Restaurant space is full of words that one might not be familiar with, and the restaurant glossary is here to simplify it all for you. It will help you keep up with updated restaurant industry lingo.
Overhead Restaurant Rate
What is an overhead restaurant rate?
The term ‘overheads’ refer to recurring costs associated with operating a restaurant, such as rent, utilities, and salaries. It is crucial to keep in mind that this idea only applies to costs unrelated to the price of food, raw materials, and other components used in the production of items.
How to calculate the overhead cost?
To calculate the overhead rate, divide the indirect costs by the direct costs and multiply by 100. If your overhead rate is 20%, it means the business spends 20% of its revenue on producing goods or providing services. Here’s what the formula looks like,
For example, determined that your overhead costs consist of the following:
- Rent: $14,000
- Utilities: $8,045
- Taxes: $9,400
- Alcohol licenses: $1,000 (this includes only the license to sell alcohol, not your license to bartend)
To get your total overhead cost, let’s add them up.
Total Overhead Cost = Rent + Utilities + Taxes + Licenses
Total Overhead Cost = $14,000 + $8,045 + $9,400 + $1,000
Total Overhead Cost = $32,445
The total overhead cost for the bar is $32,445. Now we need to know what that means against
your revenue. Let’s assume that your POS suggests sales worth $235,000.
Now we’ll use these two numbers in the overhead rate formula from above.
Overhead Rate = Overhead Costs / Income From Sales
Overhead Rate = $32,445 / $235,000
Overhead Rate = .138 or 13.8%
Your overhead rate is 13.8%. This means you spent 13.8 cents on overhead costs for every dollar you made.
Examples of Overhead expenses
The overhead costs depend on the nature of the business. For example, a fine dining restaurant’s overhead costs will be widely different from a QSR.
Some examples of overhead costs are:
- Office Supplies
- Advertising expenses
- Accounting and legal expenses
- Salaries and wages
- Government fees and licenses
- Property taxes
Rent, payroll, and insurance are examples of setting monthly and yearly overhead costs. Variable overhead costs include advertising charges, which can change from month to month depending on the volume of business.