What is Food Cost?

Food cost is the ratio of food inventory costs and revenue produced from menu items sold. Food cost is also generally referred to as food cost percentage within the food industry, the terms are often used interchangeably.

To calculate food cost percentage you divide inventory costs by the revenue produced. Frequently calculating food cost with the above food cost formula is a best practice technique that all food industry businesses should undertake.

Comparing the cost of raw materials to revenue produced is a great way to analyze if a food industry business is sustainable long term. Additionally, food cost percentages are helpful to reference when you are considering making changes to menu item portion sizes or menu prices at your restaurant.

When determining appropriate food costs it is necessary to consider both the affordability of menu items for customers as well as the revenue for your business. Food sales must consistently generate profit for a restaurant in order for it to stay in business.

On the other hand, if the menu items cost too much then customers are unlikely to continue to dine at your restaurant or even dine there in the first place. Customers want to frequent restaurants that provide great quality food for a fair price.

Actual food cost and ideal food cost are two concepts that food industry professionals should understand. The ideal food cost is defined as the optimal profit that food sales could generate. An ideal food cost does not estimate waste, portion size differences, or a decrease in sales for a particular menu item.

Actual food cost is the real cost that factors in waste, portion sizes, and sales as they occurred. Discrepancies between the actual food cost and ideal food cost can reveal where there is room for improvement and food cost control measures.