Understanding COGS – Cost of Goods Sold is crucial for restaurant accounting in order to preserve financial stability and profitability. The capacity of a restaurant to control costs, determine menu prices, and ultimately compete in a cutthroat business is directly impacted by COGS, which is more than just an accounting measure.
As the sum of a restaurant’s production costs for the food and drinks it serves to patrons, COGS is an important number that needs careful monitoring and research. In this post, we’ll delve into the complexities of COGS in restaurant accounting, explaining why it’s crucial, how it’s calculated, and the management and optimization techniques for this crucial facet of a restaurant’s financial picture.
What is the Meaning of COGS in a Restaurant?
COGS is a crucial component of restaurant accounting services. It has to do with how much money the restaurant spends buying food at a particular time. The price of the labor necessary to make the dishes from these basic materials is also included in COGS.
COGS is essential for restaurants to monitor and control their restaurant costs. This COGS number will continue to change with time for your restaurant. You may see a different figure even when you compare two restaurant days or shifts as well.
For any restaurant to calculate COGS, they must ensure to track every single ingredient procured by their restaurant along with its cost for a given period. By tracking these costs, the restaurant owners will know whether they are spending over and, if required, can cut down by identifying trends and patterns.
Remember, COGS also includes every other cost associated with the preparation of dishes. So, it will include labor but not the waiter or server cost. All these costs, once included and calculated, will help the restaurant determine its accurate profit margins.
How to Calculate COGS?
The cost of goods sold calculation is of prime importance for any restaurant owner. This calculation sets the expectation for menu pricing for the restaurant to earn profits. Hence, it is imperative to use experienced people for this calculation. You can even look for a firm to outsource accounting services for accuracy and effectiveness.
However, for your understanding, the following things are required for calculations:
1. Beginning Inventory
Before calculating COGS, the restaurant needs to decide on the period they want to consider. For insurance, they can take the figures for a day, week, month, or year for calculation purposes. Hence, the beginning of the Inventory would mean the value of food items, supplies, and beverages at the start of that period.
For calculation purposes, all the values are added together to get one beginning of the inventory figure.
2. Inventory Purchased
This inventory purchase signifies the amount you have spent in that period to buy the supplies or the raw ingredients. However, the Inventory purchased will be for the next period rather than the one which is being counted for.
3. Closing Inventory
This closing inventory number is calculated on the last day of the calculation period. It is the number that signifies the leftover Inventory in terms of the amount at the end of that specific period.
Once all the above information is available to the restaurant, they can calculate the COGS cost. The formula for the same is as follows:
Beginning Inventory + Inventory Purchased – Closing Inventory = COGS
Why Do You Need COGS?
COGS, in simple words, is the direct cost associated with the preparation of a food item in a restaurant. A restaurant needs COGS to include in its income statement and to understand where they are spending the money. COGS is needed to identify the financial performance, profitability, and efficiency of the restaurant.
Simply put, with the help of COGS, restaurants can answer the most important question of whether they are making money or profit through their business. Hence, it is essential to calculate it and, more importantly, to calculate it accurately.
Understanding and efficiently controlling the Cost of Goods Sold (COGS) is a crucial component of success in the dynamic and fiercely competitive world of the restaurant industry. This statistic is an essential element that, when used intelligently, can have a big impact on the profitability and sustainability of a restaurant.