CHAPTER 5

Costing, Budgets & Control.

Before we start with this chapter their are certain accounting terms that need to be
clarified:-
• Food Cost = Ingredient cost (Oil, sugar, flour, meat, etc).
• Total Food cost = Food Cost + Over heads + Labor
OVER HEADS: - Water charges, rent, Chemical & cleaners costs, electricity,
heating charges as gas, fuel, transportation, etc.
LABOUR: - It is of 2 types-
1. Direct: - which is involve directly in the food production, service, and
maintenance & cleaning jobs of the kitchen.
2. Indirect: - salaries paid to General Manager, accountant, and Human
resource department employees, etc. Which don’t produce the goods in
kitchens but have equally important task

• Gross Profit (Kitchen profit) = Sales – Food cost.

• Net Profit = Sales – Total food cost.
Note G.P > N.P

5.1 Identify & explain the various sources of information used for monitoring food &
beverage operations performance.
Past Performance, Kitchen Profit, Sales, Retention, Outside Influences.

It is very important to monitor the performance of the beverage & food operations. As
these help to evaluate if the business is running in the profit or not.

Past Performances can be measured with the help of the trading account, profit &
loss, turn over, net profit & budgets.
Past performances can be measured by comparing Income statements i.e.:-
• Trading Account. This shows the gross profit /loss.
• Profit & loss Account. Shows net profit or net loss.
Trading Account:- This account is also called the goods account as only transaction
relating to the goods is only recorded. This account shows Gross Profit i.e.:- difference
between the sales & food cost.
If the amount of sales exceeds the amount of purchases then the difference is termed as
G.P. that is the F & B operation is doing fine. Vice versa is gross loss.
Gross Profit (Kitchen profit) = Sales – Food cost.
Profit & Loss Account: - Trading Account only discloses the G.P earned as a result of
buying & selling of the goods. But there are other costs & expenditure incurred during
the processes which are left out.
So to have net amount of profit (N.P) sum of total food cost is subtracted from the sales.
The net profit of the current year can be compared with that of the previous years. It
enables the business to know whether the operation is being conducted efficiently or not.
Net Profit = Sales – Total food cost.

Budgets: - Budget generally refers to a list of all planned expenses and revenues. A
budget is an important concept in business, as they use a budget line to illustrate the
growth, expenses incurred from the period of the time & help to evaluate the profitability.
If the real expenditure & revenue are close to the estimates then it means that
operation is running normal. But if expenses fluctuates & increases. Then the loose pole
should be found & fixed.

SALES REVENUE/TURNOVER – The money value of the sale of products by a

business is called as a turnover. It helps the business to evaluate the profit that it has made
during the period. Higher the turnover the better the business is performing. They can
analyze with their past & see what they can do better to raise their sales revenue/turnover.

Kitchen Profit It means the Gross Profit.

This profit helps to control & give clear picture of the stock & commodities in the hand.
If the food cost increases then the sales then it mean that we are incurring losses. So
corrective action should be taken. And kitchen profit should be matched on frequent
periods.

Sales Sales mix figures may be taken from a sales summary sheet.
Food & drinks sales may be broken down further to provide sales mix data. This does not
only reconciles sales of item with different gross profit but also provides information on-
• Popular / unpopular items on the menu/drinks list.
• Record for stock control, e.g.:-helping predict future demand.
• Change in the customer’s interest.
• Where the profit & losses are being made.

Retention
By retention we mean the guest returning.
In the hospitality industry say service & goods that you may provide to the guest are of
the good quality. But you are not able to attract the guest again & again to your
restaurant. Then it is not possible for the business to make profitability in the long run.

OUTSIDE INFLUENCES:-
By outside influences it is meant the competition in the market that is faced by the
restaurant.
Say if our competitor is doing well in same period of time. Then our F & B operations
need to be amended. That may include menu items, menu mix, etc.

5.2 Describe the methods & procedures for determining purchase requirements.
Menus, Cuisine, Stock levels, Suppliers, Method of purchasing, Delivery, Availability of
the units.

Purchasing is the very crucial aspect in the kitchen management. What ever goods or
commodities to be purchased depend upon the Menu used.

MENUS: - There are different kinds of the menus used in the industry. On the bases of
demand & commodity used the purchases of the stock takes place. Here are some
examples of the menu used in the industry;-
• Table d´hote or set price menu: - This menu forms three or two courses at a same
set price. Further the choice of the dishes that is offered is also limited. (In this
menu the goods purchased would be of limited variety. And would not be as
elaborated in he other menus.)
• A la carte: – in this kind of the menu the dishes are individually priced. There is a
wide variety of food to choose from the menu. So the shopping list that is made is
elaborated.
• Special party or function menus:-Menus for the banquets or function of all kinds
comes under these menus. Before making purchases the special requirement is
made & goods & commodities that are required are ordered.
• Hospital Menu: - These are the special menus that are complied by the chefs
keeping inconsideration the need of patients. Nutrition& food value is the main
consideration.
• Ethnic or specialty menus:- In these menus the dishes that are served are of ethnic
kind – Chinese, Indian, African, Greek, etc. so the purchases that would be made
for these menus would be of ethnic condiments & commodities, etc.

CUISINE:- Cuisine is a specific set of cooking traditions and practices, often associated
with a specific culture. There are different kinds of the cuisines available in the industry.
Cuisines can be defined on the bases of the region, religion, country (Jewish, Chinese,
Indian, Jain, etc) cuisine on the bases of the diet, etc.
All these cuisines need goods & commodities for their production. Different cuisines will
have different needs.
Their ingredients that require to be purchased can be:-
Fresh –.These includes the goods that have never been processed. But used in their
natural form & fresh, but not preserved. Like dairy food; Fruits; Vegetables, poultry,
meat & sea food. For example the preparation of tandoori chicken. We need fresh
supply of the chicken. But if we need a pickle we would get ready made. As the time
factor it takes to make. Different dishes demand different kind of ingredients, say in
the fresh salad only fresh vegetables are required, frozen vegetables will not do.
 • Pre-packed:- These supplies are packed in the tins & other kind of pre packed
packaging. Unlike fresh supply they are pre portioned in packs, trimmed, etc.
Were kitchens buy it assemble & cook to complete the order of the customer.
Some time commodities that are to be used are not found in the country for that
reason they are imported from abroad, such as olives from Spain, etc. In the brine
solution to fill the demand.

• Convenience:-It includes the supplies that have been processed before in line of
production prior to reach kitchen. They are preserved, tinned, or packed. Like can
of corned beef, pre cooked can of vegetables, pickles, proprietary sauces, jams,
etc.
In busy schedule of the kitchen some goods are not made they are purchased
ready made. Such as pastas, etc. As buying them processed saves time & cost.

STOCK LEVELS:-
Before making a purchasing list it is important to check the stock levels of the goods.
These stock levels are checked with the help of bin cards, store ledgers, etc.
It is very important task to maintain the stock levels in the storage of the kitchen. Stock
should be never over stocked & under stocked. Therefore before determining the
purchase order several factors should be kept in the mind.
Such as:-
Types of commodities: - First of all we have to determine which commodity or material
do we need & how much. Whether it would be perishables, fresh, frozen, dry, packed,
tinned, etc.
Price: -Before making the purchase order for the commodity it important to determine its
price. Say if the commodity or the good have been offered lower then the regular price &
it is non perishable or dry commodity. It can be purchased in the bulk & stored. And in
the case we are getting higher prices then the regular invoice, then we shell do research
with the other suppliers and see for the cheaper option.
Storage conditions, facilities & space:-.Before ordering the stock for purchase it should
be kept in the mind that we have adequate facilities & space to accommodate the
supplies. If we order large quantities & pile them in the small space. Then there is a
danger that supplies may get rancid. Hence space must be kept in the mind while making
the orders for the suppliers.
Supplies that ordered in the kitchen need special storage conditions and are classified on
the following bases:-
Perishable supplies. These can be rancid easily at the room temperature & have special
storage requirements keeping C.C.P in mind. Like meat, poultry, fish, eggs, fruits &
vegetables, etc. they require freezers, refrigerators, cold rooms, etc. They should be
refrigerated below 40ºF & frozen at 0ºF.
Non perishable supplies. These supplies can be kept in the normal room temperatures,
and they do not have any effect at their quality at all. They are stored in the store rooms,
with the proper labeling of dates etc. Like salt, sugar, cooking oil, pulses, wheat, rice,
canned food, etc.
Facilities such as docking bays, fork lifts, additional work force, etc. also must be
considered while making the order for the purchase.

SUPPLIERS:-There are different sources of supplies & suppliers. It really takes through
research & contacts to find the reliable supplier.
First of all we will discuss the different classification of the suppliers:-
• Retail (These suppliers sell their goods to the restaurant upon the retail prices.
They buy their goods from the wholesalers or direct sellers so their prices are hire.
Occasionally these suppliers are used in case of emergencies only.)
• Wholesalers (They by the goods from the source of supply & sell to their
customers on bulk prices.)
• Direct (They are the producers them selves & they sell their produce directly at
the lowest prices at which customer can get.)
(Both of these categories are used through out the industry as commodities that are
used in the kitchen are purchased in the bulk. And hence they save the money.)
Relationship with the suppliers is also a crucial factor in the business.
• It should be very professional. They should be given clear guide lines about the
quality, quantity, & time of delivery, etc.
• Before appointing the supplier we should mush do research about their reliability
& good will in the market, about their services & goods.
• Supplier should be very reliable & respect the priority of the time.
• Suppliers should be made clear who have the authority to give the order & do
payments in the premises.
Location. Location is another factor that should be kept in the mind. As the location cost
also adds up to the transportation costs. But some major companies do not charge the
delivery charges from their customers.
Mostly it is tried to go for the supplier close by the business so that they can make the
deliveries in the nick of the time and it is better when highly contagious foods (meat,
dairy, etc) are supplied.

METHOD OF PURCHASING:-
There are different methods to make the purchases in the market.
Contracts: - These are done when both the parties sign the contract with each other. On
which bases they will deal with each other. Contracts are the formal method in which
both the parties abide by the set rules on which they agree.( like terms: of paying
methods, time of delivery, set of the prices of the different commodities & goods,
conditions on which the delivery will be not accepted, etc.)
Tender: - This is done by issuing the tenders in the market for the suppliers. Journal
conditions are given which are required from the supplier & lowest price to meat. Then
the suitable contender is selected.
Cash and carry is a form of trade in which goods are sold from a wholesale warehouse
operated either on a self-service basis, or on the basis of samples (with the customer
selecting from specimen articles using a manual or computerized ordering system but not
serving himself) or a combination of the two. Customers (retailers, professional users,
caterers, institutional buyers, etc.) settle the invoice on the spot and in cash, and carry the
goods away themselves
Local shops & markets:- On common day to day business restaurants hardly deal with
these shops & markets, as their prices are higher then the other sources. Purchases are
made only at the time of urgency when the supply is required in the nick of time.
Centralized bulk: - Some time all the commodities are purchased by the one central
supplier. For example if we need supplies we will go to respective supplier i.e.:- meat
(butcher), Vegetables & fruits (green grocers), fish (fish mongers & fisheries), etc.
But this add to cost by transport & more resources been used.
Therefore centralized bulk purchase is more convenient & saves efforts, time,
and other expenditure such as transportation.

DELIVERY:-
Frequency of the delivery depends upon the type of need and menu items on the
demand which is of three types:
1. Perishables (Like fresh fruit & vegetables, dairy foods, meat & fish, etc. Their
delivery should be taken on the short period bases & should be used fresh as there
is more danger in them to get rancid.)
2. Stable (Supplies of canned, bottled, dehydrated, frozen products. They can be
delivered once or twice in a month depending upon the storage space & facilities
& need.)
3. Daily use needs (These items are delivered frequently on the par stock bases,
stock is kept at the desired levels. So the deliveries are made as per the level goes
down. Supplies must not be excessive but only sufficient to go through the next
level.)
Notice & distance: - Some items can be received in very short notice. Such as
perishables, staples, etc.
But the specific requirements take more time to deliver. Such as order for vanilla pods
from the Mexico then it will take long time so the notice for the supply should be made
well in advance. But if we need every day supply say milk it can be met in very small
notice.
Same goes with the distance that is more is the distance of the supplies to come from
more shell be time given & notice for the supply should be send in advance so that goods
are delivered at the right time.

AVAILABILITY OF THE UNITS: - Before making the purchase order for the goods, it
should be inquired that what kind of units are available. For example if we need supply of
chicken. Chicken is graded in different grades as per their size, age, taste, etc. It is also
available in the fresh & frozen state.
So before the order is made it is wise to check if the supplier can meet our demand.
Standard specifications of the good are also sent to the supplier. Say what grade chicken
is required, whole or different cuts, etc.
5.3 Identify the various methods of evaluating the purchase price of materials.
Comparison; Expected Variations; Research, Method, Tender.

It is very important to do the price comparison of the goods that are being purchased for
the kitchen, as it helps to get lot of options & lowest price to choose from. . They are two
main methods to do so;-
• Previous price: - With the help of accounts we can go through previous prices at
which the goods are purchased. This analyses gives us better control & proof at
what price goods has been purchase, and if the prices have changed then to what
margin.
• Various suppliers: - before making any purchase it should be made sure that the
prices from the other supplier should be collected. This helps us to tally the prices
& select the best supplier.
Expected variations. While evaluating the prices we shell keep in mind the factors that
vary the prices. Such as:-
• Season: - Most of the fresh food items are seasonal used in the kitchen. As most
of the fresh farm produce is cheap in the season. But their prices tend to be hire in
the off season. Such as mangoes are cheap in the summer season but in the winter
season their prices tend to go higher. So mango is replaced by the fruit in the
season such as apples.
• Availability: - Availability of the goods also puts the direct impact on the purchase
price. Say for example shells fish & other deep ocean fish are cheaper in the
costal regions of the country so their prices tend to be cheaper in these regions.
But if these food items are demanded in the land lock areas then their prices tend
to be higher. Same goes with the produce, local produce have lower prices but if
the produce can be only obtained from the overseas then its price tends to be
higher.
RESEARCH:-
Research helps in price evaluation of the goods. With the help of the research we come
across the various suppliers in the market & their prices. Research helps us to get more
options in comparison of the price & quality of the good. Say we need a piece of electric
salamander. Then we have to go through the various suppliers, prices offered & features.
They we make the selection & go for the final step. Research can be very exhaustive
process. So there are some internet sites, trade journals, & published price lists from
which all the necessary information can be accessed for the research.

TENDER:- Tenders are special procedures to generate competing offers from different
bidders looking to obtain an award of business activity in works, supply, or service
contracts.
There are 2 types of the tenders:-
Open tenders, also called advertised or competitive tenders, are open to all vendors or
contractors who can guarantee performance. Example: ad and results.
Invited tenders, also called pre qualified, short-listed or selective tenders are only open to
selected pre qualified vendors or contractors. Example: ad and results.
Procedure:-
• First of all it is decided that what to demand in the tender.
 • Then a Request for Proposal (referred to as RFP) is an invitation for suppliers,
through a bidding process, to submit a proposal on a specific product or service.
An RFP is usually part of a complex process, also known as enterprise sales.
• Invitation of bids is accepted. The best bidder who falls in the all terms is given a
contract.
Major advantage of the tender is that we get lower prices for the product a time it is
passed & we have got more options to choose from. But at the same time there are
disadvantages such as we are bounded with the supplier for that period of the time & can
not take advantage of any new offer in the market that would be more favorable then the
existing contract.
This can be attained or done by following ways:-
• We can go to different suppliers in persons & find out the best prices every time.
• Or we can nominate a supplier to supply us. But before this various suppliers are
screened out before making an option.
• Some time the relationship between the supplier & customer also helps. If there is
better understanding between them then the good price is arranged on very
accommodating terms.

5.4 Describe the costs involved in the operation of a catering business.

Indirect, direct, & staff.
Thre are different kinds of cost enolve in the catering business. These costa are divided
into two main categories.:-
• Direct
• Indirect

“Direct cost” is defined as “ expenditure which can be economically identified with and
specifically measured in respect to a relevant cost object”. This is readily
comprehensible as the identifiable cost arising as a direct result of undertaking a
particular activity. These costs are very direct & are a cost that can be directly traced to
producing specific goods or services.
For example, the cost of meat in a hamburger can be attributed directly to the cost of
manufacturing that product. Other costs, such as depreciation or administrative expenses,
are more difficult to assign to a specific product, and so are not considered direct costs.
Example of direct costs is:-
• Labour: - Amount that has been paid to the kitchen staff to perform their job.
• Materials: - Amount & quantity f the goods that is used in the kitchen during a
time to produce a good.
• Power & fuel: - Expenditure spent upon the fuel & power.

“Indirect cost” is defined as “expenditure on labour, materials or services which cannot

be economically identified with a specific saleable cost unit”. Indirect costs are costs
that are not directly accountable to a particular function or product; these are fixed costs.
Indirect costs include:-
• taxes,
 • administration,
• personnel and
• security costs
• depreciation
• .administration
• Rent of the premise & equipment
• Interest rate etc when borrowed from the bank.

Staff: - Staff is one of the major factors from which most of the cost rises. Several
expenditures come under this category. Such as meals, laundry, training, accommodation
& traveling expenditure if provided, etc.

5.5 Explain the method of evaluating & costing performance.

Break –even point, Comparison, Analysis.

The break even point for a product is the point where total revenue received equals total
costs associated with the sale of the product (TR=TC). It is also called no profit no loss
point
A break even point is typically calculated in order for businesses to determine if it would
be profitable to sell a proposed product, as opposed to attempting to modify an existing
product instead so it can be made lucrative. Break-Even Analysis can also be used to
analyze the potential profitability of an expenditure in a sales-based business.
Break Even = Fixed Cost / (Unit Price - Variable Unit Cost))
Unit Price:
The amount of money charged to the customer for each unit of a product or service.
Variable Unit Cost:
Costs that vary directly with the production of one additional unit.
Fixed Cost:
The sum of all costs required to produce the first unit of a product. This amount does not vary as production
increases or decreases, until new capital expenditures are needed.

Comparison & analysis between the past records are done such as trading accounts that
high light the kitchen profit, profit & loss statements, turnover, etc.
Kitchen profits & turn over helps us to document the operational history of the business
whether the business is running in profit or loss. When the current statements are matched
on the regular bases with the past one’s. Then the financial losses can be rectified on
time. It is good idea to calculate kitchen profit on frequent bases. Turn over may not
show losses but they show times the good have been sold, higher the turnover means the
business is making profit.

5.6 Describe the methods for preparing & presenting costing analysis & information.
Computer
Percentage
Categories.
Costing does not only deals with the accounts only. But it also have the objective in
which account of expenditure is prepared in such a way as to obtain information & data
for the guidance of the management & to work out the total & per unit cost.

Costing is achieved with the help of computers. As new software that are available in the
market helps to easily feed the data & automatically brief the account till date with one
click of the button.
They also show us our records in the graph which makes it very easy & simple to
interoperate.
Percentage of the turnover is calculated on the bases of previous records. Say in the year
2006 it was 10% but to the date it is 43% it means the turnover has increased by 33%.
All the direct & indirect costs can be analyzed by the accounting. This helps us to have a
better control over expenses. And thus increasing our profitability. For example if we
need a product from a supplier far away from the location. Then the additional transport
cost is added. But this indirect cost can be avoided by finding a supplier who is close by
the premises.