What is Food Cost?
Food cost seems to be the one term everyone in the foodservice industry knows or has heard, but if you ask someone to explain what it is; you’ll get a different perspective with every reply. What you will find is each of their answers has some level of accuracy and will define the term to a certain degree.
The term itself has different meanings based on how the term is used. Often the term “food cost” is confused with the term “product cost” or is inaccurately used to define a measure of profitability. While food cost does have a direct impact on your bottom-line, it is not a measure of profit. There are those who will argue that both food cost and product cost are the same things, but to help better define the two, we will refer to food cost as cost associated with just food products and product cost would include other costs such as paper and packaging.
When talking about food costs, we are talking about a percentage. This percentage can represent the portion that the total raw cost of products makes up within a selling price for a single item or dish, or it can be used to show the relationship between total revenues and the total amount of product used for a specific period of time (week, month). The food cost percentage of a selling price is used to help us determine and plan our profitability while food cost as a percentage of sales tells us how effective we were in managing our product over a period of time.
Food Cost Terminology:
Raw Cost: The total cost of ingredients or products that make up a single menu item or portion
The percentage of the selling price that the raw cost makes up
An operational measurement of food usage as a percentage of sales
Product Cost: Includes Food and Paper Cost of either a selling price or as a percentage of sales
Gross Profit: Revenue minus the cost of goods to produce your product
Item Contribution: Selling Cost minus variable cost of a individual menu item
Variable Cost: Menu item cost that fluctuate due to cost and usage including raw cost of products and paper cost
Net Profit: Revenue minus your cost of goods and all operational and overhead expenses
Both of these definitions of food cost are important controls to help maximize bottom-line profit. While food cost within a selling price will affect food cost as a percentage of sales. Understand that, because you price your products or menu items at a particular food cost percentage, this does not necessarily mean that your food cost as a percentage of sales will reflect that same number. There are many factors that are controllable such as waste, over-production, theft or even portion control, that if gone unchecked will have a negative impact on food cost as a percentage of sales and profitability. In the same thought, there are factors that are non-controllable such as price, that if locked into a menu price will negatively impact your food cost as a percentage of sales. This is why you will see volatile menu items such as seafood priced as: "Market Price."
Knowing how to calculate these numbers is only part of the equation. Understanding what these numbers mean and how they impact business is what is really important. Additionally, having a clear knowledge of what drives these numbers is the difference between success and failure. Too often people want to recite numbers to impress their boss, but they lack the knowledge and experience to know exactly what these numbers represent or even worse; how to control them.