Operations – Food Costs

In its simplest form food cost is a percentage measuring the cost of the ingredients of a menu item compared to the selling price of an item.  Overall food cost compares the cost of all food items served in a given period compared to the overall sales in that same period.  To effectively measure food cost means taking an accurate periodic inventory and valuing the inventory at the correct cost.  Take the value of the previous inventory, add all the purchases, and subtract the value of the current inventory to get your food cost percentage.  That is your food cost.  Divide that by the sales from the point you took the last inventory to the point you took your current inventory to get your food cost percentage.  It sounds like a lot of work.  The alternative is giving up the control necessary to manage profits and possibly not even knowing when there might be a problem.  Remember, a 1% variance in food cost on $10,000 in weekly sales is equal to a $100 per week or over $5,000 per year.

So where should you start?  Every menu item should have a recipe with a precise list of ingredients and a recipe cost.  After you’ve listed the ingredients and the measure of each ingredient, the cost of the ingredient should be listed.  Total the ingredient cost and you have your recipe cost.  Divide this by the selling price and you have your item food cost percentage.  As the cost of ingredients changes your recipe cost will change so make sure you update the costs in your recipe regularly.  This will let you react quickly if costs go up significantly.  You can make a decision whether to change menu prices at that time.

After you develop and accurate cost for each recipe, you can evaluate whether your menu prices will let you achieve your targeted food cost percentage.  If your target is 25% and every item has a food cost of 30% you can’t achieve 25%.  In reality you’ll have some items that have a higher food cost than others.  The mix of items determines the overall food cost.  A modern computerized POS system can help measure and track food cost, keep recipe costs updated, and provide the theoretical overall food cost percentage.  Even if you use a spreadsheet program like Microsoft Excel you can do an effective job in measuring and tracking.  Once you establish your target food cost percentage then you can use it as a tool.  If your food cost goes up relative to the mix than it is a helpful warning.

Remember that food cost is only a measurement tool.  It is an indication of relative profitability.  It is not money and it is not profit.  The most important thing to remember is that profit is what is left after you deduct all expenses from the sales.  So if you want to maximize profit, first make sure that your food cost is under control, make sure your product is priced properly, and that you are actively selling the items that make you the most profit.

For more on this topic as well as a Menu Cost Example, please see the August 2009 edition of the Delco newsletter.

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