How to Calculate Food Costs and Set Profitable Prices

Every profitable food business has one thing in common: they know exactly what each item costs to make. Not roughly. Not approximately. Exactly.

This article is part of our comprehensive resource: The Ultimate Guide to Food Costing and Menu Pricing.

This guide will walk you through the process of calculating your food costs step by step—from breaking down ingredient costs to allocating overhead. By the end, you'll have a system for understanding your true costs and setting prices that actually make money.

Step 1: Create a Bill of Materials

A Bill of Materials (BoM) is simply a list of every ingredient needed for one serving or batch of your product. Start with your recipe and make it precise:

• Convert all measurements to the same unit system
• Include every component, even small amounts of salt or oil
• List garnishes, sauces, and sides that come with the main item

For example, a chicken sandwich BoM might include:

Step 2: Determine Unit Costs

Next, you need to know what each ingredient costs per unit. This requires converting your purchase prices into usable measurements.

For example:

• Chicken breast$24 for 5 lbs = $4.80/lb = $0.30/oz
• Brioche buns$6 for 8 buns = $0.75 each
• Lettuce$3 for 1 head (12 oz usable) = $0.25/oz

Step 3: Calculate Recipe Cost

Multiply each ingredient's quantity by its unit cost, then sum everything:

This is your direct food cost for this item. But it's not the whole picture.

Step 4: Add a Waste Factor

In reality, not every ounce of food you buy ends up on a plate. You lose product to:

• Prep wasteBones, fat, peels, stems, cores that get discarded during preparation
• Cooking lossShrinkage during cooking (meat can lose 25-30% of weight)
• SpoilageProducts that expire before use or aren't stored properly
• MistakesBurned items, dropped plates, incorrect orders

A standard waste factor is 5-10% for most kitchens. Add this to your recipe cost:

Using a 7% waste factor:

Step 5: Consider Labor Costs

While labor isn't typically included in "food cost," it's essential for pricing. Two approaches:

• Labor as a Separate Line ItemTrack total labor costs separately and ensure overall margins cover both food and labor. Most restaurants aim for combined food and labor costs of 55-65% of revenue.
• Labor Per DishFor high-touch items (elaborate desserts, custom cakes), calculate labor per item: 15 minutes at $20/hour = $5.00 per item.

Step 6: Allocate Overhead

Overhead includes all the costs of running your business that aren't directly tied to ingredients:

• Rent or mortgage
• Utilities (gas, electric, water)
• Equipment depreciation
• Insurance
• Marketing
• Software and subscriptions
• Packaging and supplies

Calculate your monthly overhead, then divide by the number of items you sell to get per-item overhead:

For example, if your overhead is $3,000/month and you sell 2,000 items:

Step 7: Calculate Total Cost

Bringing it all together for our chicken sandwich:

This is your floor—the minimum you need to charge to break even before making any profit.

Step 8: Set Your Price

Now you can price with confidence. If you want a 30% food cost (a common target):

At $11.70 (round to $12), your food cost is 30% and you have $8.49 to cover labor, overhead, and profit.

Alternatively, use a cost-plus markup:

With a 2.5x markup on total cost:

Building a Cost Tracking System

Calculating costs once isn't enough. You need a system to maintain accurate information:

1. Update ingredient prices monthly: Check your invoices and adjust unit costs
2. Re-calculate when recipes change: Even small modifications affect costs
3. Track actual vs. theoretical: Compare what you should have used to what you actually used
4. Review waste regularly: Identify patterns and reduce losses
5. Audit portions: Ensure staff are following recipes precisely

Summary: Your Food Cost Checklist

1. Create a detailed Bill of Materials for each menu item
2. Calculate unit costs from your purchase prices
3. Multiply quantities by unit costs to get recipe cost
4. Add waste factor (5-10%)
5. Factor in labor for high-touch items
6. Allocate overhead per item
7. Set price using food cost percentage or markup multiplier
8. Track and update regularly

Knowing your true costs isn't optional—it's the foundation of a profitable food business. Take the time to do the math right, and you'll make better decisions about pricing, menu design, and purchasing.

Learn More About Food Pricing

Explore our guides to become an expert at pricing your food products:

• Food Pricing Calculator for Small Food Businesses
• What Is Food Costing? A Complete Guide
• The Ultimate Guide to Food Costing and Menu Pricing
• Understanding Food Cost Percentage
• Pricing Guide for Home Bakers and Cottage Food Businesses