Estimating Cost of Goods Sold

Keeping the cost of food under control is a high priority for any restaurant owner. Measuring the actual usage and comparing it to the goal is a critical part of that process.

Many restaurants have a goal for food costs in the range of 30% to 40%. This means that for every $100 in food sales, they expect to spend no more than $40 on food supplies.

Small locations with no significant store room that record all food purchases directly as cost of sales can simply compare expenses to sales. But most locations will record purchases as inventory, and transfer from inventory to cost of sales as the sales occur. This means that they need to transfer some amount of inventory for every set of sales they enter.

Calculating the amount of inventory to transfer for a given amount of sales is usually an estimate, at least until the end of an inventory period. When an inventory is completed, more accurate adjustments can be entered to correct any errant estimates. An inventory period might be weekly, monthly, or quarterly, depending on the reporting needs of management. Taking inventory is time consuming, however, so it may be done less often than reports are generated.

So in order to run reports between inventory periods, estimated amounts need to be transferred from inventory to cost of sales.

First, select a target for total cost of sales. For this example, we will use 35%. For every $100 in food sales, we would need to transfer $35 to COGS. If food sales are $250, we multiply 250 by 0.35 and get $87.50.

If all food purchases are recorded in a single inventory account in the bookkeeping system, then a single transfer would be entered subtracting 87.50 from inventory, and adding $87.50 to COGS.

If, however, separate categories are used for food such as meat, produce, and frozen, then amounts need to be estimated for each category. Select a target for each category, and assign a percentage for each category. These percentages should add up to 100%. This is the percent of each food category used in the average day. For example:

Meat 18%
Poultry 10%
Seafood 12%
Dairy 5%
Produce 15%
Bakery 10%
Frozen 20%
Grocery/Canned/Dry 10%
Total 100.00%

Now apply those percentages to the $87.50 in the example. For Meat, it would be 87.50 * .18, resulting in $15.75 to transfer from Meat Inventory to Meat COGS. Each category would be calculated, and entered into the accounting system on a separate journal line.

This calculation can be done with a simple spreadsheet, which you can download for free.

Then, a periodic inventory should be done to correct any differences. The goal of the inventory is to have an estimated dollar value for each food category. For example, if you have 20 pounds of ground beef valued at $2.50 per pound, and 15 pounds of steak valued at $5.00 per pound, and 10 pounds of pork valued at $4.00 per pound, you would calculate:

Type Pounds Price per Amount
Ground Beef 20 2.50 $50.00
Steak 15 5.00 $75.00
Pork 10 4.00 $40.00
Total Meat $165.00

Now, a report should be run to show the current value in the inventory accounts. For this examples, assume the Meat Inventory account shows a current balance of $180. The above calculation shows that we only have $165 of meat currently in inventory. This means we used more meat than we estimated. A transfer needs to be recorded for $15 (180 – 165) out of Meat Inventory, and into Meat COGS. If we had more inventory on hand than shown in the accounting system, then the transfer would move value out of COGS (a negative number, or “credit“) and back into the inventory account.

The same calculation should be done for each inventory category.