From the blog How to Calculate and Manage Food Cost: A Step-By-Step Guide

The foodservice industry poses unique challenges for small business owners, especially when it comes to lowering overall costs. Among these, food cost is one of the largest – and the easiest to control. It’s estimated that restaurateurs spend as much as 32% of every dollar on ingredients alone. 

When one-third of your budget is eaten up by food costs, you can’t afford to use it ineffectively. This is where food cost percentage comes in.

It’s a helpful tool for improving profitability. With it, you can determine whether you’ve priced menu items correctly. It can also tip you off to when you should reevaluate recipes, portion sizes and even suppliers. 

We’ll teach you how to calculate food costs using a couple different food cost percentage formulas. You’ll also learn some ways to keep food costs in line.

Food cost percentage: Two ways to calculate it

As a restaurant business owner, you need visibility into two areas.

First, your business’s overall progress toward profitability. Second, how your dishes are performing on the individual level. That’s why there are two methods of calculating your food cost percentage: the actual food cost formula and the ideal food cost formula. 

Let’s walk through both formulas step by step. We’ll use the example of Bob’s Dogs, a (fictitious) gourmet hot dog restaurant, to show how these costs add up for a small business over one week.

Finally, it’s important to note that you can include or exclude the cost of beverages in these calculations. If cocktails or hot drinks make up a significant portion of your revenue, it may make sense to factor them into these formulas.

Let’s dive in.

How to calculate your actual food cost percentage 

Use this formula to find your total food costs as a percentage of your total food sales. The higher the percentage, the more your spending is outpacing your revenue.

It’s called “actual” food cost because it also accounts for changes to your inventory value over a given period of time. Using this formula, you can discover issues with food waste, inconsistent portion sizes or even inventory theft – and make improvements. 

Here’s how to calculate your total food cost percentage:

Actual Food Cost Percentage = [(Beginning Inventory + Inventory Purchases – Ending Inventory) ÷ Food Sales] x 100

1. Find your beginning inventory

Calculate the value of your inventory at the start of the time period you’re measuring. You can use inventory management features in a restaurant point-of-sale (POS) system to make this step faster. With ingredient level inventory tracking, small purchases and one-off orders won’t get lost. Before counting, check the status of purchase orders and make sure all shipments are in for the day.  

Bob uses his POS system to calculate that he has inventory worth $12,000 at the start of the week. He accounted for everything from cooking oil to hot dog buns. 

Beginning Inventory: $12,000

2. Add any inventory purchases during this time period. 

This is the amount you spent on new inventory in a given time period. During the week, Bob runs out of items like pickle relish, onions and peppers. He ends up making an additional $2,000 in food purchases.

Inventory Purchases: $2,000

3. Tally up your ending inventory

Once the week is over, Bob uses his POS system again to count up the ingredients and supplies he has left over. He finds that his inventory is now worth about $8,000.

Ending Inventory: $8,000

4. Find your Food Sales

Bob pulls up his total sales for the week on his POS. He finds that he made roughly $17,000 in gross revenue for his hot dogs, fries and milkshakes.

Food Sales: $17,000

5. Crunch the numbers

Bob plugs these figures into the original formula to find his total food cost for the week. 

Actual Food Cost Percentage = [(Beginning Inventory + Inventory Purchases – Ending Inventory) ÷ Food Sales] x 100

= [($12,000 + $2,000 – $8,000) ÷ $17,000] x 100

= ($6,000 ÷ $17,000) x 100

= 0.35 x 100 = 35% Food Cost Percentage 

Once Bob runs his food cost calculations, he sees he’s just above the industry range of 28–32% for a full-service restaurant. It’s normal for the actual cost of food for your restaurant to vary, but it shouldn’t be too far outside this range.

The menu for an upscale restaurant concept, for example, may feature expensive ingredients like filet mignon or saffron. The owner may plan for a food cost percentage of 40% due to the higher cost of goods sold (COGS). 

Bob thinks his food cost percentage is a little high. He wants to reevaluate his menu pricing. He’ll use the ideal food cost percentage, which we’ll cover next.

How to calculate your ideal food cost percentage

The thinking behind the “ideal” food cost percentage is that it’s beneficial to understand your food costs in the “ideal” situation. That is, a world that doesn’t include inventory surpluses or shortages.

You can find the ideal food cost percentage per menu item or for your entire restaurant. At the item level, this is called ideal food cost percentage per dish. It’s helpful to go through this formula first before expanding to your entire menu.

Calculating your ideal food cost percentage per dish

Let’s use an example menu item from Bob’s Dogs to work through this formula:

Ideal Food Cost Percentage Per Dish = [(Food Cost Per Dish) ÷ (Total Sales Per Dish)] x 100

Here are two other formulas you’ll use:

Food Cost Per Dish = Cost of Ingredients x Number Sold

Total Sales Per Dish = Sales Price x Number Sold

The ingredients used in one Bob’s Chili Dog – bun, hot dog, chili, cheese and onions – cost him $1.50. Bob sells 50 per week at $3.50 each. Using the above formulas, he finds the following: 

Ideal Food Cost Percentage Per Dish = [($1.50 x 50) ÷ ($3.50 x 50)] x 100

= ($75 ÷ $175) x 100

= 0.42 x 100 = 42% Ideal Food Cost Percentage for one Bob’s Chili Dog

For restaurateurs looking to expand their operations, this is an essential metric. If you discover that your per-item profit margins are too low, you can pivot to some of the most profitable food items you serve. That way, your menu prices are on target before you open your doors. 

If Bob were to lower his hot dog’s ingredient costs by 25 cents, for example, his ideal food cost percentage would be about 35%, closer to his actual overall food cost. 

Calculating your ideal food cost percentage

Apply this formula to the total costs of all ingredients and sales to find your overall ideal food cost percentage.

Ideal Food Cost Percentage = [(Total Costs Per Dish) ÷ (Total Sales Per Dish)] x 100

Bob spent $4,500 on ingredients for all his hot dogs, fries and milkshakes during the week. His total sales were $17,000. 

Ideal Food Cost Percentage = [($4,500) ÷ ($17,000)] x 100

= ($4,500 ÷ $17,000) x 100

= 0.25 x 100 = 25% Ideal Food Cost Percentage

Bob’s ideal food cost is 10 percentage points lower than his actual food cost. That means he may be overspending on inventory or losing money to food waste. Whenever possible, you want to align ideal and actual food costs – and keep them low.

Next, we provide tips to do just that. 

Our top suggestions for reducing food costs

Knowing your food cost percentage lets you optimize your menu pricing and keep costs in check. Maximize your bottom line using these ideas: 

  1. Compare prices offered by different food distributors periodically as these can change. Check for savings and negotiate or renegotiate with current vendors so you’re getting the best deal.
  2. Eliminate guesswork across your operations with a POS system. Monitor spending at the ingredient level and see sales by dish, time of day and more.
  3. Watch your portion sizes. Ask your back-of-house staff to note dishes that come back half-eaten.
  4. Reduce food waste using the First In, First Out (FIFO) food storage method. Older items should be regularly moved to the front of the shelves, refrigerator or freezer so they’re used first. Keep perishable food on hand low to reduce spoilage.
  5. Try implementing seasonal menus to save money. In some cases, you may be able to replace fresh ingredients that are out of season, like fruit, with dried or canned versions without sacrificing quality. When you do use seasonal produce picked up from your local farmers market, remember to tout that to your customers, who may see it as a perk.
  6. Before adding a menu item, determine the food cost, target sales, and which dishes may compete with your new addition. If the dish will have low profit margins, it may not be worth it to buy and store extra inventory.
  7. Experiment with the order and layout of dishes on your menu. Display your profitable items prominently, or promote dishes that need sales using your daily specials.

Keeping Food Costs in Check

Food cost is one of the biggest operating expenses for restaurants. But when you know your way around these food cost percentage formulas, you’re in control.

Take charge of your inventory spending and usage, from a single ingredient to every dish on your menu. It involves a lot of numbers – tracking sales and digging into your business financials – but the payoff is worth it.

You’ll get more accurate menu pricing, better profitability by dish, and a solid understanding of your operational costs.

Are you ready to grow together?