Do you have a simple explanation (formula) for Ideal (Theoretical) Food Cost?
Have a great day,
Director of Training and Development
Restaurant Chain with 120 Locations
Thanks for the question Tabitha!
The simple side of the ideal cost calculation involves multiplying the cost to sell a menu item by the number sold in a given period. This analysis may be accomplished for the entire menu, a specific category or a specific menu item. The result of the formula is divided by the sales to arrive at a theoretical food cost percentage.
Ideal Food Cost Per Menu Item = Menu Item Cost X Number Sold
Sales Per Menu Item = Selling Price X Number Sold
Gross Profit Per Menu Item = Sales Per Menu Item - Ideal Food Cost Per Menu Item
Ideal Food Cost Percentage = Ideal Food Cost Per Menu Item / Sales Per Menu Item
The complexity behind this simple formula involves proper weighting of category and summary statistics. By following the formulas above, you will avoid most of the improper weighting problems since the number sold is a key component in the equations.
Some companies never successfully develop an ideal usage model due to the considerable time involved in developing proper recipe cards. The "Menu Item Cost" for each item needs to be calculated using standard recipes and cost data. Depending on the menu size and complexity, this task may very well take months. It is possible to progressively build the recipe model which will guarantee benefits before the final recipe cost card is complete.
Review your sales data and identify the menu items with the highest dollar sales and the menu items with the highest number sold. Some menu items will fall into both groups. These are referred to as Stars. Stars are popular menu items which generate a high percentage of your dollar sales. These items should be analyzed first.
The menu items which are very popular but do not make the list of top items in terms of dollar sales are referred to as Plowhorses. These items should be analyzed next. By their nature, there is a premium on tight cost control since the number ordered is relatively high but the dollars of revenue are low.
Finally, you can complete the recipe model by developing recipe cost cards for all the unpopular items. I like to do these recipes last. Start with the menu category with the highest dollar sales and proceed in order until you are finished.
Once you have the recipe costs complete, you will probably want to run the ideal food cost percentage for the entire menu. You will find out what your food cost should be since the Menu Item Cost data is now available for the entire menu.
Most people wait for the entire menu to be complete. I prefer to incrementally build the model. You'll get actionable reports as you go beginning with the high impact menu items and categories.