POST GRADUATION PROGRAMME

IN MANAGEMENT
2023-25
TERM-3

Managerial Accounting

Hotel Chandana Square

Submitted By: Submitted To:

Pawan Gupta - 2310328 Prof. Mohammad Shameem Jawed
Swagatam Mandal- 2310360
Pragya Das- 2310330
Tanu Gupta- 2310361
Sidhyant Suman- 2310354
Mustafa Zamin- 2310319
 Hotel Chandana Square
Hotel Chandana Square is situated in the heart of
Visakhapatnam, a 3-start luxurious hotel which
caters to both business and vacation travelers.
Located near the prestigious Indian Institute of
Management, Visakhapatnam, it has a steady
stream of regular customers, including students
and locals, who frequently avail the restaurant
services. The hotel has earned a good reputation in
the neighborhood.
Renowned for its high-quality service, Hotel
Chandana has clean and spacious rooms with
aesthetic decorations. Each room is fully furnished
and equipped with television, air conditioning, intercom facility and free Wi-Fi connectivity.
The restaurant service offers various types of delicious and flavorful dishes that leave the guests
feeling happy and satisfied. The staff of the hotel are very dedicated and attentive and fulfills the
needs and expectations of the guests. They provided round-the-clock service, working 8 hours
daily in shifts.
Guests are attracted to their food, inviting ambience, and the comfortable amenities they provide,
which makes Hotel Chandana an ideal choice for dining and accommodation. As one of the best
hotels in the locality, it holds great potential for future growth.
Present Situation:
Hotel Chandana has grown exponentially since its establishment. They have expanded their
menu items and diversified their portfolio in many ways because of the diverse population of its
main customers, mainly IIMV and others including the local population of Gambheeram.
Apart from their diversified menu they have smooth operations with multiple chefs of different
shifting and suitable number of staff as waiters and busboys to serve the customers at 75%
capacity efficiently.
Currently they offer multiple food items as part of their menu, but we have categorically divided
into 3 main dishes which are- Vegetarian, Non-Vegetarian and Biryanis. For our analysis we
have selected these 3 main categories of food served. After some talk with the manager, we have
determined and come up with some assumptions as follows:
 Total Footfall in a day in a month is 100.
 The ratio of food order is 2:3:5 between Vegetarian, Non-Vegetarian and Biryanis.
 The total Overhead is assumed to be 8,90,000, while Direct materials that are used in
month costs 2,00,000.
 The average price for each category is assumed to be 500, 600 and 300 Rupees
respectively based on an extensive analysis of their menu prices.

Problem Statement:
Since its inception, Hotel Chandana has not done a cost analysis. Based on our discussion with
the hotel staff they do not follow any strict costing policy, and hence are sometimes not able to
make profits with certain dishes. They currently benchmark their prices with other competitors
and use direct materials incurred as their total costs while diving the overhead with all the menu
items. Due to this they do not have sufficient data to exact the costing policy benefits or
disadvantages. They are striving to find out a correct pricing model for all their menu items, to
make their processes efficient and realize value where it can be leveraged and where price can be
leveraged.
A costing policy which is structured according to a organizations need can help the organization
utilize all its resources towards their products while keeping their exact costs at check. For a
restaurant such as Chandana Hotel with multiple menu items, they need a well-coordinated
pricing strategy to maintain their high-quality service and still realize profits wherever they can
for their sustainable and future growth.

Direct Material Costs (DMC):

Direct material costing involves identifying and apportioning the expenses related to the raw
materials utilized in the manufacturing of a product or service. This encompasses all material
costs involved in production, alongside any freight or transportation charges linked to the
conveyance of materials to the production sites.
Here the total direct material costs of 2,00,000 are broken down into dairy products, oil, Non-
Veg Items (meat, chicken, etc), vegetables, dry perishables(spices), flours and rice. We have
contacted multiple chefs and acquired the material composition on average for each of the food
categories served at hotel Chandana, in proportion found in the excel sheet named Menu
Categories.
The total material and per unit cost in preparing the dishes is mentioned below as per our data
from hotel Chandana.

Veg Orders Non-veg Orders Biryani/rice

DMC: ₹ 69200 DMC: ₹ 72200 DMC: ₹ 58600
DMC per Unit: ₹ 115.3 DMC per Unit: ₹ 80.2 DMC per Unit: ₹ 39.1

Upon analyzing the data, it's evident that the Veg orders requires the highest direct material cost
for preparation, while the Biryani/rice has the lowest direct material cost among all orders served
at the hotel.

Monthly Overhead (MOH):

Monthly overhead is the amount of fixed and variable expense associated with the products in a
month incurred by the operations of conducting business. Indirect expenses are required to
sustain the operations of the business, rather than used in direct production of products or
services rendered.
We have analyzed the monthly overhead costs of Hotel Chandana Square, which are mainly due
to electricity and the salaries of cooking staff. Apart from these, other expenses would include
the cleaning staff’s salary, waiter’s salary, management salary, cooking gas and kitchen
equipment’s depreciation. The total overhead expenses are around 890000.

We have calculated the pre-determined overhead rate (POHR), using the cots drivers as- orders
and number of minutes to cook. With these we see that the highest POHR is given to electricity
(₹83) followed by waiters’ salary (₹40) and managements’ salary (₹27) while the lowest is
kitchen equipment depreciation which is nothing but the cost of new equipment bought every
month for replacement to be ₹0.13. The total POHR per order is ₹166.7, while per minute is
₹10.7 for respective food categories.

Job-Order Costing:
The managerial accounting system where the organization assigns all costs associated with the
manufacturing of a product differentiated based on customer needs is job order costing. This
costing used mainly in the service sector, manufacturing of products where customer needs
change and because of it the costs also vary.
The costs of each product are maintained separately and distributed at the end. This maintains all
costs associated with the product separate, hence enabling decision makers to look at their
business with a wide eye view of each product profits and their costs with their pricing strategy.
This is done across direct materials of all 3 food categories, how much each product will take out
of the direct materials and is done upon consulting many chefs on how much each product
consumes on average for preparation. After the DMC has been done we take the overall
overhead and calculate the overall POHR based on the number of minutes and get POHR as
₹24.3 per minute which if we extrapolate over all 3 categories, the final profit we get across all
categories is positive as shown below in the table:

From this we can analyze that although biryani is the bestseller, the profits made by it are very
less 5.9%, and vegetarian and non-vegetarian dishes are creating almost same profit margin of
18.5% and 21.7%. With respect to the direct materials cost that they are incurring, biryanis are
the lowest and yet they are still not creating profits.

Activity Based Costing:

We divide the cost analysis of a product into all the activities that are being performed to create
the product. We use cost drivers to calculate the predetermined overhead rate over all activities
separately to judge where each activity is incurring how much cost for a particular product and
then decide whether the price that we are charging for it is appropriate or not.
This costing can help a business to correctly direct its resource allocation costing when it is using
various resources and is producing mass products. This costing method is used in mass
production factories.
The manufacturing overhead is divided by 2 cost drivers which we have identified in the case of
Chandana. The number of orders affect electricity, salaries of waiter, busboys, cleaners, and
management. The number of minutes used in cooking time directly affects the salary of chefs,
cooking gas and kitchen equipment depreciation.
The total per unit cost of each category is as follows (DMC+MOH):
Veg: ₹409.9
Non-Veg: ₹417.4
Biryani: ₹312.3
As we see that the total costs of biryani exceed the price of biryani, which is ₹300, Chandana
needs to apply better pricing to ensure profits, as also seen in the table:

Conclusion:
From our analysis we can conclude that the biryani although most staple food in Andhra Pradesh,
and Chandana’s current bestseller is also their weak point as seen in the job order and activity-
based order costing analysis, resulting in either less profits of 5.9% or loss of 4%. To clearly see
their resource utilization based on their product offerings they should use a hybrid model to
verify each job’s costing with respect to the activities performed and then they will be able to see
where they can prioritize with price and where they still have some slack.
Since they consume a lot of electricity, they can also check new electric appliances that consume
less electricity both required in direct cooking or servicing the customers. Their management
costs are also quite high, which factors in increasing the per unit cost of each product as well,
right after electricity, which they can also minimize. They can also take advantage of the less
costing non-vegetarian and with less orders of it maybe price it higher or market it better to
increase its orders to see more profit. They should also try to find more cost drivers in their
business to better allocate the costs of their overheads.

References:
i. Hotel Chandana website- https://hotelchandanasquare.com/
ii. Zomato Menu- https://www.zomato.com/visakhapatnam/hotel-chandana-square-
kummaripalem-vizag
iii. Data Given by Mr. G. Venkat Kiran
iv. Activity Based Costing-
https://corporatefinanceinstitute.com/resources/accounting/activity-based-costing/
#:~:text=Activity%2Dbased%20costing%20is%20a%20way%20of%20allocating
%20overhead%20costs,cost%20driver%20like%20machine%20hours.
 Direct Material Costs

DMC
Dairy Products 50000
Oil 30000
Non-veg Items 60000
Vegetables 20000
Dry Perishables 10000
Flours 10000
Rice 20000
Total 200000