How do I calculate my prime cost?
– Andie, Owner, Andies Restaurant, Chicago
Continuing with some restaurant accounting fundamentals from last week: Most restaurateurs know the main elements that go into prime cost, but it is important to be sure you’re including all the appropriate expenses so that the ratio is as accurate—and useful as a management tool—as possible.
Put simply, prime cost is the combined cost of food and labor. Some operators find controlling their prime cost percentage to be a much more useful number than thinking of food and labor separately. A classic illustration of prime cost in action is a make-or-buy scenario. Imagine you have trouble attracting talent in the pastry kitchen, so you switch from employing a pastry chef who does scratch desserts (relatively cheap ingredients like flour, butter and sugar, but expensive in labor) to a plate-and-serve prepared dessert program (higher food cost but can be quickly plated by a cook or server). Knowing that the food cost of your dessert menu doubled, for example, from 20% to 40% looks like a horrible cost control problem. But balanced by the salary savings of a full-time pastry chef, it may in fact have been a cost-saving move—assuming the guests like the new menu.
One mistake operators sometimes make is knowing that food and beverage cost and labor cost work together to comprise prime cost, but failing to remember all the elements that make up prime cost. So within food and beverage costs, you also need to consider things like paper supplies, condiments and frying oil—basically, anything included in the cost of goods sold. Similarly for labor, it is not enough to just add your payroll; consider taxes, benefits and insurance as well. Adding every appropriate cost will give you a more conservative and more accurate number to use.
Prime cost is a great management tool, but like any tool, it is only useful if properly used. Calculate and review it frequently, and make sure it’s accurately and consistently assessed. More on prime cost here.