Standard Food & Beverage Costs: Types & Importance

Instructor: Allison Moore

Allie teaches college business and culinary management courses. She has a master's degree in business administration.

This lesson covers the basics of restaurant cost control and explains how to use food and beverage cost data to make better business decisions. Concepts covered include food cost, beverage cost, prime cost, and Cost of Goods Sold.

Food and Beverage Cost Control

Any business trying to sell a product is likely going to incur costs in order to get that product sold. In the case of restaurants and other food operations, these costs come mainly in the form of food, beverages, and labor. Restaurant operators purchase food and beverages, usually in the form of raw ingredients, and then must pay for the labor of chefs and cooks who can transform those ingredients into salable finished products.

In order for a restaurant to be profitable, it must sell these finished products at a higher price than it takes to prepare them. Careful and methodical control of costs helps a restaurant operator set accurate menu prices and is crucial for operational success and profitability.

Cost of Goods Sold

Food and beverage costs show the value of food and beverage products that were purchased and consumed in an operation over a set period of time, such as weekly, monthly, or annually. Consumption is based primarily on all of the raw ingredients used to produce menu items, but it is also based on usage or waste for other reasons, such as free employee meals, food spoilage, or theft.

Food and beverage cost can be determined using the following formula:

(Beginning Inventory + Purchases) - Ending Inventory = Cost of Goods Sold

The beginning inventory is the value of the inventory at the beginning of a tracking period (for example, March 1st - March 31st). Anything purchased during the month is recorded in purchases and added to the value of the beginning inventory. At the end of the month, the value of the inventory is calculated again, and the difference is the Cost of Goods Sold.

The Cost of Goods Sold figure can then be used to calculate food and beverage costs as a percentage of sales. The results provide figures that can be used as a benchmark to analyze and compare the performance of the operation using both historical data and industry standards. These numbers can also help determine budgets for future months, and allow management to make better decisions for greater business profitability.

Types of Costs

While the Cost of Goods Sold figure includes all food and beverage costs, these costs are often further broken down into categories. Food costs are usually examined separately from beverage costs, as beverages typically offer higher profit margins and require much less labor to prepare. Beverages can be broken down further into non-alcoholic and alcoholic beverage costs, as again, the ingredient costs and labor for soda, coffee, and tea are usually going to be much less than the costs for purchasing and preparing various alcoholic drinks. In addition, because liquor costs can be so much higher than any other ingredient used in the restaurant, these products often have their own separate inventory to ensure careful tracking of usage and to deter pilferage.

Prime Cost

Another important number that a restaurant manager can use to analyze business performance is the prime cost. Prime cost factors in total Cost of Goods Sold (food + beverages), plus total labor costs. The common rule-of-thumb number to aim for in the restaurant industry is around 60-65%. This means that for every $1.00 worth of food and beverages your operation sells, it costs the business about $0.65 in ingredients and labor. The remaining $0.35 is used for other operating expenses, such as utilities or marketing, and anything beyond that is profit to the business.

As an example on a larger scale, suppose a restaurant is bringing in $1 million in revenue per year. It should aim for a prime cost of around $650,000. This means it will be spending about 65% of its total revenue on food, beverage, and labor costs. Suppose further that the additional operating expenses for the year add up to $250,000. This means the business can take home $100,000 in profit for the year.

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