COSTING

UNIT I
 DEFINE FOOD COST?
 Food costing can be defined as the cost of food to
prepare a dish other than labour and overhead cost.
 In other words, it is the cost of ingredients of a
recipe and does not include other costs, such as
labour and overheads.
 Food cost may be defined as the ratio of the cost of
food consumed compared to the revenue received for
food sales.
 The food cost % is a tool to measure the efficiency of
food operation/kitchen.
 The food cost may be calculated on a daily, weekly or
monthly basis; depending on when the food inventory
is taken.
IMPORTANCE OF FOOD COSTING
 Food costing is an essential tool in determining whether food
costs targets are being met. It has a direct effect on the
profitability of a restaurant. It helps in,
• Determining food cost incurred on each recipe. Thus, we can
know earning per dish.
• Pricing a dish to achieve desired profit.
• Pricing a dish competitively against an industry benchmark.
• Cost control.
• Finding each menu item’s profit margin and decide which ones
to promote through push selling and promotions.
METHODS OF COSTING
 First In, First Out
Under the First In, First Out (FIFO) method, the
oldest costs are assigned to inventory items
used, regardless of whether the inventory
items were actually purchased at that cost.
When the number of inventory items
purchased at the oldest cost are used, the next
oldest cost is assigned to sales.

 Last In, First Out

The last in, first out method (LIFO) is the exact
opposite of the FIFO method, assigning the
most recent inventory costs to food items used
from inventory.
 Average Cost Method
The average cost method assigns
inventory costs by calculating an average
of all inventory purchase costs.

 Specific Identification Method

The specific identification method
perfectly matches inventory costs with
units used, assigning the exact cost of
each used inventory item when the
specific dish is sold.
 COSTING TECHNIQUES
Besides the method of costing management also
uses costing techniques for managerial
decisions .Following are the costing techniques :

1. Uniform Costing:
 When same costing principles and/or practices are
used by several undertakings for common control
or comparison of costs it is called Uniform Costing
Technique.

2. Marginal Costing:
 It is determining marginal cost by differentiating
between fixed and variable cost. It is used to
ascertain the effect of changes in volume or type
of output on profit.
3. Standard Costing:
 Standard costing is a method where
management pre-decides a standard cost for
a product based on various parameters and
then actual cost of the product is measured
against it. The result is deviation technically
called as variance. The variance/deviation
from standard cost is then analysed for the
reasons and corrective action is taken.

4. Historical Costing:
 It is a technique of costing whereby costs are
ascertained after they have been incurred. It
aims at determining costs actually incurred
on work done in the past. It is used to
compare costs over different periods may
yield good results.
5. Direct Costing:
 It is the practice of charging all direct
costs, variable and some fixed costs
relating to operations, processes or
products leaving all other costs to be
written off against profits in which
they arise.

6. Absorption Costing:
 It is the practice of charging all costs,
both variable and fixed to operations,
processes or products. This differs
from marginal costing where fixed
costs are excluded.
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 meal severed.
Ex: ₹1000 was spend for the preparation of food.
 Gross profit- The excess of sales over the cost of the food expressed as a
percentage. Ex: ₹5000 was sales where as ₹1000 was the expenses for
preparation of food, thus gross profit would be ₹5000 - ₹1000 = ₹4000
 Potential food cost– The food cost under perfect condition. Cost for
preparation of food if the conditions are perfect such as cost of raw materials
is low, no wastage, no leftovers etc. will result in less amount spend on
preparation.
 METHOD OF DETERMINING FOOD COST
 Weekly/monthly food cost report- This system is used by the small organization
where manager controls each activity as daily routine. It is a reconciliation report of
daily activities. The calculation procedure is
Opening stock + total purchase for the period – closing stock = Total food sale
 Daily food cost report- This method is used in the medium-sized operation.

Proof of inventory
O.S + Purchase – Requisition = Closing stock
 Advantages

 It is simple and easy to follow.

 It gives the day to day information about business.
 It records the daily stock level, daily purchase, daily requisition & food cost percentage.
CLASSIFICATION OF COSTS

 FIXED COSTS:
The hotel industry has a high protection of fixed costs. Fixed costs are those that do not
respond to changes in the volume of sales. Most of the expenses in a hotel are of fixed
nature. Examples: – rent, interest, management salaries depreciation.
 VARIABLE COSTS:
Variable costs are those that vary in proportion to sales volume. Food and beverage costs
are the best examples of variable costs. When the volume of business increases by say 15
percent, there is normally a 15 per cent increase in food and beverage costs and vice
versa.
 SEMI-VARIABLE COSTS:
Semi -variable costs are those that move in the same direction, but not quite in proportion
to the volume of sales. These costs are mixture of fully fixed and fully variable. Examples:
cost of telephone, (fixed rent and cost of calls), labour cost in seasonal hotels.:
 OTHER COSTS:

 Opportunity cost: The opportunity cost may be defined as the expected returns from the second
best use of the resources which foregone due to the scarcity of resources. The opportunity cost is
also called alternative cost. Had the resource available been unlimited, there would be no
opportunity cost.
 Actual Costs: Actual costs are those which are actually incurred by the firm in payment for labour,
material, plant, building, etc.
 Business costs: Business costs include all the payments and contractual obligations made by the firm
together with the book of costs of depreciation on plant and equipment
 Full Costs: Full Costs includes business costs, opportunity cost and normal profit.
 Explicit costs: are those which fall under actual costs entered in the books of accounts
 Implicit costs: in contrast, there are not costs that do not take the form of cash outlays
nor do they appear in the accounting system. Such costs are called Implicit or Imputed
Costs.
 Out of Pocket: The items of which involve cash payments, both recurring and non-
recurring, are known as out-of-pocket costs
 Book Costs: There are certain actual business costs which do not involve cash
payments, but a provision is made in the books of accounts and they are taken into
account while making the profit and loss accounts. Such expenses are known as book
costs.
 Total costs: Total cost is the total expenditure incurred in the production of goods and
services
 Average cost: is not actual cost. It is obtained by dividing the total cost by the total
output
 Marginal cost: is the addition to the total cost on account of producing one additional
unit of product.
 Short run costs: are costs that vary with variation in output. Short run costs are the
same as variable costs
 Long run costs: are costs that are incurred on fixed assets like plant, machinery, etc. It
is to be noted that running costs and depreciation of capital assets are included under
short run costs
 Incremental costs: are closely related to marginal costs but while marginal
refers to the cost of the marginal unit of output, incremental costs refers to the
total additional cost associated with the expand in output
 Sunk Costs: are those which cannot be altered, increased or decreased by
varying the rate of output
 Historical cost: refers to the cost of an asset acquired in the past.
 Replacement cost: refers to the outlay which has to be made for replacing an
old asset.
 Private costs: are those which are actually incurred or provided for by an
individual or a firm on the purchase of goods and services from the market. For
a firm, all actual costs both explicit and Implicit are private costs.
 Social Costs: refers to the total cost borne by the society due to production of a
commodity
Cost Percentage

The formula for calculating cost % is

 Cost/sales*100 = cost %
 Food cost/food sales* 100 = food cost %
 Beverage cost/ beverage sales *100 = beverage sales %

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