# Cost of goods sold for a food business – Explained

The cost of food business i.e. restaurant ingredients changes regularly, as the price of produce fluctuates with the seasons and the business finds different sources for essential items. It’s prudent to calculate food costs before the company introduces a menu item, so the company can use this decision to help determine the customer’s price.

The owner of the food business shall research every ingredient that will be going into the dish. The generally used component of the food business is salt, cooking oil, chicken, onions, rice, and flour are used in multiple dishes.

## Cost of Goods Sold for Food Business

Cost of goods sold refers to direct cost attributable to the production of the goods sold in a company. Simply putting together, it refers to the cost of all the ingredients a restaurant uses in a given time period. Cost of goods sold refers to the costs involved in making the goods or services that are being sold. It is basically the direct materials, direct labor, and direct expenses involved in making the products.

These are easily traceable costs and can be easily identifiable from looking at the products. The other costs that cannot be easily traceable and cannot be linked to the product are not associated with being the cost of goods sold.

The COGS for food business changes over time, and the business can witness completely different number when comparing your COGS for one shift to your COGS for an entire year. Various aspects relating to food business shall be analyzed over time by the business owner as Cost of ingredients or restaurant inventory for a given amount of time.

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This would help the food business to stay lean and keep costs low. While preparing the income statement of the food business, the cost of goods sold is subtracted from gross revenue, as it is money that the business either owns or has already paid. Simply, money attributed to COGS is subtracted from the profit of the business

## How to Calculate the Cost of Goods Sold for Food Business?

The cost of goods sold formula is as follows:

Beginning Inventory + Purchased Inventory – Ending Inventory = Cost of Goods Sold (COGS)

Taking an example. The food business i.e. Sinra Restaurant inc had \$9,000 of leftover inventory at the start of the month, including food, drinks, spices, and other materials basically anything and everything it takes to get a meal on a plate and a drink in a glass.

Throughout the reporting period, the business ordered \$24,000 of additional inventory and ended the month with \$6,000 worth of inventory.

Hence,

Beginning Inventory: \$9,000

Purchased Inventory: \$24,000

Ending Inventory: \$6,000

Then, plugging those numbers into the restaurant cost of goods sold equation, we get this:

Cost of Goods Sold = Beginning Inventory + Purchased Inventory – Ending Inventory

Cost of Goods Sold = \$9,000 + \$24,000 – \$6,000

Cost of Goods Sold = \$27,000

In this simple example, cost of goods sold comes at \$ 27,000.

Generally, it is observed in the food industry that cost of goods sold shall be limited up to 35% of sales at most. However, for the fine dining restaurant business, it would be higher as higher and more expensive food is served in such a business.

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