Controlling food costs is integral to running a profitable restaurant. 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. To ensure this, restaurant operators and managers must think of food cost as a performance metric; by comparing actual food costs to theoretical costs over time, restaurants can maintain profitability.
Food Costs As A Performance Metric
To gauge how well a restaurant is managing its food costs, you must first understand what a restaurant’s Theoretical Food Costs are, based on current inventory costs of all ingredients for the meals sold, and assuming perfect portions, no breakage and no shrinkage. Once the restaurant’s Theoretical Food Cost is known, you can then compare it to their Actual Food Cost, which is simply the actual cost of all the food that the restaurant used for a given period.
The difference between the two is the true measure of efficiency in food cost control; it’s called the Actual vs. Theoretical Variance and reducing it to its lowest possible point is the goal.
How To Calculate Theoretical Food Costs
Theoretical Food Cost is what your food cost should be in an ideal world with perfect portions and no breakage, waste, or shrinkage reported as a percentage of Total Food Sales. To calculate it, you need the following information:
- Food Cost for each menu item, calculated with a very accurate tally of the quantity and cost of each ingredient that goes into each menu item, including any ‘paper costs’ such as napkins, wrappers, and bags.
- Units Sold for the period for each item, which should be easily exportable from your Point of Sale system.
- Total Food Sales for the period, in dollars.
Theoretical Food Cost (%) =
[ ( item A Food Cost × item A Units Sold ) + ( item B Food Cost × item B Units Sold ) + ..] / Total Food Sales × 100
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.
How To Calculate Actual Food Costs
Actual Food Cost, also reported as a percentage of total sales, is a measure of how much your food cost truly is. It’s a straight-forward calculation, but it relies on taking careful and regular inventory counts. The formula for Actual Food Cost requires the following information:
- Beginning inventory, or the total cost of inventory at the beginning of the period. It’s important to note that if the cost of something has changed, it’s best practice to use the most recent unit cost.
- New inventory purchased, or the total cost of inventory purchased throughout the period.
- Ending inventory, or the total cost of inventory left unused at the end of the period.
- Total Food Sales for the period, in dollars.
Actual Food Cost (%) =
[ ( Beginning Inventory + New Inventory Purchased ) – Ending Inventory ] / Total Food Sales × 100
How To Calculate Actual vs. Theoretical Variance
This is the measure of efficiency in controlling food costs; the result tells you how closely the restaurant’s Actual Food Cost was to their Theoretical Food Cost.
Actual vs. Theoretical Variance =
Actual Food Cost – Theoretical Food Cost
Although Theoretical and Actual Food Costs will never match, meaning your variance will never be 0, what you are looking for are trends when the divergence is increasing or when there are sudden changes. These changes are a signal to investigate the cause of the discrepancy.
The most common cause of increased variance (and higher than desired food costs) is inaccurate inventory. To reduce error, follow inventory management best practices. Another possibility 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, possibility 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.