FOOD AND BEVERAGE MANAGEMENT

UNIT -1 COST DYNAMICS

COSTING

COST: - Costs are expenses the company has to pay during the production of its product.
TYPES OF COST:- There are 3 main types of costs, these are:
1. Fixed cost:- Costs that don't change over a period of time and don't vary with output.
E.g.:- Salaries, Rent, Tax, Insurance, Heating and Lighting. Fixed costs can also be called
indirect costs as they are not directly associated with the final product. Fixed costs have to be
paid even if the company is not producing any goods.
2. Variable costs:- Costs that vary directly with output so when output increases,
variable costs also increase. E.g. raw materials, electricity. Variable costs can also be
called direct costs as they are directly associated with production.
3. Semi-variable costs:- These costs have fixed and variable elements. E.g. a person
working for the company may have a fixed salary but may also earn commission on
sales.
Total costs are calculated by adding together fixed, variable and semi-variable costs.

ELEMENTS OF COST: - We can divide total cost in following main elements of costs:
1. Direct Cost:-It is that element of cost in which we can include the cost of direct material
and direct labor. If we take its total, it will be prime cost.
a) Direct Material Cost :- Direct material is that material which we find in finished product
and easily measures its cost. For example, for making furniture, woods are direct material and
its cost will be the part of direct cost.
b) Direct Labour Cost:- Direct labour is used for producing the product. We pay wages for
making product to labourers and this cost will be the direct labour cost.
c) Direct Expenses Cost:- Except direct material and direct labour, all direct expenses will
be direct expenses cost.
2. Indirect Cost
1. Overheads :- When we cannot charge an expense directly on the product, we can say
it is indirect expense or overhead. In overhead, we can include indirect material cost,
indirect labour cost and other following indirect expenses.
i) Manufacturing overheads
ii) Administrative overheads

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UNIT -1 COST DYNAMICS

iii) Selling overheads
iv) Research and development cost
Factory rent and rates, insurance of plants or telephone bill are the main examples of
overheads.
Factors Affecting the Percentage Of Food Costs
There are end numbers of factors that affects the percentage of efficiencies.
These are:-
a) Food Purchasing:- As a matter of fact the control starts from this first activity.
Skillful buying is quite an art and the proper discharge from this function may results
in considerable cost control. The following points in purchasing helps in reducing
costs. These are:-
 Buy the right amount of stock
 Determine the realistic stock level
 Buy according to the standard purchase specification
b) Menu Planning: - It is most important step in controlling the food cost. This is
recognized by the progressive categories. A careless menu planning results in undue
wastage of resources hence is responsible for excessive. Most of caterers think that
offering a variety of food and adding more items of list will increase their reputation
market. But at the same time it increases the food cost which is not a healthier item. If
the number of items is more, the customers get confused. Sometimes the lack of
skilled labor. Lack of proper equipment’s.
c) Method Of Pricing:- a haphazard price of pricing will eventually results in a
financial disasters. The price should be realistic and must be based on facts. To keep
the desired rates each item of menu must be carefully considered in terms of its cost
and in relation to the selling cost. The market forces must determine the selling price.
Hence one of the responsibilities in any food service is an art full working. To keep
the desired weights each item of the menu.
d) Culinary Skills:- cooking skills affects the ultimate cost of food in any
establishments. Badly cooked food is a complete write off. Food preparation loses due
to unskilled labor; lack of proper equipment’s, heat is not properly carried out,
careless control of temperature. Normally high temperature causes the shrinkage of
food items and hence reduces in yield.
e) Service Skills

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f) Portion control
g) Careful order taker
h) Avoiding Wastage:- this particular activity starts with the receiving of food. All the
procedure for avoiding wastage is observed at each level i.e. in the store, during
transportation, from the store to kitchen, during preparation of food items and during
service.

Food Cost Control:- It can be define as guidance and regulation of cost of operation.
Undertaking to guide and regulate cost needs to ensure that they are in accordance of the
predetermined objectives of the business. Hence the guidance and regulation of costs are set
as per expressed in the policy statement and budget of undertakings.

Food costs controls mean that

a) You have to stick to your predetermined standards.
b) You exercise restrains or direction over the price you paid, buy, prepare and sell
goods.
c) You have your market as each food operation cater to a specific market. Standards
vary from different markets.
d) You set standards appropriate to your market before you buy, prepare and sell goods.
e) You prepare cost control procedures.

Objectives of Cost Control:-

a) To Analyze Income And Expenditure:- In financial accounts stress is usually

placed on the ascertainments of total costs and profits i.e. cost of sales, gross profit. In
food control on the other hand must stress is placed on various departments or a
section of a business.
Gross profit=sales –food cost
Net profit=sales- (food cost +labor cost+ overheads)

b) Pricing of food: - Another major objective of food cost control is to provide a sound
basis for menu pricing. It will also help in costing price for various types of banquets
and functions. It also helps in giving quotations.

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Sale=food cost + labour cost + overheads + Profits
(30%) (10%) (10%) (50%)
c) Prevention of inefficiencies: - We know that purpose of control is to ensure the
current results are in accordance with the predetermined objectives which were
expressed in terms of targets, costs, selling and profit margins. If such objectives are
to be reached all possible forms of wastage and inefficiencies should be prevented. In
order to be effective in preventing wastage inefficiencies, a system of food cost
control; must cover the whole field of catering operations right from the purchase of
food stuff to the sale of food material. The system of food cost control has an
important function to fulfill in providing of data for individual reports on food
operations.
Phase of Control Procedure
The control procedure consists of 3 broad phases.
1. Planning:- First of all the basic policies have to be defined. Policies are nothing but
predetermined guidelines lay down by the management of the organization. It outlines
such matters as the market that is being aimed at, how it is to be catered at the level of
profitability, which is to be achieved. The policy should be clearly defined before the
business is commenced. It can be charged but whenever a major change take place a
new policy should be written down. Three basic policies which need to be considered
are:-
 Financial: - it will determine profitability and the contribution to the total profit.
Setting of the target that has to be achieved, the financial policy is prepared for each
single unit as well as for the whole organization. A budget is prepared at the
beginning of the year for the whole organization.
 Marketing Policy: - it will identify the broad market that has to be served. It will also
identify the immediate and future consumer’s requirement in order to maintain the
broad market. A large city hotel could be broken down into a segment of various
types of users i.e. in a coffee shop, Chinese restaurant, Indian restaurants etc. each
unit having a specific customers. Marketing policy also defines customer, market
share, turnover, profitability, average spending power of customer, product and
customer satisfaction.
 Catering Policy:- it is normally evolved from the marketing and financial policy. It
will also define the many objectives of operating F & B facilities and will also

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describe the method by which the objectives are to be achieved. It will usually include
the following;
 The type of customer
 The type of menu
 Beverage provision necessary for operations
 Food quality standard
 Method of pricing
 Type and quality of service
 Degree of décor and comfort
 Type and style of table & chairs.
2. Operational: - After defining the policies , it is important to outline that how they are
to be interpreted onto the day control activities of the catering operation. The
operational control consists of:-
 Purchasing
 Receiving
 Storing
 Issuing
 Production control
3. Control of events: - It consists of 3 stages.
1. F & B Cost Reporting: - the cycle of production is often is perishable so it is
compulsory to update your F & B cost reporting weekly or monthly.
Assessment: - in case of a large unit it is necessary that someone from the f & b department
analyses the f & b reports and confirm them with the budget & with potential food cost.
Correction: - control system does not cure or prevent problems occurring when the analysis
of a performance of a department states that there is a problem. A corrective measure has to
be taken to set aside any problems.
2. Calculation of Food Cost: - there are several basic terms, which are used in the
calculation of the food cost.
 Food cost- This refers to the cost of food incurred in preparing meals served.
 Gross profit: - The excess of sales over the cost of the food expressed as a percentage.
 Potential food cost: - The food cost under perfect conditions.

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UNIT -1 COST DYNAMICS

3. Methods of food control:- Daily food cost report:- this system is used by big or
medium organization where managers control each activity as daily routine. It is a
reconciliation report of daily activities.
 Monthly or weekly food cost report:- it is used by small organization where
everything is control by the owner of the or the manager of the hotel.
Food cost is calculated in two ways. These are:-
 Recipe based costing:- This refers to the costing in which the recipe is pre- decided
and the manager is responsible for the controlling the cost or wastage .The total
numbers of items sales by the outlet is recorded and it is later subtract from the total
amount of purchase of received from the store. The price of each ingredient is pre
decided by the management and for the entire year it will remain same. It is calculate
in such manner. E.G.
Dal Makhni (1 portion)
Sr. no Ingredient name Quantity rate Amount (Rs.) Paisa
1 Bengal gram 50gms 50/kg 2 50
2 Ghee/oil 100gm 100/kg 10
3 Rajma 20gm 80/kg 1 60
4 Onion 50 gms 50/kg 2 50
5 Tomato 50 gms 40/kg 2 40
6 Salt 5 gm 10/kg 00 50
7 Peper 10gm 80/kg 00 80
8 Coriander 5 gm 10 bunch/100gm 00 50
Total cost 20 80
 Indenting based costing:-this refers to the costing in which the total net sale is
divided by the total amount of purchase issued from the store in a day. However this
costing is not used in big hotels as each outlet or department can’t find the real
percentage of costing, but it is best for small hotels which has 1or 2 outlets.
Proof of inventory:-
Opening stock+ Purchase- Requisitions= closing stock
Advantage
 It is simple and easy to follow.
 It gives the day to day information about business.

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 It records the daily stock level, daily purchase, daily requisition and food cost
percentage.
Problem occurs while controlling the food and beverage:-
The perishability life of products:-food whether raw or cooked, is a perishable commodity
and has a certain life. The caterer therefore has to ensure that he buys product in right
quantity and quality in relation to estimated
Costing:- It is simply the process of arithmetic, means of memorandum statements or the
methods of integral control. Costing is the technique and process of ascertaining costs. In
hotel industry different types of costing is calculated, these can be:-
1. Batch costing 2. Food costing
3. Beverage costing 4. Labor costing
5. Material costing 6. Operational costing
And so on.
Purpose of Cost Control:-
a) To know the cost of products and services.
b) To fix the selling price
c) Cost controlling
d) Preparation of profit and loss account
e) To Generate the Operating policies
Advantages of Costing:-
a) Cost control
b) Helps in making profit
c) Closing stocks
d) Financial statements
e) Effective costing system
f) In hotel industry two costs are very important. First is food cost (also refers to
material cost) & second is Labour cost. So it is necessary to understand how these
affect the entire system of hospitality industry and how it can control.

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