 What is the variable cost? It is a cost that changes depending on your output. For example, cost of goods solds is a variable cost. And depending on how many units you sell, if you were to sell 10 burgers, your cost of goods solds, the ingredient cost to produce 10 burgers would be substantially different if you were to produce a thousand burgers. You need to buy all the patty, you need to buy 990 more buns, more burgers, more sauces and everything. And that's the reason why the ingredient cost, which is also known as the cost of goods solds, will change substantially depending on the output, how many burgers you sell. Now, in a traditional setting, variable cost would account for all these items right here. Cost of goods solds, which is basically your ingredient cost. We have food cost, your beverage cost, your sauces, and all those kind of goodness. And then labor, depending on how many people you hire, you can have like two or three different part-times and full-times. You would have your bonus, your incentives, your recruitment costs, and all these would also be calculated as variable costs. Because as more people enter your restaurant, you need more help, and thus this is a variable cost. Operating costs, utilities, your marketing, office, miscellaneous, and these are the percentages that it would account from your revenue. So to give you a more better idea, this course specifically, we're only focusing on cost of goods solds because labor is not going to be as applicable. You're not going to have people serving your guests. You're not going to have a front of the house staff. Operating costs would be super minimal and for the sake of simplicity, that's the reason why we're going to take it out. So as you can see here, we're going to take out these two items right here as your variable cost and really just focus on your cost of goods solds to figure out the expenses for your operations. Now the four different cost of goods solds to consider. You might be confused. What do you mean by cost of goods solds? What do you mean by ingredients? First up, food cost. The amount of money you spend on your food ingredients. So for example, if our item, if what we're planning to sell is a fried chicken combo, the number of pieces of chicken wings, the cooking oil, the flour, the seasoning, and etc. So all of these would be the food cost and cost of goods solds. Next up, the packaging is also included in your cost of goods solds. This is the packaging used for your product. So for the same example, fried chicken, it's this box that you're putting your fried chicken in. Let's say if you're selling coleslaw as well, the packaging for this and then also the packaging for this. These are the packaging. A lot of people make the mistake of not including their packaging in part of their cost of goods solds. But this is definitely an item you would want to consider when calculating your COGS. Okay. And from now on, moving forward, I'm going to identify cost of goods solds as COGS. That's the short form of it. Now the tools, these are the utensils and the items that you would include for people to consume your product, for example, a box of fried kitchen, the knives, the forks, the napkins, etc. For our Bulbasaur case study that we created specifically for this course, our mason jars and our scoops are also part of our cost of goods solds. The prints, any prints or packaging and designs that would enhance your customer experience that you plan on giving to your customers as well, those are also part of your COGS. Okay. Same thing. If we're selling our box of fried chicken, we're going to have a logo sticker on the side of the box. And on top of that, we're going to have a thank you card for our customers, which would thank them and also encourage them to leave us a review. And that's the reason why these are the costs that you should also consider when creating your operation. Why would you even need to know your COGS guys? Why? First up, it is because this allows you to set your price. Okay. It will help you determine the ideal price for your product. And typically speaking, the retail price of any food item is around two to four X of your COGS. So that means if fried chicken cost me $3 per box to make, I would want to charge minimum $6 to $12 to my customers. And why is that the case? Because you need enough margins in your product for you to account for all the other items that you're spending and all the other costs. So for example, fixed costs, and on top of that, the margins and the profits that you put into your pocket. And we're going to dive into this a little bit more later on, but nonetheless, this helps you determine the ideal prices. Because for example, if you sell your box of chicken for only $5 and you don't have enough of a multiple here, and if you don't have enough of a markup, then you're not going to be able to make any money because you're just going to be spending all the expenses in creating your kitchen or your chicken and not enough profits for your own pockets. Next up, profit margin. It also helps you determine your profit margins per unit of product sold. So for example, fried chicken selling for $3 per box, and you charge $10 per box. What is the profit margins? A profit margin of $7, and this allows you to help you calculate your break even as well. Moving forward, a pro tip for this is that COGS is an expense that you can control. If it is too high, you can change up a product from the ingredients used to the packaging of your product. And that's the reason why when you have a lot of volume, you can buy a lot of ingredients in bulk and in wholesale, which substantially decreases your cost of goods sold. And that's the reason why sometimes it's very difficult for you as a small operation to compete with bigger operations, because they are buying everything in boxes and boxes and boxes. And that's the reason why people sell to them at a much cheaper cost. And that's the reason why it's very difficult for you to compete on pricing. And that's something that we don't teach you is that we don't want you to compete on pricing because you will never win. There are a lot of organizations and businesses out there that compete on pricing. And that's not what we want to be able to do. Calculating your food costs, your COGS in five steps. First up, identify your units of ingredients per package. So for example, same example as the chicken wings. I buy a pack of chicken wings for 50 pieces and it costs me $10. We identify the cost of that ingredient. A pack of chicken wings costs me 10 bucks and they give me 50 pieces. Next up is to decide how many units do we need to sell per for our products. So for example, we want to sell each serving five chicken wings. After we decide that we're going to be able to do some simple math, divide that. Divide the total amount of units that you have in your packaging with the units per serving. That gives you how many servings each package can deliver. So for example, we have 50 pieces that we buy from Costco whatsoever. And each serving gives us let's say five pieces. Then from this package, we would get 10 servings from one package. Then we divide the servings by the cost for the package, which gives us a cost of a dollar per serving. You will need to know this for all your ingredients and you will need to calculate this for all your ingredients from the flour to the oil to the packaging to the chicken wings and all that goodness. And then you're going to put all those items into an Excel sheet. So I gave you an example with our case study that we created for this module specifically. And you can you're going to be able to see it from the master tab sheet. And as you can see here, there's the tea bags, the cane sugar, the cream powder and the frozen pearls. And these are the number of units and the cost for each package. And you're going to be able to see based upon our recipe and our packaging, these are the number of units per serving. So that means that when we buy a box of roasted tea bags, which gives us 300 units, we can serve 60 servings. Okay. And that means per unit per box that we create, it would give us a cost of a dollar 25. And now since we have all these ingredients listed here, we can calculate the total costs per box that we create for our people and our customers. Now it is your turn. Use the resource sheet down in the link below download it. And that gives you a really good idea of all the different expenses that you can log in there and to calculate your food costs.