What is prime cost and how to calculate it

You can sell a lot and still make nothing. The number that tells you fastest whether your restaurant makes money is prime cost: what you spend on food plus what you spend on your team. Here's what it is, how to calculate it with your own numbers and what to do if it comes out high.

What prime cost is

Prime cost is the sum of your two biggest, most controllable costs:

• Cost of goods sold (COGS): the food, beverages and disposables you used to make your sales in the period.
• Total labor cost: hourly wages, manager salaries, payroll taxes and benefits.

Prime cost = Cost of goods sold + Total labor cost

It's almost always shown as a percentage of sales, so you can compare one month to another even when sales go up or down:

Prime cost % = Prime cost ÷ Total sales × 100

Why it matters so much

Together, food and labor are usually more than half of what you sell. What's left has to cover rent, utilities, insurance, card fees, maintenance… and still leave you a profit. If prime cost runs over, there isn't enough left for everything else.

You can't change your rent this month, but you can change what you buy, how much you waste and how you build schedules. That's why prime cost is where improvements show up fastest.

Step 1. Calculate cost of goods sold

It's not the same as what you bought. If you bought a lot at the end of the month and it's still on the shelf, it hasn't been sold yet. That's why you use inventory:

Cost of goods sold = Beginning inventory + Purchases − Ending inventory

Beginning inventory is what you had at the start of the month (last month's ending inventory). Purchases are all the food, beverage and disposables invoices for the month. Ending inventory is what you count on the last day.

Step 2. Calculate total labor cost

Include the whole team, not just hourly staff:

• Hourly wages for kitchen, servers, cashiers and dishwashers (hours worked × hourly rate, including overtime).
• Fixed salaries for managers and chefs.
• Payroll taxes the business pays and benefits (health insurance, paid time off, etc.).

Tips that go straight to employees usually aren't counted, because they don't come out of your sales. If you as the owner work in the business and pay yourself a salary, include it; otherwise your prime cost looks better than it is.

Step 3. Add them up and get the percentage

Add both costs and divide by your sales for the same period. Use sales without sales tax and without tips.

One-month example

A taquería sold $60,000 this month.

• Food cost $19,700 ÷ $60,000 = 32.8%
• Labor cost $19,600 ÷ $60,000 = 32.7%
• Prime cost $19,700 + $19,600 = $39,300
• Prime cost % $39,300 ÷ $60,000 × 100 = 65.5%

This taquería has $20,700 (34.5%) left for everything else and for profit. If it lowers food cost by 2 points and labor by 1.5 points, prime cost drops to 62% and it saves $2,100 a month, more than $25,000 a year, selling exactly the same.

What prime cost percentage is healthy?

A widely used industry rule of thumb is to keep prime cost around 60% of sales or less. It depends on the type of business:

• Quick service and food trucks usually run leaner on staff, so they can come in lower.
• Full-service restaurants need more people on the floor and usually run higher.

More than comparing yourself to others, compare yourself to yourself month over month. If prime cost goes up and sales don't, something is leaking.

How to lower your prime cost

On the food side:

• Cost your recipes with yield and review the dishes with the highest food cost. We explain how in the guide on how to calculate recipe cost.
• Standardize portions with scales and measured ladles.
• Cut waste: use first what expires first, and prep to what you sell, not "just in case".
• Review menu prices when an ingredient goes up; don't wait for the next menu change.

On the labor side:

• Build schedules from sales by hour, not habit. Slow hours are where most overspending happens.
• Watch overtime: it costs 1.5 times the regular rate.
• Use a time clock so the hours you pay are the hours worked.

How often to measure it

At least monthly, and ideally weekly. A bad week you catch in time can be fixed; a bad month you see 30 days later has already been paid for. To measure it weekly you need a weekly inventory count, even if it's just your most expensive ingredients.

In Kitchfly, prime cost shows up on its own in your P&L: food cost comes from your purchases and recipes, and labor comes from your team's time clock with their hourly rates.

Frequently asked questions