What Is COGS in the Restaurant Industry? Unveiling the True Costs

COGS Formula:

Beginning Inventory + Purchases - Ending Inventory = COGS

1. Beginning Inventory

This refers to the monetary value of all food and beverage inventory you had at the start of a specific period (e.g., the beginning of the month). Ensure you consistently use the same valuation method throughout your operations. The First-In, First-Out (FIFO) method is the most popular inventory valuation method among restaurants worldwide because it reflects accurate COGS and the natural flow of inventory. FIFO is particularly suitable for restaurants since it aligns with the perishable nature of food items, ensuring older products are used before newer ones. While LIFO (Last-In, First-Out) can potentially offer tax savings by increasing COGS, FIFO generally provides a more accurate cost representation for menu pricing decisions. The weighted average cost method offers a simplified approach, particularly useful when determining individual item costs is difficult due to ingredient blending.

2. Purchases

This includes all food and beverage purchases made during that same period. It's important to include any associated freight or delivery charges directly tied to those purchases. According to accounting principles, freight charges from vendors for inventory should be capitalized as part of inventory cost. These transportation-in costs are essential expenses to bring inventory to its current condition and location. For small businesses with annual revenue under $25 million, shipping charges can be expensed to COGS immediately, although under Generally Accepted Accounting Principles (GAAP), these costs should still be capitalized. Tracking freight costs separately within your COGS calculation can provide valuable insights into their impact on your overall food costs.

3. Ending Inventory

This is the monetary value of all unsold inventory left at the end of the period. A proper physical inventory count is essential for accuracy, and best practices recommend conducting these counts during off-peak hours, such as early mornings or after closing. Consistent counting schedules with dedicated staff members lead to more reliable inventory accuracy and better identification of trends or inconsistencies. Implementing digital inventory tracking tools can significantly reduce counting errors—potentially by up to 25% compared to manual methods—especially when tracking expiration dates and implementing First-Expiring, First-Out (FEFO) protocols.

Example:

A restaurant starts the month with $5,000 worth of inventory. During the month, they purchase an additional $8,000 worth of food and beverages, including $200 in freight charges. At month's end, their inventory is valued at $4,000.

COGS = $5,000 + $8,200 - $4,000 = $9,200

If the restaurant generated $30,000 in sales that month, this represents a COGS percentage of approximately 30.7%, which falls within a healthy range for most restaurant operations. Maintaining detailed records and utilizing inventory management tools, such as those integrated into advanced restaurant POS systems, can drastically simplify this process while providing real-time insights into cost fluctuations. Studies suggest that restaurants implementing automated inventory tracking see average improvements of 15% in COGS accuracy and 20% in food waste within the first six months.

Key to Restaurant Profitability

Cost of Goods Sold (COGS) is a pivotal metric in the restaurant industry, directly influencing your gross profit margin—the difference between your revenue and the cost of producing your menu items. A higher COGS percentage translates to less gross profit, leaving fewer resources to cover operating expenses and ultimately impacting your net profit.

Understanding and managing COGS is essential for strategic menu pricing and informed business decisions. By closely monitoring your food cost percentage—calculated as COGS divided by food sales—you can assess whether your menu prices are aligned with your cost structure and profit margin goals. For example, if your food cost percentage is higher than industry benchmarks, it might signal the need to adjust pricing or implement better cost control measures.

Effective COGS management enables you to identify inconsistencies, take corrective actions, and optimize for profitability. Regularly analyzing your COGS can reveal areas of overspending or underpricing, empowering you to make data-driven decisions that improve your restaurant's financial health.

In short, a strong understanding of COGS and its relationship to your gross profit margin is critical for running a profitable restaurant. By diligently monitoring and managing your COGS, you can ensure your menu pricing supports your financial goals and sustains your business in a competitive market.

Read more: How to Design High-Performing Outdoor Dining Spaces That Boost Revenue (eats365pos.com)

Streamline Your Operations with Eats365

Running a profitable restaurant requires meticulous cost control. Integrating Eats365's POS system with inventory management tools empowers you to accurately track COGS, optimize purchasing, and ultimately boost your bottom line. Contact Eats365 today to learn how our comprehensive solutions can simplify your operations and maximize profitability for your US-based restaurant.

FAQs about COGS in restaurant industry

What is COGS in the restaurant industry?

COGS, or Cost of Goods Sold, in the restaurant industry represents the total direct costs of producing the food and beverages sold to customers. This includes expenses for raw ingredients, packaging, and sometimes direct labor related to food preparation. COGS is a crucial metric, directly impacting your gross profit margin and overall restaurant profitability.

Why is calculating restaurant COGS accurately important?

Accurate COGS calculation is vital for restaurants because food costs typically represent a significant portion of total sales (28-35%). Precise COGS calculations help maintain profitability by ensuring appropriate menu pricing, identifying areas of overspending, and effectively controlling waste. It also provides valuable insights into resource allocation, enabling data-driven financial decisions.

How is restaurant COGS calculated?

Restaurant COGS is calculated using the following formula: Beginning Inventory + Purchases (including freight costs) - Ending Inventory = COGS. Beginning inventory represents the value of stock at the start of the period, purchases include all inventory acquired during the period, and ending inventory is the value of unsold stock. This formula determines the direct cost of goods used in sales for a specific period.

How can Eats365 help manage and improve restaurant COGS?

Eats365 offers advanced POS systems integrated with automated inventory tracking tools. These tools provide real-time visibility into inventory usage, reduce manual counting errors, and can improve COGS accuracy by up to 15%. This automation simplifies cost tracking, helps minimize food waste, and allows for strategic menu pricing to enhance profitability.

What are best practices for monitoring COGS in restaurants?

Best practices for monitoring COGS include using consistent inventory valuation methods like FIFO (First-In, First-Out), conducting regular physical inventory counts during off-peak hours, tracking freight charges separately, and utilizing digital inventory management tools. These practices improve accuracy, reduce errors, and provide better insights into inventory trends and cost fluctuations.

Can Eats365's system help with food waste reduction related to COGS?

Yes, Eats365's inventory tracking features help identify patterns of inventory spoilage or over-ordering by monitoring expiration dates and usage rates. This can lead to a reduction in food waste, thereby lowering COGS and improving overall operational efficiency.