Determining how much your restaurant spends on food can be challenging and tedious. When tomatoes are in season, they’re dirt cheap…and yet, your customers still want tomatoes in the middle of winter. You can’t increase menu prices to accommodate the fluctuation of ingredient availability, so it’s imperative that you learn how to calculate restaurant food costs to keep them from eating up too much of your overall budget.
Without knowing labor and food cost, it can be difficult to appropriately price a new menu item. Charging too little will cause the restaurant to lose money on every order, while charging too much may result in no one ordering that dish. There’s a delicate balance between providing value to your customers while still eking out a profit.
Step 1: Calculate Menu Food Cost
More goes into the cost of preparing a menu item than just the core ingredients. You’ve got to also factor in all spices and prep items required to make the dish. One tablespoon of olive oil may not seem worth accounting for, but this cost will add up when you consider how many tablespoons your staff uses in a day.
However, calculating cost per ingredient per individual meal is not a good use of your time. Instead, calculate in batches. To determine the cost of food per unit, divide your total food expense by the batch based on the number of meals each batch produces. If one sack of flour nets 50 baguettes, you can divide the cost of the bag by 50 to calculate that cost. Add that to all other ingredients and divide accordingly to find the cost per food item.
Step 2: Determine Total Expenses
Beyond food costs, there are other expenses to factor into what you charge for menu items, including labor. How long does it take a chef or other kitchen employee to prepare the dish? Multiply that times that person’s hourly rate to find that cost and built it into what you charge for the dish.
Also don’t overlook overhead. You have rent for your restaurant, utilities, and marketing, and you need to cover those costs with what you charge for menu items.
Step 3: Find Your Food Cost Percentage
Once you’ve calculated your final food cost, compare it against overall sales. An easy way to do this is to divide the total food cost by the total revenue generated by menu items. This final number is the food cost percentage. A well-managed restaurant usually has a food cost percentage ranging between 25% and 35%.
Restaurants that deal exclusively in fine dining can get away with a higher percentage by balancing it elsewhere such as spending less on labor, décor, or marketing. However, undercutting these areas too much may impact sales, so think strategically about the best places to cut costs without impacting customer experience.
What to Do About Drastic Food Costs
If your restaurant’s food costs fall well outside of the usual 25-35%, there are several possible causes.
- Incorrect inventory taking. Manual inventory can result in human error. Counting by incorrect units. For example, counting by the can when the distributor charges by the case.
- Missing invoices.
- Processing invoices for returned products.
- Over-portioning. Adding as little as 10% more cheese to each dish will escalate costs quickly.
How to Calculate Price Variance
Another aspect that affects food costs is price variance — the difference between expected costs and actual costs. Calculating price variance is simple:
(Actual Price X Actual Quantity) – (Expected Price X Expected Quantity)
Actual price is what your restaurant pays for ingredients. These numbers can fluctuate with the seasons and economy. Actual quantity is the number of ingredients your restaurant purchases. You can determine expected price using historical data that takes into account market fluctuations. This allows you to determine an average price for ingredients during specific periods. Expected quantity is the amount you intend to purchase.Factor in damaged or lost goods due to spoilage as well as waste when calculating expected quantity.
Interpreting Price Variance
Price variances can either be favorable or unfavorable in the restaurant world. A price variance occurs when actual costs are lower or higher than expected costs. The general rule of thumb for the restaurant industry is to remain at or below a 10% variance. However, unestablished restaurants or restaurants operating on tight budgets may not be able to weather much unfavorable variance at all.
Here are some of the causes of favorable price variances:
- Efficient ordering strategies
- Market prices were lower than expected
- Negotiations went better than expected with vendors
- Received discounts on bulk orders
- Replaced an expensive ingredient with a less expensive substitute
- Reduced waste
- Improved portion control
Be aware, also, of what can lead to unfavorable price variances:
- Inefficient or hasty ordering
- Market prices were higher than expected
- Insufficient influence with vendors
- Ordered smaller, more expensive shipments
- Ordered expensive ingredients
- Insufficient management of waste and portion control in the kitchen
Calculating restaurant food costs and variances can be a challenge, but MarketMan can help. With our complete restaurant inventory management system, we can help you track your ingredients and costs to eliminate expensive waste while simplifying the ordering process. Contact us to learn more.