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 important?
• What is a good food cost percentage?
• How to lower food costs
• Setting profitable menu prices
• How to monitor menu pricing’s effect on sales

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 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.

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.  

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. 

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. 

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.

How to lower restaurant food costs

Find cost-effective vendors

Can you get the same quality ingredients for a lower price with another vendor? Would it help to focus on local suppliers to save on transportation costs?

Alternatively, you may be able to negotiate better terms with your existing suppliers. Engage with your current vendors and find a win-win scenario that helps you lower costs without making them feel like they’re getting the raw end of a deal. Maybe you can increase your order volume or pay upfront. Or perhaps you could consider exploring long-term contracts to secure better pricing. This approach not only provides you with cost savings but also gives the supplier a guaranteed customer for a specified period, making it a mutually beneficial arrangement.

Whatever the case, leveraging bulk purchasing or committing to a long-term partnership may provide you with more favorable pricing and terms, ultimately reducing your overall food cost.

Buy ingredients together with other businesses or join a group purchasing organization

Can’t afford to buy in bulk? partner with other food merchants so you can purchase ingredients together. This can significantly reduce costs through bulk purchasing discounts and shared delivery fees.

When you pool your resources, you and your partners can access lower prices that are typically reserved for large orders, improving your negotiating power with suppliers. 

Not only that, but you can foster a community of businesses supporting each other, potentially opening up avenues for further collaboration and mutual growth.

There are also group purchasing organizations you can enroll in, which offer collective buying power for their members. That way, participants can access bulk purchasing discounts and preferred pricing that would be difficult to negotiate individually. These organizations typically negotiate contracts with suppliers on behalf of their members, leveraging the combined purchase volume to secure lower prices on food, beverages, kitchen equipment, and other supplies.

If you’re in the United States, you can check out companies and organizations like:

• Dining Alliance
• Entegra 
• Independent Restaurant Coalition (IRC)

Just bear in mind that these groups charge membership or service fee, so factor that into your costs. 

If you’re a member of any restaurant trade organizations, talk to other members to get recommendations for which buying groups to join.

Plan your menus better

You may need to rejig your menu a bit to ensure that you’re offering in-demand dishes while minimizing costs. 

Serve dishes with overlapping ingredients so you can reduce waste and inventory requirements. Another option is to focus on seasonal dishes that have ingredients that are more affordable and at their peak quality.

In some cases, you might need to cut the fat, so to speak, by reducing the items on the menu. Double down on the dishes that are selling, so you can have better control of your food costs and revenue. 

Take for example, Maynard, which specializes in local, high-quality vegetarian and vegan food. Maynard keeps their menu concise and focused by ensuring they’re only serving dishes that resonate well with their customers and have a high turnover.

“We have a small space and a small kitchen, so we have to keep our menu small to stay in control. Everything has to be streamlined. If something isn’t selling enough, it doesn’t stay on the menu,” explains Owner and chef Brodie Somerville.

To that end, Brodie pays close attention to his POS reports and gleans actionable menu insights. 

“[Lightspeed Reports] are a really great feature, particularly the product reports. With product reports, I can see what products are selling or not selling,” Brodie adds. 

Reduce portion sizes

Reducing your portion sizes can lead to less waste and require fewer ingredients per dish, which then lowers your food costs. 

Let’s go back to Johnny’s example above. In his case, he could serve a 6-ounce burger rather than an 8-ounce burger to reduce portion sizes and his food cost per serving.

In doing so, he not only decreases his ingredient expenses but also potentially increases the perceived value of his meals. Customers may appreciate the quality and presentation of a well-crafted, appropriately portioned dish over sheer quantity.

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 fold. 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.

Aside from streamlining your operations and automating manual tasks, the right restaurant POS can shed light on data and trends you can use to make smarter decisions around your menu items and ingredients. 

Peter Marzulli, Director of Operations, RH Gold Hospitality says that their POS (Lightspeed) significantly enhanced their cost management strategies.

“Indirectly, [Lightspeed] has helped me reduce costs in a fair amount of ways. From analyzing menu items and whether they sell, whether there’s waste from following the inventory.”

Peter adds, “It’s very helpful [to be able to identify top selling and underperforming menu items]. It’s good to have an instinct knowing something doesn’t sell, but it needs to be backed up with firm data. [Lightspeed] is an easy way to do it.”

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. 

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.

FAQs about Food Cost Formula

How do you calculate food costs? 

To calculate food costs, you determine the total cost of ingredients used to make a dish and can use the basic food cost percentage formula:

Food Cost Percentage = (Cost of Ingredients / Selling Price) x 100 ​

What is the formula for cost per portion? 

The formula for cost per portion is: 

Cost per Portion = Total Cost of Ingredients / Number of Portions

What is the formula for costing? 

In a broader sense, the formula for costing a product or service often includes direct costs (like ingredients or raw materials), indirect costs (like overhead), and labor. A simple way to express this is: 

Total Cost = Direct Costs + Indirect Costs + Labor Costs 

What is the formula for labor cost per meal? 

The formula for labor cost per meal is:

Labor Cost per Meal = Total Labor Cost / Number of Meals Served

This calculates the labor cost associated with each meal served, helping businesses understand and manage their labor expenses relative to their sales volume.

What is a good food cost percentage? 

A good food cost percentage typically ranges from 28% to 35% in the restaurant industry, though this can vary based on the type of restaurant, the cost of ingredients, and the pricing strategy. Fast food restaurants may aim for lower percentages, while fine dining establishments might have higher percentages due to the cost of premium ingredients. 

What is the standard price method? 

The standard price method involves setting a predetermined cost for ingredients, labor, and overhead expenses based on expected standards or historical data. This method is used for budgeting and variance analysis, helping businesses identify where actual costs differ from expected costs.

What is the standard costing model?

The standard costing model is an accounting method used to estimate the expected cost of production in advance. It involves calculating a standard cost for materials, labor, and overheads, which serves as a benchmark for evaluating actual production costs. Variance analysis is then used to identify and manage differences between actual costs and standard costs, enabling more effective cost control and decision-making.