Back
Cost of Goods Sold (COGS)
Ever wonder why restaurants get so concerned about food waste or recipe consistency? It all comes down to something called Cost of Goods Sold, or COGS—a number that can make or break your restaurant’s profitability.
What is Cost of Goods Sold (COGS)?
In simple terms, COGS represents the total cost of all the ingredients and materials that go directly into the food and beverages you sell. It’s essentially what it costs you to make the items on your menu.
COGS includes:
- Food ingredients
- Beverage ingredients (alcoholic and non-alcoholic)
- Garnishes
- To-go containers (if included in the meal price)
- Paper products that are part of the food service (like burger wrappers)
COGS does not include:
- Labor costs
- Rent and utilities
- Marketing expenses
- Equipment
- Cleaning supplies
Why COGS matters so much
Think of COGS as your restaurant’s foundation. Here’s why it’s crucial:
- Profitability: The difference between your menu prices and your COGS is your gross profit margin. The lower your COGS, the higher your potential profit.
- Menu pricing: Understanding your COGS helps you set prices that are both competitive and profitable.
- Identifying theft or waste: If your COGS suddenly increases without explanation, it might indicate problems like employee theft, over-portioning, or spoilage.
COGS in action: A real-world example
Let’s say you run a pizza restaurant:
- You calculate that the ingredients for your Margherita pizza (dough, sauce, cheese, basil, olive oil) cost $2.85 total.
- You sell this pizza for $12.00.
- Your food cost percentage for this item is: $2.85 ÷ $12.00 = 23.75%
Most restaurants aim to keep overall food cost percentages between 25-35% of sales. If your COGS creeps higher than your target, you might need to:
- Adjust portion sizes
- Find less expensive suppliers
- Reduce waste through better inventory management
- Increase menu prices
- Redesign recipes to use less costly ingredients
Calculating your restaurant's COGS
The basic formula is: Beginning Inventory + Purchases – Ending Inventory = COGS
For example, if you started the month with $5,000 of inventory, purchased $20,000 more, and ended with $4,000 in inventory, your COGS would be $21,000 for that period.
Regular tracking of COGS is one of the best ways to ensure your restaurant’s financial health and identify potential problems before they seriously impact your bottom line.
