How to Calculate Food Cost Percentage for Restaurants

Are you wondering how to calculate food cost percentages in the restaurant industry? This is a common question in the minds of emerging restaurant owners or managers, and calculating food cost percentage is essential to ensure sustainable running. 

Among all restaurant expenses, food costs take the highest percentage of profits because a restaurant, on average, spends around 20% – 40% on food only. There are other expenses as well, like utility, operational, labor, and others. 

Food costs are expressed in percentage and it is a ratio that compares the cost of ingredients involved in cooking the meal to the revenue generated from the meal. Hence, as a manager or owner, one should know how much of the money is going on the food. 

It will help you make significant decisions, like how much you are charging for the item on the menu, whether the buying price of ingredients is justifiable, or do you need to start a hunt to look for another vendor. 

Now, let’s learn how to calculate food cost percentages and understand the factors that affect value and profitability. 

What is the Food Cost Percentage?

Understanding your food cost percentage is critical because it is one of the most crucial markers of a restaurant’s profitability—and, consequently, overall performance. A restaurant business works on thin profit margins (usually 3-5%); thus, keeping food prices under control is critical to maintaining profitability. check out Restaurant Operations Management: Unveiling Effective Principles, Practices.

There are two different ways to calculate food cost percentages: total food cost percentage and food cost percentage per dish. The former (total food cost percentage) takes into account all the food supplies at your restaurant and the total revenue generated over a period of time. 

However, you can use the food cost percentage per dish to get a detailed breakdown of the items in your menu. The food costs will yield a low percentage if the dish is popular, but this metric will increase for dishes that are not doing well. 

For example, a $5,000 monthly food cost is meaningless on its own. The food cost percentage would be dangerously high at 83% if $5,000 generated $6,000 in food sales. 

However, if that $5,000 yielded $15,000 in food sales, the food cost ratio would be significantly more beneficial at 33%. Because of this added background, many restaurant operators wonder how to determine restaurant food cost percentages.

Step-by-Step Guide on Calculating Food Cost Percentage

Calculating the food cost percentage varies depending on your needs, such as whether you want a detailed breakdown of each item on your menu or just an overall percentage. Let’s explore both options. 

Method 1: Total Food Cost Percentage for Cost Per Meal

The formula to find the total food cost percentage is as follows. 

Total Food Cost Percentage = (Total Cost of Goods Sold/Total Revenue)*100

Now, here is the step-by-step process that you can follow. 

Step 1. Calculate the Total Value of the Cost of Goods Sold

Total Cost of Goods Sold (COGS) represents the amount of food and beverages you have sold over a period costs to your restaurant. Here’s the formula to find the exact value of the costs of goods sold: 

COGS = (Initial Food and Beverage Inventory Value + Inventory Purchase Value) – Inventory Value at the End

It is simple to calculate COGS. First, you will have to calculate the value of inventory at the beginning of the evaluation period. Then, you will have to keep track of additional inventory purchases made during the period and add them to the initial inventory value. This value will represent the total value of inventory. 

Assess the value of inventory at the end of the period and subtract that from the cost of total inventory. 

For instance, you wish to know the total cost of goods sold for June. So, you will analyze the worth of your inventory at the beginning of June. Let’s say this value came to $10,000. Now, you will have to track the purchases made during June. The additional purchases cost around $5,000. 

So, the total inventory would be $15,000 ($10,000+$5,000). 

After this, you will have to assess the worth of inventory at the end of June, which was $7,000. 

So, according to the formula, the total cost of goods sold will be $8,000 ($15,000-$7000). 

Step 2. Evaluate Total Revenue 

Find the total revenue for June. You can check your point-of-sale (POS) system to see how much your restaurant has earned during the month. Otherwise, you can calculate it if you are maintaining a spreadsheet. 

Let’s assume the total revenue generated by your restaurant is $26,000. 

Step 3. Use the Formula 

Now, you have the value of total cost of goods sold and total revenue. Let’s put the values in the formula. 

Total Food Cost Percentage = (Total Cost of Goods Sold/Total Revenue)*100

= ($8,000/$26,000)*100

= 0.30*100 

= 30% approximately

So, the total food cost percentage is 30%. According to the industry standard, the average food cost percentage should be between 25% and 35%. The 30% value indicates that you are following a balanced approach, delivering quality foods while maintaining a healthy profit margin. 

Values higher than 35% mean that you are using premium ingredients, and the current pricing cannot recover all the costs involved in selling the items. 

Method 2: Food Cost Percentage Per Dish

The total food cost percentage will tell you how profitable your business is, but it doesn’t tell you which dish needs to be optimized, so you can work on refining the pricing structure or inventory management. This is where the food cost percentage per dish comes into help. The formula is as follows. 

Food Cost Percentage Per Dish = (Total Cost of Dish Per Serving/Selling Price)*100

Let’s look at the step-by-step process to calculate this. 

Step 1. Find Out How Much It Costs to Cook a Dish

The first step is to calculate the cost of cooking the dish in question. For this, you will need a standardized recipe, the amount of ingredients you purchased, and the amount of each ingredient used in the recipe. 

Calculating each ingredient will become complicated as you will also have to calculate the price of bulk items, packaged items, and herbs and spices. Let’s see how you can do this. 

• Calculating the value of bulk items

Vegetables and fruits fall into this category. For example, if you purchased a bag of 6 onions for $1.69, then 1 onion will cost $0.28. Multiply the cost of one onion by the number of onions you have used. This works for apples, carrots, oranges, lemons, eggs, and other produce. 

• Calculating the value of packaged items

Now comes the food ingredients that come in packets. For this, you will have to use the package labels to calculate partial ingredient costs. For instance, if you are using a packet of penne pasta, then check the net weight mentioned on the packet. The net weight is 1 lb, and it costs $1.49, so if you have used half of it, then penne pasta for the dish costs $0.75. 

To calculate the price of tomato paste or oil used in the dish, you will have to check the nutrition label to know the serving size. For instance, a tomato paste can of 6 oz. costs $0.39. The nutrition label mentions – “5 servings per container and serving size 2 tbsp”, so this means there are a total of 10 servings in the can. So, if you have used 2 tbsp in your dish, divide the total costs by 2. So, the price of tomato paste will be $0.08 ($0.39/5). 

Sometimes, the calculation may become complicated, like when using cheese or milk, which are measured in cups. The label on the Parmesan Cheese bottle (which costs $2.29) says that there are 45 servings of 2 tsp in the whole bottle. Suppose you have used ¼ cup in the recipe. 

So, you will have to find the value per tsp, which is $0.025 ($2.29/45/2). There are almost 3 tsp per tbsp and 4 tbsp in ¼ cups; the value of Parmesan Cheese used in the recipe is $0.3 ($0.025*3*4). 

• Calculating Herbs and Spices

It is best to work with estimates for herbs, spices, and salt. You can take an estimated value, like $0.10 per tsp. Reduce the value of salt and pepper and increase the price by a small margin if you use rare herbs/spices. 

Step 2. Find the Selling Price 

This step is simple: Look at your menu and find the selling price of the dish in question. For instance, the cost of price of chocolate mousse is $3.01, and the selling price is $6.00. 

Step 3. Input the Values into Formula

Here is the formula, and let’s input the values to find the food cost percentage per dish. 

Food Cost Percentage Per Dish = (Total Cost of Dish Per Serving/Selling Price)*100

= ($3.01/$6.00)/100

= 0.50*100 

= 50%

Hence, the cost percentage of chocolate mousse is 50%. Now, the main question arises: is the chocolate mousse dish profitable? 

According to the industry standard, no. The food cost percentage per dish should be between 25% and 40%. Since the value of the dish in question has exceeded the given range, it is too costly, and you will have to do something (either reduce the cost by finding affordable supplies or increase the dish price) to make it profitable.  Consider utilizing a software solution like Restaurant Management Software – Ensure Consistent Flow to simplify this process and maintain accuracy in your recipe costing and kitchen management.

Conclusion

The food cost percentage helps you determine whether you are underpricing menu items, overpricing them, or overpaying for the ingredients. You will have to take into account the industry standards and align the pricing structure and strategy accordingly. You can increase the price of the dish to recover the cost of ingredients or find another supplier to reduce the cost of making the dish. 

Besides, you can also redesign the layout of the menu as menu optimization can increase profits by 10-15%, or you can reduce the portion size. 

Calculating the food cost percentage is a tedious task, but a point-of-sale system can simplify the task for you. A POS system can help you find accurate food cost percentages, cost of goods sold, cost per item per dish, and more quickly and you can get insights in a less hectic way. 

Soumyajit