Advanced Diploma in Culinary Arts

Cookery & Bakery

Ruwan Ranasinghe, BSc, MBA

05 Costing, budgets and control

Introduction to Cost Accounting

What is Cost Accounting Cost accounting is the process of determining and accumulating the cost of product or activity. It is a process of accounting for the incurrence and the control of cost. It also covers classification, analysis, and interpretation of cost. In other words, it is a system of accounting, which provides the information about the ascertainment, and control of costs of products, or services.

Objectives of cost accounting

1. Determining selling price, 2. Controlling cost 3. Providing information for decision-making 4. Ascertaining costing profit 5. Facilitating preparation of financial and other statements.

1. Determining selling price

The total product cost and cost per unit of product are important in deciding selling price of product. Cost accounting provides information regarding the cost to make and sell product or services. Other factors such as the quality of product, the condition of the market, the area of distribution, the quantity which can be supplied etc., are also to be given consideration by the management before deciding the selling price, but the cost of product plays a major role.

2. Controlling cost
Cost accounting helps in attaining aim of controlling cost by using various techniques such as Budgetary Control, Standard costing, and inventory control. Each item of cost [viz. material, labour, and expense] is budgeted at the beginning of the period and actual expenses incurred are compared with the budget. This increases the efficiency of the enterprise.

3. Providing information for decision-making

Cost accounting helps the management in providing information for managerial decisions for formulating operative policies. These policies relate to the following matters: (i) Determination of cost-volume-profit relationship. (ii) Make or buy a component (iii) Shut down or continue operation at a loss (iv) Continuing with the existing machinery or replacing them by improved and economical machines.

4. Ascertaining costing profit

Cost accounting helps in ascertaining the costing profit or loss of any activity on an objective basis by matching cost with the revenue of the activity.

5. Facilitating preparation of financial and other statements

In order to operate the business at high efficiency, it is essential for management to have a review of production, sales and operating results. Cost accounting provides daily, weekly or monthly statements of units produced, accumulated cost with analysis. Cost accounting system provides immediate information regarding stock of raw material, semifinished and finished goods. This helps in preparation of financial statements.

Monitoring F & B operations and performance Periodic comparisons/against budgeted figures

Income statement Trade, profit and loss account Customer retention Total sales Sales per person Seat turnover Gross profit Productivity to staff member

INCOME STATEMENT - ABC CATERING (PVT.) LTD, YEAR END 2010 IN LKR
Sales Food Beverage Total sales Cost of Sales Food Beverage Total Cost of Sales Gross Profit Direct Expences Salaries and wages Employee benefits Other expences Total Direct Expences Revenue before tax, depriciation and interests Tax Depriciation Interest Total Net profit
1,686,740 297,660 1,984,400 708,431 95,251 803,682 1,180,718 535,788 133,947 242,660 912,395 268,323 132,608 27,060 60,200 219,868 48,455

Sales Mix

Sales Sales mix New York Strip Steak 15 15% Prime Rib of Beef 25 25% Roast Leg of Lamb 40 40% 20 20% Loin of Pork a Maison
Total covers 100 100%

Cost Concepts
Accountants define cost as a reduction in the value of an asset for the purpose of securing benefit or gain. In the context of catering business cost is defined as the expense to a catering business firm for goods or services when the goods are consumed or the services are rendered.

Examples for costs - Material

The cost of a piece of meat is incurred when the piece is no longer available for the purpose for which it was purchased because it has been cooked, served or thrown away because it has spoiled, or even because it has been stolen.

Examples for costs - Labour

The cost of labour is incurred when people are on duty, whether or not they are working and whether they are paid at the end of a shift or at some later time. Expenses for Services Electricity, water, gas and garbage clearance

Fixed Costs
Fixed costs are normally not affected by the sales volume. Eg. Insurance premium, depreciation will not vary according to the units of sales and will remain fixed. Fixed costs may change over some time. Eg. Increase of insurance premium, but will not parallel to volume.

Variable Costs
Variable costs are clearly related to the business volume and are so called. When business volume increase variable costs increase and vise versa Food, beverage and labor costs are examples for variable costs. Labour may be both fixed and variable depending on the salaries and wages (staff remain constant fixed, change according to volume variable)

Controllable and Uncontrollable Costs

Controllable costs could be changed in short term. Variable costs are normally controllable costs. Cost of food for example could be changed by several means, changing portion sizes, altering
ingredients, changing the quality of the of the products purchased.

Controllable and Uncontrollable Costs Cont

Contrarily, certain uncontrollable costs cannot be changed in the shot term. These are usually fixed costs eg. Rent, taxes, license fees and depreciation.

Unit and Total costs

Cost of 01 pizza is a unit cost, the total cost of a la carte kitchen is total cost Cost of a brandy glass, total beverage cost of the pool bar etc

Monitoring Cost at an F & B Operation

Total cost of an F & B operation count be identified in three categories 1. Material or food and beverage cost 2. Labour cost 3. Overheads

Material or food and beverage cost

Cost of ingredients that go in to making of a dish In the case of a fruit salad the cost of pinnacle, papaya, banana, mango and sugar syrup go in to making of a portion of fruit salad

Labour cost
The cost of labour involved in making of the fruit salad Staff salaries, wages, over time, EPF, ETF, staff meals, cost of laundering of uniforms Practically accounting of labour costs into dishes is not realistic. Eg. Part of exe. Chefs salary to the cost of fruit salad

Overheads
All other expenses incurred other than material and labour are grouped under this heading Cost of gas, energy, rent, telephone, stationery etc. Like labour costs it is not realistic to account overheads to particular dishes cost

Total cost of a product

Material (F & B) + Labour + Overheads Selling price Total Cost = Net Profit Selling Price Material cost = Gross Profit Gross profit = Labour cost + overheads + Net profit

Costing of a Dish

Dish Costing
The following quantities are required for 12 portions of Fillet of Sole Bonne Femme;
3 x 1.2 kg 125 gms 250 gms 200 gms sole onions mushrooms butter Rs. 32 per kg Rs. 28 per kg Rs. 45 per kg Rs. 28/ 250 gms

1/4 pnt
3 nos

cream
eggs

Rs. 45 per pnt

2.25 each

50 gms

parsley

65 per kg

Calculate a. total cost - 174.10 b. Cost per portion = 174.10 /12 = 14.50 c. Selling price when food cost is 40%= 14.50 x 40/100 = 5.80 +14.50= 20.30

Dish Costing
The following quantities are required for 100 portions of Saut of Chicken Bordelaise
25 x 1.2 kg 200 gms 150 gms 18 pnts chicken butter onions Brown sauce Rs. 65 per kg Rs. 28 per 225 gms Rs. 24 per kg Rs. 2.50 per pint

1.5 kg
250 gms

bacon
garlic

Rs. 180 per kg

45 per kg

4 pnts

Oil (50% absorption) 25 per pint

Calculate a. total cost = 2,400 b. Cost per portion = 2,400/100 = 24 c. Selling price when food cost is 25% = 24 x 25/100 =6 +24 = Rs. 30/=

How do you calculate food cost

Food Cost Sheet of ABC Restaurant Opening stock Add purchases xxx Cash Credit xx xx xxx (xx) xxx xx (xx)

Less purchase return Net purchase Add transfer inward Less closing stock

Cost of food consumed

Less Staff meal costs Complimentery food Transfer outward Discount on food Cost of food sold (xx) (xx) (xx) (xx)

xxx

xxx

Cost of food consumed

This gives a total value of food ingredients used in the kitchen for a special period of time. (d ay, week, month) etc. this figure includes the ingredient that may have been used for other purposes like given out for.

1. 2. 3. 4. 5.

Staff meal, spoilage (if reasonable) Entertaining travel agents/guest discount Fresh fruit transfer to bar Staff discount Fruit baskets

Cost of food consumed cont

The cost involve in providing above doesn't guarantee any food sale. Hence a chef cant be made responsible for the cost of food consumed being high

Cost of food consumed

This gives a total value of food ingredients used in the kitchen for a special period of time. (d ay, week, month) etc. this figure includes the ingredient that may have been used for other purposes like given out for.

1. 2. 3. 4. 5.

Staff meal, spoilage (if reasonable) Entertaining travel agents/guest discount Fresh fruit transfer to bar Staff discount Fruit baskets

Cost of food Sold

This is the value of food ingredients used only for the purpose of generating food sales. Any cost of ingredients used for other purposes other than generating food sales (as indicated under cost of food consumed) should be deducted from cost of food consumed to arrive at cost of food sold. This is the value that is compared with food sales. What is commonly referred to as food cost in proper terms is cost of food sold.

Calculating Food cost Percentage

Cost of food sold x 100 Net food sales
Net food sales (after deducting service charges and taxes)

General reasons to increase the cost of food

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. Food purchase prices goes up Many untrained staff in the kitchen Faulty equipment in the kitchen Waste of food Pilferage/unauthorized eating Accounting errors Faulty purchasing Poor portion controlling Lack of supervision/poor kitchen management Too low selling prices for dishes Wrong menu planning

Methods of food cost control

1. Quantity approach 2. Food cost analysis method 3. Kitchen profit (gross profit) analysis method

Quantity Approach Method

1. The simplest method a chef can used to control food cost 2. Here the quantity of a particular ingredient used is compared with the number of portions sold during a especial period 3. Eg. 56 kg of tea leaves used at the kitchen for the month of may, analyzing bills it was found that 8200 tea portions have been sold during the period. 4. The quantity per portion used is approx 7 gms per portion and an experience chef knows it is reasonable 5. Hence the chef would safely assume that the tea leaves have not contributed to the increase of food cost

Quantity Approach Method Cont

6 If the quantity per portion of tea served 15 gms the chef can assume tea consumption quantity has contributed to high food cost. 7 Quantity approach is simple to operate and use

Limitations of Quantity Approach Method for food cost control

1. The purchasing price is not considered. The food cost depend on two main factors, quantity used and purchasing price. In above example 7 gms of tea is reasonable, but if purchasing price of tea has gone up from Rs. 250 to Rs 500 it is not considered under this method.

Limitations of Quantity Approach Method for food cost control

2 Calculating the average quantity per porting is difficult in practice Different portion sizes may be used for different reasons for example beef is used to prepare steaks, sandwiches, curry etc. The average quantity used is not represented by any of these dishes, since the quantity sold, weight used different item to item. This could be confusing to monitor food cost

Food Cost Analysis Method

Here you will analyze the food cost figures in detail and compare with historical as well as budgeted figures. Then the causes for high food cost will be traced out

General Techniques of Cost Control

1. 2. 3. 4. 5. 6. 7. 8. Establishing standards (quality/quantity) Establishing procedures (SOP) Training personnel Setting examples Observing and correcting employee actions Requiring records and reports Disciplining employees Preparing and following budgets

Standard Recipe Costing Sheet

The following are trading results for beverage operations at Taste restaurant.
Sales (vat inclusive) Cost of sales Overhead costs (Light, heating, insurance, rent, rates) 60,000 Wages 90,000 Calculate the following: (a) Gross profit (b) Gross profit percentage (c) Net profit (d) Net profit percentage (e) Labour cost percentage 2008 320,000 100,000 2007 150,000 20,000 50,000 30,000

Break Even Analysis

Variable Rate
Is the ratio of variable cost to sales Variable rate = Variable cost / Sales Or VR = VC/S If variable cost is 250,000 and the total sales is 800,000 the VR will be, 250,000/800,00 = 0.3125 Means 31% of sales need to cover variable costs

Contribution Rate/Margin
Is the balance after covering variable costs. In other words 31% of sales need to cover variable cost and the balance of 69% of sales is available for other purposes; To cover fixed costs Providing profit So, Contribution rate = 1- Variable Rate CR 1-VR CR = 1-31 = 69

Profitability Scale
No business organization could termed profitable until all the fixed costs are met. If sales are insufficient to cover both variable and fixed costs the business will operate at a loss. If the sales are sufficient to cover both variable and fixed cost exactly and no balance to provide any profit (profit = 0), this business said to be operated at break even point. BE is the point the total sales equal to total costs of the business.

Profitability Scale cont

The mid point of the scale below is the BE point of this business at which operational expenses are exactly equal to sales revenue.

Large

Small

Small

Large

Losses

Profit

Break even graph

Break even graph cont

Cost and Market Orientation of a Business

Cost of a business organization Fixed + Variable Fixed Cost
Remain unchanged with the sales volume changes. E.g drop of occupancy of hotel from 70% to 60% the salaries will remain same. But if the occupancy continues to be low at 30% the mgt will reduce staff over time. Therefore fixed cost seems to change with time not with sales volume

 Variable Cost The costs vary with the sales volume. Eg. If 10 beers are sold each at Rs 100 the revenue will be Rs. 1000 and the cost will be 550 at a 55 cost per bottle. Similarly if 20 beers are sold the revenue will be Rs. 2000 where the cost will be Rs.1100 Both sales volume and cost have increased and hence called variable cost.

Market and Cost Oriented Businesses

Business organizations vary in cost compositions Some operate at high fixed cost and some at low. Those operate with high fixed cost affect seriously in the case of drop in sales. In other words such organizations must focus on the market or its customers These Orgs are called market oriented organizations Hotels and commercial restaurants are belong to this category

Market and Cost Oriented Businesses Cont

Organizations operating at high variable costs are called cost oriented businesses. Industrial catering units, welfare catering shops, super markets fall in to this category. They are able to carry out businesses in spite of sales drops compared to high fixed cost businesses. See the example

High Fixed cost

Low Fixed cost

Period Period I Period II Period I II

Sales Fixed costs Variable costs Total cost Net profit 10,000 6000 3000 9000 1000 9000 10000 6000 3000 2700 6000 8700 9000 300 1000 9000 3000 5400 8400 600

70% Drop of Profitability 10% sales drop from period I to period II

40%

Presenting Food cost Information

Performance Consumptions Other expenses

Food Cost Example Answer

Purchasing

5.2 Describe the methods and procedures for determining purchase requirements. Menus: kinds Cuisine: fresh, convenience, pre-packed Stock levels: storage conditions, facilities, space, types of commodities, price Suppliers: location, relationships, wholesale, retail Methods of purchasing: contract, tender, cash and carry, centralised bulk, local shops and markets Delivery: frequency, notice, distance Availability of units: kinds of purchase units available

5.3 Identify the various methods of evaluating the purchase price of materials. Comparisons: previous prices, various suppliers Expected variations: seasons, availability Research: trade journals, published price lists Method: purchases in person, nominated supplier, relationship with supplier Tender: definition, procedures, advantages/disadvantages