Keeping in mind you want to eventually compare your food cost with industry averages, how you determine the numbers must be consistent with industry practices. The industry standard is based on the Uniform System of Accounts for Restaurants (a handbook available from the National Restaurant Association). This system clearly identifies what items are included in each part of the food cost formula and IS briefly outlined below.
Food Cost = Cost of Food Sales / Food Sales.
Establish a specific time period for analysis. The food sales and costs should be generated during a set accounting time period of at least two weeks or more typically, every 28 days. Juices, coffee, soda supplies and other non-alcoholic beverage sales are included in food cost calculations.
STEP BY STEP: Calculating Food Cost
1. TIME FRAME - Working with your accountant and managers, set up a regular time frame to analyze food cost. It is critical that the elements of the food cost calculation (sales, inventories and purchases)are representative of this time period.
2. FOOD SALES - This is the relatively easy part - total the customer checks or reports from point-of-sale registers making sure to only include sales generated from food sources (sources other than food should be allocated to a "beverage" or "other income" account). Remember to use sales generated only within the allotted time frame. Example: Food Sales (+ Juice, Soda, etc.) $1,850.
3. COST OF FOOD SALES - The costs associated with food sales are comprised of purchases and inventory level adjustments. In our experience, this part of the calculation is often computed incorrectly. Determining the amount of purchases for the time period is straight-forward: Total all food purchases (include delivery charges and non-alcoholic beverages).
Example: Food Purchases in past 28 days $500 Equally important, and often not included in determining cost of food sales, is the inventory adjustment. Many restaurants consider only purchases in determining food cost. This does not create an accurate food cost percentage - depending on the day purchases are made and what the cut-off date is for including sales in the food cost calculation, your food cost could appear 5 to 6 points higher or lower than it is. Additionally, this discrepancy makes it difficult to compare and track food costs. Suppose you receive (purchase) all your dairy and meat products on Thursday to prepare for the weekend. The time period for determining food cost ends on Friday (the next day). In calculating your food cost, it appears much higher than last month. While the increase may be due to theft or another operational issue, most likely it is due to calculating your food cost inconsistently and incorrectly. Your purchases reflect a large Thursday delivery, however, you do not log the sales from the weekend to offset these purchases, making your food cost appear out of line. Additionally, you have not factored in the inventory adjustment.