Cost of goods sold for restaurants, explained

Cost of goods sold is what a restaurant spent on the food and drink it actually sold in a period. It is the number that sits between sales and gross profit on the profit and loss account, and it is the top half of every food cost percentage. The formula is short: opening stock, plus purchases, minus closing stock. Most people who run a kitchen can recite it.

What fewer people realise is how easily it breaks. The formula assumes that every delivery, every invoice and every item on the shelf is recorded in the right period at the right value. When a delivery lands on the first of the month but its invoice is dated the last day of the previous one, or a shelf is missed in the closing count, the formula still produces a number. It is simply the wrong number, and it looks just as convincing as the right one.

This guide explains what goes into the figure for a restaurant, works through a month, and sets out the ways the formula fails and how to stop them. Every figure in it is an example.

The calculation for any period is:

Opening stock is the value of food and drink on hand at the start of the period, which is the closing stock of the period before. Purchases are everything bought and received during the period. Closing stock is the value of what is left at the end. What is not on the shelf at the end, and was either there at the start or arrived during the period, has been used.

The same idea appears in every business that holds stock. Wikipedia's article on cost of goods sold covers the general accounting. In a restaurant, it has a few particular features: stock is perishable, it moves quickly, and much of it is used in ways that are not sales.

The usual definition covers the food and drink that make up what you sell: ingredients, drinks, and anything served to the guest as part of a dish or a drink. Most venues calculate it separately for food and for drinks, and often for each type of drink, because the percentages are very different and a combined figure hides both.

Some items are less clear-cut, and venues treat them differently. What matters is choosing a treatment and keeping it.

Labour is never part of it in a restaurant's management accounts. It belongs on its own line, and food and labour together make prime cost, which our guide to prime cost covers.

Both figures come from a stock count: every item on hand, counted and valued. The accuracy of the result can never be better than the accuracy of these two counts.

Valuation needs a rule. The simplest and most common in restaurants is to value every item at its latest purchase price. Accountants also use other methods, such as first in, first out, but in a kitchen where stock turns over within days, the difference is usually small. The important thing is to use the same method every time, because changing the valuation method changes the stock value without anything having moved.

Count at the same point every period: the same day of the week or month, at the same time, before or after the same service. A count taken on Sunday night and one taken on Monday morning describe different amounts of trading. Our guides to running a stock count properly and to what a stocktake is and how often to do one cover the count itself.

Purchases are the food and drink received during the period, at the price paid, net of any VAT you reclaim. In practice the figure is built from delivery notes and invoices, and the two do not always agree.

Three rules keep it honest:

A kitchen's stock is not only what arrived in boxes. At any count, the fridges also hold prepared food: stocks, sauces, marinated proteins, portioned fish, dressings, doughs. These have value, and leaving them out of the closing count makes the period look more expensive than it was, because the ingredients in them were bought and are still in the building.

Value prepared items at the cost of their ingredients, using the same recipe costs as your dishes. A ten litre batch of stock that cost 12 in bones and vegetables is 12 of stock on the shelf, not nothing and not the price you would charge for it. Our guide to recipe costing shows how to cost a batch.

Be consistent about it. A kitchen that counts prepared items at the end of one month but not the next creates a swing that has nothing to do with what happened in the kitchen. The simplest rule is to include every prepared item that will be used, valued at ingredient cost, on every count.

The same applies to stock that is neither here nor there: goods delivered to the wrong venue in a group, items returned to a supplier but not yet credited, a delivery that arrived after the count began. Decide where each one belongs, and write the decision down so the next month end treats it the same way.

An invented month for a restaurant's food:

Cost of goods sold is 6,200 plus 15,800 minus 5,900, which is 16,100. With food sales of 52,000 net of tax, the food cost percentage is 16,100 divided by 52,000, about 31 per cent. Gross profit on food is 52,000 minus 16,100, which is 35,900.

That is the whole calculation. Everything else in this guide is about making sure the three inputs are right.

Here is the case in the title. A large delivery worth 1,400 arrives early on the first morning of the new month. The supplier dated the invoice on the last day of the old month, because that is when the order was picked. The bookkeeper enters the invoice in the old month, because that is the date on it.

Now look at what each month sees. The old month's purchases include 1,400 of stock that was never in the building during that month, and it was not on the shelf when the closing count was done. The old month's figure is overstated by 1,400. The new month's opening stock does not include it either, but it is used during the new month and does not appear in the new month's purchases. The new month's figure is understated by 1,400.

On sales of 52,000 a month, that is a swing of about 2.7 points: the old month looks bad, the new month looks good, and neither number describes what happened in the kitchen. The cure is the rule above: the delivery belongs to the month in which it arrived, whatever the invoice says. Many venues put a simple check into the month end: list every delivery received in the last two days and the first two days of the month, and confirm each is in the right period.

The first-of-the-month delivery is the best known, but not the only one.

Each of these produces a number that looks plausible. That is why our guide to reading food cost variance starts with the count and the period before looking at anything in the kitchen.

Calculate it for food and for drink separately, and for drink by category if you can: beer, wine, spirits, soft drinks and hot drinks. Their percentages are very different, and a combined figure moves whenever the balance of sales between them moves, even if every category is perfectly controlled.

The formula is the same for each category, with its own opening stock, purchases and closing stock. That means the count and the purchases need recording by category too, which is easiest if each supplier's invoice lines are coded to a category when they are entered. Our guide to pour cost shows the drinks side of the calculation in detail.

Cost of goods sold divided by sales, for the same period and the same category, gives the cost percentage: food cost percentage for food, pour cost or beverage cost for drinks. Sales minus that cost gives gross profit.

Use sales net of VAT and service charge, and make sure the sales and the cost cover exactly the same period and the same category. A food cost percentage calculated on food cost but total sales, or on a month of costs and four weeks of sales, is wrong in a way that is hard to spot. Our guide to calculating food cost percentage step by step covers the rest of that calculation.

Gross profit is the cash that pays for everything else: labour, rent, energy and the rest. A venue can improve its food cost percentage and still make less gross profit, if sales fall or the mix moves towards cheaper dishes. Our guide to gross profit on a dish explains why cash matters as much as the percentage.

On a restaurant's profit and loss account, cost of goods sold sits immediately below sales. Sales minus it is gross profit. Below gross profit come labour, occupancy, operating costs and the rest, and at the bottom, net profit.

The layout matters because it shows how much of the business's result depends on this one line. A two point error in food cost on a busy venue's sales can be a large share of its net profit. Our guide to a restaurant profit and loss you can read walks through the whole statement.

The kitchen's weekly figure and the accountant's monthly one will rarely match exactly, and they do not need to. The accountant works in calendar months, uses the invoices as entered in the books and makes adjustments for items that arrive late. The kitchen works in weeks, uses its own counts and may not have every invoice yet.

What matters is that the two are reconciled regularly, and that the difference is small and explained. A large, persistent difference points at the count, the period or a category of purchases that one side records and the other does not. Find it early, because a difference that is allowed to build up for months is much harder to untangle.

For the accounts, monthly is the minimum. For running a kitchen, weekly is far more useful, because a problem shows within days rather than weeks.

A practical pattern is a full count monthly, for the accounts, and a weekly figure from a count of the most valuable lines, which in most kitchens cover most of the value. Our guide to the weekly food cost report shows how to present that weekly figure on one page.

Record purchases net of any VAT or sales tax your business reclaims, and calculate the cost percentage against sales net of the tax you charge. Mixing tax-inclusive costs with tax-exclusive sales, or the other way round, distorts the percentage by the rate of the tax.

If your business cannot reclaim VAT on purchases, the tax is a real cost and belongs in the figure. Ask your accountant which applies, and keep to the answer.

A correct figure is the start, not the end. Once it is reliable, it supports decisions that a rough figure cannot.

Compare each category with its own theoretical cost from recipes and sales, and the gap tells you how much is being lost to waste, portions and counting. Compare it month by month, and a steady rise points at prices or portions before it becomes a problem. Compare it across venues in a group, carefully and only where menus are alike, and it shows which kitchens run tightly. Our guide to actual vs theoretical food cost covers the first comparison.

None of these comparisons is worth making on a figure built from a missed freezer or a misdated delivery. That is the practical reason for the care in the rest of this guide.

A clean month end avoids most of the failures above. A short checklist, run every time, is enough:

The calculation needs counts and purchases, and those stay in your own stock sheet and accounts today. servearound covers the sales side of the percentage and the records that explain some of what was used.

Food and drink sales come through the point of sale, and the menu report in Analytics breaks them down by dish and category over any range of dates, so the sales figure for each category matches the period of your count. The payments report shows discounts, voids and comps by member of staff, and bills for a date range can be downloaded as a spreadsheet for your own reconciliation.

servearound does not track stock, purchases or invoices today, so opening stock, purchases and closing stock stay with your own records. Inventory tracking, for the stock behind the menu, is coming. If you would like to see the sales side, get in touch.

It is the cost of the food and drink used in a period: opening stock plus purchases minus closing stock. It sits below sales on the profit and loss account, and sales minus it is gross profit.

Food cost usually means the food part of cost of goods sold, often expressed as a percentage of food sales. The wider figure may also include drinks, which are better calculated separately.

Not in a restaurant's management accounts. Labour has its own line, and food and labour together make prime cost.

Usually because deliveries or invoices are in the wrong month. A delivery that arrived on the first but is entered in the previous month makes the old month look worse and the new month better.

Most restaurants use the latest purchase price for every item. Whatever method you choose, use it every time.

They are stock used and not sold. Either leave them in and accept the higher figure, or record them separately and take them out. Choose one treatment and keep to it.

Monthly for the accounts, and weekly from a count of the most valuable lines if you want to manage it rather than just report it.

The periods, the invoices available and the adjustments are different. Reconcile the two each month, and investigate any large or persistent difference, which usually points at the count or the cut-off.

Cost of goods sold is opening stock plus purchases minus closing stock, calculated for the same period as the sales it relates to, and separately for food and each type of drink. It is the basis of the food cost percentage and of gross profit, so every error in it flows straight to the bottom line.

The formula breaks when its inputs are in the wrong period or at the wrong value: deliveries entered by invoice date, late invoices, missing credits, missed locations, one-sided transfers and changed valuations. Count at the same time every period, record purchases when the stock arrives, run a short month-end checklist, and reconcile with the accountant. A number that is right is worth more than one that is merely low.