Food Cost Percentage: Definition & Calculation

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  • 0:04 What Is Food Cost?
  • 0:36 Why Is Food Cost Useful?
  • 1:10 Calculating Percentage…
  • 1:42 Reasons for Differences
  • 2:23 Example
  • 3:06 Lesson Summary
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Lesson Transcript
Instructor: Kaitlin Oglesby

Kaitlin has a BA in political science and extensive experience working in the business world as Director of Marketing and Business Development at a financial advice firm.

For a restaurant owner, food cost percentage represents one of the fastest ways to make sure an establishment is pricing its goods properly, as well as making enough money with respect to one of its biggest expenses.

What Is Food Cost?

If you own or manage a restaurant, you know that food cost matters. It's generally your largest or second largest expense, making up over a third of your budget. Typically, only staff expenses can even come close. Therefore, knowing how much you spend on food compared to how much you spend on everything else is a useful measure of whether you're running an efficient operation. In this lesson, we'll focus on why the food cost percentage is important and how to calculate it and look at an example to see what we can learn about a restaurant by using food cost percentage.

Why Is Food Cost Useful?

As we noted earlier, food cost is very often the single most expensive item in a restaurant's budget. It's also one that is open to the most fluctuation. A cook's wages are unlikely to change several times a year, but the price of fresh produce certainly will. Also, the food cost percentage lets you see if you need to adjust prices. While it is only a rough guide, many restaurants try to keep their prices to about 3 to 3.5 times the cost of food. If your food cost percentage is 40%, it may indicate that your customers are getting a bargain.

Calculating Percentage of Food Cost

To calculate the percentage of food cost, you first must calculate how much you've spent on food in a given period. Then determine your net inventory by subtracting your ending inventory from your beginning inventory. Subtract your net inventory from your purchases and then divide the resulting number by your total food sales for the given period. You'll end up with a decimal, which you can multiply by 100 to get your food cost percentage. In short, the formula is:

(purchases - net inventory) / food sales = food cost percentage

Reasons for Differences

If you calculate your food cost percentage and it seems wildly off, there are a few possible causes that should be examined before you start worrying that your restaurant is in financial trouble. Ask yourself:

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