Smells of fresh bread baking or the richness of chocolate melting are welcoming scents that waft through the air in bake shops. The delectableness of your bakery items will draw customers into your bakery. Then they will see display cases with beautifully decorated cakes.
To determine the cost of ingredients for your bakery first understand of the importance of accurate valuation of your ingredients, calculate the pricing for each recipe, and determine the operating expenses for your bakery.
Calculating the cost of your bakery items based on their ingredients is a key to your success. Using percentages and averages to determine how to charge for your baked costs will not capture all the elements of your business. Grab a slice of your freshly baked cake and continue reading for information on bakery ingredients and costs.
Understanding the Importance of Accurate Valuations of Ingredients
Using an average percentage markup to price your baked goods will not cover the costs of all your ingredients. Each cake, cookie, or pie that you bake has different ingredients; therefore, you need to account for each component of your recipe. If you do not, it will be a tremendous challenge for you to generate a profit or remain in business.
- Ability to Make a Profit
Without accurately valuating the cost of each ingredient in your baked goods, you risk your profitability. Businesses that do not earn profits will not have the money to reinvest in their business. The money from profits lets business owners pay down debt, which saves more money since you are no longer paying interest on the debt. Profits also provide cash flow to purchase new equipment, additional marketing, add new products, or other great ideas you have for your bakery.
- Control and Reduce Costs
Ingredients for baked goods ebb and flow in their costs and availability. When ingredients are in short supply, their costs can quickly escalate. For example, if the price of walnuts skyrockets, you need to know the impact to each item that includes walnuts. Then you can recalculate the cost of those items. Once you have the information, you can decide to raise prices, reduce the number of walnuts in your recipes, or change your ingredient mix and maintain the same pricing.
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- Special Offers for Marketing
Offering discounts or sales to promote new products or add new customers, you might want to sell some of your goods at lower prices. You do not want to lose money on the items that you select. Knowing your breakeven point provides you flexibility in the range of pricing you offer promotional items for.
- Inventory Management
Knowing the profit margin of each item gives information to assess the value of each item that you offer. Analyze your most profitable items; look for a pattern on what makes them more profitable than others. Use that information to determine the mix of items you sell in your bakery. Some of your less profitable items, you can look to alter the recipes, only offer on certain days of the week, or eliminate from your bakery.
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Pricing for Each Recipe
Once you set up a system to gather the information to price each item, this task will be manageable. Using a spreadsheet will simplify this process. You can replicate and then adjust formulas. Spreadsheets can be set up to recalculate all the formulas from a main ingredients page. If you are not conversant with spreadsheets, there are courses available that may be worth your time. There are also online programs available that will help you calculate your costs.
Your first step is to gather all your recipes. Make sure that each baked goods for your bakery has a unique name. You may want to set up separate pages by categories such as breads, muffins, etc. For each recipe you need the following information –
- A list of all your ingredients for each recipe – include any decorative items
- The cost for all your ingredients – flours, sugars, eggs, salt, etc.
- The amount of product that each recipe produces or the recipe yield
- Time it takes to make each recipe (you need to determine your hourly rate or that of any bakers you employ)
- Mixing the ingredients
- Rolling and cutting the dough
- Decorating
- Packaging the batch
- Packaging costs
Some bakery owners like to have the cost per batch for just the ingredients as one number. Then add in the labor and packaging costs as a separate number. Either way, you still have another step, which is to calculate your overhead or operating expenses. Here is an example of calculation for biscuits.
- 10 cups of flour
- ¼ cup of sugar
- 5 Tbs. baking powder
- 6 tsp. of salt
- 1 cup of shortening
- ¼ cup of butter
For your ingredients, you need to determine unit pricing. For example, if flour is purchased in a 10-pound bag, you need to determine its cost per cup. That size bag of flour might contain 40 cups of flour. If you paid $4.50 for the bag of flour, you divide the 4.50 by 40 to determine your cost per cup. Therefore, one cup of flour will cost $0.11 per cup. Then you multiply the 10 cups needed for the biscuits times the cost per cup, which is $1.123.
Remember your math classes and round up!
You follow the same steps for each ingredient. Take your total cost for the recipe and divide by the yield or number of biscuits you can make. This is your cost for ingredients only! You need to include labor and packaging for your price for each recipe. For the total cost of goods sold, continue reading for information on overhead costs.
Operating Expenses for your Bakery
For your bakery, you have two different key groupings of costs. If you incurred or will incur startup costs, these also need to be accounted for. Startup costs could include first and last month’s rent on your property, licensing and permits, and/or equipment. For our illustrations here, those will be incorporated as part of fixed costs.
You will also see the term, overhead costs. These often include your rent, utility bills, equipment costs, etc. These will be captured as mostly fixed costs. The important part of reviewing all your expenses is to be certain that you have listed all the costs associated with your bakery.
Fixed Costs
Include in this list the costs connected with operating your bakery that do not vary much month to month. Here are some costs to consider.
- Monthly rent or mortgage
- Utility bills – include water, gas, electricity, and internet. These do change month to month, but they are a consistent fee that must be paid.
- Insurance
- Taxes
- Licenses – this might be an annual charge, but you can divide annual fees over the year to ensure that they are accounted for in your costs.
- Marketing – your website fees, promotional costs, business cards, etc.
- Loans that you may have taken to purchase your equipment.
Variable Costs
Costs included in this category change monthly. All the ingredients that you purchase are part of this category because the amount you need can vary month to month.
- Ingredients
- Labor for baking
- Labor for selling goods in the store
- Packaging
- Cleaning supplies – sponges, paper towels, mops, etc.
- Replacing baking pans, muffin tins, etc.
- Car expenses if you deliver and/or drive to meet customers to discuss orders
- Labor to develop estimates for large orders and/or to design specialty orders
- Shipping and handling costs for items you ship and receive
All these numbers need to be added together to determine your total costs to operate your bakery. Be sure to include all costs, but also make sure that you do not include any costs twice. For example, if you determined your pricing for each recipe, that already includes the cost of your ingredients for the product and possibly your labor – depending on how you calculated your costs. So, if you use that number to determine your cost of goods sold, do not include the labor for baking or the ingredients in your variable costs.
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Frequently Asked Questions
Most often bakery products include six main categories; all of which usually include grain-based ingredients. Goods found in bakeries can be grouped as either breads, rolls, muffins, pastries, pies, or cookies.
Retail bakeries are located in areas in which they can sell their goods directly to their customers. Wholesale bakeries sell to other businesses. These businesses include restaurants, specialty stores, coffee shops, and grocery stores. Each varies greatly in the equipment, financing, building, and business plans needed.
Leavening agents are different ingredients that bakers add to their dough. These substances cause the dough to expand, which makes the batter and final product lighter and fluffier. Baked goods rise, fill with bubbles of gas or air, because of the interaction of leavening agents with other ingredients.
No, baking soda and baking powder are not the same ingredient. Baking soda contains one ingredient that is sodium bicarbonate; it is activated when mixed with an acid. Baking powder is a mixture of sodium bicarbonate and a powdered acid such as cream of tartar.
To learn more on how to start your own bakery business check out my startup documents here
This blog post is provided for informational purposes only. The information contained is not intended to constitute legal advice or to substitute for obtaining legal advice from a qualified attorney.
About the author. Entrepreneur and Bakery Business Fan.
Hi! I am Shawn and I am a happy individual who happens to be an entrepreneur. I have owned several types of businesses in my life from a coffee shop to an import and export business to an online review business plus a few more and now I create online bakery business resources for those interested in starting new ventures. It’s demanding work but I love it. I do it for those passionate about their business and their goals. That’s why when I meet a bakery business owner, I see myself. I know how hard the struggle is to retain customers, find good employees and keep the business growing all while trying to stay competitive.
That’s why I created Bakery Business Boss: I want to help bakery business owners like you build a thriving business that brings you endless joy and supports your ideal lifestyle.