The cost of food production is the total direct costs incurred to make and serve food to customers. Culinary industry players agree that most of the costs are spent on raw materials and direct labor. Want to know how to calculate the cost of food production, why is this important, and how to do it efficiently? Come on, see the complete information in this article!
Get to know what the cost of food production is
Quoting Investopedia, cost of production refers to the direct costs required to produce goods sold by a company—in this case a food business.
The amount can increase or decrease based on production volume. In contrast to operational costs, the amount will remain the same regardless of the amount produced.
For this reason, COGS are sometimes referred to as variable costs, while operating costs are described as fixed costs.
Also read: Food Canvas Business Model: Definition, Components and Examples
The Importance of Calculating the Cost of Food Production
In financial reports, COGS is an important metric for evaluating how efficiently a company manages labor and inventory in its production process.
The following are several other reasons why it is important to know how to calculate the cost of food production.
1. Calculating Profit
Calculating the cost of production can help you determine the expected profit margin. Without calculating the correct cost of production, you may not know whether the culinary business you are running is making a profit or not from the start.
2. Adjust Prices
The cost of goods sold can also help you determine the selling price of the product after taking into account the profit margin and other factors. However, the point is that this calculation helps you analyze the costs.
3. Make Financial Reports
Even though it is still on an MSME scale, creating comprehensive and accurate financial reports is still important so you can make strategic decisions. However, you won’t be able to solve it if you don’t calculate the profit and loss.
4. Identify areas that need to be streamlined
HPP also provides insight into the efficiency of a company’s production processes and supply chain management.
An increase in COGS may indicate an increase in material costs or inefficiencies in production, while a decrease may indicate improvements in cost control or production processes.
That way, you can manage inventory more effectively and identify areas where efficiency can be improved.
5. Controlling Costs
In the food industry, knowing how to calculate food production prices is also very important for monitoring and controlling costs. This helps you stay lean and keeps operational costs low.
What is the Ideal Cost of Goods Sold for a Food Business?
Just as with fluctuating food prices, there is actually no rule of thumb regarding the ideal cost of production. This depends on the type of food served, miscellaneous expenses, and menu prices.
However, Food Service Warehouse recommends that the cost of food production should be no more than 31 percent of total sales. The lower the COGS percentage, the higher the profit margin.
How to Calculate the Cost of Food Production
In the food industry, COGS refers to the total cost of all ingredients purchased and used to prepare and serve food to customers.
Unlike typical COGS, you may need to take into account other factors such as material waste and damage to understand the true costs.
However, to simplify it, you can use the following formula to calculate COGS.
1. Based on Cost Components
The calculation of the cost of production only involves costs that are directly related to production, such as raw materials, direct labor costs, and other overhead costs. The formula is as follows:
COGS = (Raw Material Costs + Labor Costs + Overhead Costs): Total Production
For example, Mrs Untung has just received an order for 200 portions of burger packages and wants to calculate the COGS of the product so she can determine the right selling price. Here are the cost details:
- The total cost to purchase the materials used is IDR 5,000,000.00.
- The cost to pay employee wages is IDR 1,000,000.00.
- Total other costs for packaging, gas, electricity, etc. are IDR 3,000,000.00.
COGS = (Rp. 5,000,000.00 + Rp. 1,000,000.00 + Rp. 3,000,000.00) : 200
= IDR 8,000,000.00 : 200
= IDR 40,000.00
So, in order for Mrs Untung to make more money, the selling price of her product must be higher than IDR 40,000.00 per portion.
2. Based on Inventory
Another way that you can use to calculate COGS is to use inventory data. Here is the formula:
COGS = Beginning Inventory + Inventory Costs – Ending Inventory
For example, Mr Untung operates a fast food restaurant called Untung’s Burger Bar. Currently they still have remaining January supplies worth IDR 8,000,000.00 which includes ground beef, bread, vegetables, sauce and potatoes. So, to start February, they purchased additional inventory worth IDR 6,000,000.00 and at the end of the month they had total remaining stock worth IDR 3,000,000.00. So, how much does the food product cost?
COGS = IDR 8,000,000.00 + IDR 6,000,000.00 – IDR 3,000,000.00
= IDR 11,000,000.00
This means Untung’s Burger Bar needs IDR 11,000,000.00 to produce burgers. This figure must be considered an expense and must be deducted from gross income if Mr Untung wants to know what his profit is this month.
Also read: 9 examples of interesting and unique shop names that will make customers curious
How to Lower the Cost of Food Production
According to LightSpeed, there are several tips you can apply to reduce COGS. Here are some of them:
- Monitor ingredient supplies so you can avoid waste by buying ingredients that are easily damaged.
- Buy materials in large quantities at once (if possible) to save on shipping costs and get discounts from suppliers.
- Work with suppliers who offer the most profitable prices and deals.
- Prevent waste by choosing fresh ingredients, caring for them so they don’t spoil easily, and using them as needed.
- Utilize local ingredients that are in season to save on material shopping costs—instead of having to import them.
- Explore menus with cheaper ingredients. For example, Mr Untung can make chicken burgers whose ingredients are cheaper than beef burgers.
- Reevaluate portion sizes, especially if you often find that consumers don’t finish their meals—perhaps they are too large.
- Monitor and evaluate staff performance to ensure that they are wise and competent in using materials as intended.
- Investigate anything suspicious regarding ingredient inventory—anticipate kitchen staff fraud or something similar.
- Automate several manual procedures to increase business operational efficiency.
So, when it comes to efficiency, of course Labamu could be the solution. With just one application, you can manage material inventory, employee absences, cashier systems, and even financial reports. Come on, immediately download the Labmu application on Google Play or the App Store!
