Recipe costing is one of the differences between successful menu pricing and prices that leave your eatery with low profit margins. “Guessing” doesn’t offer reliable profits that allow you to:
- Pay your employees
- Earn a profit
- Save for slow seasons
And with ingredient price fluctuations, you need to know how to calculate food cost properly. We’re going to explain exactly how you can protect your profit margins and use a proven formula that other successful restaurateurs are already using.
Why Does Recipe Costing Matter?
Food cost control requires you to understand how much it costs to prepare dishes. While you might calculate each ingredient’s cost separately, there are other factors to consider:
- Utilities
- Employees wages
- Rent or mortgage costs
Before you can begin to work with these factors, you must work out recipe costing because it does a few things:
Protects Profit Margins
Food cost percentage should remain between 28% and 35%, according to research from JWU Online. If you use a recipe cost calculator and find that your margins are much lower than this amount, it’s time to either negotiate better rates on your ingredients or raise your prices.
Recipe costing helps you protect profit margins so that you can steadily grow your business.
Helps You Make Smarter Pricing Decisions
Your prices must allow you to have enough money to cover overhead and still have money to reinvest in your eatery. Smarter pricing decisions only begin when you have a starting point for each recipe’s cost.
Naturally, consumers are only willing to pay so much for your menu items, and costing helps you:
- Identify true ingredient costs
- Price your menu accordingly
- Eliminate unprofitable items
Makes Operations More Efficient
Optimizing your restaurant goes beyond food costs. You can use the data that you gather from your cost breakdown to better make decisions on:
- Ingredient usage
- Portion sizes
- Recipe modifications
Chefs and management can decide to change portion sizes, making them smaller, because you notice that patrons throw out 20% of their plate. Standardizing your menu and knowing exactly what each ingredient costs also helps chefs show off their creativity.
Your back-of-house operations are instantly more efficient the moment that you decide to cost out a recipe.
Drives Strategic Growth and Innovation
Costing helps you further identify high-performing menu items using data-driven intelligence. You can find innovative growth paths using information, such as:
- Customer preferences so that you can better select which items to keep and nix from a menu
- Market trends for items that may be falling out of or gaining favor
If you want to diversify or expand your menu, your menu costing data will include information on your most common ingredients. Buying more of these ingredients and adding them to new menu items means that you can request better deals from suppliers and reduce costs.
Slow and steady changes like these, that are backed by data, are what separate thriving restaurants from those that fail.
How to Cost Out Recipes Using the Food Cost Formula
Precision is required for you to cost out a recipe. Attention to detail helps chefs and restaurateurs understand how to maximize profitability. You’ll start with one of the most important steps:
1. List the Ingredients in Each Recipe
Food cost control demands meticulous inventory of your ingredients. Start with one main menu item and then do the following:
- Primary ingredients
- Garnishes
- Seasonings
Be sure that each ingredient is listed so that you can move on to the next step. If you’re making a large batch of a dish, such as several pounds of lasagna, you’ll need to calculate how many portions your batch makes.
For example, your batch may serve 10 people, and this will allow you to calculate your costs with greater accuracy.
2. List the Price of Every Ingredient
Use a recipe cost calculator or perform the following and calculate the price of each ingredient:
- List each ingredient
- Price the ingredient in the quantity purchased
For example, let’s assume that you buy 10 pounds of beef for $50, you would list this price on your ingredient list. And while this may seem counterintuitive to some extent, it’s a good option that allows you to move on to the next step.
3. Calculate the Cost Per Item
You have $50 down for your beef, but each serving requires just 1/4 a pound. Based on your prices, you’ll have (1 / 4) = .25 = (1 / .25) = 4 * 10 = 40.
Based on this calculation, you can make 40 servings of a certain dish with the quantity that you purchase.
The price for the beef in your dish?
$50 / 40 = $1.25.
Add all of the ingredients in a dish together like this so that you know exactly what each ingredient costs per serving.
4. Add Your Numbers to a Recipe Cost Calculator
Work through the ingredients for a dish and add them into a cost calculator to arrive at your total recipe cost.
Calculating Food Cost Percentage
Your food cost should also be broken into a percentage so that you know if a dish is profitable. Let’s assume that you sell a burger for $10 and the ingredient cost is $3, you would then divide (cost/price) or (3/10) or 0.30 * 100 = 30%.
When determining your food cost percentage, you’ll need to consider other variables that will impact your sales and profitability:
- Competitor pricing to be sure that you’re not too overpriced or underpriced for your target demographic.
- Labor and overhead pricing, such as the cost for staff, equipment and prep.
Customer perception also matters. If your price isn’t aligned with your brand experience and level, you might have issues remaining profitable.
Food cost control is one of the strategic steps that managers and owners can take to make an eatery more profitable. If a menu item costs too much to justify keeping it, yet you don’t want to eliminate it from the list, your options are simple: reduce portion size or charge more.
Quarterly or when you notice a spike in ingredient costs, calculate your food cost percentage to make sure that your eatery remains profitable.