STUDY MATERIAL
SUBJECT
CLASS
SEMESTER
UNIT
HANDLED BY
: FOOD AND BEVERAGE MANAGEMENT
: III YEAR
: VI
: IV
: RAJESH PANDIAN.T.R
SYLLABUS
Elements of cost: Cost defined, basic concepts of profit, control aspect, pricing
aspects; cost dynamics; Fixed and variable costs- Break even charts- Turn over and
unit costs. Variance analysis:- standard costs- standard costing- cost variancesMaterial variances-Over head variances- Labor variances- Fixed overhead
variances- Sales variance.
COST: Cost is the expenditure enquired in various operational activities, in order to
manufacture or purchase and sell goods and services.
ELEMENTS OF COST
The cost of operating a catering unit or department is usually analyzed under three
headings of
1. Material cost: Cost of food and Beverage consumed and the cost of additional
items such as tobacco. (note; the cost of any food and beverage provided to staff
in the form of meals is deducted from the material costs and added to labor cost).
The food cost is then calculate by the formula
Opening stock+ cost of purchases-closing stock-cost of staff meals = material cost
2. Labor cost: Wages and salaries paid to all employees plus any employer,
contribution to government taxes, bonus, staff meals, pension fund etc
3. Over head cost: All costs other than material and labor cost, foe eg. Rent, rates,
insurance, depreciation, repairs, printing and stationary, china and glassware,
capital equipment.
COST DEFINED;
As most catering operations are subject to changes in the volume of business
done, it is normal practice to express the elements of cost and net profit as a percentage of
sales. A change in the volume of sales has an affect on the cost structure and on the net
profit.
Materials—30%
Labor---
30%
Overheads---20%
Net profit
-20%
Total cost
- 80%
Sales
- 100%
PROFIT:
The term profit is defined as the excess of revenue/ income over expenditure/ cost
incurred to conduct the economic activity.
Nature of profit: Profit is the reward to the entrepreneur, for the entrepreneurial
functions. In the words of” Drucker” “The surplus of current income over past cost is
profit. It is measured by comparing the present income with the past average profits over
a period. From the point of view of industry economy, profit is represented by the
difference between current cost and current production and it is a sort of a premium for
the future cost of staying in business and these profits differs from the return of other
factors in three important respects;
A) Profit is a residual income and not contractual or certain income as in the case of
other factors.
B) There are much grater fluctuations in profits than in the rewards of the other
factors.
C) Profits may be negative, where as rent, wages and interest must always be
positive.
Basic concept of profit;
A)
B)
C)
D)
E)
Profit is residue. Hence, it is exact forecast is not possible.
Profit can be negative also.
All business does not have equal opportunity for profits.
Uncertainty of profit affects its magnitude year to year.
Profit is an end product of dynamic economy.
CONTROL;
The managerial function of controlling is the measurement and correction of
performance in order to make sure that enterprise objectives and the plans devised to
attain them are being accomplished. Controlling is the function of every manager from
president to supervisor. For making profits all people, top to bottom , must strive and
control the costs. Although, the scope of control varies among managers, those at all
level have responsibility for the execution of plans and control is therefore an essential
managerial function at every level.
The basic control process involves three steps.
1. Establishing standards
2. Measuring performance against these standards
3. Correcting variations from standards and plans
PRICING ASPECTS;
Price is the amount of money that has to be paid for a commodity or service.
In legal terms, the price is the consideration for the title in a product or a commodity in
exchange. In other words, the price is the quantity of money that has to be exchanged for
one unit of a good or service.
As a matter of fact, it is not easy to define price is in real life situation. When
price is quoted, it is related to some assortment of goods and services. So price is what is
charged for goods and services obtained. Any business transaction in our modern
economy can be thorough of as an exchange of money the money being the price for
something.
An important objective of food & beverage control is to provide a sound basis for
menu pricing including quotations for special functions. It is therefore, important to
determine food menu and beverage list prices in the light of accurate food and beverage
costs and other main establishments costs, as well as general market considerations, such
as the average customer spending power, the prices charged by the competitors and the
prices that the market will accept.
COST DYNAMICS:
Cost groups: It is necessary to examine costs not only by fixed cost, labor cost &
over head cost but also by their behavior in relation to changes in the volume of sales.
Costs may be identified by four kinds.
FIXED COSTS;
These are the costs which remain fixed irrespective of the volume of sales.
Ex; rent, rates, insurance, etc...
SEMI FIXED COST:
These are costs which move in sympathy with but not in direct proportion to the
volume of sales. For E.g. fuel cost, telephone, laundry etc..
VARIABLE COSTS;
These are costs which vary in proportion to the volume of sales for ex. F&B
TOTAL COSTS;
This is the sum of the fixed costs, semi fixed costs & variable costs involved.
BREAK EVEN ANALYSIS;
It is very common for food & beverage management to be face with problems
concerning the level of food & beverage cost that can be afforded, the prices that need
to be set for F&B, the level of profit required at departmental & unit level & the no.
of customers required to cover specific costs or to make a certain level of profit.
B.E.A enables the relationship between fixed, semi fixed & variable cost at specific
volumes of business to be conveniently represented on a graph. This enables the BEP
to be identified & the level of net profit.
The term BEP may be defined as that volume of business at which the total costs
are equal to the sales and where neither profit nor loss is made. The technique is
based on the assumption that the selling price remains constant irrespective of the
volume of business: that certain unit costs remains the same over the sales range of
the charted period; that only one product ( E.g. a meal) is being made or sold; that the
product mix remains constant in cost price, Volume, labor & machinery productivity
is constant.
Nearly every action or planned decision in a business will affect the costs, prices
to be charged the volume of business of the profit. Profit depends o the balance of the
selling prices, the mix of products, and the volume of sale. The BE technique
discloses the interplay of all these factors in a way which aids F&B in selecting the
best course of action now & in the future.
Pricing is a multi dimensional problem, which depends not only on the cost structure
of a business & its specific profit objectives but also on the level of activity of the
competition & the current business economic climate.
B.E. FORMULA;
Although a BE chart shows diagrammatically the varying levels of profit or loss
from volume of sales, the level of accuracy f the information may at times be in doubt
owing the scale of the graph& the skill of the person drawing it. A precise BEP may
be calculated using the formula.
BE =
C
---------------------- =Units of out put at the BEP
S-V
Where C- The total capacity cost’, i.e.,, the costs of establishing the particular
production capacity for an establishment. (For e.g., this would include rent, rates,
insurance, salaries, building and machinery depreciation.)
S- Sales price per unit
V- Variable cost per unit.
VARIANCE ANALYSIS.
Standard cost: Standard costs are scientifically predetermined cost of manufacturing
a single unit or a number of units of a product, or of rendering services during
specified future periods. The main purpose of standard cost is to provide a base for
control i.e., to fix desired targets in various areas,
Thus standard costs are planned cost of a product or service under current and
anticipated operating conditions. Standard assist the management in measuring
performance and in ensuring efficiency in operations. Standards are laid down on the
basis of past experience and records, current business trends and future forecast.
Standards serve as a device, a yardstick, to measure the actual performance against
the planned, that is, budgeted performances, and there by measure the deviation of
actual performance form the standard performance. It enables the management to take
corrective actions wherever necessary.
STANDARD COSTING;
Standard costing is used to as certain the efficiency and effectiveness of
performance based on certain realizable measures of performances, known as
standards, normally expressed in terms of percentages or in any other convenient
means of measuring performances and comparisons. The purpose of standard costing
is to reveal the difference between actual cost and standard cost. CIMA defines
standard costing as “ a control technique, which compares standard costs and
revenues with actual results to obtain variances which at used to stimulate improved
performance”.
ADVANTAGES OF STANDARD COSTING
1. It helps locate the causes of wastages and losses and eliminate them.
2. It helps activate and channelize human energy towards greater operational
efficiency.
3. It nullifies the effects of Constants fluctuations in order to maintain standard
prices and rates.
4. It helps objective judgment of people.
5. It focuses management attention only to those factors, which relates to
deviation between standard and actual costs, thereby saving management
time, energy and material.
6. It helps management in strategic planning for efficient operations.
7. It reduces administrative expenditure and costing and cost control procedures
by introduction of simplified methods, systems and procedures of work.
8. It ensures continuity of cost reduction in operations
9. It helps in analyzing performance and interpreting information to enable the
management to take appropriate decisions.
VARIANCE:
Variance is the difference between budgeted and the actual level of activity. It
refers to the deviation of actual cost from standard cost. It reveals the extent to which
the standards have been observed in the performance of activities and in achieving
desired results, thereby enabling the management to take corrective measures
wherever necessary. Variance help locate high cost areas, which may be so due to
factors beyond the control of the management or due to inability of the authority to
prevent rise in costs. Variance analysis in respect of each element of cost helps
identify efficient and non efficient, productive areas, so as to detect the causes and
factors responsible for the same and effect measures to improve the operational
performance. Variance analysis means the analysis of performance. Variances can be
classified into two categories as:
1. Cost variance
2. Sales Variance.
COST VARIANCE
It is the difference between what should have been the cost. i.e., standard cost and
what has been the cost, i.e. actual cost. If the actual cost is lesser than the standard
cost, the variance is termed as ‘favorable’. If, however, the actual cost I more than the
standard cost, the variance is termed as ‘adverse’ or ‘un favorable’. Cost variance can
be broadly classified in to the following.
1. Direct material cost variance.
 Material price variances
 Material usage variances
a) material yield variance
b) material mix variance
2. Direct labor cost variance
 Labor rate (wages) variances
 Labor efficiency( Time) variance
3 Over head cost variance
 Fixed overhead variance
 Variable overhead variance
DIRECT MATERIAL COST VARIANCE
This variance arises either on account to change in price or change in quantity or both
and is calculated as under
Direct material cost variance = Standard cost- Actual cost
Standard cost = Standard price × Standard quantity for actual output
Actual cost = Actual price × Actual quantity
A). MATERIAL PRICE VRIANCES
It is that portion of material cost variance which arises due to difference between
the standard price specified and actual price paid. It reflects the price paid on the units
purchased. If the actual price is more than standard price, the variance would be
adverse and in case the standard price is more than the actual price, it would result in
a favorable variance. It is calculated as under,
Material price Variance = Actual quantity× (Standard price- Actual price)
B). Material usage variance/ material volume variances
It is that portion of material cost variances which arises due to difference between
standard quantity of materials specified and actual quantity used. If the actual
quantity used is more than standard quantity, the variance would be adverse and in
case the standard quantity is more than the actual quantity used, it would result in a
favorable variance.
1. Material Usage Variance = Standard rate × (standard quantity actual quantity
Material yield variance: It is that portion of material usage variance which arises
due to differences between actual yield obtained and standard yield specified. It
enables effective control over usage f material. A lower actual yield is
unfavorable and indicates inefficiency. It may be caused by defective operating
methods, purchase and use of substandard quality of materials or improper
handling and storing of material. It is calculated as under.
II Material mix variance: It is that portion of the material usage variance, which is
due to difference between the standard composition of mixing different type of
materials and the actual composition. This variance arises a due to a change in the
ration of actual material mix from the standard ratio of actual material mix from the
standard ratio of material mix, and is calculated as under
Revised std mix = Total actual quantity × std quantity of a material
-----------------------------------------------------------Total std quantity
Material mix variance = std cost of revised std mix – Std cost of actual mix
DIRECT LABOUR COST VARIANCE;
It reveals the difference between the standard direct wages fixed for the desired
activity and the actual direct wages paid. The cost of labor depends upon two factors;
wages rate and number oh hours worked. The labor variance is worked out as under
Direct Labor Variance = Standard cost – Actual cost
Standard cost= Standard rate × standard time for actual out put
Actual cost = Actual rate × Actual time
Labor Rate (wages) variance.
LABOR RATE (WAGES VARIANCE)
This variance is that part of the labor cost variance. This occurs
due to difference between the actual rate paid and standard rate of pay fixed. If the actual
rate is higher than the standard rate, the variance should be adverse and in case the
standard rate is more than the actual rate, it would result in a favorable variance. It is
calculated as under;
Labor rate (wages) Variance:
This variance is that part of the labor cost variance. This occurs due to difference
between the actual rate paid and the standard rate of pay fixed. If the actual rate is higher
than the standard rate, the variance should be adverse and in case the standard rate is
more than the actual rate, if would result in a favorable variance. It is calculated as under:
Labor rate variance = Actual time× (Standard rate- Actual rate)
Labor efficiency (Time) Variance:
It is the part of the labor cost variance , which occurs due to difference between
the standard labor hours specified for the activity achieved and the actual labor hours
spent for the activity, and is worked out as under:
Labor efficiency variance = Standard rate × (standard time – actual time)
Over head cost variance
It is the difference between the standard / budgeted overheads for actual output
and actual overhead. It is the total of both fixed and variable overhead variance, and is
worked as under;
Overhead cost variance = standard cost – actual cost
Overhead cost variance = fixed overhead variance + variable overhead variance.
Standard overhead cost = standard rate × actual output
This variance can be divided into (a) fixed overhead variance (b) variable overhead
variance.
Fixed overhead variance
It is the difference between standard fixed overhead for actual output and actual fixed
overheads incurred, and are calculated as under;
Fixed over head = standard fixed overhead – Actual fixed overhead
Std fixed overhead = std fixed rate × Actual output
Variance overhead variance
It is the difference between standard variable overheads for actual output and actual
variable overheads incurred, and are calculated as under:
Variable overhead variance = standard variable overhead – Actual variable overhead
Standard variable overhead = std variable rate × actual output.
Sales Variance:
It is the difference between that should have been the sales, i.e. budgeted sales. And what
have been the sales. i.e., actual sales. If the amount of actual sales is more than the
budgeted sales, the variance is said to be ‘favorable’. If, however, the amount of actual
sales is less than the budgeted sales; the variance is said to be ‘adverse’ or ‘unfavorable’.
Sales variances can be broadly classified into the following:
I.
sales price variance
II.
sales volume variances
I.
Sales price variance
This is the difference between the budgeted selling price for actual; quantity and the
actual selling price, and is calculated as under:
Sales price variance = Actual quantity sold × (Actual price – Std price)
II.
Sales volume variance
This variance represents the difference between the budgeted quantity and actual
quantity of goods sold, and is calculated as under:
Sales volume variance = Std price × (actual volume – Budgeted volume)
Suggested Questions:
1. Define cost?
2. Define profit?
3. Define pricing?
4. Classification of sales variances?
5. Classification of cost variances?
6. Explain elements of cost?
7. Basic concept of profit?
8. Explain BE formula?
9. Explain cost groups?
10. Explain variances?