by the number of servings the recipe produces.
This method is best suited for dishes that are made in large batches, such as soups or casseroles, or in settings in which everything is produced at scale, such as meal-prep companies or non-commercial foodservice providers.
Actual vs. Theoretical Food Costing
Above, when discussing the language of food costing, we looked at “actual” and “theoretical” food costs. Theoretical costs are what you write down during planning, whereas actual costs are what really happens in the kitchen when producing the meal.
Understanding both of these costs is crucial to effectively managing your restaurant's financial health, because it enables you to determine the lowest possible (theoretical) food costs juxtaposed with the real (actual) costs. This leads to another number—the “food cost variance”—which is the difference between the two. In order to run a successful kitchen must lower that variance to get your food costs as tight as can be.
Calculating Actual Food Costs
To calculate actual food costs over a certain period (say, a week or a month), you must determine these things:
Beginning Inventory: Calculate 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.
Therefore, 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 used during the period, whether they were served to customers, wasted, or lost to theft or spoilage.
In this example, the theoretical food cost percentage is calculated by dividing the total food cost ($4000) by the total sales ($13,000), which leaves a food cost percentage of 30.8 percent.
The actual food cost, on the other hand, considers waste, spoilage, and theft. So, the adjusted food cost of $4600 is the $4000 original cost plus $600 waste. Again, dividing this by total sales ($13,000) gives an actual food cost percentage of 35.4 percent.
This 4.6 percent difference might seem small, but it can have a significant impact on the profitability. In this example, it represents $600 of lost income. By identifying and reducing such losses, you can lower your food cost percentages and profit more on each dish sold.
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 Review Reports
Food costing is hard. It can take time to collect vendor data, input it into a spreadsheet with your recipes, and add up all the costs. However, it’s a hugely important step in managing your profitability. So set aside time for it reviewing these food cost reports.
Regular analysis of the reports can help identify trends, catch issues before they become larger problems, and highlight areas for improvement. This could include frequent comparison of actual to theoretical costs, vendor price changes, and wastage patterns.
We suggest running food cost calculations every two to four weeks for most businesses. If you’re a caterer, meal prep company, or another food business that runs set menus, we suggest looking at the numbers weekly.
➞ Analysis-based Changes
Once you’ve reviewed your food cost data, and you’ve determined that your food cost percentage is higher than is sustainable, it’s time to make some changes to your menu to realign those costs with your goals. This could include:
Negotiating with vendors to lower costs for key ingredients.
Finding substitutes for ingredients that are becoming more expensive.
Tweaking portion sizes or recipes to keep costs down.
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.
Costs are always changing, so don’t expect any adjustments to be one-and-done. It’s an ongoing process to align your menus with the realities of food costs, and it should be done at regular intervals.
➞ Food-Costing Tech and Tools
To address this, we created Galley’s Culinary Resource Planning platform. It’s a unique system that connects your vendors, recipes, and menus to serve up real-time, always-accurate food costs. Foodservice operators today must leverage data and technology to enhance marketing, streamline inventory management, calculate food costs rapidly and accurately, and take on the challenges of rising costs and competition. Data-driven intelligent decision-making is crucial for an efficient and excellent culinary operation.
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 extremely manual and time-consuming. That’s why most companies don’t actually go through the full costing process nearly as often as they should. With the rapid changes in food costs we’re seeing, this can mean operating on thinner and thinner margins. Galley’s CRP platform can do all this and more.
The foodservice industry is on the brink of a major transformation, and it’s time for culinary professionals to take a big step into the future. Galley is leading the way in merging culinary excellence with operational brilliance. We are at the forefront of this revolution, sharing the recipe for culinary success the industry has been waiting for and deserves. If you’re ready to join the revolution and see how Galley can improve your food-costing process and business in general, get your free account below and start today!
