5.7.3.1. Interpreting Cost Percentages 

Cost percentages are invaluable for comparing an operation’s performance at different times throughout the year or between similar restaurants. They also enable generalizations about several types of restaurant operations. For instance: 

Fast-Food Restaurants: These establishments often use convenience foods, which are more expensive to purchase. Consequently, their food cost percentage might be slightly higher. However, they typically have lower labor costs compared to full-service restaurants. Profits in fast-food restaurants are achieved through high product turnover and low labor costs. 

Fine-Dining Restaurants: These high-margin establishments rely more on quality ingredients and a high level of service, rather than convenience foods. While their food costs in raw dollars are high, the food cost percentage may be lower due to higher menu prices. Labor cost percentages are also higher because they require more highly trained staff. Profits in fine-dining restaurants often come from serving fewer customers but generating higher revenue per sale, compared to casual dining venues that rely on high volume. 

Using Cost Percentages

The basic equation for cost percentages can be expressed in several ways: 

• cost % = cost / total sales 

• sales = cost / cost % 

• cost = total sales × cost % 

These formulas are useful when restaurant management sets a target cost percentage and needs to determine what that percentage means in terms of menu pricing. For example, if a restaurant aims to keep its food cost percentage at 30%, management can use these formulas to set appropriate menu prices to achieve that goal.