Updated: Feb 28, 2019
If you're an independent restaurant chances are that you're using purchases as your COGS which means that you're not properly calculating your true Cost of Goods Sold and its probably costing you money! This article will teach you to properly calculate your COGS and record the entry into your accounting software.
COGS is an acronym which stands for Cost of Goods Sold which describes "the actual cost of the items that you sell or sold during a specific period". For example, if I paid $20 for 100 tomatoes, each tomato would have a cost of .20 cents. If I sold 10 of those tomatoes my COGS for those sold tomatoes would be (10 x .20) $2.00.
Calculating the cost of 10 sold tomatoes is simple, however if you apply that same logic to hundreds of items and include such factors as yield and metric conversion, calculating your COGS becomes a little more challenging. But the problem isn't calculating COGS itself, the problem is that instead of using the COGS formula, many restaurants simply use their purchases instead. So in other words, if my restaurant generated $100,000 in monthly revenue and I purchased $30,000 worth of inventory during the month, I would simply use the $30,000 purchase as my COGS and this would be INCORRECT! Their are various potential problems with using purchases as your COGS but for this article we'll focus on the fact that it can be misleading. For example, if you purchase $30,000 worth of inventory but you think that your manager should've purchased less, then you might assume that there's a problem when in fact there is not. The extra items purchased should technically be on your shelf, ready to be sold. Therefore, by using purchases as your COGS you have no idea if you have a problem or not.
By correctly using COGS you can determine how much inventory is on-hand, measure your estimated shrinkage and if you dig deep enough you can even identify the exact items causing the shrinkage.
Restaurants who fail to properly calculate their COGS have a more difficult time of identifying problems because they follow the wrong data.
The standard formula for calculating your correct COGS is as follows:
beginning inventory + purchases - ending inventory = COGS
To calculate your beginning and ending inventory you must do an actual inventory count of all items in-house then multiply the items counted by their individual cost. For example, if I count 80 apples and each apple cost .20 cents, my inventory value would be $16.
Full inventory counts are typically done on the first day of each month prior to you opening for the day. To make these entries into your accounting software you will need to do what's called a journal entry. Don't panic, journal entries aren't that difficult and we'll walk you thru it.
Journal entries are used by your bookkeeper to make entries into your financials when existing modules won't work for the task. For example, if I want to pay my employees I simply go in and use the payroll feature to write a check and everything is properly stored in my financials. If I want to enter a vendors invoice I simply go to the vendor invoicing section, enter the data and the information is properly stored in my financials. Journal entries are typically used when there's no pre-set tool available for the required task.
Depending on the software that you're using you'll want to find the part of the program that allows you to do a journal entry. Now let's say it's the morning of January 1st (before your restaurant opens), your staff has counted all food inventory on-hand and calculated your total food value as $10,500. Now let's pop open the journal entry section in our accounting program and enter the transaction date as December 31st. Why enter December 31st if my inventory count was on January 1st? I'll explain shortly. Now let's make the journal entry
Food Cost $10,500 entered as a Debit
Food Inventory $10,500 entered as a Credit
Now don't panic but we now have to reverse that entry by making a second entry on January 1st. So save the previous entry and make the following entry dated January 1st
Food Cost $10,500 entered as a Credit
Food Inventory $10,500 entered as a Debit
That's it, all done! Now, why did we do the entry twice. Remember the first formula that we noted above
Beginning Inventory + Purchases - Ending Inventory = COGS
Well the count we did on the first was not only today's beginning but it was also yesterday's ending. Think about it, if on Sunday night I go to sleep with 10 apples in my refrigerator, it means that I ended Sunday with 10 apples. Now when I wake up on Monday morning, it means that I'm starting my day with 10 apples. So when you do your count on the 1st day of the month it means that what you counted on the 1st (before you opened) is also what you had on the day before (after you closed). So by creating the entry on the day of the count and the day before the count we ultimately create a beginning and ending inventory which we can use for our COGS calculation.
Now using our COGS formula, lets say that on December 1st we did an inventory count and calculated our food on-hand food value to be $9000. We do our journal entry of $9,000 on November 30th and reverse it on December 1st. We do the same think on January 1st but this time our on-hand inventory value is $10,500. Again we do our journal entry on December 31st and reverse it on January 1st. Now let's say that from December 1st - 31st we purchased $11,250 worth of inventory. Now from December 1st thru December 31st here is our COGS
Beginning + Purchases - Ending = COGS
$9000 + $11,250 - $10,500 = $9750
That's it, all done! Using this method you can also see how the COGS value is different from your purchases. In the above example the restaurant purchased $11,250 worth of inventory. Let's say the food sales for that $11,250 came out to be $50,000. This would give you a cost percentage of 22.5% food cost however your correct food cost would be $9750 which is actually 19.5%. The other 3% should be sitting on your shelf as inventory and was not actually sold. If you're properly budgeting and planning, then properly costing out your COGS is essential and should be done properly.
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