How often should I calculate food cost and prime cost?
At minimum, calculate weekly. Weekly tracking catches problems early, while monthly tracking often finds issues too late to fix quickly.
Restaurant Cost Formula 101
Overview
Running a restaurant on instinct feels normal - especially when you've been in the business long enough to "sense" when something is off. The problem is that instinct usually reacts late. By the time you feel food cost is high, the waste has already happened. By the time you notice labor is heavy, the schedule has already been posted and overtime has already hit payroll. Cost formulas give you something better than a vibe - they give you early signals.
Think of formulas like your kitchen's dashboard gauges. You don't need to know every number, every day. But you do need a few indicators that tell you if you're running hot, leaking money, or drifting away from your targets. Without that, owners tend to make the most common "guesswork" moves - raising menu prices randomly, cutting hours across the board, switching vendors impulsively, or blaming staff - without understanding the real cause. Those moves can hurt guest experience and team morale while barely improving profit.
Cost formulas also make your decisions easier and faster. Instead of debating whether you should reduce prep, change portion sizes, or adjust staffing, you can pinpoint the problem. Is it actual food cost rising because inventory is inaccurate? Is it prime cost climbing because labor is outpacing sales? Is a high-volume menu item underpriced because recipe costs changed and nobody recalculated? Formulas turn those questions into answers you can act on.
The Core Building Blocks
Before you calculate anything, you need a small set of inputs you can trust. The good news - you don't need dozens of reports or an accounting degree. Most "cost formula" problems happen because one or two basic numbers are missing, inconsistent, or pulled from the wrong place. If you lock in these six, every key formula in this article becomes simple - and repeatable.
1) Total sales (and ideally food vs. beverage sales). Total sales is the denominator for most cost percentages. Pull this from your POS for the exact period you're analyzing (week or month). If you can separate food sales from beverage sales, your food cost % and beverage cost % become more accurate and easier to manage.
2) Beginning inventory (value). This is the dollar value of the inventory you had at the start of the period. If you're calculating weekly, it's last week's ending inventory. If you're calculating monthly, it's the inventory value on the first day of the month. Consistency matters more than perfection.
3) Purchases (for the same period). Purchases are what you bought from vendors during the period - usually pulled from invoices or your accounting software. The biggest mistake is mixing time periods (counting invoices from one week but using sales from a different week). Match dates.
4) Ending inventory (value). This is what you have left at the end of the period. It's the key to converting "what you bought" into "what you used." Without ending inventory, you're guessing.
5) Total labor cost. Use total labor, not just hourly wages. That means wages plus employer taxes, and ideally benefits and workers' comp if you track them. Pull from payroll reports so you're not missing hidden labor costs.
6) Fixed costs. Rent, insurance, software subscriptions, utilities, loan payments - these don't change much with sales in the short term. You don't need fixed costs for every formula, but you do need them to understand break-even and true profitability.
If you build one weekly habit, make it this - pull these six numbers for the same timeframe, from the same sources, every week. When your inputs are clean, the math becomes a powerful decision tool - not a confusing spreadsheet exercise.
The Food Cost Formula
When owners say, "My food cost is around 30%," they're often talking about a theoretical number - what the food should cost based on recipes and sales mix. That can be useful, but it's not the truth of what happened in your kitchen. The number that protects your profit is actual food cost, because it includes everything recipes don't capture- waste, over-portioning, spoilage, comps, employee meals, mis-rings, theft, inaccurate prep, and simple counting errors.
Here's the core formula -
Actual Food Cost ($) = Beginning Inventory + Purchases - Ending Inventory
This tells you how much product you used during the period (week or month). Then convert it into a percentage -
Actual Food Cost % = Actual Food Cost ($) / Food Sales ($)
Example in plain terms- If you started the week with $8,000 in inventory, purchased $6,000, and ended with $7,500, then your actual food cost is $8,000 + $6,000 - $7,500 = $6,500. If food sales were $20,000, your actual food cost % is $6,500 / $20,000 = 32.5%.
The biggest reason this formula is powerful is that it gives you a reliable baseline. Once you know your actual food cost, you can stop guessing and start diagnosing. If food cost jumps, the next question becomes - is it vendor prices, portioning, waste, or inventory accuracy? If your ending inventory is consistently "too low," you may have counting issues or untracked waste. If purchases are rising but sales are flat, you may be over-ordering or carrying too much product.
Don't obsess over a perfect target on day one. Focus on consistency - same counting process, same categories, same schedule. When you do that, even small improvements - cutting food cost by 1-2 points - can translate into major monthly profit.
The Prime Cost Formula
If you only track one restaurant cost formula every week, make it prime cost. Prime cost is powerful because it combines the two biggest, most controllable expenses in your business - food (and beverage/COGS) and labor. Together, they typically represent the majority of what it costs to operate a restaurant day-to-day. When prime cost is healthy, profitability becomes much easier. When prime cost is drifting up, you'll feel it in cash flow fast - even if sales look strong.
Here's the formula -
Prime Cost ($) = COGS ($) + Total Labor ($)
Prime Cost % = (COGS + Total Labor) / Total Sales
COGS usually includes food and beverage (and sometimes paper/packaging if you track it that way). Total labor should include wages plus employer taxes, and ideally benefits if you want the fullest picture.
Why does prime cost "tell the truth"? Because it removes the excuse of focusing on the wrong thing. Many owners see a profit dip and immediately blame food cost, then start cutting portions or buying cheaper product - only to discover the real issue was labor creep from overstaffing slow shifts or overtime. Others slash labor to hit a target, then quality drops, ticket times rise, comps increase, and food cost gets worse. Prime cost forces you to look at both sides of the same profit equation.
Prime cost is also a great weekly metric because it's actionable. You can't meaningfully change rent this week, and you probably won't renegotiate insurance today. But you can tighten ordering, fix prep waste, adjust scheduling to match sales, and improve station efficiency right away. That's why many operators use prime cost as their "weekly health check."
When your prime cost is higher than it should be, don't panic and cut everything. Diagnose the direction first -
- If COGS is rising, look at portion control, waste, vendor price changes, and inventory accuracy.
- If labor is rising, look at staffing levels by hour, overtime, early clock-ins, and productivity by station.
- If both are rising, check whether sales mix shifted to lower-margin items or if sales fell while staffing stayed the same.
Prime cost doesn't just show you a number - it tells you where to focus next, so your fixes actually improve profit instead of creating new problems.
The Menu Item Cost Formula
A menu can be busy and still be unprofitable. That usually happens when pricing is based on "what competitors charge" or "what guests will pay," without a clear understanding of what each plate actually costs you. The fix isn't complicated - you just need a consistent menu item cost formula so every price has a reason behind it.
Start with the most basic number - plate cost. This is the total ingredient cost of one portion of a dish.
Plate Cost ($) = Sum of (ingredient portion x ingredient unit cost)
Include everything guests consume- proteins, sauces, sides, garnishes, oils, bread, dips - plus packaging if the item is commonly sold to-go or delivery.
To calculate portion costs accurately, you need yields. For example, a raw case of chicken might lose weight after trimming and cooking. If you ignore that, your plate cost will always look better on paper than it performs in real life. The easiest way to stay consistent is to build a recipe card with the portion size and the cost per portion based on current invoice prices.
Once you have plate cost, you can set pricing using a target food cost percentage -
Target Menu Price = Plate Cost / Target Food Cost %
So if a dish costs $4.25 and your target food cost is 30% (0.30) -
$4.25 / 0.30 = $14.17 - you'd price around $14-$15 depending on your strategy and market.
Two key reminders -
1. Target food cost % isn't the same for every item. A burger might run higher food cost % because it's a "traffic driver," while beverages, sides, and add-ons help balance margin across the menu.
2. Your best-seller is often your biggest risk. A popular item with thin margin will quietly drain profit at high volume. That's why recalculating recipe costs when vendor prices change is essential - especially for your top 10 sellers.
Finally, pricing isn't just about math - it's about structure. Use the formula to set a profitable baseline, then refine with smart tactics- bundles that raise average check, strategic add-ons, portion sizing that protects margin, and menu placement that steers guests toward better-profit items. When every price is tied to plate cost and a target, your menu becomes a profit tool - not a guessing game.
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The Labor Cost Formula
Labor is often the fastest-moving cost in a restaurant because it can change daily based on traffic, callouts, seasonality, and how well your team executes. That's why labor needs a simple formula - and a scheduling approach that connects staffing to sales. Without that link, labor becomes reactive - you either overstaff just in case or understaff and pay for it through slower service, mistakes, comps, and burnout.
Start with the basic labor percentage -
Labor Cost % = Total Labor ($) / Total Sales ($)
Total labor should include hourly and salaried wages plus employer payroll taxes (and benefits if you want the full picture). If you only look at hourly wages, you'll underestimate what labor is really costing you.
Next, add one practical lens that helps you manage labor in real time -
Labor per $1,000 Sales = Total Labor ($) / (Total Sales / 1,000)
This turns labor into a simple "cost per unit of sales" number you can compare week to week. It's especially helpful when sales fluctuate, because it tells you whether your labor spend is scaling appropriately.
Now, here's where labor formulas become operational - not just a report. The goal is to schedule to sales by using a basic workflow -
1. Forecast sales by daypart (breakfast/lunch/dinner) using recent POS history, seasonality, and known events.
2. Set a labor budget in dollars using your target labor % (or your target prime cost strategy).
Example - If you forecast $25,000 in weekly sales and target 28% labor, your labor budget is $7,000.
3. Convert dollars to hours using your blended labor rate (average hourly cost).
Example - If your blended rate is $18/hour, $7,000 buys about 389 hours ($7,000 / $18).
From there, allocate hours by daypart and stations based on demand. Most labor creep happens in predictable places - opening shifts that start too early, closing shifts that run too late, "extra help" added without a sales reason, overtime from poor shift handoffs, and slow periods where labor doesn't flex down.
A good labor system isn't about cutting people - it's about matching coverage to volume. When you use the labor cost formula weekly and schedule based on forecasted sales, labor stops being a surprise and becomes a controllable lever that supports both profitability and guest experience.
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Frequently Asked Questions
How do I price a menu item using a cost formula?
Calculate plate cost (ingredient portions x unit costs), then use, Menu Price = Plate Cost / Target Food Cost %. This keeps pricing tied to real costsnot guesswork.
What tools do I need to run these formulas?
At minimum, your POS sales report, vendor invoices, inventory counts, and payroll/timekeeping reports. A simple spreadsheet works fine to start - consistency matters more than fancy software.
What counts as COGS in prime cost?
Typically food + beverage. Many restaurants also include paper/packaging (especially takeout-heavy concepts). Decide once and stick to it.
How do I calculate actual food cost?
Use. Beginning Inventory + Purchases - Ending Inventory. Then divide by food sales to get Actual Food Cost %.
