What are Theoretical Cost, Usage, and On-Hand Calculations?

In the world of inventory management, Actuals tell you what happened, and the formulas for calculating actual cost and inventory usage are relatively straightforward. Theoreticals tell you what should have happened. While the math for theoreticals is a little more complex, these calculations can be very helpful for identifying where your profit is leaking.

In this guide, we’ll break down the three pillars of theoretical tracking: Theoretical Usage, Theoretical Cost, and Theoretical On-Hand.

What are Theoreticals?

Theoretical calculations analyze your Sales Mix (the volume of each menu item sold) against your Recipes (specific ingredients, portions, and costs). This process determines exactly what your Cost of Sales, Inventory Usage, and On-Hand Quantities should be, providing a baseline to compare against your actual results.

• Theoretical Cost: What your cost of sales should be in dollars and as a percentage of sales.

• Theoretical Usage: The quantity of an ingredient you should have used.

• Theoretical On-Hand: The quantity of an item that should be on the shelf.

  
  

What are the Requirements? 

Theoretical calculations require existing recipes for your Menu Items and that your sales mix is imported from your POS system. You also need to import invoices regularly to keep ingredient costs up to date.

Theoretical Cost of Sales

The Theoretical Cost of Sales (Theo COS) is calculated by multiplying the quantity of each menu item sold by the theoretical cost of that item. The cost of each menu item is determined by the recipe ingredients, their portion sizes, and their current cost.

The Formula: (Menu Item Cost) x (Number of Times Sold) = Theo COS

Theoretical costs are usually calculated for a date range that aligns with an accounting period, allowing for a direct comparison to actual costs. Theo COS is normally reported in both dollars and as a percentage of revenue, and is often subtotaled by categories such as Food, N/A Beverage, Wine, etc.

Here is an example of a Theoretical Cost of Sales report in COGS-Well showing menu item ingredients, portion sizes, current costs, and total theoretical cost per item sold:

Theoretical Usage: The Usage from Sales Formula

Theoretical Usage (also known as Usage from Sales) is calculated by depleting the ingredients in a recipe, by their portion size, every time the menu item is sold. This (Theo Usage) is then aggregated for each ingredient over a selected period.

The Formula: (Ingredient Portion Size) x (Quantity of Menu Items Sold) = Theo Usage

Theoretical Usage is typically calculated for a period that matches your inventory count cycles (e.g., weekly or monthly) so you can compare it to your actual inventory usage (a Usage Variance report). Theoretical Usage reporting typically shows item usage in quantity and dollars.

Here is an example of an Inventory Usage Variance report comparing Actual Usage vs. Theoretical Usage to pinpoint quantity and dollar variances for high-value ingredients:

Theoretical On-Hand: What Should be on the Shelf

Theoretical On-Hand calculates exactly what your stock levels should be by tracking every transaction since your last physical count and then subtracting Theoretical Usage. Think of Theoretical On-Hand as a real-time digital twin of your physical shelf.

This calculation can simplify ordering by suggesting reorder levels and allows for spot checks to identify discrepancies without waiting for a full month-end inventory count.

The Formula: Beginning Inventory + Purchases – Theoretical Usage = Theo On-Hand

Note: Systems like COGS-Well can also factor in transactions like Transfers (in and out) and Waste to ensure your theoretical on-hand reflects all product movement.

Here is a Theoretical On-Hand report displaying calculated stock levels based on beginning inventory, purchases, and theoretical usage for inventory items:

Managing Theoreticals with a Key Item Strategy

All theoretical calculations are dependent on accurate recipes. Creating and maintaining detailed recipes for every menu item is a significant undertaking. To see immediate results without the heavy lifting, we recommend a Key Item Strategy.

Theoretical Usage and On-Hand tracking do not require every ingredient to be included in the recipe from day one. Instead, you can focus on your Big 10—the high-cost or high-volume inventory items like steaks, seafood, or expensive wine. By assigning these specific ingredients to your menu items first, you can begin tracking your most valuable inventory immediately.

COGS-Well provides a feature to pick an ingredient and then assign it (with a portion) to a menu item. This makes setting up Key Item tracking very quick and easy.

Conclusion: From Counting to Control

The difference between a restaurant that survives and one that thrives often comes down to accountability. When you know exactly what your costs, usage, and stock levels should be, you finally have the roadmap to reach your true profit potential.