Calculate Food Cost | 4 mins read

The Proper Way to Calculate Food Cost

the proper way to calculate food cost
Mary Kate Morrow

By Mary Kate Morrow

The Importance of Calculating Food Cost

The restaurant industry is highly competitive, many restaurants rely on a very thin profit margin to keep their doors open. In order to maximize bottom line profitability and stay in business long term, restaurants must implement cost control methods.

Business owners who calculate food costs properly can more effectively create and update their restaurant menu. There are many different cost formula methods to choose from including-

  • Food cost formula
  • Actual food cost
  • Ideal food cost
  • Food cost percentage
  • Cost per serving
  • Plate cost
  • Liquor cost
Benefits of proper food costing ranging from menu optimization to portion control. Food costing can help decrease food waste by allowing food industry professionals to not overstock or understock their inventories.

Avoiding food waste will optimize your beginning and ending inventory as well as decrease unnecessary labor costs associating with disposing food. Your customers will also decrease their food waste with correct portion sizes, which will not leave them feeling unsatisfied, wasteful, or uncomfortably full.

Correct food pricing will make your restaurant more competitive, especially if you take the time to research the menu prices of similar establishments in your geographical area. Cost control methods provides customers with optimized menu prices while boosting your bottom line profitability long term.

Difference Between Recipe Costing and Food Costing

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Each cost formula may be used concurrently or interchangeably depending on your restaurant's needs and wants. Food industry professionals should make sure they understand the difference between each cost formula used to calculate food cost as well as what each of these formulas can teach them about their restaurant.

One example of a cost formula crucial for food industry professionals to learn the difference between is recipe costing and food costing. Food costing determines the cost per individual dish. The food cost formula is often used to help price menu items accurately and appropriately.

Recipe costing factors in the cost of each separate ingredient used in a dish. In order to understand the total cost of a recipe, you must also include labor costs for preparing and cooking the menu item.

Food costing and recipe costing require analysis of many changing circumstances. For instance, seasonal changes and novel food trends can affect the price of ingredients. If done correctly, food industry professionals can use food costing as not only a cost control method but also to save money where they may not otherwise have noticed a trend.

Both recipe costing and food costing can be simplified through software programs. A recipe costing software program has an option to use an ingredient cost database that can display vendor costs for comparison. For food costing, the software may offer a food cost calculator that even compares your menu pricing to local competitors.

Although food costing and recipe costing requires time and energy, it is well worth crafting a menu that will perform more effectively and produce more profit for your restaurant. Steps for pricing your menu accurately using a cost formula include-

  1. Write down each menu item
  2. Below the menu item title add recipe details
  3. Make a list of all ingredients used for the menu item
  4. Note ingredient cost per recipe
  5. Divide this total by the total number of servings each recipe will create
  6. Take a moment to consider portion sizes
  7. Rank menu items by their total cost and total sales
  8. Calculate risks of over and underbuying
  9. Add in other factors including labor and utilities

How to Price Menu for Maximum Profits

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Proper menu pricing requires complex analysis of many different cost formula types as well as additional considerations. There are many different menu pricing methods, including-

1. Competition pricing- Researching the menu pricing system of your competitors can help you with your own menu pricing technique. If you price your item similarly to your competitor, you will be relying largely on the quality of your menu item and your unique brand.

Pricing your item higher than the competition is helpful if your restaurant is more upscale. Menu pricing at a lower cost per menu item than the competition is great if you want to provide a lower cost option or you are more casual than your competitor.

2. Supply and demand- Some restaurants have a stronger ability to price menu items based on demand based due to their geographical location. For instance, a restaurant located in a stadium or amusement park can upprice its menu items due to the lack of other options available for customers.

Uncommon or harder to find food offerings can be priced high for a similar reason. If you provide a menu item that is in low supply but high demand, your customers are much more likely to pay a higher price.

3. Menu psychology- Psychology can be incredibly useful in menu planning and menu engineering. Case studies have found that customers are most likely to order the menu items they notice first, usually the top two items or bottom item in a section.

High profit menu items can be highlighted in your menu to direct customer attention to them and increase the likelihood of a customer ordering them. It is important to not highlight too many menu items as this may overwhelm your customers.

The golden triangle is a psychological term used by psychologists to explain how people look at menus. According to this theory, high profit menu items should be put in the center, top right, and top left corners of the menu. Proper menu engineering that uses menu psychology can provide you a valuable edge over the competition.