It is crucial to understand how to calculate cost of goods sold for a restaurant (COGS) to operate profitably. This metric helps you track how much your business spends on food and beverage items. By understanding restaurant COGS, you can make more informed decisions about pricing and menu.
In this blog post, we will walk you through the steps of calculating COGS for a restaurant.
To get the complete picture of what is cost of goods sold in a restaurant, let’s first discuss what it means.
What Is Cost of Goods Sold In a Restaurant?
The cost of goods sold (COGS) in a restaurant refers to the direct costs associated with preparing and serving menu items. This includes the cost of ingredients, labor, and other expenses directly related to food and beverage production.
While COGS can be a valuable metric for assessing the profitability of a restaurant business, it is important to keep in mind that it only includes some costs associated with running the business. For example, overhead expenses such as rent, utilities, and restaurant marketing budget are not included in restaurant COGS. As such, COGS should not be used as the sole measure of a restaurant’s financial performance.
Average Cost of Goods Sold for Restaurants
The 30% to 35% rule is a good guideline for the average cost of goods sold for restaurants. This percentage should cover the cost of all food and beverage items sold, including labor and other direct costs associated with preparing and serving those items.
Suppose your restaurant’s COGS is significantly higher or lower than 30-35%. In that case, it may indicate that your menu prices need to be in line with your costs or that you need to control your food and beverage expenses more effectively. Reviewing your COGS regularly can help you identify areas where you may need to make changes to improve your bottom line.
How to Calculate Cost of Goods Sold for Restaurant
To calculate the cost of goods sold for a restaurant, you will need to know the following:
- Beginning Inventory: This is the value of all food, beverages, and supplies on hand at the start of a period (day, week, month, or year). To calculate it, add up the values of everything in your inventory.
- Purchased Inventory: It represents the dollar value of all the ingredients and supplies bought in advance to be used for the next period.
- Ending Inventory: It represents the value of all the ingredients and supplies that are left at the end of the period.
Once you have collected the necessary values, you can now calculate COGS.
Cost of Goods Sold Restaurant Example
You can calculate the cost of goods sold (COGS) for a restaurant by adding the beginning inventory to the purchased inventory and subtracting the ending inventory.
Here’s the cost of goods sold formula:
(Beginning Inventory + Purchased Inventory) – Ending Inventory
For example, if a restaurant has a beginning inventory of $10,000, purchases $5,000 worth of additional inventory during the month of October, and has an ending inventory of $2,000, the COGS would be calculated as follows:
COGS = ($10,000 + $5,000) – $2,000
COGS = $13,000
In other words, it costs you $13,000 to make your meals/drinks.
Calculating COGS gives business owners and managers a clear picture of how much it costs to produce the goods or services they sell. This information helps in making pricing decisions and determining the most profitable products.
The COGS ratio, or cost of goods sold ratio, is a key metric used by restaurant owners and operators to measure their business’s efficiency and profitability. This ratio tells you what percentage of your revenue is being spent on food and beverage costs and can be a helpful tool in managing your business’s overall finances.
To calculate the COGS ratio, divide your total food and beverage costs by your total revenue.
Cost of Goods Sold / Total Revenue x 100 = COGS Ratio
For example, if your restaurant had $100,000 in total revenue last month and $30,000 in food and beverage costs, your COGS ratio would be 30%.
How to Lower Cost of Goods Sold
Restaurants are always looking for ways to lower the cost of goods sold. Here are 10 tips to help you do just that:
1. Pay Attention to Portion Sizes
One way to cut costs is to be mindful of your portion sizes. This means that you’re serving the right amount of food and using the correct ingredients in each dish. By being aware of how much food you’re serving, you can avoid wasting any ingredients – and save money in the process.
2. Calculate Your Prices Correctly
Another way to keep your costs down is to make sure you’re calculating your prices correctly. This includes taking into account all the costs associated with each dish, including labor, overhead, and food costs. Once you clearly understand all the expenses involved in serving a particular dish, you can set a fair and accurate price.
3. Compare Vendors / Negotiating Better Terms
If you want to save even more money on food costs, it pays to shop around for the best deals on ingredients – learn how to find vendors. This means comparing prices at different stores or negotiating better terms with your current suppliers.
You can further reduce your overall cost of goods sold by getting the best deal possible on ingredients.
4. Keep a Close Eye On Menu Items Sell-Through Rate
It’s also important to keep an eye on your menu items’ sell-through rates. This is the percentage of customers who order and finish a particular dish. If you notice that a specific dish isn’t selling well or has a low sell through rate, consider removing it from your menu.
5. Monitor Inventory Closely
Another way to reduce your food costs is to monitor your inventory closely. This means taking accurate inventory regularly and keeping an eye on items that are running low.
By doing this, you can avoid ordering too many ingredients. Additionally, keeping an eye on your inventory for signs of theft or other losses is essential.
6. Reduce Food Waste
One of the best ways to lower food costs is to reduce food waste. This includes ensuring that all ingredients are used before expiration and that dishes are prepared correctly to avoid over- or under-cooking.
Additionally, it’s important to have a restaurant training manual on food safety, proper food shipping and handling, and storage procedures. By taking these steps, you can significantly reduce the amount of food waste in your restaurant – and lower your COGS.
7. Re-evaluate Your Menu Design
One way to lower the cost of goods sold is to redesign your restaurant menus. This may involve streamlining your offerings, eliminating items that are costly to produce, or finding ways to use less expensive ingredients. By re-evaluating your menu design, you can help reduce your overall food costs.
8. Buy Food Inventory and Supplies In Bulk Whenever Possible
Another way to lower your cost of goods sold is to buy items in bulk whenever possible. This can help you get discounts from suppliers and save on shipping costs. Additionally, it can help you reduce the time you spend restocking shelves and preparing orders.
9. Use Seasonal Ingredients In Your Menu
A third way to lower your cost of goods sold is to use seasonal ingredients in your menu. This can help you take advantage of lower prices for fresh produce and other items. Additionally, it can help you create rotating specials and seasonal menus that keep your customers coming back.
10. Automating Parts of Your Production Process
Finally, another way to lower your cost of goods sold is to automate parts of your production process. This can help you reduce labor costs and increase operational efficiency. Additionally, it can help you eliminate errors and wastefulness in your production process.
The way to lower the cost of goods sold often boils down to good restaurant inventory management processes, supplier relationship management, efficient distribution, and a strategy of selling higher-margin products to offset lower-margin products.
Frequently Asked Questions About How to Calculate Cost of Goods Sold for a Restaurant (COGS)
This section answers some of the most frequently asked questions about COGS to give you a better understanding of this important metric.
Is Food Cost the Same As COGS?
Cost of goods sold (COGS) is an important metric that measures the direct cost of producing the goods or services a company sells. On the other hand, food cost is the total cost of all the ingredients used to make a dish.
While food costs and COGS may seem similar, they are pretty different. Food cost only includes the cost of the ingredients used to make a dish, while COGS also includes labor, overhead, and other direct production costs.
Do COGS Include Salaries?
Generally, COGS only includes direct costs associated with producing goods or services. This includes raw materials, direct labor costs, and manufacturing overhead.
If salaries are directly related to the production process, they would likely be included in COGS. However, if wages are not directly related to production, they would be treated as an expense.
What Percentage Should Cost of Goods Sold Be?
Ideally, your COGS should be around 30-40% of your total revenue. This leaves you with a healthy profit margin that can be reinvested into your business.
If your COGS starts to creep up above 40%, it’s time to take a close look at your operations and see where you can cut costs. Otherwise, you’ll start eating into your profits and putting your business at risk.
Is Cost of Sales and COGS the Same?
No. The cost of sales and COGS are different. Cost of sales includes all the expenses incurred in generating revenue for a company. This includes the cost of raw materials, labor, shipping, and other fees related to producing and selling a product or service.
COGS, on the other hand, only includes the direct costs associated with manufacturing a product. This includes raw materials and labor costs, not shipping or other indirect costs.
When Should COGS Be Recorded?
COGS should be recorded at the end of an accounting period after inventory has been accounted for. This allows businesses to get an accurate picture of their profits for the period.