How to Calculate Ingredient Costs and Take Control of Your Bottom Line

Calculating ingredient costs can help operators navigate food inflation and successfully set menu prices.

It’s important to calculate ingredient costs for individual products, recipes, and portions costs — as well as for the total cost of all inventory associated with the restaurant’s ingredient list.

Many operators rely on excel-based inventory and recipe cost calculators to manage ingredient costs. While this can be a great start, there are more reliable, automated tools that restaurants can use to control food costs.

Read on to understand why controlling costs is so critical, see how to calculate plate costs for individual dishes, and learn about essential automations that add consistency and scalability into your ingredient cost processes.

How do you calculate food costs?

Calculating individual ingredient costs can be a simple exercise. Here’s a quick run down of what operators need to do:

1. Review the most recent supplier invoice

2. Find the ingredient in question on the invoice

3. Determine the cost of said ingredient based on the unit of measure (UoM)

It’s a simple process assuming operators and the back-of-house staff keep the track of invoices and ingredient price fluctuations.

The more complex calculation is going from ingredient costs to costs for recipes, plates, portions, etc. A step-by-step guide for calculating these restaurant costs typically involves:

1. Listing all the ingredients — Calculating the cost of a steak may involve one ingredient (the beef). Or it could involve the butter, garlic, shallots, and herbs used in the basting process. It may also involve all the costs associated with a loaded baked potato as well.

2. Noting the ingredient (UoM) and quantity — Take eggs for example, operators could cost two eggs for a breakfast plate vs 8 eggs for a whole quiche. It isn’t always as easy as counting eggs. For example, restaurants that breakdown their own beef may need to factor their ounces per steak to understand the number of servings per whole cut.

3. Referencing the most recent invoice for the ingredient price(s) — Supplier invoices are a single source of truth when it comes to ingredient costs. For example, restaurant egg prices have been highly volatile in 2023. Operators that meticulously track invoice prices and regularly update their ingredient costs are set up to navigate this volatility from week to week or month to month.

4. Calculating the costs for each individual component — Ingredient costing all comes together by applying a food cost formula. Do that by combining the ingredients, the quantity or UoM for each, and the cost by quantity/UoM for each. An even more accurate calculation can factor in individual ingredient costs with labor, waste, and other fixed and variable costs.

Consistent ingredient costing processes can help restaurants achieve profits

Restaurant ingredient costing is essential for helping operators mitigate ongoing food inflation and set a successful course through the present economic uncertainty. 

Even in the best of times, a formal ingredient cost calculator is a valuable, gross profit-enhancing tool for all types of food businesses — small businesses, regional operations, and national chains.

Consistent recipe costing can help manage food inventory and set strategic menu pricing strategies.. It's a must-have practice for operators looking to be more intentional about their profitability.

Food cost calculations demand standardized recipes

Food costing and management practice requires standardized recipes for components that make up a restaurant's menu — standardization which helps provide consistency across dishes, especially for restaurants with multiple locations.

Costing a recipe enables business owners, chefs, and back of house managers to calculate portion and plate costs. These are essential steps to setting strategic menu prices and being intentional about the profitability of individual menu items.

A common trap for recipe costing is that it's done when a new recipe is implemented and then never again. That'd be fine if ingredient prices remained stable, but that's not the world we live in.

Tracking ingredient costs can help restaurants encourage greater profitability

Here are a few examples of how ingredient and recipe costing can help restaurant owners encourage more profitable food sales and take control of their cost of goods sold.

Menu engineering

Menu engineering is a systematic framework restaurant operators can use to evaluate and optimize restaurant menu prices.

It’s a tool that can assist with menu aesthetics and brand design, strategic placement of menu items, and optimized gross profit based on menu prices and ideal food costs and actual food costs.

However, menu engineering falls flat without understanding the plate costs for each menu item. Plate cost calculations require all the individual recipe costs for every portion size that’s in the dish.

Optimized online ordering

Menu engineering and a minimum viable menu can work in tandem to help optimize food sales for online ordering. For restaurant owners looking to expand online ordering menu, accounting for varying recipe costs can help identify ideal menu prices.

Online ordering may often come with higher costs due to packaging requirements and delivery costs from 3rd-party fees. Menu engineering and recipe costing can help restaurant operators determine the total cost of a dish to-go and set menu prices to account for such food cost variability

Ingredient costing software and tools can help control costs and manage profitability

Ingredient costing tools automate the tedious tasks required to manage food cost percentages — especially those systems built on top of an invoice automation system.

Invoice automation is the foundation of sound recipe costing

Invoices are the unsung hero of the back of house. These documents are the single source of truth for reporting supplier price fluctuations. Though with multiple invoices coming through each week, it can be difficult to manually track individual line item changes.

That's where invoice automation tools shine. They automate the ingestion of your invoice data — not just to satisfy your accounting system needs but also to extract line-item details to keep ingredient costs updated within your recipe costing system.

Consistently updated ingredient prices enable recipe costing tools to provide near real-time looks at COGS for individual menu items. Operators can pair that with menu prices from their point of sale, or POS system to forecast potential profit margins for individual menu items.

This practice enables operators to compare costs over time and pinpoint annual and seasonal trends and fluctuations. These insights can help with setting quarterly profitability targets, determining discounts, specials, and limited-time offers, and more.

Harness an insightful inventory management system rooted in invoice automation

Restaurant businesses can gain untold insights from an inventory management system that’s rooted in invoice automation.

While there’s still need for inventory counts, the invoice system provides a snapshot of truth for restaurant operators to work from when managing supplier orders.

For example, what happens if a new case of peppers gets lost in the walk-in? Maybe it was shoved to the corner and had other items set in front of it. An average inventory count may miss the case entirely, prompting the kitchen manager to order another case — impacting overall gross profit and causing unfortunate food waste.

Achieve consistent ingredient costing with xtraCHEF by Toast — a food cost calculator and so much more

xtraCHEF by Toast can help operators help their staff save time and do more with less by eliminating manual, time-consuming paperwork.

No one has time to spend read over invoices, notating price changes, and updating ingredient prices and recipe calculations. The proper systems in place can automate these manual tasks — helping take control of food costs, save on labor costs, and get back of house staff back to doing what they love.

xtraCHEF can help automate tedious manual tasks — unlocking critical food costing capabilities that can provide some intentionality around menu prices, profitability, and other key metrics. 

Request a demo today to learn more about the power of xtraCHEF combined with the larger Toast platform.