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, semi-
finished 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 1,686,740
Beverage 297,660
Total sales 1,984,400
Cost of Sales
Food 708,431
Beverage 95,251
Total Cost of Sales 803,682
Gross Profit 1,180,718
Direct Expences
Salaries and wages 535,788
Employee benefits 133,947
Other expences 242,660
Total Direct Expences 912,395
Revenue before tax, depriciation and interests 268,323
Tax 132,608
Depriciation 27,060
Interest 60,200
Total 219,868
Net profit 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%
Loin of Pork a Maison 20 20%

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 Con’t

• 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. Chef’s
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 dishe’s 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 sole Rs. 32 per kg

125 gms onions Rs. 28 per kg
250 gms mushrooms Rs. 45 per kg
200 gms butter Rs. 28/ 250 gms
1/4 pnt cream Rs. 45 per pnt
3 nos eggs 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 Sauté of
Chicken Bordelaise

25 x 1.2 kg chicken Rs. 65 per kg

200 gms butter Rs. 28 per 225 gms
150 gms onions Rs. 24 per kg
18 pnts Brown sauce Rs. 2.50 per pint
1.5 kg bacon Rs. 180 per kg
250 gms garlic 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 xxx
Add purchases Cash xx
Credit xx
xxx
Less purchase return (xx)
Net purchase xxx
Add transfer inward xx
Less closing stock (xx)

Cost of food consumed xxx

Less Staff meal costs (xx)

Complimentery food (xx)
Transfer outward (xx)
Discount on food (xx)

Cost of food sold 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. Staff meal, spoilage (if reasonable)

2. Entertaining travel agents/guest discount
3. Fresh fruit transfer to bar
4. Staff discount
5. Fruit baskets
 Cost of food consumed cont’
• The cost involve in providing above doesn't
guarantee any food sale.
• Hence a chef can’t 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. Staff meal, spoilage (if reasonable)

2. Entertaining travel agents/guest discount
3. Fresh fruit transfer to bar
4. Staff discount
5. 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. Food purchase prices goes up
2. Many untrained staff in the kitchen
3. Faulty equipment in the kitchen
4. Waste of food
5. Pilferage/unauthorized eating
6. Accounting errors
7. Faulty purchasing
8. Poor portion controlling
9. Lack of supervision/poor kitchen management
10. Too low selling prices for dishes
11. 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 Con’t
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. Establishing standards (quality/quantity)
2. Establishing procedures (SOP)
3. Training personnel
4. Setting examples
5. Observing and correcting employee actions
6. Requiring records and reports
7. Disciplining employees
8. Preparing and following budgets
Standard Recipe
Costing Sheet
 The following are trading results for beverage
operations at Taste restaurant.
2008 2007
Sales (vat inclusive) 320,000 150,000
Cost of sales 100,000 20,000
Overhead costs (Light,
heating, insurance, rent, rates) 60,000 50,000
Wages 90,000 30,000

Calculate the following:

(a) Gross profit
(b) Gross profit percentage
(c) Net profit
(d) Net profit percentage
(e) Labour cost percentage
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 con’t
• 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 0 Small Large

Losses Profit
Break even graph
Break even graph con’t
 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
 Low Fixed
High Fixed cost cost
Period
Period I Period II Period I II

Sales 10,000 9000 10000 9000

Fixed costs 6000 6000 3000 3000
Variable costs 3000 2700 6000 5400
Total cost 9000 8700 9000 8400
Net profit 1000 300 1000 600
Drop of Profitability 70% 40%
10% sales drop from period I to period II
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