How to Calculate Actual and Theoretical Food Costs
Restaurant owners, managers and chefs all stress over food costs. They are never low enough. At its heart, lies the challenge of balancing the (rather) static cost of the item displayed on the menu with the daily variations in cost for its ingredients.
How to Calculate Actual Food Cost
When you ask (or are asked) what your food costs are, Actual Food Cost is probably what is being referred to. Actual Food Cost is a straight-forward calculation, but it relies on taking careful and regular inventory counts. The formula for Actual Food Cost is (all units in dollars):
- Actual Cost of Goods Sold = (Beginning Inventory + New Inventory Purchased) – Ending Inventory
- Actual Food Cost (as a percentage) = (Actual Cost of Goods Sold / Food Sales) x 100
If you use an inventory platform like LiveInventory to place your food orders and track what you have on hand, this can be calculated automatically in a exportable report.
A few things to remember. When taking inventory, it needs to be done either at the end of the day or the beginning of the day. Accurate inventory counts cannot be made while items are being sold or delivered. If the cost of something has changed (for example you have two cartons of eggs, that were purchased at two different prices), use the most recent unit cost.
How to Calculate Theoretical Food Cost
Theoretical Food Cost is what, in an ideal world, your Food Cost should be. To calculate it, you need a very accurate tally of what and how much of each ingredient goes into a menu item. For example, in the case of a bacon cheeseburger, this might be the four ounces of ground beef, one bun, three strips of bacon, two slices of cheese, one ounce each of ketchup, relish, mustard, the portion of fries and so on. You would also include the “paper costs” like one napkin, one wrapper and one bag. Additionally, you need to how many of each item you have sold for the period (this should be easily exportable from your Point of Sale system) and total dollars in sales made. All units are in dollars.
- Theoretical Cost of Goods Sold = (Item A Food Cost x Units of A sold) + (Item B Food Cost x Units of B sold) + (and so on)
- Theoretical Food Cost (as a percentage) = Theoretical Cost of Goods Sold / Food Sales
Because each restaurant has so many items sold and so many ingredients for each item, this is a very difficult calculation to do manually. If your Sales data is synced with your Inventory system, this is likely a report that can be run with no manual intervention. Ideally it is run every time you calculate your Actual Food Cost, so a comparison can be made and major discrepancies investigated. Theoretical and Actual Food Costs will never match, what you are looking for is trends when the divergence is increasing or there are sudden changes.
Why Are My Food Costs so High?
There are many reasons. The most common is that inventory (starting, ending or both) was taken inaccurately. Make sure you use Inventory Count Sheets (or a tablet to input counts digitally) to reduce errors. If you are weighing items for inventory and portioning, your scales may be inaccurate (more on that here). Another possibility (particularly if your Actual and Theoretical Food Cost differ widely) is that you are wasting a lot of food. This may be due to inefficient portioning, spoilage, employee theft or error.
The other, much more concerning, possibilty is that the cost of what you are selling is out of line with what you are charging. Most often, this is because prices on the menu have not been updated to reflect increasing food costs. For example, during the winter, the price of tomatoes or lettuce may increase substantially, but that is not taken into account in the prices customers are charged for a BLT.
How are you combatting food costs at your restaurant? Let us know in the comments section below.
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