6.1 Food cost and selling price

Raw material cost refers to the direct cost of all ingredients used to prepare a dish. This includes both the intrinsic value of ingredients such as meat, vegetables, dairy products, and spices, as well as the accumulated losses arising from waste or packaging.Without an accurate overview of ingredient purchases and waste, it is difficult to establish correct pricing and ensure operational efficiency.

Stop losing money on your menu / food cost rules

To calculate the actual cost per portion, three main components must be considered:

1. Average purchase price of ingredients: The average of the prices paid for necessary ingredients over a given period, for example a monthly period, to smooth out price fluctuations between purchases.
2. Waste and loss factor: A factor describing the proportion of ingredients lost during preparation, such as bones, shells, or trimming waste, which must be included to calculate the actual cost. This component may account for as much as 10–15% of the total measured quantity if it is not carefully monitored.
3. Service cost (labour and utilities): The wages of staff involved in preparing the dish, energy costs (electricity, steam, or gas consumption), and the cost of dishwashing and cleaning, which are ultimately allocated across each portion produced.

Once these components have been added together, the total cost per portion is obtained, which ultimately forms the basis for pricing the dish. When we want to determine how large a share of each unit of revenue goes toward this cost, we use the food cost percentage, which in written form can be explained by the following statement:
The percentage of the selling price that goes toward all direct costs is obtained by dividing the total cost of the dish by its selling price and multiplying by one hundred.

To illustrate this with an example: if the total cost of a dish is ISK 830 and the selling price is ISK 2,100, then 830/2100 × 100 = 39.5% of the price goes toward ingredients and service. This ratio helps operators assess whether dishes are priced too low or too high in relation to food cost targets, most often in the range of 30–35%.

In addition, it is important to carry out regular price reviews of inventory costs in order to monitor fluctuations in purchasing prices and update pricing accordingly. Appropriate tools may include:

• Inventory Management Software: Provides real-time visibility over inventory and automatically calculates waste percentages and average purchase prices.
• Yield Testing Protocols: Measurements of the actual quantity of ingredients that ends up in the dish to verify loss and waste data.
• ABC analysis: Classification of ingredients according to their impact on total cost to direct attention to the most important items.

Through these methods, we not only ensure accurate assessment of raw material costs, but we can also respond quickly to market price changes to maintain stable and sustainable operational performance.

Most restaurants FAIL because they ignore Prime Cost

3 prime cost rules every profitable owner lives by

Prime cost is your secret weapon