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How to Calculate Ingredient Cost

Chef calculating food cost
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You know that the little things matter no matter the size of your restaurant. From how much avocado goes onto a dish to how much salt there is, seasoned operators know that perfect details make guests’ experiences special, and drive margins, profits, and growth.  

Over the last few years, several significant changes have permanently disrupted the restaurant industry. Still, little changes have also had an outsized, across-the-board impact on the entire business, owners, and operators. The most significant among them has been the staggering increases in wholesale prices for everything from chicken to pre-cut vegetables. The cost of meats other than beef and veal rose by 3% in 2022, according to the USDA. Retail egg prices rose more than 10% in October 2022, 43% percent above October 2021 prices. These changes are a big deal in an industry with historically tight margins.  

That’s why it’s more important than ever to know how to calculate ingredient cost and monitor it regularly for unexpected shifts. Owners, operators, and managers today have two choices: Either track it manually on an ongoing basis or let an integrated, cloud-based, industry-specific platform do it for you.  

Given that restaurant leaders have full plates every day of the week, it’s unlikely that the former is possible. By using a Restaurant Enterprise Management (REM) system to track these critical costs, restaurant leaders can easily track hundreds of ingredient costs and leverage that data to generate greater profits.   

Ingredient costs can be examined from various perspectives, but they most simply are what you pay for any component item. This cost can be refined into what you paid for a particular delivery of ingredients, like a case of tomatoes. Ingredient costs can also be broken up into units of measurement, so while you have the price of a case of tomatoes, you can also easily calculate your price per tomato. Finally, ingredient cost can be expressed as a percentage of the cost of a dish, such as the cost of the tomatoes on tacos topped with pico de gallo or a bacon cheeseburger crowned with a tomato slice.   

First and most importantly, operators need a system that can integrate with and collect data from food vendors and invoice payments to capture any costs outside of that system. This transforms tracking ingredient costs from an error-fraught, time-consuming process into a simple report that operators and managers can use to increase margins.   

A REM system should also include powerful accounting tools and general ledger integration to eliminate extra work and empower your accounting and finance teams to move faster, become advisers to the business and deliver critical, profit-driving information to store-level managers at regular intervals.  

Finally, a robust inventory system with weekly counts taken on a cloud-based platform enables faster, more accurate tallies that provide actionable, high-level cost data for analysis by store-level managers and above.   

Knowing how to calculate ingredient costs and having a reliable system that can do it for your business at scale is just the beginning. It’s also the building block of effective menu engineering, which empowers you to identify and promote your most profitable and popular dishes and turn less-than-stellar plates into powerhouses.  

One of the benefits of an integrated REM system is its ability to track and report on individual ingredient price changes. By aggregating your item cost data into simple yet detailed reports, leaders can constantly monitor all ingredient prices, whether they’re believed to be stable or constantly changing.  

With this item price change analysis, you can identify how prices for proteins, dairy, produce, and more change on a delivery-by-delivery basis and if a vendor delivers a substitution. Operators should pay careful attention to both the quality and prices of substitutions. While lower-quality substitutions should be dealt with quickly, those of the same quality, potentially at a lower price, could represent an opportunity to increase a dish’s profitability.    

While economists and agencies like the USDA are predicting continued price increases in certain food categories in the coming years, restaurant operators aren’t powerless in the winds of larger business cycles. By using a restaurant management platform that tracks ingredients prices and all aspects of the business, companies can quickly and confidently access the data needed to ensure stable growing margins and overall growth and improvement for their guests and employees.