2. Cost
From a seller’s point of view, cost is amount of money that is spent to
produce a good or product.
If a producer were to sell his products at the production price, his costs
and income would break even, meaning that he would not lose money on
the sales. However, he would not make a profit.
From a buyer’s point of view, cost of a product is also known as price. This
is the amount the seller charges for a product, and it includes both
production cost and mark-up, which is added by seller in order to make a
profit.
3. Material Cost 30%
Labour Cost 30%
Overhead Cost 20%
Net Profit 20%
TotalCost80%
Sales100%
Elements of Cost
The cost of operating a catering unit or department is
usually analysed under three headings of elements of cost:-
4. • Material Cost – cost of food and beverage consumed and the cost of additional
items such as tobacco. (Note: cost of any food and beverage provided to staff in
form of meals is added to labour cost)
The food cost is then calculated by the formula:
opening stock + purchase cost – closing stock – cost of staff meals = material cost
• Labour Cost – wages and salaries paid to all employees, plus any employer
contribution to government taxes, bonuses, staff meals, pension fund, etc.
• Overhead Cost – all costs other than material and labour costs, Eg. rent,
insurance, depreciation, repairs, printing and stationery, china and glassware,
and capital equipment.
5. Classification of Cost
1. Fixed Costs: Remain fixed irrespective of the volume of sales, E.g. rent, salary,
rates and insurance.
2. Semi-Fixed Costs: Contain a fixed and variable cost element, for example, charge
for a post paid mobile service contains a fixed cost for rental of each phone and a
variable cost depending on number of phone calls made.
3. Variable Costs: Vary in proportion to the volume of sales, for example, food and
beverage cost.
4.Total costs: This is the sum of above three costs involved.
6. Budget
“In a business or organization budget represents
an estimate of costs and revenues for a time
period.”
“A formal statement of financial resources set
aside for carrying out specific activities in a
given period of time.”
It helps to co-ordinate activities of organisation.
For example an advertising budget or sales
budget.
7. Types of Budget
a) Sales budget: A financial plan which shows how the
maximum utilization of resources should be allocated
to achieve forecasted sales.
b) Production budget: Tells business owner how many
units of product to produce to meet sales needs and
ending inventory requirements.
There are three parts of production budget:
• direct materials purchases budget,
• direct labour budget and,
• overhead budget.
8. c) Raw materials and purchasing budget: Refers to the procedure of
preparing material or purchase budget for a specified time period. it
helps in estimating material prices and analyses requirement.
d) Labour budget: A budget created by a business, company,
organization or form of unity government for complete number of
employees that are employed.
e) Cash budget: A cash plan for a defined period of time. It summarises
monthly receipts and payments. Hence, it highlights monthly surpluses
and deficits of actual cash.
9. Characteristics of a budget
A good budget is characterized by the following:
· Participation: involve as many people as possible in drawing up a budget.
· Comprehensiveness: embrace the whole organisation.
· Standards: base it on established standards of performance.
· Flexibility: allow for changing circumstances.
· Feedback: constantly monitor performance.
· Analysis of costs and revenues: this can be done on the basis of product lines,
departments or cost centres.
10. Objectives of Budgetary Control:
• Compel for planning: Management is forced to look ahead, setting of targets,
anticipating problems and giving direction to the organization.
• Communication of ideas & plans: In order to make sure that each person is
aware of what he is supposed to do, it is necessary that there is a formal system.
• Coordinating the activities: Co-ordinates the activities of different departments
of the organization.
• Motivating employees: Motivates employees for improving their performances.
• Establishing a system of control: A system of control can be established by
having a plan and a progressive comparison can be made of actual results.
11. Advantages of budget and budgetary control
• Provides an overall picture of result expected from proposed plan of operations.
• It serves as a guide to various executives who are responsible for various
departments of hotel.
• Maximizing efficiency which is achieved by avoiding wastage and loss of
manpower and materials.
• Budgetary control ensures co-ordination and control.
• Helps to monitor performance since failure to achieve the budgeted forecast
will be a measure of the overall performance for the hotel and its employees.
12. Essentials of Budgetary Control:
There are certain steps which are necessary for successful implementation of
budgetary control system:
1. Organization for Budgetary Control
2. Budget Centres
3. Budget Manual
4. Budget Officer
5. Budget Committee
6. Budget Period
7. Determination of Key Factor
13. Key Factors of Budget & Budgetary Control
A key factor (limiting factor or governing factor) limits or
governs whole process of budget preparation.
• Sales Volume
• Seating Capacity
• Management Policies
• Availability of Raw Materials
• Labour – Skills and availability
• Condition of Market
It is, therefore, necessary to consider what possible key factors
may influence the business operation before preparing budget.
14. Break-even analysis
The break-even point (BEP) or break-even level represents sales or revenue that is
required to cover total costs, consisting of both fixed and variable costs.
Profit at the break-even point is zero.
Advantages of Break-even analysis:
1. Profit planning
2. Product planning
3. Activity planning
4. Lease decisions
5. Make or buy decisions
6. Distribution channel decisions
7. Price decisions
8. Choosing promotion mix
9. Decision regarding profitability of products or department.