The edible mushroom powder has an essential role in sustainable food technology and innovation, and therefore, it is considered a multifaceted functional food ingredient. Edible mushrooms are rich in proteins, fibers, vitamins, and bioactive compounds like polysaccharides and antioxidants, making them valuable for food product innovation. Mushroom powder enhances food texture, stability, and nutritional value, aligning with consumer preferences for nutritious and eco-friendly alternatives. The present review highlights the role of mushroom powder in improving the health attributes and sensory qualities of food products, providing a comprehensive overview of its nutritional benefits, processing methods, and applications in the food industry. By incorporating mushroom powder, food technologists can develop health-oriented products that meet the demands of modern consumers seeking dietary diversity and sustainability. This manuscript emphasizes mushroom powder’s utility in food technology and product development, promising significant advancements in functional and sustainable food solutions.