Food cost and beverage cost: why they are calculated separately and what a good range looks like

In a hotel restaurant, cost of sales reaches the monthly meeting as a single percentage and the argument starts there. Kitchen says the waste belongs to the bar, the bar says the comps belong to the front desk, and the controller asks for a number nobody knows the origin of. The problem is almost never the percentage. It is that it was calculated with purchases instead of consumption, and with food and beverage mixed together.

What cost of sales is and what it is not

Cost of sales is the value of the ingredients you consumed to generate the period’s sales. It is not what you bought, not what you paid the supplier and not what sits in the storeroom. It is what left inventory and became plates and drinks served, expressed as a percentage of net sales. That distinction between buying and consuming is what separates a useful report from a decorative one.

In a hotel the definition gets harder because the same ingredient leaves through several doors. It goes to the restaurant as a plate sold, to the room as room service, to the pool as a beer on a lounger, to the staff canteen as an employee meal and to the lobby as a comp for an upset guest. All those exits lower inventory, but only some of them are sales. If you do not separate them, cost rises without the kitchen having done anything wrong.

The full formula, with opening and closing inventory

The base formula is short: opening inventory, plus purchases for the period, minus closing inventory, equals consumption. Then it is adjusted: consumption, minus employee meals, minus comps, minus transfers to other revenue centers, equals cost of sales. Finally it is divided by net sales for the same period and the same revenue center to get the percentage.

1. Take the physical inventory from the previous month’s close: that is your opening inventory. If you do not have it, you will not be able to calculate cost this month, only estimate it.
2. Add all purchases received in the period, valued at invoice cost, including the ones that have not reached accounting yet.
3. Subtract the closing physical inventory, counted on the same day and at the same hour as the last sales close.
4. Subtract employee meals at cost, authorized comps and transfers to other revenue centers of the hotel, each with its own requisition slip.
5. Divide the result by the net sales of the revenue center: no tax, no tips, discounts already deducted and room charges included.

Look at the last step. If the sales figure you divide by does not include consumption charged to the room, the percentage comes out higher than reality, because you consumed ingredients to generate sales you are not counting. In a hotel with many corporate guests that error can be worth several points. The guide to the shift close by revenue center (A guide to the shift close by revenue center in a hotel) explains how to get that sales figure clean before calculating anything.

Why food and beverage are calculated separately

A combined cost is an average of two businesses that do not resemble each other. Food has waste from expiry, from portions and from kitchen mistakes; its margin depends on the recipe and the menu price. Beverage has waste from over-pouring, from bar comps and from bottle control; its margin is usually higher and its turnover slower. The suppliers are different, the people responsible are different and the controls are different.

When you add them together, a good bar covers a bad kitchen and a good kitchen covers a careless bar. The hotel controller knows it, and that is why the hospitality standard asks for the two lines separately. Separating them is not more work: it means counting food inventory and beverage inventory on different lists and recording each category’s sales at the point of sale, something any serious system does from the ticket itself.

What to do with what sits in between

Some ingredients live on the border: coffee, juices, ice, cocktail mixers, desserts that come out of the bar. Decide once which side they go on, write that decision into a policy and do not change it for the convenience of the month. What matters is not the perfect classification but keeping it the same in January and in December so the number can be compared.

An illustrative example with numbers

The figures below are invented to show the calculation. They are not market data and not from any hotel. They are there to follow the arithmetic from start to finish.

Added together, total cost is 97,000 on sales of 350,000, that is, 27.7 %. That combined number looks reasonable and says nothing. Separated, it tells two stories: a kitchen at 30 % and a bar at 22 %. If next month the combined figure rises to 29 %, only the separated version tells you whether it was the kitchen, the bar or both, and therefore whom to call into the office.

What a good range looks like

There is no correct percentage that works for every hotel. A restaurant with included breakfast and a low allocation value will have a high food cost by design. An all-inclusive resort calculates cost on imputed sales, not real ones. A boutique hotel with a chef-driven menu and a wine bar can have beverage higher than food and be perfectly healthy. Any figure someone hands you as a universal range ignores your rate, your concept and your guest mix.

What does exist is your own range. It is built from three comparisons: against the theoretical cost of your recipes, against your own twelve-month history and against the budget you agreed with the controller. When real cost drifts more than two or three points from theoretical, there is waste, theft, portions off recipe or a sale recorded wrong. When it drifts from history, something changed: supplier, menu, season or discipline.

Theoretical cost versus real cost

Theoretical cost is calculated from the recipe: every dish has an ingredient cost and a quantity sold, and the sum divided by sales tells you how much you should have consumed. Real cost is calculated from inventory, as in the example. The gap between the two is your most honest control indicator. A hotel restaurant with recipes loaded in the system and sales by product can see that gap every week instead of discovering it at month end.

What the hotel adds to the problem

A hotel restaurant has inventory exits that a street restaurant never sees. Each one distorts cost if it is not recorded with its own slip and its own accounting destination.

• Included breakfast: it consumes real ingredients against an allocated sale. If the allocation value is low, breakfast food cost comes out high and drags the rest of the day; it is worth treating it as a separate revenue center.
• Employee meals: they are payroll, not cost of sales. Without a daily requisition slip they end up inflating the kitchen’s cost.
• Front desk comps: the welcome bottle, the dessert after a complaint, the free breakfast for a long-stay guest. They leave the restaurant’s inventory and must go to promotion expense with an authorization.
• Transfers between revenue centers: the pool bar takes ice and fruit from the kitchen, room service takes wine from the bar. Without a recorded transfer, one center carries the cost and another takes the sale.
• The minibar: if the restaurant stocks it but housekeeping bills it, the cost appears in one place and the sale in another.
• Banquets: they consume a lot in a single day and are billed by contract; if the event falls in one month and the invoice in another, cost and sales split apart.

The most common mistakes

The same mistakes repeat in twenty-room hotels and in four-hundred-room resorts. Almost all of them come from taking shortcuts with inventory or with sales.

• Using purchases as cost. A month with big purchases ahead of high season looks like a disaster and a month without purchases looks like a miracle. Neither is real.
• Counting inventory on different dates for storeroom, kitchen and bars. The consumption of the days in between is lost or doubled.
• Valuing closing inventory at menu price or at an old list price. It is valued at the cost of the latest invoice.
• Dividing by sales with tax or with tips. The percentage comes out artificially low and everyone relaxes.
• Dividing by sales that do not include room charges. The percentage comes out artificially high and the kitchen gets blamed.
• Forgetting purchases that arrived without an invoice. If the ingredient is in the storeroom, its cost exists even if accounting does not have it yet.
• Mixing food cost with beverage cost and reporting one number to the controller.

How to see it every week, not only at month end

A cost that is calculated once a month gets corrected once a month. With a weekly count of the twenty or thirty ingredients that weigh the most, usually proteins, dairy, spirits and wine, you can have an approximate cost every Monday. It does not replace the monthly close, but it warns you in time. A three-point jump in week two gets investigated in week two, not at next month’s meeting when nobody remembers what happened.

The point of sale helps when it records sales by product and by revenue center, and when the kitchen (Kitchen display) can see what was sold against what should have been consumed. Without that record, weekly cost is an estimate; with it, it is a figure the controller can audit.

What to do this week

1. Confirm you have a physical closing inventory from last month; if not, take one today and that becomes your opening inventory from now on.
2. Split the count sheets into food and beverage and decide in writing which side coffee, juices, ice and mixers go on.
3. Create a requisition slip for employee meals, comps and transfers between revenue centers, and require it to be filled in daily.
4. Check that the net sales you divide by include room charges and exclude tax and tips.
5. Calculate the theoretical cost of your ten best-selling dishes and ten best-selling drinks and compare it with last month’s real cost.
6. Schedule the month-end closing inventory for the same hour as the last close, in storeroom, kitchen and every bar.

Inn Restaurant records sales by product and by revenue center, with food and beverage separated from the ticket and room charges tied to the folio, so cost of sales is calculated on the complete sales figure; the reports are explained at (Reports). If you want to see how theoretical cost compares with real cost in your hotel, book a 15-minute demo at (contact).