Prime cost is the combined cost of food and beverage purchases used in sales and direct labour associated with producing and serving those sales. In restaurant management, it is a key indicator of how efficiently the operation controls its two major controllable cost categories. The exact calculation should be defined consistently for the business.
Prime cost = Cost of goods sold + Labour cost
Prime cost percentage = Prime cost ÷ Net sales × 100
Some operators include payroll taxes and employee benefits in labour cost; others report them separately. The accounting basis should be stated when comparing results.
If food and beverage cost for a period is $30,000 and labour cost is $32,000, prime cost is $62,000. If net sales are $150,000, prime cost percentage is 41.3%.
Prime cost combines the cost of what the restaurant sells with the labour required to produce and serve it. Monitoring it helps managers assess menu pricing, scheduling, productivity, purchasing, waste and sales mix. It should be reviewed alongside service quality and guest experience rather than managed by cutting costs indiscriminately.
Prime cost does not normally include fixed and other operating expenses such as rent, insurance, utilities, marketing and many administrative costs. Those expenses are considered separately when calculating operating profit.
Chef’s tip: Track food cost and labour cost separately as well as together. A favourable prime cost can hide an issue in one category that is being offset by the other.
Key distinction: Prime cost combines cost of goods sold and labour; it is not the same as total operating expenses or net profit.
This term is one of hundreds covered in depth across OCS courses, learning paths, and 1-on-1 coaching with Chef Eric.
