How a Restaurant Cost Breakdown Can Help Inform Prices and Protect Profitability

This should come as no surprise: you need profits to sustain your food business.

It can be surprising for many new operators to realize just how difficult those profits can be to achieve — especially amidst ongoing inflation, labor shortages, and general economic uncertainty.

It’s never been more important for operators to conduct ongoing restaurant cost breakdowns. Cost breakdown insights can help operators control restaurant costs, inform menu pricing strategy, and foster sustained profitability.

Read on to learn what a restaurant cost breakdown entails and how to consistently conduct them. See why they’re essential to your restaurant’s financial and operational performance. And take a look at critical restaurant technologies that incorporate automations and efficiencies into your costing practices.

What is a restaurant cost breakdown?

A restaurant cost breakdown is simply the calculation and analysis of all the costs associated with operating a restaurant business. These restaurant operating costs include any expenses paid to open, manage, grow, and optimize a food business. 

Restaurant costs are typically broken into two categories: fixed costs and variable costs.

Restaurant fixed costs are all the costs that aren't directly tied to sales. 

For example, your lease and your insurance premium remain the same from month to month, whereas the cost of a case of tomatoes can change from one week to the next. That’s why leases and insurance are fixed costs and food costs aren’t. 

Operators typically have little to no control over restaurant fixed costs once they’ve been agreed upon. There may be potential to negotiate fixed costs lower at the time of contracting, and there’s always refinancing and other debt-based tactics that could technically lower fixed costs.

Examples of restaurant fixed costs include:

• Restaurant occupancy costs, including lease or mortgage payment, insurance premiums, and taxes

• Water, electric and/or gas, city sanitation fees, and other utilities

• Point of sale, accounting system, and other technology fees as well as ongoing professional and custodial services 

• Kitchen equipment depreciation 

• Salaried wages, included benefits

Restaurant variable costs are all those controllable expenses tied to your sales. 

For example, the cost of a case of tomatoes is a variable, controllable cost that directly impacts your sales — variable in that the price can change week to week and controllable in that you can shop around to different suppliers or even omit tomatoes from your menu for a while. 

Cost variability is another reason that restaurant cost breakdowns must be an ongoing exercise. If you want a true read on profitability, you have to keep a consistent pulse on ever-changing variable costs — during turbulent and favorable environments. 

The two main examples of restaurant variable costs include:

• Cost of goods sold (food costs, non-alcoholic beverages, paper goods, etc.)

• Labor costs (salaried and hourly, payroll taxes, benefits)

Ongoing restaurant costs breakdowns can inform pricing and protect profitability

Continuous cost breakdowns are critical for healthy restaurant financials.

You want profits, right?

At the highest level, profits are the difference between revenue and costs. Expressed as a formula, it looks like this:

Revenue - Costs = Profits 

$100 - $60 = $40

If you want more profit, you can do one or both of the following:

1. Increase your restaurant revenue by raising prices or generating more sales.

Revenue - Costs = Profits 

$200 - $120 = $80

2. Lower your costs by optimizing your product mix and tracking operating expenses.

Revenue - Costs = Profits 

$100 - $40 = $60

Can you just increase prices and maintain current restaurant costs? Not quite. A restaurant menu pricing strategy needs to work in tandem with ongoing cost analysis to help forecast and ensure target profitability.

That’s not to say you shouldn’t increase prices. It’s just that any price increases should be calculated and tied to a profitability goal — especially these days as inflation has consumers hyper-aware of rising prices across the board.

An advantage of a detailed, continuous restaurant cost breakdown is seeing where ingredient price fluctuations and labor cost spikes are eating away profit margins. 

This insight can empower operators to act with more immediacy in increasing prices, swapping out ingredients, and adjusting staff schedules — all critically important as record 40-year inflation is pinching both sides of prime costs.

From a labor perspective, the industry continues to struggle with labor shortages as well as an ongoing restaurant retention and employee turnover crisis. 

For food costs, it’s safe to assume ongoing ingredient price volatility continues — driven by the conflict in Ukraine, surging energy costs, global commodities speculations, and record setting droughts and heat across the US and India.

Through all this uncertainty and unavoidable turmoil, now is the time to zero in on individual ingredient costs; to get creative with menu items that counter specific ingredient costs and require less labor to execute on; to negotiate with your suppliers and lock in prices; and to implement systems and processes that enable you to do more with less.

How to conduct a restaurant costs breakdown

Cost of goods sold (COGS) and labor costs make up the bulk of restaurant variable costs. The combination of these two cost categories are referred to as prime costs.

Restaurant prime cost calculations provide an accurate assessment of financial and operational health. Prime costs typically make up 60 to 70 percent of total restaurant sales costs — often with an even split between COGS and labor.

You can see the importance of accurate prime cost calculations for conducting a larger restaurant cost breakdown. 

In fact, with your fixed costs remaining fixed, any ongoing restaurant cost breakdown exercises will mostly be exercises in prime cost fluctuations. It’s where you can uncover actionable insights and identify savings opportunities.

Calculating restaurant COGS

Total cost of goods sold refers to all ingredients and products purchased for use in your restaurant — any ingredient or product regularly used to prepare and serve menu items to customers.

To calculate COGS, you simply add up the costs of all the ingredients and products used to produce what you sold over a given time period.

Calculating an accurate COGS requires an all-too-important, often overlooked restaurant data source superstar: supplier invoices. 

Restaurant invoices are the single source of truth for actual costs of inventory, whether it’s produce, meats, beverages, dry goods and pantry staples, or even takeout containers, to-go cutlery, and other material goods.

The importance of detailed invoice data is the reason xtraCHEF by Toast is built on invoice processing automation.

Calculating restaurant labor costs

Total labor cost refers to the total amount spent on restaurant labor — annual salaries and hourly wages, taxes incurred on salaries and wages, employee insurance and benefits, and bonuses.

Labor costs calculations aren’t as simple as adding up the hours worked and multiplying it by wages. For example, if you pay an employee $20 an hour, it actually costs you closer to $23 or $24 an hour with added costs such as insurance and taxes. That’s the number you need to end up with.

Take a look at our extensive guides for how to calculate restaurant cost of goods sold as well as how to calculate restaurant labor cost percentage for more on these calculations.

Combining COGS and labor costs to get Prime Costs

Once you have your COGS and labor costs, the restaurant prime cost formula is simply:

Total COGS + Total Labor = Prime Cost

While a total dollar amount prime cost is valuable, it’s entirely relative to your operation. For example, the prime cost of a single food truck is pennies when expressed as a total dollar amount and compared to the prime cost of a national chain.

That’s why the more universal prime cost metrics is the ratio of prime costs as a percentage of total sales. This calculation transforms your prime cost into a percentage that’s benchmarkable across past performance, regardless of sales volumes, revenue, growth, etc. 

Here’s the slightly different formula for prime cost as a percentage of sales:

Prime Cost / Total Sales = Prime Cost as a Percentage of Sales

Drilling beyond prime costs for your breakdown

Prime costs are a fine endpoint for your restaurant cost breakdowns. They provide a high-level look at overall food and labor costs. If any issues arise, you’ll know which bucket to dive into. How do you do this deeper dive though?

Zooming in beyond prime costs into granular COGS and labor cost contributors requires detailed, easily scannable datasets. 

For COGS, that means itemized looks at changes in individual ingredient costs and upticks in ingredient usage.

For labor costs, that means a look into changes in labor hours for each employee, for employee groups, and for sales amounts by day/shift.

It’s these deeper insights that uncover actions restaurant operators can take to improve costs — but what are the mechanisms for zooming into these granular levels?

Successful, streamlined restaurant costs breakdowns require proper tech

The ability to conduct restaurant cost breakdowns is only as valuable as the action items they produce. 

The point of using radars in ships and airplanes isn’t simply to know what’s around the vessel — it’s to make safe, effective adjustments to the path based on data from the radar. If the Titanic could’ve detected that iceberg, they would have maneuvered to avoid it.

The same is true with your restaurant costs. If you can see boneless chicken breast prices creeping up week after week, you’re going to pivot to chicken thighs or something else entirely to mitigate the damage done to your profit margin.

Identifying and acting on ingredient price fluctuations is an ideal next best action. When it comes to taking action on rising food costs, here are a few levers you can pull to manage food costs.

Adjust what goes on your plate: Calculating plate costs is a detailed exercise that zooms into the costs and profit margin for individual menu items. When paired with recipe costing, operators can see exactly how each component is contributing to the overall profitability of a dish or drink — making it easier achieve an ideal balance between portions and profits.

Be direct in negotiating and working with suppliers: Supplier relationships are crucial to a restaurant’s success. But that relationship needs give and take both ways. Many restaurants can take more liberty in negotiating with suppliers — a process can be made easier with xtraCHEF’s costing tools that empower operators to analyze cost data, identify pricing trends, and come to negotiate from a position of power.

“Kill your darlings”: Restaurant operators must be careful not to fall into a trap of sentimentality for certain dishes if their costs become untenable. Underbelly Hospitality Group realized that the cost of chicken had risen dramatically, fluctuating between 30 and 40 percent higher than usual. Rather than sacrifice the quality or portion size of their famed, crowd-pleaser wings, they pulled them entirely.

Operators must factor ingredient price data to calculate plate costs, negotiate with suppliers, or pull menu items. But this is a tedious process to do manually and an expensive one to outsource to bookkeepers.

That’s where invoice processing automation comes into the cost breakdown picture. It’s an automated tool that digitizes critical invoice line-item data. Having this ingredient pricing data readily available can simplify your ability to calculate COGS, monitor price fluctuations, and take action on the COGS side of your ongoing restaurant cost breakdowns.

And there are similar actions and technologies you can leverage to take control of labor costs.

Get more efficient with scheduling: More staff doesn’t equal better service. Too many team members and not enough work leads to complacency. Then everyone loses — staff members and their tips and engagement, customers missing out on great experiences, and your ballooned labor costs. Restaurant scheduling software that’s integrated with payroll software can help you take control of your weekly staff schedule and associated costs. 

Implement the New Steps of Service: What if a single adjustment could improve guest and employee experiences while saving on labor costs? Sounds too good to be true until you dive into the New Steps of Service — with streamlined service that can empower guests to order and pay at the table whenever they like. The New Steps of Service ROI Calculator can quantify potential impacts on your labor costs and operational efficiency.

Leverage granular reporting within your payroll software: An easy-to-use payroll and team management software gives you transparency and visibility into fluctuations in your weekly labor costs, tip pooling breakdowns, payroll taxes, and deductions. 

You and your managers don’t have time to manually calculate individual payrolls — and you definitely don’t have time to add all that up to get your cumulative labor costs. But this is a must for honing in on your labor costs.

Just like with invoice automation for food costs, scheduling and payroll and team management tools can help automate and simplify labor cost calculations.

Where do you go from here?

The greatest takeaway from this article is the importance of ongoing, consistent restaurant cost breakdowns. This analysis doesn’t exist in a vacuum. As a restaurant operator, you’ve bought the ticket. Now it’s time to take the ride.

The first best action you can take is to assess your current costing process and the systems you can employ for conducting a cost breakdown — or lack thereof.

While something is better than nothing, and manual calculations are something, your ability to accurately, consistently breakdown costs at scale is dependent on proper technology.

At the end of the day, profitability is the name of this game — not sales or revenue. A laser-focus on profitability requires a laser-focus on your costs — and a laser-focus on costs requires actionable, pinpoint accurate restaurant cost breakdowns.

Combining Toast and xtraCHEF can help all types of restaurants access reports on daily sales, costs, and how they’re impacting profitability.

Toast Payroll and Team Management, as well as Scheduling, powered by Sling, work together to uncover valuable labor trends so you can make better decisions.

xtraCHEF by Toast empowers you to drill into line-item level detail for every ingredient on each of your supplier invoices.

Together, these tools can automate and simplify the process of creating restaurant cost breakdowns.