Purbanchal University

Cost Analysis of Balaji Hotel

Sabitri Kumari Ray

BBA-I, Roll no. : 27
Kasturi College

Presented To
Bheshaja Kafle

2080 Chaitra
Acknowledge

I would like to express my sincere gratitude to Miss Bheshaja Kafle for providing me with
the term paper. This results has helped me to think creatively and work in a practice field. I
would also like to extend my deepest appreciation to Balaji hotel for providing their valuable
time to complete this research. My thanks should also go to Kasturi college for providing me
with the laptop to complete this research.

Sabitri Kumari Ray

Abstract

This term paper deals with the cost analysis of Balaji Hotel. This research helps to find out
the fixed cost and variable cost of Balaji Hotel and their potential earnings.
Table of Content

Chapter 1
1. Introduction
1.1 Meaning of Cost
1.2 Various Concepts of Cost
1.3 Short run cost curve

Chapter 2

2. Case Analysis
2.1 Introduction of Organization
2.2 Objective of Study
2.3 Methodology
2.4 Data presentation, analysis and interpretation

Chapter 3

3. Summary and Conclusion

 Chapter 1

1. Introduction

1.1 Meaning of Cost

Cost means the money expenditure incurred on factors of production while producing a
commodity. There are various types of cost, such as fixed cost, variable cost and opportunity
cost. Cost analysis is crucial for decision-making process, budgeting, pricing strategies, and
evaluating profitability of investments. Hence, understanding the cost is essential for
organizations and individuals to effectively manage resources and achieve their goals.

1.2 Various Concepts of Cost

I. Implicit and Explicit Cost

i. Implicit cost

Implicit cost refers to the opportunity cost that arises from the use of resources in a particular
enterprise or firm, where the cost is not explicitly incurred or recorded as a monetary
transaction. It represents the value of benefits sacrificed by choosing one alternative over
another. For example, implicit costs include the value of owner’s time, the use of self-owned
resources, and forgone opportunities.

ii. Explicit cost

Explicit cost refers to the actual monetary expenses incurred in conducting business activities
or producing goods and services. These costs are easily identifiable and recorded in the
company’s accounting records. The explicit costs include wages paid to employees, utility
bills, raw material costs, rent for premises, and expenses for marketing and advertising.
 II. Accounting and Economic Cost

a. Accounting cost

Accounting cost refers to the explicit cost in incurred by a business in its operation
production or other activities these costs are quantifiable and a recorded in the company
accounting records to analyze financial performance and make informed business decision.
Accounting cost includes expenses such as wages, raw materials, rent, utilities, taxes, and
other costs directly related to production or operation of goods and services.

b. Economic cost

Economic cost is the sum of implicit and explicit cost. It reflects the total value of resources
used in an economic activity including, both the costs that are directly paid for and the costs
associated with the forgone alternatives.

III. Opportunity Cost

Opportunity cost refers to what an input could earn in its next best alternative job. It arises
due to scarcity and alternative uses of resources. It’s the value of the next best alternative that
is sacrificed when a decision is made.
IV. Short run and Long run Costs

A. Short run cost

Short run is such a period of time in which some factors of production can be variable and
some factors of production remains constant. Land, plant, machinery, etc. are fixed factor of
production whereas labor, raw materials, etc. are variable factors of production.

Short run costs are those cost which are incurred by the firm during a period in which some
factors like labor, raw materials, fuel, etc. can be variable with the change in the level of
output.

B. Long run Cost

Long run is such a period of time in which all factors of production can be variable. Variable
factors such as land, plant, machinery, etc.

Long run cost are those cost incurred during a period which is sufficiently large to allow the
variation in all factors of production including capital equipment, land and managerial staff to
produce a level of output.

V. Fixed and variable Cost

1. Fixed cost

Fixed cost is defined as expenses incurred on fixed factor of production. Fixed factors of
production are those factors which cannot be changed in the short run. Fixed cost includes the
rent of land, interest on capital, salaries of permanent employees, insurance premium, etc.

2. Variable cost

Variable cost is defined as the expenses incurred on variable factors a production. Variable
factors of production are the factors that can change with the change in production. Variable
cost includes the cost of raw materials, wages of workers, cost of fuel, etc.
Short run cost curve

1. Total Fixed Cost (TFC)

Total fixed cost is the expenses incurred for fixed factor of production in short run. It
includes land, machine, equipment, salary of permanent employees, interest on capital,
etc.

2. Total Variable Cost (TVC)

Total variable cost is the total expenses incurred on variable factors of production. It
includes raw materials, cleaning supplies, etc.

3. Total Cost (TC)

Total cost is the sum of total fixed cost and total variable cost.
Symbolically:
TC = TFC + TVC

4. Average Fixed Cost (AFC)

Average fixed cost is for unit fixed cost of production of output. If TFC is divided by
production quantity of output, AFC is calculated.
Symbolically:
AFC = TFC

5. Average Variable Cost (AVC)

Everest variable cost is for unit variable cost of production. If TVC is divided by
production quantity of output at a given period of time, AVC is calculated.
Symbolically:
AVC = TVC

6. Average Cost (SAC)

Short average cost is per unit cost of production in short run. It is the sum of AFC and
AVC. If TFC and TVC is divided by production quantity of output at a given period of
time, SAC is calculated.
Symbolically:
SAC = TC. OR, TFC + TVC
7. Marginal Cost (MC)
Marginal cost is the ratio of change in total cost to the change in production quantity of
output.
Symbolically:
MV = TC
 Chapter 2

2. Case Analysis

2.1 Introduction of Organization

Balaji Hotel is one of the oldest hotel which is located in Itahari-6, Sunsari.
This hotel was established in 2014, October 18. This hotel provides quality
food to their customers at reasonable price. The food includes samosa,
chaumin, curd, ghee, and various type of sweets. Those food are prepared by
the Balaji Hotel itself.

In this organization, fixed cost includes rent, salaries, depreciation on furniture

and equipment, loan payment, marketing and advertising, and other fixed cost
whereas variable cost includes raw materials, cleaning supplies, electricity
charge, packaging, and other variable cost.

Objective of Study
 To analyze the fixed cost and variable cost
 To evaluate total cost

Methodology
 Primary source: Interview
Observation
 Secondary source: Website
 Data presentation, analysis and interpretation
The collected data are presented in the table below:

Total Fixed Cost Price per month Total Variable Cost Price per month
Rent 20000 Raw materials 40500
Salaries 48000 Cleaning supplies 2000
Loan payment 2000 Electricity charge 1500
Depreciation on 500 Packaging 750
furniture
Depreciation on 800 Other variable cost 1000
equipment
Marketing and 1000
Advertising
Other fixed cost 1000
Total 73300 45750

The above tables show the total fixed cost and total variable cost of Balaji Hotel per
month. The total fixed cost per month is 73300 and total variable cost is 45750. Balaji
Hotel pays 48000 salary to their employees and 20000 rent to their landlord. Likewise,
raw materials cost includes 40500 and electricity charge 1500 per month.

Calculation of TFC, TVC, TC, AFC, AVC, AC, and MC

Output TFC TVC TC AFC AVC AC MC

0 73300 0 73300 0 0 0 0

1 73300 45750 119050 73300 45750 119050 45750

2 73300 65750 139050 36650 32875 69525 20000

24433.333 26916.666
3 73300 80750 154050 51350 15000
33 67

4 73300 105750 179050 18325 26437.5 44762.5 25000

5 73300 140750 214050 14660 28150 42810 35000

12216.666 44841.666
6 73300 195750 269050 32625 55000
67 67

The information include in above table are presented in the figure below:
 300000

250000

200000

150000

100000

50000

0
0 1 2 3 4 5 6 7

The above figure represents the units of output and Total fixed cost curves, Total variable cost
curves, and Total cost curves respectively. The slope of TFC remain same either in zero
quantity of output or any other quantity of output. The inverse “S” slope of TVC states that as
the output increases TVC increases at decreasing rate in the beginning and it starts to
increases at increasing rate. TC is similar to TVC except TC starts from 73300 as TFC
remains equal to TC even when output is zero.
 140000

120000

100000

80000

60000

40000

20000

0
0 1 2 3 4 5 6 7

The above figure presents the units of output and Average Fixed Cost, Average Variable Cost,
Average Cost, and Marginal Cost respectively. The slope of AFC states that as the production
quantity increases AFC declines gradually while the AVC declines gradually for sometime,
becomes minimum and remain constant and thereafter it starts to increases. The “U” shaped
curve is AC curve. It states that as the output increases AC declines thereafter it becomes
minimum remain constant and starts to increases. MC curve decline gradually & rapidly in
the beginning, become maximum thereafter it starts to increase rapidly. When MC is less than
AC, AC falls with an increase in output. Similarly, when MC is greater than AC, both AC and
MC increases but AC increases gradually and slowly whereas MC increases rapidly.
 Chapter 3
Summary and Conclusion
This term paper reveals the total fixed cost, total variable cost, total cost, average fixed cost,
average variable cost, and marginal cost of Balaji Hotel per month. This term paper shows
that total fixed cost is constant by 73300 and total variable cost is increasing at decreasing
rate and thereafter it starts to increase at increasing rate. As the unit of output is increasing,
total cost is also increasing. Similarly, average fixed cost decreases with the increase in
output whereas average variable cost decreases with the increase in outputs at 4 th units and
increases from the 5th units of output. Likewise, average cost decreases with the increase in
outputs and marginal cost decreases with the increase in outputs at 4 th unit and thereafter
increases with increase in output. In conclusion, cost analysis helps to determine the
economic benefit of a business by evaluating all the available resources.
Reference
 Asmita Microeconomics New Edition
 https://asana.com