COSTING IFA_Unit 4

Costing is a continuous process through which the total cost of an item of sale is determined for
establishing the selling price of each unit to be offered to the customer in a manner that is profitable.
Although food costs form the largest single cost in a restaurant, other costs which are less obvious
often add up to more than the cost of the food.

Cost Components In every food service, there are basically three types of costs involved in its
day to- day operations
1. Cost of materials: This includes raw food and other ingredients that make up a dish, meal or a
beverage, and is commonly referred to as material or food cost. Food costs can easily be
ascertained from purchase invoices. Thus, materials include all commodities used in the
production and service process, whether in raw, partly processed or ready to use forms.

2.Cost of employees: This includes the salaries of staff and the value of all benefits provided to
them such as meals, housing, medical facilities, uniforms, bonus, etc. It is generally referred to as
labour costs.

3.Overhead cost: This includes all such costs which cannot be directly identified with food
products, such as rent, rates, fuel, cleaning materials, administrative and selling costs. Overhead
costs therefore have to be distributed evenly between units produced or activities of an
organization as they apply equally to all departments of production and service

Behaviour of costs: The manner in which costs respond to changes in the volume of sales
is referred to as the behaviour of costs.

1. Fixed costs: As the name suggests, these costs virtually remain unaffected by changes in
the volume of business of an establishment. Examples of such cost are rent, insurance and
so on.
2. Semi fixed costs: These costs which have a greater fixed element in them as compared to
the variable element are termed as semi fixed costs.
Example: when feeding more customers the fuel costs change very little, compared to a
situation in which the menu is changed to include extra frying in preparation.
3. Variable costs: These include food costs which change in direct proportion to the output.
In a food service institution known for its standards, one would not expect portion sizes to
be reduced, if demand for the meals goes up, and therefore it stands to reason that for each
extra meal demanded
Cost control
Controlling costs is the most challenging task in a catering institution since it deals with food
which is the biggest temptation for any person
The advantages of an efficient costing system are:
• It discloses the net profit made by each section of the organization and shows the cost of
each meal produced.
• It will reveal possible sources of economy and can result in a more effective use of stores,
labour, materials and so on.
• Costing provides information necessary for the formation of a sound pricing policy.
The areas which need to be focussed upon, in terms of control are variable costs, that is those costs
that vary with demand. In food services these are:
✓ Food Costs ✓ Labour Costs ✓ Overhead Costs ✓ Hidden Costs

Food Costs: The food costs in any catering establishment whatever its size vary between 40–60
per cent of total sales, depending on the nature of the organization.

These costs being variable need to be controlled because the amount of profit that the establishment
makes depends on them

Checklist for Purchasing

• Develop specifications for every food item. These should be followed while purchasing.
• Visit to the markets is necessary to study market conditions and recent trends. A capable
buyer is one who is alert to ever changing market conditions and has knowledge of new
products as they become available.
• Decide on the amount of convenience foods to be used as this will decrease the labour
requirement but may substantially add to the food cost
• Adopt appropriate methods of purchasing.
• Close cooperation and good working relations between the food buyers and production
manager.

Checklist for Receiving

• All items received must be checked against the purchase order.

• The quantity and quality must be checked against specifications.
• Substandard quality should be immediately returned and the vendor should be informed

Checklist for Storage

• Buy only what can be used at once or those that can be stored adequately without
deterioration in quality.
 • Store only whatever is essential for a limited period of time. Unnecessary storage of large
amounts might result in loss through spoilage, waste, pilferage or theft.
• Keep the store room locked and let the supplies be issued by an authorized person against
written requisition.
• Storage temperature has to be checked regularly so that foods are stored in the best possible
temperature.
• Keep the store room in an orderly and logical manner and adopt first-in first-out system.

Checklist for Food Production

• Use previous records in estimating the amount to prepare. These records should have
information about the amounts prepared, amounts sold and leftover amounts.
• This gives a realistic basis for estimating quantities required.
• Attempts must be made to store leftover foods properly and use them skilfully.
• Leftover mutton or vegetable curry can be converted to biryani; salads can be converted
to interesting sandwich fillings.

Checklist for Portion Size

• It is important to establish portion size for every item and this information should be
communicated to the employees.
• It is necessary to provide suitable equipment to give the correct portion such as standard
ladles, ice cream scoops and standard glasses.
• Standard recipes and portion control are essential not only for cost control but also in
maintaining customer satisfaction. No one likes to receive smaller portions than other
customers for the same price so the portions should be uniform.

Labour cost control

Labour costs are less controllable than food costs. It is impossible to change the number of
employees or their scheduled times of duty day by day in proportion to the number of customers.
• All payments made to staff require to be signed to indicate that remuneration has been
received.
• Payroll payments are more or less fixed as per time rates or contracts of employment and
cannot be controlled, as can bonus payments or awards linked with productivity and
efficiency, and incentive costs.

Checklist for Labour Cost

• Adjust the hours of service for greater profitability.

• Evaluate if there is enough business and income at certain hours to justify being open at that time.

• Think up ways to generate more sales at slack periods.

• Plan additional tasks for employees at slack time to improve productivity

Overhead cost control

Overhead costs which are generally fixed over a period of time are termed as fixed overheads, and
therefore do not change with the volume of sales. Some overheads like repairs and maintenance
costs change with time but not in the same proportion as the change in the sales volume.
Checklist for Overhead and Other Expenses
• Calculate cost of repairs and maintenance over a specific period.
• Train employees to report any broken equipment.
• Service equipment at regular schedules.
• Keep a record of breakage.
• Train employees in proper dish handling procedures to keep breakage at a minimum.
• Keep a check over cleaning materials, paper goods such as paper towels, kitchen paper and other
office supplies.

Calculation of percentages:

Example:

A school cafeteria serves 1,000 meals per day. The total cost breakdown for a typical day includes:

• Food costs: $1,800

• Labor costs: $1,200
• Overhead costs (utilities, maintenance, etc.): $600

Problem:

1. What percentage of the total cost does each category (food, labor, and overhead)
represent?
2. What is the cost per meal?

Step 1: Calculate the Total Cost for the Day

The first step is to calculate the total cost for the day by adding up all the individual costs:

Total cost=Food costs +Labor costs+Overhead costs Total cost=1,800+1,200+600=3,600

Step 2: Calculate the Percentage for Each Category

Now, calculate the percentage that each category (food, labor, and overhead) contributes to the
total cost.

Step 3: Calculate the Cost per Meal

To calculate the cost per meal, divide the total cost by the number of meals served:

• Percentages:
• Food costs: 50%
• Labor costs: 33.33%
• Overhead costs: 16.67% Cost per meal: $3.60