Theoretical Food Cost vs Actual Food Cost - Acceptable Variances

Theoretical Food Cost vs Actual Food Cost – Differences & Acceptable Variances

In our last video called “The Myth of Food Cost % – why standard food cost evaluations techniques are inadequate” we discussed Sales Mix and how it impacts your food cost percentage. In this addition of Whiteboard Chef Management we are examining the differences between theoretical food cost vs actual food cost, what things impact them, and what is an acceptable variation between the two when it comes to your P&L meetings. If you haven’t watched Part 1 (Myth of Food Cost %) of this series then I strongly recommend that you watch it before watching this one.

So, a brief recap…Theoretical Food Cost Percentage is your Sales Mix. It represents what your food cost would be based solely upon menu items sold. Different items on your menu have different food cost percentages, so if you sell a lot of high food cost items one month then you will have a high food cost that month. Theoretical Food Cost evaluates this fact. It does not account for all the other things which can negatively impact your food cost such as waste, cook errors, server errors, theft, inventory errors and so on.

To Calculate Theoretical Food Cost Percentage Requires 3 Things

Accurate Written Recipes
Accurate Updated Costing
Accurate Food Sales Reporting

Accurate recipes means that you have actually weighed and documented everything which goes into a recipe and scaled it out for actual yields if it is a large batch recipe. Something which is often overlooked is your “give away” items such as bread, rolls, butter, ketchup, steak sauce, salt & pepper, etc. These are the little things which you might overlook in your recipes and will not be represented in your theoretical food cost but which will certainly show up in your actual food cost and will therefore be a part of your variance between theoretical and actual food cost percentages.

Accurate updated costing in all your recipes is essential in order to have an accurate theoretical food cost. Best practices are to update all the costing in your recipes whenever you do your period end inventory. This way you will have accurate numbers for both your actual and your theoretical.

Accurate food sales reporting is typically accomplished through your POS system. If you are extremely fortunate you may have a POS system which integrates with your recipe software and with your inventory control software and it may calculate theoretical food cost for you. But the whole concept of theoretical food cost is still relatively new to the hospitality industry so you may have to do it the old fashioned way by exporting your food sales from your POS to Excel. Here’s a link to an Excel Sales Mix form I created which you can use, the free download is near the bottom of the page.

Open Food – get rid of it! Using the Open Food key in your POS system can become a black hole which can skew your food cost. There is no cost associated with it and the sales amount varies by use so you have no way of knowing what your staff are actually selling. They could be using it to pad their pockets by deep discounting an item to a guest and reaping a bigger tip. Create a POS key for all the open food items which your staff use on a fairly regular basis.

Actual Food Cost Percentage on the other hand is what we are used to discussing in our P&L meetings. It includes all the mistakes and errors which can impact our food cost. The list of possible problems is both extensive and complicated…read a complete discussion on the topic in our 40 Thieves of Food Cost article.

Be Better Prepared for your P&L Meetings!

You should always know your theoretical food cost vs actual food cost percentages before you go to your P&L meetings, and you should have taken the time to analyse the numbers and be prepared to answer any questions which your numbers prompt. Knowing both numbers gives you a better picture of the health or trouble of your operation.

If your theoretical FC increased by 2 points then it only makes sense that your actual FC has also increased. Tracking fluctuations in theoretical will also take the mystery out of fluctuations in your actuals. I have seen my theoretical FC swing +/- 2 full points. Knowing this can be a huge stress reliever!

What is a Good/Acceptable Variance between Theoretical and Actual Food Cost Percentages?

Honest answer…I don’t know! I don’t have enough data from enough different operations to clearly say. But I will share what I have learned by tracking 5 operations over a span of 12 months.

Evaluate your operation for 6 to 12 months. You will see a trend emerge as an average variance. It may bounce quite a bit month to month, but taking an average over the number of months tracked will yield helpful stats.
Each operation will be different…there’s no “one size fits all.”
A Sandwich Venue (or perhaps other operations w/o much scratch cooking or perishable inventory) had an average variance of about 1 point between theoretical and actual food cost (again, it did jump around a lot, but this was the average over 12 months).
An Upscale Fresh Seafood Venue had an average variance of about 1.5 to 2 points.

Next Best Practices

After you have established what the trend between theoretical food cost vs actual food cost is for your venue it is then time to begin to evaluate what is contained within the variance. This goes back to the whole 40 Thieves of Food Cost. Start by re-evaluating all your recipes to be sure that they are accurate. What food items are missing from your recipes which count against your actual food cost (fryer oil, bread/rolls, butter, ketchup, etc). If your recipe software has the ability to add a yield percentage to food items then consider implementing accurate yields. For instance, do you really get 100% yield from your mayo? I doubt that all your staff are that skilled/disciplined with a rubber spatula!