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 a dish
too high, and customers won’t order them. Price a dish 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 your 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:

o What is restaurant food cost?

o Calculating your food cost percentage
o Why is your food cost percentage imporant?
o What is a good food cost percentage?
o Setting profitable menu prices
o How to monitor menu pricing’s effect on sales
o 3 ways to lower food costs

But before we dive in, what are food costs exactly?

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What is restaurant 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.

What to do before you start food costing

Budgeting is a crucial part of running a business. It’s not something you do only when you create
your business plan, but an ongoing process that you monitor to keep your restaurant profitable.
Reviewing your budget on a regular basis helps you keep track of your finances and achieve
success.

Although many of us feel anxious or confused when we must think about numbers, the process
doesn’t have to be difficult and complicated. Monitoring your cash flow and managing your
restaurant budget can be easily done with the right tools, and you’ll have peace of mind knowing
you’re on top of everything.

An accounting software helps you manage your books and records, as well as your inventory and
transactions quickly and accurately. If you have a POS system with inventory management
capability that tracks all your inventory and purchases, you can simply sync your data with your
accounting software and the rest will be taken care of.

However, if you want to go about it the old-fashioned way, here are a few budgetary items to
keep in mind:

o Track all of your numbers. Whether your POS system

does it for you or you do it yourself, you have to know
your prime cost, or the ratio between your sales and
cost.
 o Define your
accounting
period. While most restaurants follow a four-week
accounting period, you can set it to whatever time
length makes the most sense for your business.
o Set budget targets. Budgets aren’t just reflections of
what’s happening in your restaurant—they should be
guides that lead your restaurant to maximum
efficiency.
o Focus on a weekly operational budget. High-level
views of your restaurant’s financial health are
important, but there’s something to be said for having
a more granular view of your operations as well. It
can help you to track your expenses more easily
because the scale is smaller and more manageable.
Food cost per serving explained.
Before you determine the price of your restaurant’s meals, you must know how much they cost
to make. Specifically, you need to figure out how much it costs your restaurant to make one
serve 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
those 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.

o 8 ounces of ground beef = $1.90

o 1 sesame seed bun = $0.25
o 1 tbsp. of sauce = $0.10
o 2 slices of cheese = $0.90
o 2 slices of tomatoes = $0.50
o 2 potatoes = $0.75
Cost per serving = $1.90 + $0.25 + $0.10 + $0.90 + $0.50 + $0.75 = $4.40
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:

o What food cost percentage is

o Why it’s important to calculate your food cost
percentage
o What the ideal food cost percentage is
o How to calculate food cost percentage
o 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.

Why is food cost percentage important?

To really know how your restaurant is running, you need to know your food cost percentage.
Having a handle on food costs helps you decide things like dish prices, dish profitability, overall
costs and where you can optimize. The more you know about your food cost percentage, the
better equipped you’ll be to make bigger decisions about your restaurant and menu.

Benefits of calculating food cost percentages

Understand your food costs and pricing.
When was the last time you took a hard look inside your kitchen pantry? Calculating your food
cost percentage requires you take a detailed look at the ingredients you’re purchasing and the
individual cost of each ingredient. You might learn that a certain ingredient costs more than
previously planned and might no longer make sense to use in your dish to keep it profitable.
When you understand food costs you can also adequately price your items.

Try out new recipes.

If after doing your food cost percentage analysis you realize that certain items would need to be
priced too high in order to remain profitable, you might want to reconsider the ingredients you’re
using. Understanding your food costs opens the door to recipe testing based on data. Maybe there
are alternative ingredients you can use to reduce menu prices or even to just make a particular
dish more profitable. Testing different ingredients is a great way to find the perfect combination
to match your ideal food cost percentage.

Make smart changes to your menu.

Menu management is essential for a successful restaurant. Suppliers change, prices increase, and
customer habits and preferences are constantly changing. By regularly calculating your food cost
percentages, you’re better equipped to make smart edits to your menu and ensure profitability.

Get to know your best sellers and underperformers.

Do you sell out of specific items constantly? Are there dishes that rarely get ordered? Do you
know if your most popular items are your most profitable? Having access to this information can
make a huge difference when analyzing your menu. There might be menu items that cost less to
make and make you more money. Understanding your food cost will help you get a clearer
picture of menu performance.

Understand your food cost per location.

Do you run multiple locations? Your food costs might vary per branch, making it even more
important to get to know the food cost percentage in each location. Once you have your food cost
percentage for all your locations, you’ll be able to understand how each one performs and how
menu item popularity and profitability compares in each restaurant.

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.

A common misconception about food cost percentage is that every restaurant should aim for a
perfect number. In reality, a healthy percentage can vary greatly depending on the products you
sell, food cost control and the market you serve.

Food cost percentage examples for restaurants

For example, a steakhouse can run a food cost percentage close to 35% because the cost of its
ingredients is much higher. On the other hand, a restaurant that serves primarily pasta, which is
cheap to buy in bulk, might run somewhere around 28%. Both percentages are acceptable
according to the context of the restaurant.

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:

o Beginning inventory value: the dollar value of the

inventory you purchased at the beginning of the week.
o Purchases: the dollar value of the inventory you
purchase throughout the week and wasn’t part of your
beginning inventory.
o Ending inventory: the dollar value of the inventory
left over at the end of the week.
o 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:

oBeginning inventory value = $11,000

oPurchases = $7,000
oEnding inventory value = $15,000
oTotal food sales = $8,000
Food cost percentage = (11,000 + 7,000) – 15,000 / 8,000

Food cost percentage = 18,000 – 15,000 / 8,000

Food cost percentage = 3,000 / 8,000

Food cost percentage = 0.375, or 37.5%

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:

o Total food costs

o 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.

Ideal food cost = $2,500 / 8,000

Ideal food cost = 0.31, or 31%

As it turns out, Johnny’s Burger Bar’s ideal food cost is 31%. Knowing that their current food
cost percentage calculation 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:

o Find cheaper vendors

o Reduce portion sizes
o 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:

Menu item price = 4.40 / 0.31

Menu item price = $14.20

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. With a point of sale with analytics capabilities like Lightspeed’s Advanced
Insights, you would be able to access a detailed breakdown of your menu’s performance and see
how price changes impact your menu.

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

Restaurant food costs are on the rise. Many restaurants have resorted to increasing their food
prices in order to meet this new challenge. While this can work for many restaurants, others
might be hesitant to increase their prices. 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:

o Find cheaper vendors: Can you get the same quality

ingredients for a lower price with another vendor?
o 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.
o 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.
 o Invest in technology: Time and time again, restaurant
owners say that the money they spent on technology,
such as an effective restaurant POS system with an
inventory management system has saved them money
ten folds. This is because the right technology will
save you time, provide you all the data you need and
will spot any discrepancies such as theft, leakage or
waste immediately.
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:

oDetermine your food cost per serving for each menu

item.
o Calculate your current food cost percentage.
o Find your ideal food cost percentage.
o Adjust menu items to match your ideal food cost
percentage.
o Monitor how sales react to those adjustments.
o 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.

Maximize your profits with technology

With Lightspeed’s restaurant POS, you can offer tableside ordering, start a loyalty program and
view reports to see what’s working. Chat with one of our restaurant experts to see how software
can help you streamline your operations and make informed decisions.