How to Calculate Prime Cost for a Restaurant (Formula + Example)

What is prime cost?

Prime cost is the sum of your cost of goods sold (food and beverage) and your total labor cost (wages, salaries, and benefits). It represents the two largest and most controllable expenses in a restaurant. If you run a full-service restaurant, prime cost typically accounts for 60 to 65 percent of your sales (Restaurant365, accessed 2026). For a bar with lower pour costs, the range is 55 to 65 percent (Backbar Academy, 2019).

Prime cost matters more than any single ratio because it captures both what you buy and who you pay. A restaurant can have excellent food cost but still lose money if labor is out of control, or vice versa.

The formula

Prime cost = Cost of goods sold + Total labor cost

Cost of goods sold (COGS) includes:

• Food purchases
• Beverage purchases (alcohol and non-alcohol)
• Beginning inventory minus ending inventory for the period

Total labor cost includes:

• Hourly wages
• Salaries (kitchen managers, front-of-house managers, yourself if you draw a salary)
• Payroll taxes
• Benefits (health insurance, paid time off, workers' compensation)

Prime cost percentage = (Prime cost ÷ Total sales) × 100

Worked example: 80-seat full-service restaurant, one month

Sales:

• Food sales: $140,000
• Beverage sales (alcohol): $35,000
• Beverage sales (non-alcohol): $8,000
• Total sales: $183,000

Cost of goods sold:

• Beginning food inventory: $12,000
• Food purchases during the month: $44,000
• Ending food inventory: $11,000
• Food COGS: $12,000 + $44,000 − $11,000 = $45,000
• Food cost percentage: ($45,000 ÷ $140,000) × 100 → lands inside the 28 to 35 percent benchmark for full-service restaurants (MarginEdge, 2026)
• Beginning beverage inventory: $8,000
• Beverage purchases: $9,500
• Ending beverage inventory: $7,800
• Beverage COGS: $8,000 + $9,500 − $7,800 = $9,700
• Beverage cost percentage: ($9,700 ÷ $43,000) × 100 → lands inside the 18 to 24 percent benchmark for restaurant beverage programs (Backbar Academy, 2019)
• Total COGS: $45,000 + $9,700 = $54,700

Labor cost:

• Hourly wages: $38,000
• Salaries (two managers): $10,000
• Payroll taxes and benefits: $9,600
• Total labor cost: $57,600
• Labor cost percentage: ($57,600 ÷ $183,000) × 100 → lands below the 34.2 to 36.5 percent median for full-service restaurants (National Restaurant Association, 2025)

Prime cost:

• Prime cost: $54,700 + $57,600 = $112,300
• Prime cost percentage: ($112,300 ÷ $183,000) × 100 → lands inside the 60 to 65 percent range for full-service operators (Restaurant365, accessed 2026)

This restaurant sits within the 60 to 65 percent range for full-service operators (Restaurant365, accessed 2026). Food cost falls within the 28 to 35 percent benchmark (MarginEdge, 2026), and labor cost is below the 34.2 to 36.5 percent median for full-service restaurants (National Restaurant Association, 2025).

Why 60 to 65 percent matters

Prime cost leaves room for every other expense: rent, utilities, insurance, marketing, repairs, loan payments, and profit. If your prime cost climbs above 65 percent, you have less than 35 cents of every sales dollar to cover occupancy (typically 6 to 10 percent of sales, HigherMe, 2021), operating expenses, and net margin.

A full-service restaurant running a 68 percent prime cost and 8 percent occupancy cost has 24 percent left for everything else. Net profit margins in the industry range from 3 to 9 percent (ChowNow, 2025), which means a 68 percent prime cost leaves almost no cushion for unexpected repairs, slow months, or debt service.

How often should you calculate prime cost?

Monthly, at minimum. Weekly is better if you have the discipline to count inventory every week. The sooner you see a spike in food cost or labor cost, the sooner you can adjust portion sizes, renegotiate with a supplier, trim a shift, or raise a menu price.

Many operators wait for the accountant's P&L, which arrives 30 to 45 days after month-end. By then, two more months of losses may have passed. Calculating prime cost yourself, in a spreadsheet, takes one hour per month: count inventory on the last day, pull sales and payroll from your point-of-sale system, and enter six numbers.

Common mistakes

Forgetting benefits and payroll taxes. Labor cost is not just gross wages. Payroll taxes (FICA, unemployment) and benefits (health insurance, workers' comp) add 20 to 30 percent on top of wages. If you pay $40,000 in wages, your true labor cost is closer to $50,000.

Ignoring beginning and ending inventory. COGS is not the same as purchases. If you bought $10,000 of food but your inventory grew by $2,000, you only used $8,000 worth of food that month. The formula is: beginning inventory + purchases − ending inventory.

Mixing periods. Sales, COGS, and labor must cover the same period. Do not compare one week of sales to one month of labor.

Using food cost alone. A 28 percent food cost looks excellent, but if labor cost is 42 percent, prime cost is 70 percent and the restaurant is losing money. Always calculate both.

What to do when prime cost is too high

1. Identify which half is the problem. Calculate food cost percentage and labor cost percentage separately. If food cost is 38 percent and labor cost is 30 percent, fix food cost first.
2. Check portion sizes and waste. Weigh three portions of your most popular dish. If they vary by more than 10 percent, you have a portioning problem.
3. Review your menu pricing. Calculate the recipe cost of your top five sellers. Divide recipe cost by your target food cost percentage (typically 30 to 32 percent). If the result is higher than your current menu price, you are undercharging.
4. Audit your schedule. Compare labor hours to covers served, by shift. If you served 40 covers at lunch and scheduled four servers, your productivity was 10 covers per server. Industry norms vary, but 12 to 15 covers per server is common for full-service lunch.
5. Renegotiate or switch suppliers. If your food cost climbed 3 percentage points in six months and your menu prices stayed flat, your supplier raised prices and you absorbed the increase. Get three quotes for your top ten ingredients.

Free calculator

Track your prime cost, food cost, beverage cost, and labor cost every month with a free spreadsheet. Enter your beginning inventory, purchases, ending inventory, and total sales. The calculator shows your percentages in green, yellow, or red against industry benchmarks.

https://finoutils.gumroad.com/l/free-food-cost-calculator

The free version calculates the current month only. If you need a full P&L, break-even analysis, menu pricing, and a three-year projection for a bank, the paid Restaurant Financial Toolkit includes all of that, with three presets (restaurant, bar, cafe) and every benchmark sourced by publisher and year.