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Costing and Cost Sheet: Analysing the Cost at Gopal Catering Services

Student Name

Institution Affiliation

Date of Submission
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Executive Summary

Managers are responsible for ensuring smooth running of businesses from the production

to marketing and selling. While keeping track of the performance of internal resources, the

management has to analyse the external environment along with the demand patterns of the

target consumers to form realistic projections and plan the future. Obtaining food cost calculation

for instance, can enable hotels, restaurants, and catering businesses like GCS to design clear

objectives and invest in the right resources. Although food waste management is a global

concern, it is often left at a consumer level due to the purchase, preparation, consumption,

storage, and disposal practices. However, businesses are slowly realizing their contribution to

food waste during the production, marketing, and selling levels. Comprehending the complexity

of the food waste reduction system is crucial from an economic and social perspective.

Consequently, after carrying incremental analysis, Scenario 1 is found to be more favourable to

be adopted by GSC as a new standardized therapeutic diet meal in addition to the current menu.

Scenario 1 yield a net income of Rs. 156,100 and scenario 2 yield net income of Rs. 143,500.

GCS can track its progress and monitor the implementation process to fine-tune the production,

marketing, and delivery stages. For return on investment, Gopal has to develop a definable

strategy that accounts for the assumptions, risks, costs, and dependencies that may affect its

operations.

Table of Contents
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Executive Summary.....................................................................................................................................2
Introduction...............................................................................................................................................4
Literature Review......................................................................................................................................5
The impact of cost attribution and cost dynamics....................................................................................5
Theoretical Models Addressing Food Waste Costs Reduction................................................................7
Analysis and Calculations.......................................................................................................................10
Application of Incremental Analysis.....................................................................................................10
Conclusion.................................................................................................................................................13
References.................................................................................................................................................14
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Costing and Cost Sheet: Analysing the Cost at Gopal Catering Services

Introduction

Managerial accounting is a crucial concept for businesses looking to strategically

improve performance and revenue to stay operational and thrive successfully. Food and

hospitality businesses can opt for total-factor framework and food cost performance

disaggregation models to enhance menu performance and maintain sustainable production (Chin-

Yi, 2020). Managers are tasked with assessing potential pricing mechanisms that account for the

financial and economic status of the business (Noreen et al., 2021). The management has to

understand the various operating costs and how they are represented in financial statements.

Besides computing for operating costs, managerial accounting conceptual frameworks enable

businesses to assess how costs and expenses behaviour with respect to the changing dependent

and independent variables. Profit planning and budgeting is possible if businesses can control

costs such as food waste costs to curb expenses that could impact profitability (Narvanen et al.

2019). To make effective decisions, managers can compare the actual results (sales, purchases,

and revenue) against the standard costs and planned objectives. Understand the type of data to

collect in relevance to the revenue and expenses of a firm will significantly impact the demand

and profit projections.

This paper analyses the impact of cost attribution and cost dynamics on the company’s

leadership to address the cost unit. It also proposes three theoretical frameworks that address the

reduction of food waste costs that can help GCS’ leadership in taking decisions in the future. The

paper proceeds to apply the incremental analysis approach to demonstrate when GCS can

produce and drop its new standardized therapeutic diet meals. As the paper hypothesizes,
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acquiring the right financial statements can allow businesses to do proper food cost calculations

paving way for informed decision making regarding the operation, expenses, pricing, and

marketing. The current performance of GCS will determine how the customers will respond to

the new meal menu.

Literature Review

The impact of cost attribution and cost dynamics

Cost attribution is the basic concept of determining the impact of various inputs and

activities on a business’ output, with the aim of developing a realistic pricing strategy as per the

cost causation. This principle recognizes that the existence of certain costs is dependent on direct

service provision as per the incremental decisions and incremental costs. Therefore, managers

have to decide on the allocation of deviation costs that arise due to resource variability. As Porter

establishes, cost dynamics allow businesses to analyse cost behaviour and cost drivers based on

the relative and absolute cost of value (Ellram, 1995). To thrive in the competitive food and

catering industry, GCS needs to consider its set of actions and competitors’ responses for

strategic management.

Since GCS offers its products and services to a variety of consumers (schools, offices,

colleges, and other ad hoc customers), the management could consider dynamic pricing. This

pricing mechanism will enable the management decide on flexible prices for the food as per the

prevailing demand patterns. The average cost per order could vary depending on a time-based,

bundle, value/elasticity, competitors, activity-based, and cost-plus pricing dynamics (Raucci et

al., 2020). When determining food prices, the management should note that the purchase cost

reduces when the demand is price inelastic and vice versa. Also, despite the changes in food and
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price quantities, effective consumer prices tend to decline. However, if the consumers do not

incur the disposition cost, then the consumption rate will always go high.

Adopting innovative food cost management approach is the right direction towards

understand where GCS is and where the company is going. Food cost is manageable; hence,

controlling this price will increase profitability and save money without necessarily bringing in

extra revenue. The company can track its inventory changes with regard to the total purchases

and sales to determine whether it is operating on profit of loss (Jurušs et al., 2019). From GCS’

case, the company has recorded Rs 18,493,750 in total sales while the purchases and expenses

amount to Rs 14,928,000. The profit of the business is at Rs 3,565,750, which means GCS is

bringing in substantial revenue.

The firm can also determine its unit cost (also cost of goods sold) while conducting the internal

management analysis by obtaining the values of the fixed and variable expenses that directly

affect the production, storage, and marketing of a single unit of a product. These expenses

include staff wages, marketing fee, charges to run machinery, etc. As a business expands, the

growth coincides with a lower unit cost. Reviewing these costs gives managers insight on the

increasing expenses to take preventative measures to minimize cost. Consequently, the

management can maximize the profits at the lowest possible unit cost. In this case:

The unit cost

¿ expenses+variable expenses
=
Total units produced

Total production costs (fixed and variable expenses in Rs)

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= 480,000 + 480,000 + 576,000 +3 60,000 + 60,000 + 600,000 + 600,000 + 6,000 +5 40,000 +

540,000 + 12,000 + 6,000 + 120,000 + 7,500,000 + 300,000 + 3,000 + 45,000 + 2,700,000

= Rs 14,928,000

Assuming the quantity of food produced in (Kgs) = 7,378,000

Cost unit will be given as

14,928,000
7,378,000

¿ 2.0233 Per unit

Since GCS has outlets in different locations, the business should compare its operating

costs and revenue accrued from all locations to see where each branch ranks (Singh, 2019). This

way, management will know where more resource investment is necessary to optimize operation,

minimize costs, and maximize profitability for a higher return on investment.

Theoretical Models Addressing Food Waste Costs Reduction

Reducing food waste has become a corporate social responsibility owing to the global

concerns of food security and climate change. GCS, like other firms in the food industry should

actively engage in theoretical frameworks that address the reduction of food waste to not only

save planet Earth but also cut on costs (FAO, 2014). The approach the company takes will

impact future leadership decisions that will determine its success or failure. To address food

reduction, businesses should understand the contribution of the dependent and independent

variables. From a managerial perspective, the attitude of the management and stakeholders
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significantly influences food waste generation and prevention. As Blum (2020) explains,

managers should have strong interpersonal skills to effectively engage staff in the food waste

reduction program.

In this case, Gopal should assess the inventory management and checks practices,

understand the underlying business concept, and review food sales revenue for proper decision

making. With this approach, the company can accurately predict the number of expected

customers to design a more specific food menu and mitigate waste. GCS should engage the

kitchen staff like chefs through meetings, trainings, and conversations to find creative ways of

reducing food waste. Gopal should optimize its corporate commitment to reduce food waste and

reap the accompanying financial benefits of preventing overproduction by applying the

following theoretical models:

Demand forecasting

GCS could predict its future food sales by analysing historical sales data to facilitate

informed decision making (Singh, 2019). With demanding forecasting, Gopal and his team can

estimate future total sales and revenue to add value and improve performance. Based on GCS’s

previous sales data, the firm has a probable rise in demand as the company is targeting various

market segments from all outlets. The company plans to produce new standardized therapeutical

meals in anticipation of future clients’ needs. As a predictive analytical model, demand

forecasting will help GCS optimize its food supply to prevent waste.

Purchase planning

While enabling GCS stay competitive in the food and catering industry, purchase

planning is strategic procurement planning model that ensures the right quantity supply, quality
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maintenance, and cost minimization. Through purchase planning, Gopal can determine what

supplies the business needs in a proactive approach to obtain enough stock that meets the

demand forecasted.

Proper quantification

According to Blum (2020), restaurants can reduce food waste by generating a food waste

inventory that shows how much is being wasted and where. Exploiting smart tools and software

to measure accurately will enable managers to control production and understand the food order

patterns for better planning. GCS could invest in automated quantification tools that will offer

the firm an efficient strategy to reduce food waste while minimizing cost (Dhir et al 2020). This

innovative theoretical framework is a reliable cost-saving criteria due to the comprehensive food

management approach. Gopal spends heavily on manpower, hence, has competent staff to

implement these measures for significant adjustment on food waste and expenditure.

Other strategies GCS can apply to mitigate foot waste costs occasionally checking the

refrigerator to store the food in the “right to left” order (Behmen-Milicevic, 2019). The staff

should then use the food in reverse order to ensure the fresher products stay and the existing food

is closer to access. Recycling food waste to for example produce bioenergy will also provide an

alternative revenue source or cost reduction strategy for the business.

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Analysis and Calculations

Application of Incremental Analysis

Incremental analysis is a decision making strategy that management of business apply to

determine true cost difference between alternatives. It’s a useful for business success since it

incorporates the decisions to outsourced and self-produced functions (Dickinson, 2015). Also,

it’s a problem-solving method that applies accounting data to make sound decision for

organizations. Therefore, Gopal Catering Service should adapt this approach to identify potential

outcomes of an alternative strategy compared to another. In this section, there are assumptions

that GSC is planning to produce a new standardized therapeutic diet meal in addition to the

current menu. Incremental analysis is used to demonstrate when the new diet can be produced or

be dropped by using two scenarios.

Scenarios

Assuming that GSC is considering to produce a new standardized therapeutic diet meals to add

their existing menu. Let call Scenario 1 Alternative A and Scenario 2 Alternative B.

Alternative A Expenses

Expenses Amount (Rs)

Additional Chef Salary 12,000

Additional Kitchen Expense 6,000

Gas Cylinder 14,500

Telephone cost 4,000

Delivery cost 30,000

Cost of Vegetables, Non- Vegetables and provisions 123,000

Carrying cost of Vegetables, Non-Vegetarian items, and 9,600

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Provisions to the Kitchens

Additional Supporting Kitchen Staff 11,000

Miscellaneous 16,000

Total Expenses 226,100

The total revenue for alternative A is 382,200

Alternative B expenses

Expenses Amount (Rs)

Additional Chef Salary 10,800

Additional Kitchen Expense 8,000

Gas Cylinder 12,500

Telephone cost 5,000

Delivery cost 32,700

Cost of Vegetables, Non- Vegetables and provisions 145,6000

Carrying cost of Vegetables, Non-Vegetarian items, and 13,900

Provisions to the Kitchens

Additional Supporting Kitchen Staff 10,000

Miscellaneous 20,000

Total Expenses 258,500

The total revenue for alternative is 402,000

Incremental Analysis will be calculated as shown in the table below

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Scenario 1 Scenario 2 Net Income

Amount (Rs.) Amount (Rs.) (Increase or Decrease)

Total Income 382,200 402,000 19,800

Total Expenses 226,100 258,500 32,400

Net Income 156,100 143,500 12,600

Scenario 1 reports a net income of Rs. 156,100, while Scenario 2’s net income is Rs.

143,500. Based on the above financial data, GCS management team should adopt scenario 1 as a

new standardized therapeutic diet meal in addition to the current menu. Scenario 1 can be

produced when the firm need to make more profits since the total expenses are less compared to

alternative B. However, Scenario 1 can be dropped if Alternative B reduces the total expenses.

This is because Alternative B has more total revenue compared to alternative A. On the other

hand, Scenario 2 can only be feasible if the management of GCS can work on expenses by

reducing them since its total revenue are higher compared to alternative A. Therefore, Scenario 1

is most feasible compared to Scenario 2 because it has higher net income.

Conclusion

Calculating food costs and analysing the financial statements of a food and catering

business are crucial steps in boosting profits and achieving the set objectives. Despite the hard

work of the firm personnel and level of investment, controlling food costs helps meet market

demand and stay operational despite market and other impromptu changes. One approach to

control food costs is to reduce food wastes. Demand forecasting, proper quantification, and

purchase planning are efficient approaches to managerial accounting. All these frameworks will
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enable a business to identify and consolidate consumer requirements and determine how the

company resources can best meet the demand without food wastes. Additionally, after carrying

incremental analysis, Scenario 1 is found to be most feasible to be adopted by GSC as a new

standardized therapeutic diet meal in addition to the current menu. Scenario 1 yield a net income

of Rs. 156,100 and scenario 2 yield net income of Rs. 143,500.

References

Behmen-Milicevic, A. (2019). 16 Tips for Restaurant Food Waste Reduction.

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https://possector.com/management/restaurant-food-waste-reduction

Blum, D. (2020). Ways to reduce restaurant industry food waste costs. International Journal of

Applied Management and Technology, 19(1)

Chin-Yi, F. (2020). From the total-factor framework to food cost performance Disaggregation –

Developing an innovative model to enhance menu performance. Sustainability, 12(22),

9552.

Christ, K, and Burritt, R. (2017). Material flow cost accounting for food waste in the restaurant

industry. British Food Journal, 119(3), 600-612.

Dhir, A., Talwar, S., Kaur, P. and Malibari, A. (2020). Food waste in hospitality and food

services: A systematic literature review and framework development approach. Journal

of Cleaner Production, 270.

Dickinson, R. (2015). Incremental analysis: For retail decision making. In Proceedings of the

1990 Academy of Marketing Science (AMS) Annual Conference (pp. 415-419). Springer,

Cham.

Ellram, L. M. (1995). Total cost of ownership: an analysis approach for

purchasing. International Journal of Physical Distribution & Logistics Management.

Food and Agriculture Organization (FAO). (2014). Food waste footprint: Full-cost accounting.

http://www.fao.org
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Jurušs, M., Roze, L., and Lūka, M. (2019). Impact of value added tax on restaurant services.

Acta Prosperitatis, (10):23-40,157-158.

Narvanen, E., Mesiranta, N., Mattila, M. and Heikkinen, A. (2019). Introduction: A

Framework for Managing Food Waste. Food Waste Management, 1-24.

Noreen, E., Brewer, C. and Garrison, H.(2021). Managerial Accounting - seventeenth edition.

McGraw-Hill Education. ISBN: 9781260247787.

Raucci, D., Lepore, D., & Sabatiello, R. (2020). Activity-based pricing in small and medium

sized restaurants. Evidence from the Italian context. International Journal of Culture,

Tourism and Hospitality Research, 14(4), 565-577.

Singh, S. (2019). Cost estimation using econometric model for restaurant business.

Quantitative Methods in Economics, 20(3), 217-229.