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:

• What is restaurant food cost?
• Calculating your food cost percentage
• Why is your food cost percentage imporant?
• What is a good food cost percentage?
• Setting 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 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 have to 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:

• 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.
• 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.
• 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.
• 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.

Once your budgeting system is firmly in place, you can get started with food costing.

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
• Why it’s important to calculate your food cost percentage
• 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.

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 are 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: 

• 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 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: 

• 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. 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:

• 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.  
• 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:

• 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.

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.