DEFINE COST?
A Value of an asset for the purpose of securing benefit or gain is called “cost”. It means the price to the hotel or restaurant of goods and services when the goods are consumed or the services are rendered. The cost of any item may be expressed in a variety of ways such as in units of weight or volume, or total value. The cost of chicken can be expressed as a value for 250 gms or a value per individual proportion. The cost of liquor can be expressed in terms of the cost per bottle, per drink or per ounce.
ELEMENT OF COSTS
There are broadly three elements of cost by nature of expenses:
- Material cost
- Labour cost
- Overhead cost/ Expenses
- MATERIAL COST:
- Material is a substance from which the product or dish or drink is made. Food & beverage are the most common raw material or ingredients. The material could be direct or indirect.
- Direct: this material cost is the cost incurred for commodities which are used in preparation of food for e.g meat, fish, oils, herbs and spices.
- Indirect: this material cost is the cost which is ancillary to the business and not to integral part of the product but is necessary for preparation. For e.g. gas, electricity cost etc.
- LABOUR COST:
- This is the compensation given to employees for completion of a particular job for which they have been assigned and to convert the raw materials to the finished products to be served to the guests. It includes – salaries, commission, bonus and wages which are paid to the employees. Labour can be both direct and indirect.
- Direct: this cost includes chefs and cooks, bar and restaurant service staff who are directly responsible for preparation and service of food and beverage to guests.
- Indirect: this labour cost is the labour employeed for carrying out tasks which are secondary to the goods or services. For eg – the storekeeper of an (F&B) outlet and kitchen stewarding staff.
- OVERHEAD COST/EXPENSES:
- all other costs excluding labour and material cost used in preparation a product or providing service are said to be expenses/overhead. For e.g. expenses in advertising, rent and taxes, insurance, depreciation etc. an expense can be direct and indirect.
- Direct: expenses which are directly related or allocated to various cost centres or units are called direct expenses. They are allocated to a particular job or services rendered which are also known as productive response. For e.g. the hiring of a particular machinery or equipment for preparing certain dishes.\
- Indirect: expenses which cannot be directly charged and are neither indirect wages not indirect materials. For e.g. rent and taxes, insurance, depreciation, required and maintenance.
DEFINE SALES?
Sales, is defined as an in-flow of assets occurring as a result of doing business. In another ways, sales may be referred to as the restaurant’s exchange of products and or services for value.
Sales = cost of sales+ cost of labour + cost of overheads+/-profit/loss
Sales= variable cost + fixed cost + profit
Customer focuses on:
- Location-convenient
- Service and style
- Products differentiated
- Menu items- variety of
- Acceptable prices
- Décor- pleasant
- Portion sizes
- Product-quality.
VARIOUS METHODS OF CALCULATING SELLING PRICE OF FOOD
The various methods used to determine the selling price of food are broadly classified into two –cost approach and market approach.
- COST APPROACH:
The following methods are used under the cost approach:
- Cost plus : in this process, first the food cost (FC) is determined and ,multiplied with either tow or half times or 250% of the food cost, or
Selling price = food cost x 2.5%
Selling price = food cost x 250%
For example, the food cost of vegetable biryani is rupees 35. Hence, the selling price of biryani would be 35x 2.5 = 87.5 or rounded 90 (selling price)
- Gross profit method: selling price = fixed cost + gross profit
Gross profit = labour cost + overhead cost + net profit)
First, the food cost is calculated, then gross profit. The average food cost of a dish should be between 30% and 40% and the gross profit would be between 60% to 70%.
For example, the food cost of a portion of laal maas is rupees 85 which is 30% of the cost. Considering the gross profit to be about rupees 198, the selling price of the dish will be as follows:
Selling price = 85 + 198 = 283 which could be rounded to rupees 285.
- Return on investment: The total investment is calculated and the mark –up is decided upon. For example, 20% of the investment amount and the mark up the pricing is done in a way that the amount can be brought back/recovered in a specific time period.
For example, there is an investment of rupees 5,00,000 and 20% mark up. This means rupees 1,00,000 and the total amount on which the return on investment would be calculated will be rupees 6,00,000.
- MARKET APPRAOCH:
The following methods are used:
- Copying competitors’ price: The competitor’s rates are checked and similar rates are quoted which are in the same grade as that of the competitors.
- Going rate/customary rate: it is the process of pricing by the commodity as it is priced in the market and the same changes when the market rate change.
DEFINE CONTROLS?
Control may be defined as a process by means of which managers attempt to direct, regulate and restrain the actions of people in order to achieve desired goals of establishment, financial success, preservation of sound environment, promotion of better health etc.
CONTROL TECHNIQUES:
- Establishing standards: – quality, quantity, standard costs
- Establishing procedures: steps or ways to achieve targeted goals
- Setting examples
- Observing and correcting employees actions
- Requiring records and reports
- Preparing and following budgets
- Censuring and disciplining employees.
An effective control system in a food and beverage operation is very important to understand and examine the relation between cost, sales and profit of the products. A good cost to sales relationship for variable cost does not mean profit in the operation.