Terms used in Food Costing

Before we start discussing food cost in more detail, lets explain the basic terms used in Food Costing:

Food Cost: This is the total cost of food items that are used to produce a meal to be sold from the menu.

Labour Cost: This is the cost of the weekly payroll plus any payments made for casual labour. It includes the gross pay, plus the cost of the employer for contributions to retirement funds, medical aid funds and taxes. Indirect employee costs such as supplying meals, uniforms and accommodation to staff must be added to this cost.

Overheads: These are the expenses associated with running the business. Examples include rent, rates, telephone, insurances, gas, electricity, fuel, printing, stationery, cleaning and laundry, cleaning materials, repairs and replacements, maintenance, depreciation, and any other expenses typical of the foodservice industry. These occur whether the business has any sales or not.

Fixed and Variable Costs: Fixed costs are costs that don’t change, for example rent. Variable costs however vary dependant on the levels of business and situations. Examples include how much you spend on advertising or marketing, legal fees, sundry expenses, and guest amenities.

Selling Price: This is the selling price of an item or dish. This is set by using the cost price of an item ÷ targeted food cost percentage x100 which gives a selling price (we discuss this in more detail later in the course). It is important to note that a selling price is fixed to cover all costs of labour, overheads, and to yield a reasonable net profit. These are called the basic elements of cost and are calculated as a percentage of the selling price, which always represents 100%.

Gross Profit: The amount of profit left after deducting the direct costs of materials to make a dish (food or beverage cost of the business).

Net Profit: This is the profit left after all fixed (overhead) costs (staff costs, licences, utilities, rent) and variable costs have been paid. This is the how much profit the owner or shareholder can expect to receive for capital invested in the business.