Food cost has a direct impact on a restaurant’s operating profit. Because no two operations are identical, it is necessary to calculate the food cost of your particular restaurant monthly. Industry averages cannot be used as an accurate standard.
The concept of food cost management must be examined at several different levels in order to take into account any and all variables. For example, one variable is your menu sales mix. When one menu item sells better than another, there will be variances in your overall food cost and you should know how this affects your profits.
Maximum allowable food cost percentage
Essentially, there are four aspects of food cost that must be individually calculated for each operation.
The actual food cost percentage is calculated for the income statement. The menu sales mix determines potential food cost percentage.
The standard food cost percentage includes a waste allowance.
The maximum allowable food cost figure determines the food cost percentage an operation needs in order to achieve its profit objective. It is calculated from the actual operating budget of the business.
To calculate the maximum allowable food cost percentage, select a representative accounting period and determine the amounts for payroll related expenses (salaries, wages, government mandated taxes, and fringe benefits), overhead expenses (advertising, utilities, maintenance, other supplies excluding food costs). Also include a target figure for profit before tax.
Convert the dollar value for these three areas to a percentage of the total sales. Remember that food cost is not included. Now subtract these numbers from 100 to determine the maximum allowable food cost percentage.
If you are working with the following percentages of sales payroll 27 per cent, overhead 20, profit 15, then the maximum allowable food cost percentage is 38 per cent (100 – 62).
Actual food cost
The actual food cost percentage appears on the monthly income statement. This is the cost of the food consumed by your patrons, and does not include employee meals or spoilage.
Although the actual food indicates what the food cost is currently running, it has little value unless the operator knows what the target percentage should be.
Potential food cost
Potential food cost is a theoretical or ideal percentage, which indicates what the food cost should be in a perfectly run restaurant, given the sales mix. It reflects the fact that the most popular menu items will have the greatest impact on the overall food cost percentage.
To calculate the overall foods cost multiply the cost of each item by the number of portions sold.
Multiply the sales price by the number of portions sold.
Add both columns and them multiply the total cost by 100 and divide it by the total sales of the column. This will give you the potential food cost.
If then your total cost is $ 3,000.00, and your sales $ 10,000.00, your potential food cost is 30 per cent. If the sales mix produces a potential food cost that exceeds the maximum allowable cost. You won’t achieve your profit target.
Standard food cost
Management needs to adjust the potential food cost to include waste and spoilage that occurs during normal preparation, as well as an allowance for complimentary or discounted meals to employees and patrons. An acceptable variance will range from half to three percentage points of food sales.
The exact percentage is determined from management studies. The standard food cost percentage is calculated by adding this variance percentage to the potential food cost.
The difference between actual food cost and standard food cost reflects inefficiencies that should have been controlled by management
How they relate
Bringing all four aspects of food cost together shows the importance of each in examining food costs.
Assume that you have a maximum allowable food cost percentage of 35. The month-end food sales and inventory figures for the same period result in an actual cost percentage of 34.0. If the food cost analysis stops at this point, one may conclude that the food cost is in line because the actual food cost is slightly below the maximum allowable food cost percentage.
However, further analysis using the weighted sales mix analysis reveals a potential food cost percentage of 29.4 the variance that exists between the actual and potential food cost percentage is 4.6 percentage points, much too high for the existing sales mix.
Management has set a standard food cost percentage of two per cent to take into account acceptable food waste etc. The actual food cost percentage is still 2.6 percentage points higher than the standard food cost percentage. Thus minimum profit objectives are being exceeded, but they are not being optimized. Finding out why, and correcting the problems, will mean more for the bottom line.