Restaurant Accounting 101: PRIME COSTS
PRIME COST Accounting
Running a successful restaurant requires more than just good food and great service—it demands a keen understanding of the financial metrics that drive profitability. One of the most critical key performance indicators (KPIs) in restaurant accounting is Prime Cost. Whether you’re a seasoned restaurateur or just launching your first concept, mastering this metric is essential for maintaining a healthy bottom line.
What Is Prime Cost?
Prime Cost is the sum of a restaurant’s two biggest expenses:
Cost of Goods Sold (COGS) – This includes all the ingredients and beverages used to produce menu items.
Labor Costs – This encompasses wages, salaries, benefits, and payroll taxes for both front-of-house and back-of-house staff.
The formula is straightforward:
Prime Cost = Cost of Goods Sold + Labor Costs
This metric is typically expressed as a percentage of total sales to make it easier to compare across time periods and locations:
Prime Cost % = (COGS + Labor Costs) / Total Sales × 100
Why Is Prime Cost Important?
Prime Cost is a crucial indicator of a restaurant’s operational efficiency. Here’s why it matters:
Controls the Biggest Expenses: Since labor and food are the largest controllable costs, tracking Prime Cost helps identify areas where savings can have the most impact.
Benchmarks Performance: Industry benchmarks suggest that a restaurant’s prime cost should ideally be between 55% and 65% of total sales. Numbers outside this range may signal inefficiencies or pricing issues.
Informs Menu Engineering: High food costs might point to overpriced ingredients or underpriced menu items. Keeping tabs on Prime Cost can help optimize your menu for profitability.
Supports Labor Scheduling: Monitoring labor as part of Prime Cost enables smarter scheduling, helping balance adequate staffing with cost control.
Facilitates Operational Decisions: From renegotiating supplier contracts to revising portion sizes, Prime Cost provides actionable data for making informed business decisions.
How to Calculate Prime Cost
To calculate your restaurant’s Prime Cost, follow these steps:
Step 1: Calculate Cost of Goods Sold (COGS)
COGS = (Beginning Inventory + Purchases) - Ending Inventory
For example:
Beginning Inventory: $10,000
Purchases: $25,000
Ending Inventory: $8,000
→ COGS = ($10,000 + $25,000) - $8,000 = $27,000
Step 2: Add Labor Costs
Include wages, salaries, bonuses, payroll taxes, and benefits.
Example:
Labor Costs = $18,000
Step 3: Add COGS + Labor Costs
→ Prime Cost = $27,000 (COGS) + $18,000 (Labor) = $45,000
Step 4: Calculate Prime Cost Percentage
Let’s say total sales were $75,000:
→ Prime Cost % = ($45,000 / $75,000) × 100 = 60%
Final Thoughts
Tracking Prime Cost isn’t just a restaurant accounting exercise—it’s a strategic imperative. A consistently high Prime Cost at your restaurant may indicate problems with pricing, waste, theft, or overstaffing, while a well-managed Prime Cost signals operational excellence.
By routinely measuring and managing your Prime Cost, you’ll be in a much stronger position to make informed decisions that drive profit and long-term success for your restaurant.
Need Help Managing Prime Costs?
The Kitchen CPAs specializes in restaurant accounting and taxation. From breaking down your Prime Cost to optimizing your entire financial picture, our team is here to help you build a more profitable and sustainable business. Don’t let hidden costs eat into your margins—contact us today to schedule a free consultation and learn how we can support your restaurant’s financial health.