Calculating food costs is essential for any restaurant. It is imperative to calculate your food cost. You are spending money on food every day to ensure that people have a great dining experience at your establishment.
If you are not running the business properly, you’re losing money every day. You need to make sure that you are making a profit to keep your business running successfully.
How to Calculate Food Cost with a Formula
There are three different types of costs you will need to calculate when it comes to the food cost at your restaurant. You need to know what kind of food is being ordered, what kind of product is used in the preparation process, and how much inventory you have on hand. The formula for determining your food cost percentage is as follows:
Cost of Food Consumed ÷ Total Sales = Food Cost Percent (or) (Food Purchases + Dining Room Costs + Carry Out Costs) ÷ (Revenue – Break Even Revenue) = Food Cost Percent
For example, let’s say your restaurant sold $10,000 worth of food and beverages on January 1, 2013. Over that same month, you spent $4,500 on ingredients and supplies for your food products, including delivery charges. You also spent an additional $1,100 on wait staff wages. At the beginning of January, your inventory was valued at $900, while your closing inventory was worth $350. This means that your food cost percentage for January was 22.2% ($4,500 + $1,100 = $5,600 / 10,000 = 0.226).
A food cost of less than 30 percent is ideal if you want to ensure that your restaurant will be profitable. It means you are spending less than 30 cents of every dollar you made that month on food.
Generally, it is hard to control costs in an organization or manage expenses because most are fixed.
Surplus of the demand curve implies excess capacity, which means a low marginal revenue product.
The more significant the gap between short-run and long-term supply curves, the more likely consumers will have excess demand.
In a restaurant, the marginal revenue product of waiters is high because there are more patrons than they can handle. Extra waiters would be a surplus to demand and thus challenging to produce. A manager could hire fewer waiters, but that would mean longer waiting times for customers and reduced demand.
In economics, the law of diminishing marginal returns states that additional units of input will have a minor effect on output beyond a certain point. The law of diminishing marginal returns is typically used to explain why increasing production in the short run above some input level will eventually lead to an increase in unit costs or average cost.
In restaurants, for example, this law would apply to the addition of extra waiters or cooks. If there are already ten cooks in a restaurant, adding one more will likely increase output by less than 10% (diminishing marginal returns).
According to Lightspeed HQ, “One of the key concepts you need to understand to set proper menu prices is food cost percentage.” If you need help, you could always use a food cost calculator.