Monitor Your Prime Costs (Include Labor Cost in Recipes)

Cost of Goods Sold:

There is no better way to understand your food and beverage cost of goods sold (COGS) than to create recipes for each prepared item and menu item recipe you sell.

When you know, based on the most current cost of ingredients, what a recipe is costing you to prepare, you know how to price it and how much margin it contributes to profits.

By adding an interface to your Point of Sale system to your recipes, you will also know how much inventory you should have used (theoretical usage), what your cost of sales should be (theoretical cost of sales), and what your most (and least) profitable menu items are based on your sales mix (menu engineering).

Restaurants that maintain recipes, perform menu analytics, and monitor actual vs. theoretical inventory usage consistently report reductions in their COGS as a percentage of sales of 2%–5%.

Prime Costs (Add Labor):

In addition to the cost of the ingredients, recipes also have a labor cost. Most recipe items require someone to prepare them.

The full labor cost for a menu item often includes the labor cost from other recipe items it uses as ingredients as well as preparing the menu item itself. The combination of the cost of the ingredients (COGS) + the labor cost = the "Prime Cost" for a recipe or menu item.

Typically, full-service restaurants have more complicated menus and spend more on skilled labor to prepare menu items. Quick-service restaurants often have less complicated menus and buy products that are ready to cook and serve, resulting in lower labor costs to prepare menu items.

Using Prime Costs:

The question is often whether a recipe should be made in-house or purchased already prepared or pre-portioned. For example, a steakhouse must determine whether to pay a premium for pre-cut steaks or portion their own from less expensive primal cuts. The only way to make an informed decision is to compare the cost of pre-cut steaks to the Prime Cost for steaks portioned in-house.

An item’s Prime Cost will also help you price a menu item. Without including the labor cost in a recipe, you run the risk of lowering your overall profit contribution or possibly selling an item for less than its prime cost to prepare.

Suppose the sales mix from your POS is added to recipes with prime costs. In that case, you can evaluate your theoretical cost of sales, and profit from sales, and perform menu engineering based on a more comprehensive analysis of what your menu items are costing you.

The Solution:

COGS-Well provides an easy-to-use solution for Prime cost analysis. You start by entering your various Labor Types, or kitchen positions, along with an average hourly rate for each. When completing a recipe, you will select the Labor Type and enter the number of minutes required to prepare the recipe.

Not only will you be able to see the ingredient cost (COGS), but also the Labor Cost, as well as the combined Prime Cost for each recipe. When reporting on menu item sales and recipe costs, you will have the same choices – COGS only, Labor only, or Prime cost.

If a labor cost is entered for a prepared recipe item that is used in another recipe item (like salsa used in breakfast burrito), the labor cost for the salsa will show up in the breakfast burrito in addition to any labor costs for making the burrito.

Summary:

Using COGS-Well to add the labor cost for recipes, in addition to the ingredients, will provide prime costs for better insight into pricing and evaluating your menu items.

It will also help you do a “build versus buy” analysis for prepared items.

Just another “prime” example of COGS-Well going the extra mile to provide the most comprehensive solution for inventory control and menu analysis!