Determine Inventory Adjustment

Realizing the time and energy that counting inventory on the line (in "production") is prohibitive to including inventory in food cost calculations, we recommend estimating a production inventory level. Conduct the inventory of the dining room, service and production areas a few times, average the inventory levels and use that constant figure each time period. Add the estimated figure to the physically counted storeroom inventories each period for your ending inventory. It is important to update the production inventory level at least once a year.

Now that you have your ending period inventory level, look at the change from your beginning (start of time period) inventories (kitchen and storerooms). The key to accurate cost determination is understanding the role inventory levels play.

For example, if the beginning inventory level is valued at $100 and four weeks later the ending inventory for the period is valued at $75, the inventory adjustment is the $25 difference - an increase in cost of food sales because you used $25 worth of inventory and did not replace it with new purchases.

Considering this change and its effect on cost of food sales, apply the difference to the total purchases for the time period, giving you the total cost of food sales.
Cost of Food Sales = Purchases +/- Inventory Adjustment (ADD if Beginning Inventory > Ending Inventory, SUBTRACT if Beginning Inventory
Example: Purchases $500 Beginning Inventory $750 Ending Inventory $625 = $500 + $125 = $625 Cost of Food Sales.

Food Cost Percentage

The final step - putting the numbers together! Food Cost = Cost of Food Sales / Food Sales Example Food Cost = $625 /$1,850 = 33.8%
Now you have the basic steps to complete your own food cost accurately and consistently with industry practices. Following is a form to assist you in the calculation.