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Understanding The Basics Of Food Cost

Updated on April 16, 2012
How much?
How much?

If you are familiar in any way with restaurants you have probably heard the term food cost thrown around, often by owners and chefs. The term 'food cost' can apply to a few different concepts which are all interconnected. The basic term refers excatly to its name, the amount of money a restaurant spends on its food products. Yet, there is a lot more invovled in the idea than most people know about, and controlling food cost plays a vital role in how much money a restaurant can make and how it must set prices.

Overall Costs

When determining basic food cost a restaurant will add up all of the food purchases they have made in a set period of time, usually a month. While this is the amount spent on food it does not correctly illustrate the 'cost' of the food to the restaurant. This is determined by calculating the

Example using simple numbers:

A restaurant spends 1,000 dollars on food in a month. If they sell 4,000 dollars worth of food (gross sales) the food cost is the percentage [(cost) / (sales) *100 ] or (1,000) / (4,000) * 100] = 25%.

So what does this mean, well, it means a lot for the bottom line of a restaurant. There is a lot at play in a restaurant's bills, employee wages, electricity, heat, liquor, administration, ect. Many of these bills the restaurant has little control over. However, food cost is one thing that a restaurant can exercise control over and by decreasing food cost a disciplined restaurant can increase profits.

In my experience, food cost in a restaurant is variable, but 32% is usually a standard number that my places of employment have set as the bar in order to be marginally profitable. Steakhouses, and seafood restaurants may have higher food costs, edging up toward 35% and those eat-in chains supplied by the huge distributors that serve you frozen protein recently thawed, GMO veggies, in a below average salty American style (read into this however you want) strive to be below 30%.

Now, if your total sales for a year is $100,000 and you run a 35% food cost, that is $35,000 spend on food. If you were able to get down to 32% thats $32,000 , a savings of $3,000. Might not seem like much, but in a busy small restaurant total yearly sales could easily come close to $500,000, now your looking at $15,000 in savings. In large restaurants, that do well over a $1,000,000 in sales, the money that can be saved is huge. That potential money is a reason any restaurant should continuously examine its food cost and how to improve it.

Expensive items should be monitored closely
Expensive items should be monitored closely

Individual Costs

Food cost can be monitored easily as a whole, however the dynamics of food cost are found in the individual dishes and the operations of a restaurant. Minimizing waste, appropriate ordering, and error free in dish preparation are ways an efficient restaurant keeps their food cost low.

However, a restaurant must prepare itself by setting the cost of a dish appropriately. If you are shooting for a 30% total food cost the average cost of your dishes on the menu should be below this. Remember foods such as steaks and seafood are often the most popular dishes, and yet they have the highest food cost and therefore are the least profitable for a restaurant to include.

Determining the food cost of an individual dish is something that each head chef usually has his own method for, unless you are at a chain where food cost for a dish is determined well before the chef ever gets involved. It involves breaking down the cost of each item on a plate. Many chef's use this as a guideline for predicting food cost, not as a absolute means of determining the actual food cost in a restaurant.

Example using simplified numbers and weights:

You have a strip steak, with roasted potatoes and a vegetable on a plate. Three items, fairly simple to breakdown.

First the steak, which comes in a 10 pound strip for $50 ($5.00/lb). Now don't make the mistake of assuming that since you serve 8 ounce strips that your cost is automatically $2.50 for the meat. What if we only get 15 orders, that is $3.33 a piece, almost a dollar difference. This is the most expensive part on the plate, so you want to be sure of the costs. After cutting a few strips during the month, or from personal experience you should have an idea of how many orders you can get from each piece.

Now the potatoes come in a 50 pound bag for $25 and you use a quarter pound (4 ounces). The potatoes are $0.50 a pound, and a quarter pound is then about $0.13. In this case you might round up to $0.25 cents or $0.50 per plate if you season the potatoes, add olive oil or cheese. Always attempt to mildly overestimate on food cost to account for price variations, portion variations added condiments, ect.

The vegetable would be calculated the same way, so for this example let us say that comes out to $0.50 as well. The total for our plate is $4.33. Some chefs like to be very specific on these costs, and many will set up a running spread sheet or ust food costing software to be as specific as possible. It really is up to the individual, I have seen both very specific and very 'gut based' estimates work extremely well.

Creating a good reputation in the community might offset high food costs
Creating a good reputation in the community might offset high food costs

Monitoring Stock and High End Products

One final blurb about food cost. Food that is unused, or excess of expensive products can lead to a calculted food cost at the end of the month that is higher than expected. Keeping a firm handle on inventory important. Not considering your inventory into food cost will create an artifically high, at the end of the month may lead to to believe that changes in a restaurant need to be made. Likewise understanding how to keep the correct amount of products in stock is essential to prevent unecessary waste.

One reason that higher quality restaurants and those that use organic or localized ingredients are often difficult to maintain is that they have a higher food cost. However, the quality of the product is much better, and therefore one can demand a higher price. That steak which has a cost of $4.33 might be priced at $14.50 on your menu. However, a local steak may be 2 dollars a pound more expensive and cost $70 to plate $5.66 an increase of $1.33 overall.Thats an $18.66 cost for a plate.

Is the local steak worth $18.66 a plate? Probably, since it tastes better, and supports the local economy, yet, are people willing to spend the additional $4.00? Thats where the talent of the chef must shine and make people feel as if the steak lives up to its actual worth.

So what does this have to do with anything? Well, a lot. A $4.33 food cost would mean that you could sell the product for $12.99 and have a 33% food cost. Understand the price of the plate represents the total food sales. so [(cost)/(sales) *100] = [($4.33)/($12.99)*100 = 33.33%

To get to a 30% food cost you would need to up the price to $14.43 and a 28% food cost would be set at $15.46. This is where you need to know your customer base, are they willing to spend the extra money for the steak?

The same proceudre must be carried out fore every dish that a restaurant has. This is one reason that many chefs have their own method of costing, to ensure that this process takes up a minimal amount of time. You must also ensure that you have popular dishes that are low on food cost, these 'money makers' are essential to maintaining operations that ensure a profit. Balancing varied items and food costs on a menu can be difficult. To ensure that proper execution takes place is just as hard. Understanding the principles and execution of basic food costs is just one small step in learning the operations of a restaurant


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    • Georgina_writes profile image

      Georgina_writes 5 years ago from Dartmoor

      Great article on costing. So many small companies don't work out their costings well enough and therefore make a loss. you can bet the big guys have it down to a fine art.