Cost of goods sold (COGS) is how much it would cost you to produce a menu item, based on the sum of the items needed for that recipe. Since the cost of goods sold is tied directly to inventory, profit margins and revenue, it’s one of those need-to-take-serious measures that you can’t afford to take for granted.
Bars and restaurants who fail to understand and manage COGS are effectively (or not so effectively!) gambling their profit and loss statement.
With a little number crunching and a hands-on approach, you can successfully take control of your COGS. Here you’ll learn what COGS is, how to calculate it and whether or not you can calculate it without doing inventory.
What is the meaning of “cost of goods sold” (COGS)?
Knowing your numbers is an important part of good restaurant management and accounting processes. But if we were to single out one number as the one to rule them all, that number would be your cost of goods sold (COGS). It stands head and shoulders above the rest. Why? Because everything hinges on that figure.
Here’s an example of just how COGS fits into the grander scheme of things.
Imagine your restaurant’s signature meal is a creamy pesto shrimp. Customers love it, you love it and it flies off the pass so fast you barely keep things together back of house. Now consider what’s needed for the dish. Before being plated and served up, you’d need basil, olive oil, pine nuts, parmesan and garlic for the pesto. Shrimp for the shrimp, pasta and everything else that’s used to make it the delicious meal everyone looks forward to having.
The sum total of all that’s needed for your signature dish is called the cost of goods sold.
To see how profitable your restaurant is, you’ll need to learn how COGS is calculated.
How to calculate COGS - learn the COGS formula
To understand the COGS formula better, you’ll need to take a wider view of your kitchen stock management. For every dish that you create you’ll need the figures from the start of the period for beginning inventory, purchased inventory and ending inventory at hand.
- Beginning inventory is the monetary amount of the inventory you have remaining from the previous day/week/month/year.
- Purchase inventory is the monetary amount of the inventory purchases you make for a given period.
- Ending inventory is calculated after the end of the time period in question. It’s the monetary amount of the inventory left over.
With that cleared up, cost of goods sold is calculated as follows:
(Beginning Inventory + Purchase Inventory) - Ending Inventory
Say, for example, you’ve got a keg of beer left over from last week's service that comes to £110. (Beginning inventory).
You go out and buy another three kegs for the week ahead which cost you £330. (Purchase inventory).
At the end of the week you’re left with 2 kegs valued at £220. Your COGS would be:
(£110 + £330) - £220 = £220
How to calculate COGS using FIFO
FIFO stands for first in, first out and is used for calculating the beginning and ending inventory. It assumes that the earliest inventory which is purchased is sold first. FIFO is another way to calculate the beginning and ending inventory in an inflationary environment.
Can you calculate COGS without doing inventory?
Well, no. As mentioned above, inventory forms the basis of all you need for accurate COGS. Each stocktake is taken into consideration when coming to the COGS equation.
Get accurate COGS figures anytime, anywhere, with growyze
By now you likely have come to realise the importance of having a handle on COGS for your restaurant. With growyze, you get an automated COGS analysis report which helps you stay on top of the profitability of your restaurant. To assist you in getting accurate COGS figures anytime and from anywhere, get in touch with us at growyze for a 30-day trial.