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Restaurant operators should all know that tracking food costs is a must. It allows you to quickly identify supplier price changes, maintain accurate prime costs, and identify cost trends to make better business decisions.
Advanced operators are graduating from basic food cost calculations to more complex reporting, such as actual vs theoretical food costs (or AvT).
Actual vs theoretical reports the difference between what your costs should have been over a given period of time with what they actually were. It’s a financial forecasting measure that’s completely different from actual vs theoretical yield, which is more of a scientific measure of chemical interactions.
Conducting actual vs theoretical reports can help you gain more control of restaurant costs and show you how to boost your profitability — all while providing a picture of your restaurant’s financial health and efficiency.
Read on to learn more about the difference between these actual costs and theoretical costs, what actual vs theoretical food cost variance is, and how to calculate and track AvT using the right software.
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Actual vs theoretical food cost: what is the difference?
Theoretical food cost is what your food costs should be for a period based simply on what you sold and the cost of those items according to the latest ingredient prices. It assumes zero breakage, shrinkage, or wastage.
To arrive at accurate theoretical food costs, you need:
Accurate recipes that account for everything that goes into a dish
The most recent ingredient prices for accurate recipe costs
Exact sales figures you can obtain from a POS such as Toast
Actual food costs are your real food costs for a period based on what you sold and after you’ve factored in the product used, wastage, breakage, and shrinkage. Actual food cost will always be higher than theoretical food cost, as it includes more than just the cost of menu items.
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Learn how invoice processing automation is a foundational tool for restaurant operators with invaluable benefits.
Actual vs theoretical formula for in-depth food cost analysis
The actual vs theoretical formula is quite simple. It relies on accurate calculations of your restaurant cost of goods sold, or COGS.
The AvT formula is simply the difference between your actual cost of goods sold and the theoretical costs of goods sold (COGS).
Actual (COGS) - Theoretical (COGS) = Food cost variance
You can forecast your COGS using the following formula:
Beginning inventory + Purchased inventory – Ending inventory = Cost of goods sold (COGS)
Again, theoretical COGS highlights what your COGS should be if you literally operate at maximum efficiency with zero waste or spoilage.
Take a breath...you should know that no one operates at maximum efficiency with zero waste or spoilage. It’s obviously something to strive for, but this is why your theoretical COGS will always be less than your actual COGS.
Your actual COGS is the true cost of what you spent to make everything you sold. Once you start monitoring COGS, you can start accounting for waste, spoilage, etc. into your theoretical COGS to get a more accurate forecast.
Understanding actual vs theoretical food cost variance
The difference between actual and theoretical food cost is known as food cost variance. Several factors contribute to your food cost variance:
Theft, or shrinkage, which is often more prevalent in restaurants that don’t have proper restaurant inventory management controls and systems.
Food waste due to spoilage, miscalculated portions, food spillage, and refires. To learn more about these four factors that cause restaurant food waste and how you can track and reduce it, read this post.
Basic restaurant accounting errors because of data input mistakes, such as your accountant recording the wrong ingredient price when capturing an invoice.
Modifiers and add-ons, such as sauces and sides, that aren’t properly accounted for eat into your profitability and increase your actual COGS.
Food cost variance is a measure of how efficient a restaurant is at managing its food costs. A lower variance means the restaurant is more efficient at controlling costs.
This means that a restaurant with a higher actual food cost may still be more efficient at managing costs than a restaurant with a lower food cost as long as its food cost variance is lower.
For example, if Jamie’s restaurant has an actual food cost of 33% and a theoretical food cost of 32%, their food cost variance is 1%. If Alex’s restaurant has an actual food cost of 32% and a theoretical food cost of 29%, Alex’s food cost variance of 3% – three times as much as Jamie’s!
Alex’s restaurant has more wastage, shrinkage, and/or spoilage than Jamie’s so, despite having a lower actual food cost, Alex is not as good at managing food costs.
What does this actually look like as a dollar amount? If each restaurant does $3,000,000 in annual sales, Alex’s extra 2% in food costs amounts to lost profits of $60,000 compared to Jamie’s.
It gets even more impactful if Alex’s operation has 10 units all with the same food cost variance. Now we’re talking about $600,000 — over half a million in lost profits.
How to track actual vs theoretical food cost variance
To arrive at theoretical and actual food cost numbers, you must:
Account for all purchases and prices
Take inventory counts
Cost your recipes
Track food waste
You can use manual methods to arrive at all these numbers. Here's a download spreadsheet and template to help you get started.
But even with our spreadsheets (which are better than nothing), these manual methods take time, are error-prone, and can cost you money in unnecessary labor and mistakes.
A better approach is using software that unlocks automation, eliminates manual data entry, reduces mistakes, and saves you heaps of time — a software such as xtraCHEF by Toast.
How understanding your food cost variance can help you
Simply knowing your restaurant’s food cost variance is only half the battle.
Once you determine your food cost variance, it’s time to focus your attention on identifying and improving inefficiencies.
For example, if you know over portioning is a big issue, you could focus on improving your recipe costing with a formal recipe management system.
If you’re constantly throwing out lots of food due to spoilage, you can revamp your inventory management process to ensure you’re ordering to par levels rather than over ordering.
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Using software to track actual vs theoretical food cost variance
Determining what’s impacting your COGs can be tricky. Tons of factors can cause variance, and you already have so many moving parts requiring your attention every day.
Luckily, the right restaurant costing platform can zero in on your cost drivers. This is exactly what xtraCHEF by Toast provides.
Built on invoice processing automation, the platform digitizes critical invoice data that’s GL coded and mapped to your restaurant chart of accounts. The platform simultaneously provides visibility and detailed insights into your ingredient price fluctuations, how that impacts recipes and final plate costs.
Reach out to one of our Product Specialists to see how you can combine xtraCHEF with Toast to calculate actual and theoretical food costs, reduce variance, and take control of your restaurant costs for maximum profitability.