Restaurant food cost and menu pricing: a step-by-step method

To price a dish, cost every ingredient on the plate, divide by your target food cost percentage, then round to a price that reads well on the menu. Your target depends on your cuisine and format, so set it with your accountant from your own results. In most US states, sales tax is added to the check at the end rather than built into the menu price.

What is food cost percentage and why does it matter?

Food cost percentage is what you spend on ingredients divided by what you sell. If you divide a week's ingredient spend by a week's food sales, you get the percentage for that week.

It matters because food is the cost you control most directly. Rent is fixed, labor is hard to cut without hurting service, but a portion that grew by an ounce, a supplier who raised a price quietly or a dish priced two years ago all show up here first.

To measure it properly over a period:

The formula is: food cost % = (opening inventory + purchases − closing inventory) ÷ food sales.

Count inventory on the same day each week or month, the same way every time.

How do you cost a single dish?

Write down every ingredient on the plate, the amount used and what that amount costs you. Include the garnish, the oil, the sauce and the side. Small things add up.

Set out a costing sheet with one row per ingredient: the item, the quantity on the plate, your latest invoice price per unit and the cost of that quantity. Add the garnish, the sauce, the side and a share of the frying oil and the packaging. The total is the plate cost. A sandwich with fries has a dozen small lines, and the small ones are where the money leaks.

Use what you actually pay from your latest invoices, not what you paid when you wrote the menu.

How do you turn plate cost into a menu price?

Divide the plate cost by your target food cost percentage, written as a decimal.

The formula is: menu price = plate cost ÷ target food cost %.

Run it at two or three targets, such as one a little above and one a little below your usual, and look at the spread. Then round to a price that reads well on the menu, and sanity-check it against three things: what similar places nearby charge, what your guests expect to pay for that dish, and whether the dish earns its place on the menu. Not every item needs the same percentage. Drinks and sides often run at a much lower food cost and carry dishes with expensive proteins.

Should US menu prices include sales tax?

In most of the US, no. The custom is to show prices before tax and add sales tax to the check at the end, and guests expect it. Sales tax rates differ by state, county and city, and some places tax restaurant meals at a different rate from groceries, so look up the rate for your exact address and check it each year.

A few owners choose tax-inclusive prices for simplicity, especially for drinks at a bar. Where that is allowed, you usually have to tell guests clearly, for example with a line on the menu saying prices include sales tax. Ask your state revenue department before you switch.

Whichever you choose, your food cost calculation uses the price before tax. Tax is money you collect for the state, not money you earned.

How often should you review menu prices?

At least twice a year, and any time a major ingredient moves sharply. Re-cost your best sellers first, because a small change on a dish you sell two hundred times a week matters more than a big change on one you sell five times.

Keep a simple spreadsheet with each dish, its plate cost, its price and its food cost percentage. Update the costs from your invoices. Any dish that has drifted well above your target needs a decision.

How do you raise prices without losing regulars?

Raise them in small steps rather than one big jump. Change a few dishes at a time, not the whole menu at once. Improve something when you raise the price: a better bun, a bigger side, a new sauce. Guests notice value more than numbers.

Other levers before a straight increase:

• Trim the portion that comes back. If half the fries return to the kitchen, serve fewer.
• Re-engineer the dish. Swap one expensive component for a cheaper one guests will not miss.
• Cut waste. Prep to your sales, not to habit.
• Renegotiate with suppliers or compare a second one each quarter.

What about labor and the rest of the cost?

Food cost is one part of what a dish has to pay for. Labor, rent, utilities, card fees and insurance all come out of the same menu price, and what is left is profit. A dish with a fine food cost can still lose money if it takes a cook twenty minutes of hands-on work. When you add a new dish, think about prep time and station load as well as ingredients, and favor dishes that use what you already stock.

What should you watch every week?

Your weekly food cost percentage, your top ten dishes by sales and their individual food cost, and waste. If the weekly number creeps up two weeks in a row, look at portions and prices before you look anywhere else.

More guides for your business:

• Restaurant gift cards: the five-year rule and how to sell more
• Restaurant loyalty programs that work for independents
• Tip pooling and service charges: the federal basics for owners

More in the US guides for food businesses.