Cost Dynamics

Cost - Definition

 The price to the hotel or restaurant of goods

or services when the goods are consumed or
the services rendered.
 a cost is the value of money that has been

used up to produce something, and hence is

not available for use anymore.
Classification of cost

Costs can be grouped under

1. Variability – Fixed, Variable, Semi Variable
2. Controllability- Controllable,
non controllable
3. Functions – Production, Administration,
Selling, Distribution
4. Normaility: Normal, Abnormal
Fixed Cost

 Those which have little direct relationship to

the volume of business. Insurance premium,
depreciation on equipment, property taxes,
interest expense, rent are examples of fixed
cost.
Variable & Semi Variable cost
 Variable cost have relationship to volume of
business. As business volume increases, these
cost will increase; as volume of business
decreases so should these costs.
 Directly variable cost: they increase or decrease as
per volume of business. Cost of food or beverage
is an example.
 Semi variable cost: Cost which has both the fixed
element and the variable element. A portion of the
cost remain constant with changes in business
volume and the other portion will not. Example
pay roll cost.
Controllable & non controllable cost
 Controllable costs are those that can be
changed in the short term. Variable costs are
normally controllable. Certain fixed costs like
advertisement & promotion, repairs &
maintenance.
 Non Controllable costs are those that cannot

be changed in the short term. Example rent,

interest on mortgage, license fee and
depreciation.
Functions

Production Cost

 Administration cost
 Selling cost
 Distribution cost
Normal & Abnormal
Normal: A cost which is normally incurred at
a given level of production in the conditions
in which that level of production is normally
attained. Sum of direct material cost, actual
labor cost, and other direct expenses.
Example: Salaries paid to employees, repairs &
maintenance
Abnormal: Costs which are unusual or irregular
incurred due to abnormal situtations.
Example: destruction due to fire, shut down of
machinery, lock out etc.
Unit and Total cost
 Unit cost: The cost incurred by a company to
produce, store and sell one unit of a
particular product. Unit costs include all fixed
costs (i.e. plant and equipment) and all
variable costs (labor, materials, etc.) involved
in production. Example: cost of one steak
 Total cost: It is sometimes useful to discuss

in terms of total, as in the total cost of all

food served in one period-such as a week or
a month, or the total cost of labour for the
period
Prime cost
 It is a term our industry uses to refer to the
combined total cost of food & beverage sold,
plus labour payroll, payroll taxes, and
employee benefits. These last three
represents the largest portion of all operating
costs for all food service operations. Control
of prime cost will play a large roll in
determining whether or not an establishment
meets its financial goals.
 Elements of cost

Material Labour Overheads

Direct Indirect Direct Indirect Direct Indirect

Elements of cost – Direct

 Direct Material Cost: Cost of material which

enter into and form part of product.
 Direct Labour cost: cost of the people who do
the core work of the product. Cost of
remunaration of the employees of an
organization. (wages, salaries, commissions,
bonus etc.,)
 Direct Expenses: All other costs which are
incurred for a specific product or service.
Anything which is not direct material or labour
cost, also known as overheads
Elements of cost – Indirect
 Indirect Material Cost: Cost of material which
do not form the part of product but which
help in production
 Indirect Labour cost: If a person’s labour
cannot be easily linked to a specific
customer’s order or the person does not
directly make the product, the person’s
labour is called “indirect labour”
 Indirect Expenses: rent, rate, depreciation,
maintenance expense that do not have instant
relationship with the manufacturing process.
Cost to sale ratio
 (Cost/sales) x100 = cost%
 (food cost/food sale)x100=food cost%
 (beverage cost/beverage sale)x100=beverage

cost%
 (labour cost/total sale)x100=labour cost%
 Cost/cost% = sale
 Sale x cost% = cost
Assignment questions
1. List three examples of costs that are fixed in a
restaurant. Are they controllable? Explain.
2. Define: Labour cost, food cost, profit, beverage
cost percentage, controllable cost, unit cost,
prime cost.
3. Restaurant sea view purchased burgundy wine
at 4200/- per bottle. Each bottle contains 3
liters. 140ml of wine is served per glass.
Management allows 30ml spillage per bottle.
a. what is the average unit cost per drink?
b. what is the total cost of 60 glasses of wine?
Assignment questions
Calculate cost percentage:
 Cost 200/- sales 500/-
 Cost 610/- sales 2000/-

Calculate cost:
 Cost% 28.0% sales 500/-
 Cost% 21.2% sales 4100/-

Calculate sales:
 Cost % =30% Cost =90/-
 Cost% = 34.8% Cost = 1113.60/-