Food Cost Formula: How to Calculate Food Cost Percentage
How you price dishes on your restaurant’s menu can make or break your business. Price dishes too high, and customers won’t order them. Price dishes too low, and you won’t generate enough revenue to cover your expenses.
Lucky for you, we’ve got restaurant pricing down to a science. We’re revealing how to set menu prices that will cover your expenses and ensure that your restaurant is financially healthy.
One of the key concepts you need to understand to set proper menu prices is food cost percentage. This important metric shows how much of your overall sales are spent on ingredients and food supplies. Keeping tabs on your food costs will help you set menu prices and maximize profits.
In this post, we’ll walk you through how to find the following and use it to set menu prices:
- How to find your food cost per serving
- How to calculate your food cost percentage
- How to set profitable menu prices
- How to monitor menu pricing’s effect on sales
- 3 ways to lower food costs
But before we dive in, what are food costs exactly?
What is food cost?
Food cost is the ratio of a restaurant’s cost of ingredients (food inventory) and the revenue that those ingredients generate when the menu items are sold (food sales). Food cost is almost always expressed as a percentage known as food cost percentage, which we’ll cover further below.
While some restaurants use food cost to determine the price of making a dish for a restaurant, others prefer to use the Cost of Goods Sold (COGS), which measures the total value of inventory used to make a dish, down to the toothpick, napkin and garnishes.
Food cost per serving explained
Before you determine the price of your restaurant’s meals, you have to know how much they cost to make. Specifically, you need to figure out how much it costs your restaurant to make one serving of each item on your menu. In this section, we’ll cover how to calculate your food cost per serving.
Food cost per serving formula
To calculate your food cost per serving (or food cost per menu item), find the sum of the ingredient cost per serving.
Cost per serving explained
Johnny of Johnny’s Burger Bar wants to determine his famous Johnny Burger’s cost per serving. The dish consists of 8 ounces of ground beef, 1 sesame seed bun, 1 tablespoon of sauce, 2 slices of cheese, 2 slices of tomatoes, and 2 potatoes.
Johnny buys his ingredients in bulk and pays $19 for 5 pounds of ground beef. He calculates that 8 ounces of ground beef for a single burger costs his restaurant $1.90. Johnny does similar calculations to determine the cost per serving of the remaining ingredients in the burger.
- 8 ounces of ground beef = $1.90
- 1 sesame seed bun = $0.25
- 1 tbsp. of sauce = $0.10
- 2 slices of cheese = $0.90
- 2 slices of tomatoes = $0.50
- 2 potatoes = $0.75
The ingredients used to make the Johnny Burger cost $4.40.
Food cost percentage explained
While some restaurateurs don’t take food cost percentage seriously, you shouldn’t be one of them. Maintaining as low of a food cost percentage as possible (without sacrificing food quality) leaves more gross profit to pay for other expenses and have revenue leftover. In this section, we’ll cover:
- What food cost percentage is
- What the ideal food cost percentage is
- How to calculate food cost percentage
- Examples of how to calculate food cost percentage
What is food cost percentage?
Food cost percentage is the value of food costs to revenue expressed as a percentage. The figure helps restaurants set menu prices.
What is a good food cost percentage?
To run a profitable restaurant, most owners and operators keep food costs between 28 and 35% of revenue. With that said, there is no such thing as an ideal food cost percentage; it varies depending on the type of food they serve and the restaurant’s overhead and operating expenses.
Each restaurant should calculate their food cost percentage and not rely on catch-all averages, but the general consensus is that the higher your total restaurant expenses are (including food costs), the higher your menu prices need to be.
How to calculate food cost percentage
To calculate food cost percentage, you need to first have values for the following things:
- Beginning inventory value: the dollar value of the inventory you purchased at the beginning of the week.
- Purchases: the dollar value of the inventory you purchase throughout the week and wasn’t part of your beginning inventory.
- Ending inventory: the dollar value of the inventory left over at the end of the week.
- Total food sales: the dollar value of your sales for the week, which you can find in your sales reports.
Food cost percentage formula
To calculate your food cost percentage, first add the value of your beginning inventory and your purchases, and subtract the value of your ending inventory from the total. Finally, divide the result into your total food sales.
Food cost percentage explained
Let’s see how Johnny’s Burger Bar would calculate their food cost percentage using these values:
- Beginning inventory value = $11,000
- Purchases = $7,000
- Ending inventory value = $15,000
- Total food sales = $8,000
Johnny’s Burger Bar’s food cost percentage is 37.5%, meaning that 37.5% of their revenues go towards paying for ingredients. That’s above the industry average for burger joints, which makes Johnny wonder if he should tweak his menu prices.
To know for sure, he needs to calculate his ideal food cost percentage and compare it to his actual food cost percentage.
How to calculate ideal food cost percentage
To find your ideal food cost percentage, you first need to know two values:
- Total food costs
- Total food sales
Let’s say their total food costs were $2,500 and, as we see above, their total food sales are $8,000. To calculate ideal food cost percentage, divide total food costs into total food sales.
As it turns out, Johnny’s Burger Bar’s ideal food cost is 31%. Knowing that their current food cost percentage is 37.5%, it’s clear that Johnny is missing out on 6.5% more revenue.
Knowing this, Johnny has several options for lowering his food cost percentage:
- Find cheaper vendors
- Reduce portion sizes
- Adjust menu prices
Johnny chooses to adjust his menu prices.
How to set menu prices
It costs Johnny’s Burger Bar $4.40 and their food cost percentage is 37.5%, which makes its current menu price $11.70. How much should he charge for his burger to bring his food cost percentage down to 31%?
To determine that, we’ll use this formula:
Based on their ideal food cost percentage (31%), the menu price of the Johnny Burger should be $14.20. That’s a whole $2.50 difference!
While it might not seem like a lot at first, that extra $2.50 per burger adds up quick. If he sells 75 burgers a day, that $2.50 becomes over $65,700 in additional revenue per year. Now, just imagine if Johnny optimized the food cost percentages for each menu item, not just his burgers.
Now, it’s clear that Johnny was underpricing his burgers. He decides to change the price of his burgers to $14.20 and track its impact on sales and profitability.
How to track menu pricing’s effect on sales
Successful restaurants make a habit of tracking their menu prices and sales and making ongoing adjustments as food costs fluctuate.
After comparing his current food cost to his ideal food cost, Johnny increased the menu price of the Johnny Burger to $14.20. There are two possible ways the higher price could affect sales:
Scenario 1: Burger sales slow down
In this scenario, sales of the Johnny Burger have gone down since the price increased.
This could mean that the price is too high for customers. If Johnny wants to reduce the menu price of the dish to increase sales, he should do it strategically. Perhaps he can explore partnering with cheaper vendors, reducing portion sizes or using less expensive ingredients altogether to justify lowering his burger’s menu price.
Scenario 2: Burgers sell like crazy!
Conversely, if the Johnny Burger is selling really well with the new price, it could mean that customers can afford another price bump.
To increase the price without outpricing customers, Johnny could aim for a food cost percentage of 28%, which prices the Johnny Burger at $15.70.
In either scenario, it’s important to remain vigilant and monitor how the adjustments you make impact sales. Ideally, the menu price is affordable to customers and has a manageable food cost. When done correctly, sales will cover your ongoing restaurant expenses and leave some leftover money in the bank.
3 ways to lower restaurant food costs
If increasing menu prices results in fewer people eating at your restaurant, you can decrease your food cost percentage by reducing your cost per serving. You can do this by:
- Find cheaper vendors: Can you get the same quality ingredients for a lower price with another vendor?
- Reducing portion sizes: In Johnny’s case, he could serve a 6-ounce burger rather than an 8-ounce burger to reduce portion sizes and his food cost per serving.
- Use cheaper ingredients: While it can lower your food cost percentage, this is usually a last resort. Customers will notice if your food quality suffers and you risk losing their business as a result.
Takeaways for managing food cost percentage
While it might seem like a hassle, carefully controlling your restaurant’s food cost percentages assures that your restaurant is able to pay its bills and turn a profit on each sale. In an industry with notoriously low profit margins, every cent counts.
To recap, here’s how to price menu items at your restaurant for financial success:
- Determine your food cost per serving for each menu item.
- Calculate your current food cost percentage.
- Find your ideal food cost percentage.
- Adjust menu items to match your ideal food cost percentage.
- Monitor how sales react to those adjustments.
- Explore alternatives to lowering food costs.
Once you decide on menu prices, you can revisit your menu design and reconsider how you’re positioning each dish, from how you describe menu items to the layout you choose. Believe it or not, the way a menu is designed has a proven correlation with increased sales.