Inventory cost is the cost associated with procurement, storage and management of inventory. Managing your kitchen inventory cost can be a difficult task; it can take enormous energy, time and effort to understand what to buy when to buy, and how much to buy for your restaurant. Managing inventory is not just laborious but also be costly for your business if not managed well. On average, inventory cost comes to 20% to 40% of the entire restaurant expense. At the same time, inventory is one of the key components in any restaurant. Unavailability or improper management of it can lead to losses. Therefore, it is important to develop an effective system to manage your inventory cost for your outlet be it a bakery, bar, ice cream or dine-in!
What Is Kitchen Inventory?
Kitchen inventory means all the items and raw materials required to prepare dishes you serve in your restaurant that have been bought but have not been used or sold to the customers. It can include fresh meat, frozen vegetables, fresh produce, soda cans etc. These products can either be directly sold to the customers or used to make a complete dish for them.
What Is Inventory Management?
Inventory management aims to hold resources at the lowest possible cost while ensuring uninterrupted supplies for ongoing operations. It can be challenging as food has a limited shelf life, and customer demand keeps shifting. Efficient management of your inventory is helpful for day-to-day operations, as well as your long-term goals.
What Is Inventory Costing?
Inventory costing means assigning a value to the inventory. These inventory costs include the cost of products bought and the hidden costs incurred during your operations like the cost of space, cost of money, cost of wastage, etc. Inventory costing is a necessary part of sustainable inventory management practice.
Inventory Cost = (Value of Opening Inventory+ Inventory Purchased) – Value of Closing Inventory
What Is The Cost of Goods Sold (COGS)?
While inventory is products bought but not sold to the customers, COGS is the cost of the products that have already been sold to the customer. It includes the costs of everything served to a customer, including whatever is served on the customer’s plate or the drinks they consume. COGS is usually calculated at the end of a week or a month for a business. To calculate COGS, you have to multiply the number of units sold by the price paid per unit.
What Are Various Inventory Costing Methods?
The profitability of your business is calculated based on the cost of goods sold. You can deduct the cost of products you buy to resell from your income to reduce taxes. To that end, inventory costing methods help you determine the cost of goods sold to the consumers.
Here are some commonly used methods for calculating your inventory costs.
1. First In, First Out (FIFO)
FIFO is the most common method for inventory management. Under this method, it is assumed that the goods purchased first are sold first. Using this method means that the cost of your remaining kitchen inventory will be based on your most recent purchases. It is the most effective method in the context of a restaurant kitchen, as chefs use ingredients that are closest to expiration dates and were bought first. FIFO is easy to apply and decreases food waste. However, it costs higher tax bills because restaurants show higher profits. The inventory cost for calculating COGS is the cost of initially purchased goods.
2. Last In, First Out (LIFO)
LIFO assumes that the ingredients purchased last are sold first. Under this system, the value of your remaining inventory will be based on the oldest products you purchased. LIFO is useful during inflation, as more expensive products get sold first. This method also costs lesser tax bills as profits will be lesser. However, LIFO is used only in cases of non-perishable items as perishable inventory would go to waste under this system. The inventory cost for calculating COGS is taken as the cost of the last purchased goods.
3. Weighted Average Cost (WAC)
WAC uses the average unit cost instead of the oldest or newest prices. It means that all inventory valuations will be the same, regardless of the time and expense of their purchase. To calculate the cost of ingredients at a particular time, you can multiply the average cost per item by the final inventory count. This method is ideal for simplifying the restaurant’s record-keeping and purchasing sets of ingredients in large quantities. However, WAC is not practical for restaurants to calculate inventory costs as the products degrade over time, in which case, it is better to use the FIFO method.
It is vital to select and stick to any one method throughout the financial year to keep track of your inventory costs. Inventory cost tends to fluctuate due to seasonality, excessive demand, low supply or scarcity. You can track your inventory through a Restaurant Management System. A PoS system with in-built inventory management is perhaps the best way to compare your inventory data, allowing you to compare it against the recipes you serve.
Hope this blog helps you in developing a method that works for your inventory management. For regular restaurant-related updates, subscribe to our newsletter and follow us on Instagram!