The Food Cost Percentage Myth –
why standard food cost evaluation & evaluation techniques are insufficient

Food Cost Percentage Calculation Myth - why food cost evaluation techniques are insufficientSee image licensing info

Welcome to the first edition of Whiteboard Chef Management, and ongoing video series. We are going to talk about the myth of a budgeted food cost percentage being the accurate and/or best way to evaluate the success or failure of a restaurant or chef.

So to begin with, what is food cost percentage? In it’s most simplified version it is
(beginning food inventory + food purchases – ending food inventory) / food sales
This equation will give you your Actual Food Cost Percentage for the period and it is the most common equation used by managers and corporate number crunchers to evaluate the budgetary success of a restaurant/chef.

At the end of the period your actual food cost percentage will be compared against your budgeted food cost percentage to see if you pass or fail. Hopefully the budgeted food cost is determined by people who want an achievable, realistic food cost percentage. I’ve seen many corporate operations choose a “pie in the sky” number which is never achievable…but that’s a whole different story.

Evaluating your food operation or chef based upon their actual food cost percentage is an antiquated technique which by itself is utterly inaccurate as an evaluation tool because food cost percentage is a relative number based upon or dependent upon your sales mix.

Download the video presentation of the Sales Mix -vs- Food Cost discussion!
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You MUST consider both your actual food cost percentage and your theoretical food cost percentage in order to get a true picture of a restaurant’s success or failure when it comes to food cost. Theoretical Food Cost Percentage is your Sales Mix, meaning that based upon the mix of total food items sold your food cost percentage should be the combination of the food costs from all those items. It’s important to remember that all menus have a variety of food cost items, some with a high food cost and some with a low food cost. Hopefully the budgeted food cost is an accurate representation of the items your guests actually purchase.

Theoretical Food Cost Percentage (aka Sales Mix)

Let’s look at an example of the impact of sales mix on actual food cost percentage. Let’s say that the budgeted food cost is 42%:

Sold mostly Lobster
Cost Sales $ Food Cost Margin # Sold TT Cost TT Sales Food Cost Margin
Lobster $25.00 $50.00 50% $25.00 900 $22,500 $45,000 49.6% $23,200
Spaghetti $3.00 $10.00 30% $7.00 100 $300 $1,000
Total $22,800 $46,000

 

Sold mostly Spaghetti
Cost Sales $ Food Cost Margin # Sold TT  Cost TT  Sales Food Cost Margin
Lobster $25.00 $50.00 50% $25.00 100  $2,500 $5,000 37.1% $8,800
Spaghetti $3.00 $10.00 30% $7.00 900 $2,700 $9,000
Total  $5,200 $14,000

 

These 2 examples show the effect on your food cost % if one month you sell mostly a high food cost item and then the next month you sell mostly a low food cost item. So, let’s dive into this. In the top example you sell 900 lobster  at a 50% food cost and 100 spaghetti at a 30% food cost. Your sales mix for the period is a 49.6% food cost. Since your budgeted food cost is 42% but you ran a 49.6% it appears that you have done poorly and unenlightened managers will rip you up at your P&L meeting for running such a bad food cost.

But in the second example you sell 900 spaghetti and 100 lobster. Now your sales mix for the period is 37.1% against a budget of 42%…you look like a star! Pats on the back, the P&L goes easy, everyone is happy. But should they be? Something of primal importance is being overlooked…the Margin earned.

Margin is the difference between food sales and the cost of goods sold. The lobster has a 50% food cost but it also has a $25 margin, whereas the spaghetti has a 30% food cost but only a $7 margin. So in the top example you have a total margin of $23,000 and in the bottom example a margin of only $8,800. Would you rather have a 50% food cost percentage and $23,000 -or- would you rather have a 37.1% food cost percentage and $8,800? Give me the money! This clearly shows that using just a food cost percentage as the most important evaluation of an operation is utterly inadequate.

Food cost percentage does not pay the bills! You cannot take food cost percentage to the bank.

Margin and money in the bank is what pays the bills. It is virtually always better to have a high margin of profit even if it means a poor food cost percentage.

So how do you reconcile these two food cost evaluation methods…actual food cost and theoretical food cost? Both numbers must always be brought to your P&L meetings. You should always know what your sales mix theoretical food cost is as well as what your actual food cost is…ALWAYS!

See the next Whiteboard Kitchen Management video The Difference Between Theoretical Food Cost & Actual Food Cost.

Related Info:

 What are your thoughts about this discussion? Does your company compare Actual FC and Theoretical FC?

 

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