This is Part 9 from 125 Building Blocks for Your Bakery Business
Costing versus not costing often means the difference between success and failure in the manufacturing arena. We see this clearly throughout the food industry, where even the most talented chefs are capable of bankrupting their kitchens because they are unwilling to perform mathematics. The fact is, you can never be sure if you’re turning a profit unless you calculate your cost of goods. All it takes is one overly expensive ingredient or one poorly priced menu item to negatively impact your profit margin.
For those who intend to turn a profit and stay in business long term, the costing process must not be ignored. Those who regard costing as a matter of unnecessary tedium or as a task that gets in the way of the creative process are perhaps better off baking or cooking as a hobby instead.
Keep in mind that food costing is a cumulative effort, meaning the more you cost, the more data you accumulate, and the easier it gets over time. It’s like exercising in that there are many benefits to costing but one must be disciplined in order to see results. Like exercising, the muscles you build here make your business stronger and more stable. In successful bakeries, the costing process goes hand-in-hand with product design; both are considered equally important and related tasks. Before a new product hits the sales floor, smart manufacturers first cost. By knowing the cost, you can determine an appropriate sale price and decide whether or not your product is competitive enough to thrive in the marketplace.
FREE Food Costing and Pricing Spreadsheets
Click here to download the Microsoft Excel Product Calculator
Click here to download the Microsoft Excel Recipe Element Calculator
- These spreadsheets offer a tried & true system especially designed for bakeries of all sizes.
- Compatible with Microsoft Excel (office software)
- Scale your recipes with the push of a button!
- Automatically compute a recommended sale price for nine different styles of bakery operations including retail, wholesale, farmer’s market, home businesses, private label, co-packer, and distributors.
- Pre-loaded labor rates may be customized to your liking.
- Pre-loaded price margins may be modified to match your own preferences.
- Work backwards from your desired sale price to arrive at a compatible cost of goods.
How to Calculate Food Costs
Below, you will find my three part video tutorial series on food costing.
VIDEO #1: Costing & Pricing Introduction
- This video presents the value of food costing and how it is guaranteed to strengthen your business.
- Learn the three things we do differently when it comes to food costing calculations.
- Acquaint yourself with the format of the spreadsheet system.
- Meet your friends, COGS & Margin
VIDEO #2: Costing a Basic Food Product
- This video walks you through every single stage of a basic costing & pricing example including volume-to-weight conversions.
- Example used: cookies sold in various quantities at a farmer’s market.
- Learn how to compare your ingredients & packaging purchasing costs between three different vendors (retail supermarket versus wholesale club versus local distributor). Discover how these differences impact your end price.
- Learn how to increase production efficiency to lower your cost of goods.
- Learn how to discard or modify your product concepts to compete with market prices.
VIDEO #3: Costing & Pricing Complex Products
- This video tackles the costing & pricing of a product that includes multiple recipe elements & packaging components.
- Example #1: a two-layer retail style carrot cake with packaging.
- Example #2: three-tier wedding cake.
- Example #3: a wholesale style cake sold in corrugated 6-packs by the pallet.
How to Calculate Labor Cost
Labor is a big part of food production. It must be accounted for in your calculations. If you are doing all the baking yourself, I recommend costing out different stages of the labor with different hourly rates. Imagine that your bakery has seven employees working under management. Since each employee has a different set of skills and experience, each earns a different hourly rate.
Dishwasher (minimum wage + $1) per hour
Baker (beginner level) (minimum wage + $3) per hour
Retail Salesperson (minimum wage + $3) per hour
Baker (advanced level) (minimum wage + $5) per hour
Decorator (beginner level) (minimum wage + $5) per hour
Delivery Driver with Vehicle (minimum wage + $8) per hour
Decorator (advanced level) (minimum wage + $13) per hour
When calculating the labor that is required to make one wedding cake, make sure to delineate each necessary task according to its appropriate hourly rate. So you may spend two hours consulting with the client about design ideas. For that stage, charge the salesperson’s rate. You may spend two hours frosting and decorating the cake. For that part of the process, you should charge a specialty decorator’s rate. And so on and so forth. The delivery driver has a high hourly rate because s/he also expends gas and the use of a car.
How to Estimate Shrink Cost
In the food business, we refer to lost ingredients and products due to theft as “shrink.”
- Time spent fielding customer inquiries that do not amount to a sale
- Free samples
We see high levels of shrink when it comes to products that are valuable, such as meat or fish. We also see shrink when it comes to popular grocery items such as milk, butter, and cheese. We also see shrink when it comes to products that are good to eat, such as cookies and cupcakes. When products and ingredients walk out the door because employees are stealing them, eating them on the job, or giving them away to friends, your business absorbs the loss.
As the owner of a bakery business, you set the precedent on how free handouts are handled. If you give free food out to your friends/family or eat pastries out of the bakery case, then your employees are more likely to do the same. If you don’t indulge in snacks and freebies yourself, you will influence honest employees to follow your lead. If you create a system for employee discounts and follow it yourself, that will set the right example.
There is a certain amount of shrink that is unavoidable. The way to account for shrink loss is to factor a contingency percentage into your pricing. Add an extra 5% to your margin to cover these costs. That way, the losses don’t come out of your profit.
How to Calculate Overhead Cost
- Rent or mortgage
- Kitchen Maintenance/Repair
- Vehicle Maintenance/Repair
- Miscellaneous Operating Fees
If you rent or own a commercial space, these costs are significant and will need to be accounted for in your margins. Calculate how much your overhead will cost both monthly and annually. Your prices should include a large enough margin to cover these expenses all year round. Some months will be slower than others. January, for instance, is a painfully slow month for most bakeries. It is not enough that you are profiting during busy times of the year. The profits that you collect at those times will need to float you through the month of January.
How to Price According to Profit Margins
Once you have established your COGS (cost of goods sold = food cost + packaging + labor cost), it’s time to decide how much of a margin you want to aim for.
The margin is a percentage that is largely determined by your overhead costs. Your margin is there to cover all the other expenses associated with running your business that are not included in the COGS. Here are some suggested margins based on industry averages.
50% Home Baker
40% Private Label
Once you have determined your margin, you may arrive at the price of the product.
Price = COGS ÷ (1 ̶ Margin)
When it comes to striking big deals with large companies, you may never have a chance to re-negotiate your price again. In that case, it’s important to cost your food according to the highest possible price of ingredients and work in some contingency percentage so that if the price of, say, flour increases, you can absorb the added cost.
How to Calculate a Market Comparison
In addition to pricing your product according to your desired margin, you will need to compare your estimated price with similar existing products in the market. If your price is considerably higher than comparable items, you will need to work backwards to adjust the recipe to arrive at a lower price point.
How to Maximize Your Top Sellers
Invariably, you will end up with a bestseller. It is critically important that your bestseller is priced with a decent profit margin, as you will be spending more time manufacturing it than everything else. If your top sellers are not profitable or if you don’t know whether or not your top sellers are profitable then you are taking a tremendous risk with your business. Do not enter blindly into the marketplace without knowing the cost of every item you sell.
Food Cost Exercise
- Begin with your most popular menu item
- Calculate its food cost
- Calculate its packaging cost
- Calculate its labor cost
- Calculate its shrink cost
- Pick a margin
- Calculate your price based on that margin
- Compare that price to the average market price at other bakeries
- If it’s too high, adjust the product’s recipe or presentation
- Repeat this exercise for every item on your menu
This is the end of Part 9 from 125 Building Blocks for Your Bakery Business. Return to the Table of Contents or proceed to Part 10 – Bakery Investment Capital and Finances
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