What items should be included in COGS?
Only items that are sold to customers - including ingredients, beverages, and consumables that become part of the menu. Non-food items like cleaning supplies, paper goods, and kitchen equipment should not be included.
How to Calculate Cost of Goods Sold in Your Restaurant
Overview
Running a restaurant is a constant balancing act between delighting customers and keeping costs under control. One of the most important numbers to watch is your Cost of Goods Sold (COGS) - the total cost of the food and beverages you sell over a given period.
Why does this matter so much? Because COGS directly determines your gross profit. If your food costs are too high, even a busy dining room won't guarantee strong earnings. On the other hand, keeping COGS at a healthy percentage means you have more room for profit, reinvestment, and competitive menu pricing.
For many restaurant owners, calculating COGS can feel like a tedious accounting chore. But when done correctly and regularly, it becomes one of the most valuable tools you have for understanding where your money is going. It reveals if ingredient prices are creeping up, if waste is eating into profits, or if your menu pricing needs adjustment.
Understanding the COGS Formula
The good news is that the formula for calculating Cost of Goods Sold is straightforward. The challenge lies in applying it consistently and accurately. The standard formula looks like this -
COGS = Beginning Inventory + Purchases During the Period - Ending Inventory
Let's break it down in the context of a restaurant -
1. Beginning Inventory - This is the total value of all your food and beverage items at the start of your chosen time period (for example, the first day of the month). It includes everything in your fridges, freezers, dry storage, and bar stock.
2. Purchases During the Period - This includes all the food and beverage items you buy during that same period. That means invoices from your suppliers for meats, produce, spices, bottled drinks, and any other consumables.
3. Ending Inventory - This is the value of everything you still have left at the end of the period (e.g., the last day of the month). It's measured in the same way as your beginning inventory.
How it works
By adding your beginning inventory to your purchases, you get the total value of all goods available for sale. Subtracting your ending inventory leaves you with the value of the goods you actually sold (or used) during the period - your COGS.
For example, if you started the month with $5,000 worth of inventory, bought $12,000 worth of goods, and ended with $4,000 in inventory, your COGS would be-
$5,000 + $12,000 - $4,000 = $13,000
It's important to note that COGS only includes items you sell to customers, not cleaning supplies, uniforms, or kitchen equipment. Keeping this calculation accurate is the foundation for making informed menu pricing, supplier, and cost control decisions.
Step 1 - Determine Your Beginning Inventory
Your beginning inventory is the starting point for calculating COGS. It represents the total value of all the food and beverages you have in stock at the very start of your chosen accounting period - whether that's a week, a month, or a quarter.
To get this number right, you'll need to conduct a physical inventory count. This means going through your entire stock - fridges, freezers, shelves, and bar storage - and recording everything you have on hand. For each item, note the quantity and its cost per unit, then multiply the two to find its total value. Once you've done this for every item, add them together to get your beginning inventory value.
Practical tips for accuracy -
1. Be consistent with timing. If you decide to track COGS monthly, always take your inventory count on the same day each month (e.g., the morning of the 1st).
2. Use consistent units. Don't mix measurements - if you record flour in kilograms one month, don't switch to pounds the next.
3. Organize by category. Group similar items (meat, dairy, produce, beverages) so the counting process is faster and less error-prone.
4. Account for partial containers. Estimate the remaining percentage in open packages or bottles, and calculate their value accordingly.
For example, if you have half a case of wine and each bottle costs $12, and there are 6 bottles in a case, the value is 3 bottles x $12 = $36.
Getting your beginning inventory right ensures your COGS calculation isn't distorted from the very first step. Even small miscounts here can ripple through and give you misleading food cost numbers, which might cause you to make the wrong pricing or purchasing decisions.
Step 2 - Add Purchases Made During the Period
Once you've established your beginning inventory, the next step is to add up all the food and beverage purchases you made during the period you're calculating COGS for. This figure should only include items that will eventually be sold to customers - not cleaning products, kitchen tools, or staff meals (unless those meals are part of your menu).
To find this number, gather all supplier invoices and receipts from the period. These may include deliveries of fresh produce, meat, seafood, dairy, pantry staples, baked goods, or beverages. It's important to use the purchase cost listed on the invoice, not the selling price.
Practical tips for accuracy
1. Keep all invoices organized. A digital filing system or a folder for each month can prevent missing documents.
2. Separate non-COGS items. If a supplier invoice includes cleaning supplies, paper products, or other non-food items, subtract those costs before adding the total to your purchases.
3. Track discounts and returns. If you received a credit from a supplier for spoiled or damaged goods, deduct that amount from your purchase total.
4. Match purchases to your period. Only include goods purchased within your chosen timeframe, even if they arrive just before or after it.
For example, if you receive three supplier deliveries in a month - $3,000 from your meat supplier, $2,000 from your produce vendor, and $1,000 from your beverage distributor - your total purchases would be $6,000 (assuming all items are for resale).
By accurately tracking your purchases, you get a true picture of the money going into inventory during the period. This step is critical because overestimating purchases can artificially inflate your COGS, making your food cost percentage seem higher than it really is.
Step 3 - Subtract Your Ending Inventory
The final step in the COGS formula is subtracting your ending inventory - the value of all the food and beverages you still have at the end of your chosen period. This tells you how much of your available inventory was actually used or sold.
Just like with beginning inventory, you'll need to do a physical count at the end of the period. Go through your storage areas - fridges, freezers, shelves, and bar stock - and record the quantity and unit cost for each item. Multiply the quantity by the cost per unit to get the value of each product, then add them up for your total ending inventory value.
Tips to make the process smooth and accurate -
1. Count during non-service hours. This reduces the chance of missing items or double-counting because staff are using inventory while you're counting.
2. Use the same categories and units as your beginning inventory. Consistency makes calculations easier and prevents errors.
3. Estimate partial items carefully. For example, if a 20-pound bag of rice is half full and costs $25, record it as $12.50.
4. Avoid rushing. A rushed count increases the risk of inaccurate data, which will throw off your COGS calculation.
For example, if at the end of the month you still have $4,200 worth of food and beverages in stock, that number will be subtracted from your total goods available for sale (beginning inventory + purchases).
This step is crucial because ending inventory directly lowers your COGS figure. If your ending inventory count is too low due to mistakes, it will artificially inflate your COGS, making it seem like you spent more on food than you actually did.
By taking the time to get this right, you ensure your COGS reflects the real cost of the goods you've sold - not just what you bought.
Secure Your Supply, Safeguard Your Standards
Total Hospitality Safety with Altametrics
Example Calculation for a Restaurant
Now that we've gone through each step, let's see how the COGS formula works in practice for a restaurant. This will help you visualize how beginning inventory, purchases, and ending inventory fit together.
The COGS formula again -
COGS = Beginning Inventory + Purchases During the Period - Ending Inventory
Example -
Let's say you're calculating COGS for the month of July.
1. Beginning Inventory (July 1) - After counting and valuing everything in storage, you determine you have $5,000 worth of food and beverages on hand.
2. Purchases During July - Throughout the month, you order from your suppliers - $3,500 from your produce supplier, $4,000 from your meat supplier, and $2,500 from your beverage supplier. That's a total of $10,000 in purchases.
3. Ending Inventory (July 31) - After another careful count at the end of the month, you find you still have $4,500 worth of food and beverages in stock.
Plugging the numbers into the formula -
COGS = $5,000 + $10,000 - $4,500
COGS = $10,500
This means your restaurant used or sold $10,500 worth of food and beverages in July.
How to interpret the result
You can use this COGS figure to calculate your food cost percentage, which is -
Food Cost % = (COGS / Total Sales) x 100
If your July sales were $30,000, then -
Food Cost % = ($10,500 / $30,000) x 100 = 35%
This percentage helps you compare your costs to industry benchmarks (many full-service restaurants aim for 28-35%) and decide if adjustments are needed in pricing, portion sizes, or purchasing.
By following this step-by-step method every period, you get a clear, accurate picture of how your inventory spending translates into sales - and where you can improve.
Tips to Keep Your COGS Accurate and Useful
Calculating COGS once in a while is better than not doing it at all, but the real value comes from tracking it regularly and accurately. This way, you can spot trends, catch problems early, and make decisions based on reliable data.
1. Track COGS on a consistent schedule
Decide whether you'll calculate COGS weekly, bi-weekly, or monthly. Weekly tracking gives you faster insights into rising costs or waste, while monthly tracking is less labor-intensive but still effective. Consistency is key - irregular tracking makes it harder to compare periods and notice patterns.
2. Use the right tools
While you can use a spreadsheet, restaurant inventory software or POS integration can save time and reduce human error. These tools can track purchases, automate inventory counts, and even generate COGS reports.
3. Standardize your counting process
Count items the same way every time, with the same people or team involved if possible. Provide a checklist or inventory sheet so nothing gets overlooked.
4. Separate non-food costs
Make sure only ingredients and beverages sold to customers are included in COGS. Paper goods, cleaning supplies, and small wares should be tracked separately as operating expenses.
5. Keep an eye on variances
If COGS suddenly spikes without a matching increase in sales, investigate. Possible causes include supplier price hikes, over-portioning, spoilage, or theft.
6. Use COGS data for decision-making
Don't let the number sit on a spreadsheet. Compare it to your sales to find your food cost percentage, then use that insight to adjust menu pricing, negotiate with suppliers, or fine-tune portion sizes.
When tracked carefully, COGS becomes more than just an accounting figure - it's a powerful operational tool that can directly boost your restaurant's profitability.
Turning COGS Insights into Better Business Decisions
Calculating your Cost of Goods Sold isn't just about filling in a formula - it's about gaining a clear picture of how efficiently your restaurant turns inventory into revenue. When you track COGS accurately and consistently, you create a foundation for smarter menu pricing, better purchasing decisions, and improved cost control.
The beauty of COGS is that it transforms raw numbers into actionable insight. A slightly high food cost percentage might reveal a need to renegotiate supplier contracts, adjust portion sizes, or replace low-margin menu items. A sudden spike could signal waste, spoilage, or theft. And a steady, healthy percentage reassures you that your kitchen is running efficiently.
It's worth remembering that even small improvements in COGS can have a significant impact on profitability. For example, reducing your food cost percentage by just 1-2% can translate into thousands of dollars in savings over the course of a year - without compromising quality or customer satisfaction.
The key takeaway is simple - treat COGS as a living metric, not a once-a-year exercise. By making it part of your regular operational review, you give yourself the data you need to stay competitive in a challenging industry.
Efficient Ordering at Your Fingertips
Experience Flawless Inventory Management with Altametrics
Must-Read Content
How to find cost of goods sold
How to Find Cost of Goods Sold for Hotels
Cogs formula
Understanding the COGS Formula for Restaurant Owners
Cogs analysis
COGS Analysis for Quick Service Restaurants
Expense reports
The Complete Guide to Hotel Expense Reports
Frequently Asked Questions
How do I calculate COGS if I have partial inventory items?
Estimate the remaining portion of partially used items. For example, if half a bag of flour costing $20 remains, count it as $10 toward your ending inventory.
Can software help with calculating COGS?
Yes. Inventory management systems and POS software can automate calculations, track purchases, and generate reports, reducing errors and saving time.
How do I account for spoilage or waste in COGS?
Spoiled or wasted items should reduce your ending inventory value. Accurately recording waste ensures your COGS reflects what was actually sold.
What's the difference between COGS and operating expenses?
COGS only includes the cost of ingredients and beverages sold. Operating expenses include rent, utilities, labor, and other non-food costs. Confusing the two can give a misleading picture of profitability.
