TOPIC 1: INTRODUCTION TO CONTROL

Definition and importance of control

o Definition Food and beverage control may be defined as the guidance and regulation of the costs
and revenue of operating the catering activity in a food and beverage establishment.
o It is important at this stage to clarify the limitations of a control system.
 A control system can only identify problem areas and trends in the business. The system cannot
automatically correct such problem areas.
 A control system will require constant management supervision to ensure that it functions efficiently.
 A control system will need management action to evaluate the information produced and to act upon
it.

Sectors of food and beverage outlets

o Bars
o Night clubs
o Pubs
o Fine dining restaurants
o Dining rooms
o Sandwich bars
o Deli shops and employees cafeterias
o Coffee house and tea rooms
o Snacks and refreshment centers
o Lounge
o Take away and home deliveries

THE OBJECTIVES OF FOOD AND BEVERAGE CONTROL

The objectives of a food and beverage control system may be summarized as follows:
1. Analysis of income and expenditure: The analysis is solely concerned with the
income and expenditure related to food and beverage operations. The revenue side of operation
deals with the sales trends in food and beverage, the average spending power (ASP) of customers at
various times of the day, and the number of customers served.
2. Establishment and maintenance of standards: The basis for the operation of any
food and beverage outlet is the establishment of a set of standards which would be particular to an

Page 1 of 98
 operation, for example, a chain of steak house restaurants. Unless standards are set no employee
would know in detail the standards to be achieved nor could the employee‟s performance be
effectively measured by management. An efficient unit would have the set standards laid down in
manuals often known as SOPs (standard operational procedures) which should be readily available to
all staff for reference. Having set the standards, a difficult problem always for the management of an
operation is to maintain these standards. This can be aided by regularly checking on the standards
achieved by observation and analysis and by comments made by customers, and when necessary,
conducting training courses to re-establish the standards.
3. Pricing: An important objective of food and 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
establishment costs; as well as general market considerations, such as the average customer spending
power, the prices charged by competitors and the prices that the market will accept.
4. Prevention of waste: In order to achieve performance standards for an establishment,
targets are set for revenue, cost levels and profit margins. To achieve these levels of performance it is
necessary to prevent wastage of materials caused by such things as poor preparation, over-
production, failure to use standard recipes, etc. This can only be done with an efficient method of
control, which covers the complete cycle of food and beverage control, from the basic policies of the
organization to the management control after the operation has been completed.
5. Prevention of fraud: It is necessary for a control system to prevent or at least restrict the
possible areas of fraud by customers and staff. Typical areas of fraud by customers are such things as
deliberately walking out without paying; unjustifiably claiming that the food or drink that they had
partly or totally consumed was unpalatable and indicating that they will not pay for it; disputing the
number of drinks served; making payments by stolen cheques or credit cards. Typical areas of fraud
by staff are overcharging or undercharging for items served and stealing of food, drink or cash.
6. Management information: A system of control has an important task to fulfill in providing
accurate up-to-date information for the preparation of periodical reports for management. This
information should be sufficient so as to provide a complete analysis of performance for each outlet
of an establishment for comparison with set standards previously laid down (e.g. budget standards).

Summary of the objective of control in any operations

 Safeguard assets
 Check the accuracy and reliability of accounting data
 Promote operational efficiency

Page 2 of 98
  Encourage and adherences to prescribe managerial practices

Characteristics of effective control system

1. Accurate or accuracy
It should provide accurate data ie. The accuracy should not be camber some in terms of time
spent to produce report and time spend to collect the data
2. It should be one that gives timely report or data i,e if daily report is required, it should be ready
soon after and not after eg 3 or 4 days
3. Objective: the system to be objective thus it should measure upto the standards expected or
intended
4. Priority: it should give preference to matters that pertain priority eg sales and food cost
5. Consistence: it should be a system that will be used to set standards, achieve the same the same
standards or apply actual implementation
6. Cost effective: what you spend should be less and what you receive to be more i.e within the
expectations
7. Realistic: every part of the organization should be able to participate to achieve the objectives
8. Unit of command: every officer should be answerable to only one superior. E.g in control setup,
system should follow a chain of command i.e people in lower positions should have the work of
a more senior official eg clerk check financial records. It should be the other way round for
accountability
9. Appropriate: it should fit into the flow of work, should not hinder customer services i.e
operational or having a system that is quick or fast to avoid delay of services
10. Flexibility: it should be able to adopt to operational changes as they happen eg electronic control
systems, use of computers eg point of sale systems
11. Specific: in the reporting, it should pick point exactly where the problem is so that the problem
can be worked out. If food cost is to be 35% of sales and it happens to be 40% therefore the
report should be said to be food cost is 5% above the standard (35%)
12. Acceptable: to the staff i.e by people whom are going to use

SPECIAL PROBLEMS OF FOOD AND BEVERAGE CONTROL

Food and beverage control tends to be more difficult than the control of materials in many other industries.
The main reasons for this are:
1. Perishability of the product: Food, whether raw or cooked, is a perishable commodity
and has a limited life. The caterer, therefore, has to ensure that she buys produce in the correct
quality and quantity in relation to estimated demand, and that it is correctly stored and processed
(beverages are less perishable and this contributes to easier control).
2. Business volume unpredictability: Sales instability is typical of most catering
establishments. There is often a change in the volume of business from day to day, and in many
establishments from hour to hour. This causes basic problems with regard to the quantities of
commodities to be purchased and prepared as well as to the staffing required.

Page 3 of 98
 3. Menu mix unpredictability: In order to be competitive and satisfy a particular market,
caterers must often offer a wide choice of menu items to the customer. Predicting menu item
preference on top of customer volume can be a challenge. Effective forecasting as part of the total
food and beverage control system is therefore necessary.
4. Food and beverage operation short cycle: The speed at which catering operations
take place, relative to many other industries, allows little time for many control tasks. It is not
uncommon that items ordered one day are received, processed and sold the same or next day. It is
for this reason that in larger catering establishments cost reporting is done daily or at least weekly.
Further problems, particularly with perishable foods, are that with a short life for produce, items
cannot be bought very much in advance of their need; and the problem of availability at times of
produce relative to the price that can be afforded in relation to the selling price.
5. Departmentalization: Many food and beverage operations have several production and
service departments, offering different products and operating under different policies. It is,
therefore, necessary to be able to produce separate trading results for each of the production and
selling activities.
6. Multiplicity of low value transactions: the spending power of customers eg the
average amount spent per head will vary from one type of establishment to another. The turn over of
customers also affects multiplicity of transactions.

TOPIC 2: CONTROL PHASES

THE FUNDAMENTALS OF CONTROL

Effective control systems and procedures consist of three broad phases: planning, operational and
management control after the operation has taken place.

The planning phase

It is difficult to run an effective catering operation without having firstly defined the basic policies. Policies
are pre-determined guidelines, laid down by the senior management of an organization, which outline such
matters as the market or segment of the market that is being aimed at, how it is to be catered for, and the
level of profitability/subsidy to be achieved. Policies in general are particular to individual companies and
establishments, although in the public sector operations, there may well be broad national policies, for
example, for hospital catering.
A catering operation should have its policies clearly defined before it commences business, and re-defined
whenever a major change takes place, for example, when a new theme is chosen for a restaurant to aim for a
different market segment. Ideally, in a large organization the policies should be written down and periodically

Page 4 of 98
reviewed in relation to the current business and future trends; however, in smaller organizations there is not
the communication problem of a large organization and to formally draw up and commit policies to paper is
not so vital. There are three basic policies which need to be considered:
a) The financial policy will determine the level of profitability, subsidy or cost limits to be expected
from the business as a whole and the contribution to the total profit, subsidy or cost limit that is to
be expected from each unit, and then from the departments within them. This involves the setting of
targets for the business as a whole as well as each unit and the departments within them. Thus, the
financial policy for a large hotel will set profit targets for the hotel, and departmental profit targets
for the accommodation and catering as well as other departments. The financial policy for the
catering department will set the overall target for the department itself, which will be further divided
into targets for the various restaurants, bars and function facilities. The financial policy for an
industrial contract catering operation will set the overall target for the operation, the level of subsidy
and the level of management fee, as well as the cost limits per unit (meal or employee).
b) The marketing policy will identify the broad market the operation is intended to serve and the
particular segment(s) of the market upon which it intends to concentrate. It should also identify the
immediate and future consumer requirements on a continuous basis in order to maintain and
improve its business performance. It is obvious from the above that the broad market intended to be
served by a large city hotel could be broken down into the specific segments of the various types of
users of, for example, the coffee shop, the carvery, the cocktail bar, the banqueting rooms, etc. each
having specific and different consumer requirements. The interpretation of the marketing policy
for a national commercial catering organization into a marketing plan for the next year may
include some or all of the following objectives:
 National identity – to achieve a better national identity for all units by corporate design and by
meeting consumer expectations of what a „popular restaurant‟ concept should be.
 Customer– the customer profile being the business person, shopper, tourist of either sex, aged
twenty-five years or more, commonly using the high street of any major town, requiring food
and beverage of good general standard, waitress served, for a typical price of £ n per meal.
 Market share– to achieve, maintain or increase the percentage of „our‟ market.
 Turnover – sales volume to be increased by x % on previous year.
 Profitability– profit to be increased by each unit by y % on previous year.
 ASPper customer to be increased by z % – to achieve a new ASP of not less than £ n.
 Product – the product to be maintained at a consistently high standard.
 Customer satisfaction– the net result must be the satisfaction of every customer.

Page 5 of 98
 c) The catering policy, which is normally evolved from the financial and marketing policies, will
define the main objectives of operating the food and beverage facilities and describe the methods by
which such objectives are to be achieved. It will usually include the following:
 The type of customer, for example high spending business executive, low spending female
shopper, short-stay hospital patient, etc.
 The type of menu(s), for example table d‟ hôte, à la carte, fast food.
 The beverage provisionnecessary for the operation.
 The food quality standards, for example fresh, frozen, canned, etc. and the grade of
produce to be used.
 The method of buying, for example by contract, quotation, cash and carry, etc.
 Type and quality of service, for example cafeteria, counter, waiter, etc.
 Degree of comfort and décor, for example square footage per customer, type and style of
décor, of chairs, tables, etc.
 Hours of operation, for example twenty-four hours, seven days a week; 1200–1500 and
1800–2200 hours, Monday–Saturday, etc.

The operational phase

Having defined the policies (i.e. pre-determined guidelines), it is then necessary to outline how they are to be
interpreted into the day-to-day control activities of the catering operation. The operational control is in five
main stages of the control cycle. These are:
1. Purchasing: There are five main points to be considered.
a. Product testing– to identify as a result of a series of taste panel evaluations the particular
products to be used.
b. Yield testing– to identify as a result of tests the yield obtainable from all the major
commodities used.
c. Purchase specifications– a specification is a concise description in writing of the quality,
size, weight, etc. for a particular food or beverage item.
d. Method of buying– by contract, quotation, cash and carry, etc.
e. Clerical procedures– it is necessary to determine who originates sanctions and places
orders and what documentation is required for control.
2. Receiving: There are three main points to be considered:
a. Quantity inspection– a person must be nominated to be responsible for physically
counting and weighing goods and checking that the quantity and size of items in the delivery

Page 6 of 98
 matches the purchase order. If there is a shortage in the delivery the purchasing manager or
a member of the management must be informed.
b. Quality inspection– this is particularly important with perishable foods where inspection
may be made by a senior chef. Whenever possible the items should be checked against the
appropriate purchase specification.
c. Clerical procedures– this is a very important aspect as all necessary documentation must
follow a set procedure. It includes the acknowledgement of the receipt of acceptable goods
and the delivery person‟s signature on a „request for credit‟ note for returned goods and
short deliveries.
3. Storing and issuing: There are four main points to be considered:
a. Stock records– it is necessary to decide what records are to be kept.
b. Pricing of items– the method of pricing of the various types of items must be decided upon so
that there is consistency within the operation
c. Stocktaking– the points to be considered here are the level of stock to be held, rate of stock
turnover, dealing with discrepancies, identification of slow-moving items, etc.
d. Clerical procedures– there is a need to determine what documentation is necessary, for
example requisitions, record cards, bin cards, stocktaking reports, etc.
4. Preparing: This is a critical stage in the control cycle, in particular for food. There are three main
points to be considered:
a. Volume forecasting – a method of predicting the number of customers using the catering
facilities on a specific day, and also of predicting as accurately as possible what items they will eat
and drink.
b. Pre-costing– a method of controlling food and beverage costs in advance of the preparation
and service stages. It is done by preparing and using standard recipes for all food and beverage
items and also by using portion control equipment, for example ladles, scales, optics, standard
glassware, etc.
c. Clerical procedures– what documentation is required and the distribution and destination of
this information.
5. Selling : This important stage of operational control needs to take into consideration the following
points:
a. A checking system– this is necessary to keep control of the number of covers sold and of the
items sold. This may be done through a standard type of waiter‟s check system or through a till
roll or in the case of hospital patients, by the summary and analysis of completed individual
patient menu cards.

Page 7 of 98
 b. The control of cash– this is vitally important. It is necessary to ensure that all items sold have
been paid for and that the money is received or credit has been authorized.
c. Clerical procedures– these would be necessary to control items sold and the money received or
credit entitled, and would often include a restaurant checking system, meal and sales analysis,
cashier ‟ s paying-in book, etc.

The post operation phase

This final phase of food and beverage control is in three main stages:
1. Food and beverage cost reporting: As mentioned earlier, the cycle of production is very short and
the product is perishable. These factors together with the variations in demand for the product
necessitate up-to-date reporting at least weekly if not daily.
2. Assessment: There is a need for someone from the food and beverage management team in the case
of a large unit, or the proprietor or manager of a small unit, to analyze the food and beverage reports
and to compare them with the budget for the period and against previous actual performance.
3. Correction: A control system does not cure or prevent problems occurring. When the analysis of the
performance of a unit or department identifies that there is a problem, it is up to management to take
the necessary steps to correct the problem as quickly as possible.

TOPIC 3: PURCHASING
Definition: Purchasing can be defined as „a function concerned with the search, selection, purchase,
receipt, and storage and final use of a commodity in accordance with the catering policy of the establishment‟.
The general principle of purchasing applies to materials to be bought. Two important principles that affect
purchasing are
1. Availability of supply
2. The keeping quality of goods

Importance of a purchasing function

The purchasing function as illustrated in the figure below is vitally important in the control cycle. Should it be
managed inefficient it creates problems which often result in unsatisfactory level of both cost and profit to
the establishment and dissatisfied customers.
With no specifications for commodities there would be neither quality standards nor quantity standards
resulting in over-ordering or under-ordering, as yields for items would be indeterminable. The receiving
department would only be able to check on quantity and not on quality.
The work in the stores and preparation departments would be difficult with the quality of produce varying
greatly. Finally, it would be difficult to measure satisfactorily the performance of departments if they were
continually being provided with non-standardized commodity items.

Page 8 of 98
The purchasing function

Requirements of a purchasing officer

The designation of the member of staff which has the responsibility of food purchase differs in many types
and sizes of the establishment. for a large hotel there will be at least one purchasing officer , for some
establishments there will be more than one in which they will tend to specialize eg in the purchase of meat,
poultry and fish or fruits and vegetables, groceries or beverage. A purchase officer in this type of
establishment would be of departmental head status. For a medium size hotel, restaurant, large canteen, it is
usually the catering manager or one of the assistant manager who among other duties has the responsibility
for the purchasing function.
For smaller hotels and restaurant, it is usually the chef to purchase all perishables foods and for the manager
or the general assistants to purchase all non-perishables and all beverages.

Page 9 of 98
Qualification requirements
For views of the amount of money involves and the specialist knowledge required for the job efficiently, it is
essential for the purchasing officer to be properly trained and qualified.
The qualification would be a good general catering education. Courses such as
1. Higher national diploma in hotel and catering administration
2. Higher national diploma in hotel institution management
3. Degree courses in hotel and catering administrations e.t.c

Duties of a purchasing officer

The duties of the purchasing function will vary between establishments but however this role is covered and
it will usually include aspects of the following:
1. Responsibility for the management of purchasing/procurement and keeping purchasing records,
recording the receiving and correct storage of goods.
2. The purchasing of all commodities within their responsibility.
3. Ensuring continuity of supply of those items to user or departments
4. Finding cheaper (for same quality) and more efficient sources of supply where this forms part of the
job role.
5. Keeping up to date with all the markets being dealt with and evaluating new products.
6. Research into products, markets, price trends, etc.
7. Co-coordinating with production departments to standardize commodities and therefore reduce
stock levels.
8. Liaising with production, control, accounts and marketing departments.
9. Reporting to senior management usually through establish communication channels.

The purchasing procedure

The procedure can be broken down into eight steps:
1. Each section of the organization will have established stock levels and a procedure for stock
replacement. This may be a requisition form from an authorized member of staff, for example, head
chef, restaurant manager or from the storekeeper. With more sophisticated electronic point of sale
(EPOS) systems currently in use many stock out or low stock alerts are raised automatically by the
system. In larger organizations these systems may even generate an order and send it electronically to
the approved supplier.
2. The selection of the source of supply is usually agreed in advance by the department manager or by
head office so that contracts can be agreed, for example the price to be paid, delivery performance
with particular reference to the time, date and the place of delivery.
3. The ordering process is electronic, telephone or written order.
4. The acceptance of goods ordered and the adjustment of any
discrepancies in quality or quantity of goods delivered, checking delivery notes/invoices.
5. Checking the temperature of the goods on delivery and recording this in writing.
6. Checking the condition of packaging or containers and rejecting those that are not in good condition.
7. Periodically checking the temperature of the delivery vehicle and recording this in writing.
8. The transfer of commodities to the ordering department or to the stores or cellar.

Page 10 of 98
Sources of food and beverage suppliers
Purchasing research
Research in purchasing is not undertaken frequently in the purchasing department. The reason for this is
often one of lack of time available in the working week or because purchasing officers tend to became
too involved in the day to day running of the department and do not delegate routine jobs to juniors.
Research need to be done in a systematic manner in the following areas
a. Market and materials or commodities
Details of prices can be produced on graph paper, trends observed, evaluated together with market
information and used as an aid to budgeting. This would enable correct actions to be taken to ensure
that prices paid for suppliers are in relation/ accordance with the prices charged to the customers
and also to ensure at all times continuity of supply by either entering into a contract or by bulk
buying in advance of scarce /costly commodities.
b. Cost analysis
This should be done with the full cooperation of the production department to ensure that what is
being purchased is satisfactory with regard to the final quality and yield obtained. This checks out
exactly what the cost of portion of the item really is, by taking into account and obtaining figures on
the storage loss, preparation loss, cooking loss and serving loss.

The selection of a supplier

With global markets and competitive pricing selecting a supplier should be given careful
consideration. Seeking a new supplier requires caution and detailed enquiries need to be made in at
least the following areas. Initially larger organizations will carry out routine credit reference checks to
ensure that companies are bona fide.
1. Full details of the firm and the range of items they are selling.
2. A copy of recent prices lists.
3. Details of trading terms.
4. Details of other customers.
5. Samples of products.

In all cases of food purchasing a visit should be made to any potential supplier to see the size of the
company, the full range of products, the size of processing and storage facilities, the size
of their transport fleet and to meet members of the management team. It is an essential process that
should be recorded as part of the organizations HACCP policy and forms part of the due diligence
criteria.
Selected suppliers will be added to an approved suppliers list and will be periodically evaluated for
their performance using performance criteria established for each range of goods. Typically
this would include price, quality and delivery.

Supplier rating
Price and quality performance
Whilst the price paid for goods are important it is value for money and fitness for purpose that
guides most buying decisions.
Essential to any business is continuity of supply and the building of a sustainable relationship with a
supplier that are often greater importance than saving a few pence per item.

Page 11 of 98
 The cheapest item is not necessarily the best buy; often a cheap item is of a low quality and may not
perform well against purchase specifications, for example not obtained from an ethical source,
genetically modified, not organically produced.

Delivery performance
This is the ability of the supplier to meet agreed delivery times and dates with the buyer. Prompt
deliveries mean that the goods will be delivered when required and when staff is available to
check them efficiently for quantity and quality. The late delivery will often add to the pressure of
work to the receiving department while other goods are also being checked in and to possible
complication in the production department
The nearer the schedule delivery date and time the high the delivery performance rate.
Factors that may affect the quantity of products to be purchased
1. Changing prices
2. Availability of storage facilities
3. Storage and handling cost
4. Waste and spoilage concerns
5. Theft and pilferage
6. Market conditions
7. Transportation and delivery
8. Order lost

Methods of purchasing
There are several methods of buying food and beverage commodities and every establishment will normally
decide on which particular methods to use. The following are some of the buying methods.

1. Purchasing by contract- this is basically of two types-

a. The specific period contract: This aims at determining the source of supply and the price
of goods for a stated period often of three or six months. This reduces the time and labor of
negotiating and ordering to a minimum, plus it has the added advantage of assisting with
budgeting and pricing, when the prices of items are fixed for a period of time. Items with a fairly
stable price, such as milk, cream, bread, etc. can be contracted in this way
b. The quantity contract: This aims at ensuring continuity of supply of a given quantity of an
essential item at an agreed price over a particular trading period. The purchase of frozen fruits
and vegetable for use in a banqueting or a summer season are typical examples when the supply
could be affected by the weather conditions with subsequent price fluctuations and where a
quantity contract is advisable used.
Note that a contract is a legal document and that the conditions of the contract should be
prepared by the firm‟s solicitors to safeguard against possible areas of dispute or, alternatively,
prepared using the guidelines available from one of the professional bodies.
The general condition would include clauses such as the period of the contract where deliveries
are to be made, where invoices are to be sent, the method of payment, sample of commodities,
etc. the specific conditions would normally be given as detailed specification for particular items
as explained in purchase specification detail. e.g.

Page 12 of 98
 Advantages
1. Leaves no chance to improper practices
2. Food budgets can be estimated quite accurately
3. Discounts are usually obtained
4. The supplier has assured outlet for his goods
5. If properly done very reliable
6. There is continuity of supply of commodities

Disadvantages
1. There is difficulty in negotiating fine details e.g delivery notes
2. Better terms may have been arrived at by negotiation
3. Prices might have come down during the tender period yet you have to buy still to the
tender price
4. To the supplier there is security only during the tender contract period
5. The procedure can be camber some and ineffective
6. There is difficult in the organization especially one is not satisfied yet the contract period has
not expired
2. Purchasing by daily market list- this method is used when purchasing perishable
food on a daily basis and when it is possible to have two or more approved suppliers. A senior
member of the kitchen staff would take a quick stock take of the food left after each meal period and

Page 13 of 98
 then take into account the volume forecast for the next day, list the quantities of items required to be
delivered the following morning . This would then be passed to the purchasing office.
Advantages
o Price quoted would be with reference to the purchasing specification for the item previously sent
to the supplier and the quantity required
o The purchasing officer can quote the lowest when placing an order.
Disadvantages
o There are sometimes problems of general supply over the year
o It is so tiring for the chef thus making orders on a daily basis
o Encourages fraud
3. Purchase by weekly/ fortnightly quotation list- this method is used to purchase
grocery items where delivery of once or fortnight is adequate. The method is similar to that described
when purchasing perishable food by daily market list. The head store man or other person
responsible would check the level of all items in the stores at the weekly or fortnightly period or
extract them direct from the stores records. These quantities required to be ordered for the next
period. Blank quotation sheets would be sent out to approved suppliers asking them to complete
them with prices for the next period and return them by a specific date. On receiving the prices from
the supplier e.g. for an individual, price per case, etc. they would be entered onto a master quotation
sheet. As all prices would have been made against the establishment purchase specification. It is
logical for orders to be placed with the firms quoting the lowest price.
Advantages
o The purchasing officer retains general overall control of buying
o The purchasing officer exercises his or her experience and judgment in accessing quality and
service
o In the event of unsatisfactory quality service, there is an immediate remedy switch from another
registered supplier.
o Continuous assessment can be made on prices and performance of the firm concern
o Standards may be enforced without Dias action e.g. if a firm doesn‟t get or from one or two
establishment for some time. It might improve its services.
Disadvantages
o The method can encourage improper practice especially at unit level
4. Purchasing by cash and carry- this method is of particular interest to the medium and
small establishments whose orders are often not large enough to be able to get regular deliveries
from wholesalers and food manufacturers. Cash and carry food warehouses are situated in all towns
and resemble in layout and operation that of very large food supermarkets
Advantages
o The warehouses are situated near to most catering establishments and their hours of business are
usually longer than those of most food wholesalers.
o Small or large quantities may be purchased at competitive prices.
o Customers are able to see what they are buying, as against buying just from a price list or
catalogue. They may also see special displays of a particular food company‟s products and
be able to taste them.
o Customers may use the warehouse as often as they like and in doing so they keep the level of
stocks held low. Also, when there is a sudden increase in their business it is easy for caterers to
replace their stock.
o In emergency, is quite suitable as you can always go and pick what you require

Page 14 of 98
 o It allows the opportunity small quantities of an item, so that a new product or a new brand may
be sampled the minimum of cost.
Disadvantages
o It works only with cash
o No negotiation e.g in supermarkets shops
o It is tempting as leads to impulse buying
o No discounts in some warehouses
o Caterers have to provide their own staff and transport to collect the items from the warehouse
5. Purchasing by paid reserve- this method is used when it is necessary to ensure the
continuity of supply of an item for the menu which is of particular importance to a restaurant.
Caterers are buying in advance a large quantity of a commodity to cover needs for several months
ahead, and requisitioning their weekly requirements from suppliers, who holds the stock. Examples
of products which are purchased by the method are frozen jumbo size pacific prawns and frozen
fillets of beef.
6. Total supply- this method is relatively new. It is a method offered only by a few major suppliers
who are able to offer a full supply service of all commodities to caterers. This has the advantage of
only having to negotiate with one supplier; a reduce volume of paperwork and far fewer deliveries.
The main disadvantage is that of being tied to one major supplier, whose prices may not be
competitive as when using several suppliers and whose range of certain commodities may be limited.
7. Cost plus- this is method used frequently in the welfare sector of the industry. The
establishment agrees to pay an approved supplier exactly the same price that the supplier paid for the
commodities plus an agreed percentage, often 10-12 percent. This percentage would include the cost
of handling, delivery charges, and a profit element for supplier

Food and beverage ordering procedure

1. Requisition
The consumption rate of the various user sections determines what is to be bought. The users
department will make requests for various items to be purchased, using the requisition form (internal)
to the purchasing officer. For items that are frequently used, orders are done through tenders by the
purchasing officer to the suppliers
Requisition are written by various heads of departments and signed by the manager then referred to
the purchasing officer for ordering. The requisition of the items describes all the purchase
specification required as well as the delivery date or when the items are required for use

2. Preparation of orders
Preparation of orders from the various user departments is done. A summary of all orders or ordered
items is done. The purchasing officer determines the method of purchase as per agency of the item
and the price given as well as the quantity required. Some orders will be purchased by tenders, others
by cash etc.

3. Writing out an L.P.O(local purchase order)

Items are ordered using an L.P.O. An L.P.O is a booklet with printed forms that are filled in
triplicate; top copy is sent to the supplier, duplicate to the accounts clerk or accounts office for
payment and triplicate used for receiving items against the delivered goods.

Page 15 of 98
 4. Importance of follow up
Follow up is normally done by the user departments to the purchasing officer and to the supplier.
The aim of follow up is to make sure that the ordered goods are delivered on time in order not to
delay the production services. Also it is important as the purchasing officer can arrange for
alternative supply in good time without too much inconvenience to users departments.

TOPIC 4: RECEIVING

Introduction
In many catering establishments the receiving department is not considered to be a very important one, and
people with little or no specialized knowledge often staff it. Unless this department operates efficiently, it
becomes the weak link in the food control cycle and nullifies all effort in the rest of the control cycle. It may
also pose problems in meeting the requirement of the organizations HACCP policy.
It is important to realize that all goods being received into an establishment have a monetary value and that it
is essential to ensure that exactly this value in goods is properly accounted for and received. It is also
important to remember that often these goods will have a selling value several times their original purchase in
price in a matter of hours and most certainly come within the requirements of food temperature control
regulations.

Objective of receiving
1. The quantity of goods delivered matches the quantity that has been ordered. This means that goods
may have to be weighed or counted.
2. The quality of goods delivered is in accordance with the specification stated.
3. The prices where stated are correct.
4. When the quantity or quality (or both) of the food delivered is not in accordance with the purchase
order or an item is omitted from the order a credit note is provided by the driver. When this happens
it is important to inform the end user as soon as possible.
5. An accurate record is made on the delivery note, recording details of the delivery including
temperature and condition of packaging.
6. Goods should be decanted into clean storage containers where appropriate, for example, meat
should be un-wrapped and stored in covered clean containers before being placed in refrigeration.
For these objectives to be achieved it is essentials that staff employed in this department are trustworthy
and fully trained in the clerical procedures, spot checks in this area , should be made periodically by the
management team to notice irregularities that can go unnoticed for many weeks.

Page 16 of 98
Blind receiving
Many hotels and catering establishments have in recent years introduced the system of „blind receiving‟.
The main purpose of the system is to compel indifferent receiving clerks to weigh and count all goods
coming into the establishment. The system works as follows;
The receiving clerks are sent a copy of the purchase order, which lists the goods to be purchased but
does not show the quantities of such goods. All invoices and delivery notes are, in such circumstances
sent direct to accounts office. The receiving clerk has therefore no access to these documents. As he/she
is required to count and weigh all goods received. The Blind receiving is giving the better receiving results
and the efficiency of the receiving (department can be easily evaluated).

Receiving procedure
The receiving clerk should be in possession of particulars of all the goods which have been ordered.
1. The receiver checks the delivery note (supply note / order which comes along with the goods) and
the copy of the purchase order along with purchase specification to ensure that the goods are
received late then they are not accepted. . If there is any difference in-between the delivery note and
the purchase order and purchase specification then this must be immediately brought to the notice of
supplier .and purchaser and recorded on the supply order and if the supplied goods are unacceptable
then they must be returned immediately with remarks that the goods are not as per the order.
2. After checking the delivery note and the quantity supplied, the next Step for the receiving
department is to check the quality of goods supplied. The quality supplied should be as per the
purchase specification. Any variation should be brought to the notice of supplier, purchase officer
and must be recorded in the delivery note and the receiver's report.
If any order is found not to be equal the quantity stated in the delivery note, this should be brought
to the attention of the delivery man and a request for credit note made out and signed by the delivery
man.
3. The goods having been checked for quantity and quality in accordance the purchasing specification,
it is essential for the receiving clerk to have a thorough knowledge of food and beverage. it is
important to open crates and cases and up to the requirements specification should rejected, a credit
note obtained for the full value, for all shortages or rejected goods. The receiving department will not
in any circumstances allow themselves to be hurried when inspecting goods.
4. An accurate record is made in the goods received book as per the details of delivery note.

Page 17 of 98
Timetabling deliveries
Whenever possible it is advisable to seek the cooperation of suppliers so that a regular timetable for the major
deliveries can be established. This would have the advantage to the supplier in that their delivery state would
not be wasting time queuing up to make a delivery, also to the receiving clerk in that he would ideally have a
succession of deliveries being made as against several being made at the same time and he would have more
time to do his job thoroughly. It would be usual for the deliveries of perishable foods to take place early in
the mornings and for grocery items to be delivered in the afternoon.

The receiving of expensive commodities

Meat tag
Although the quality and quantity received of every item should be checked but al special attention is given to
the most expensive items. Prawn, Jumbo Prawns! Smoked Salmon, Meat, Caviar, etc are checked more
thoroughly for both quality and quantity before receiving them. Each expensive item so received is tagged
along with the details of quantity and quality received.
The use of tag serves the following purposes:
1. It ensures that receiving officer actually weights and checks each individual expensive item.
2. The reference number is issued and this helps in yield testing, portion control and control of food
cost.
3. It provides a basis of control for expensive food items.
4. The weight of expensive item is taken and compared with the purchase specification and supply
order / delivery note.
5. The date on which the expensive item is received is mentioned and this helps kitchen and store for
efficient item is received is mentioned and this helps kitchen and store for efficient rotation of stock.
6. It helps in taking weekly and monthly inventories as the purchased weight is recorded.
7. A portion of the tag is sent to control department before issuing them to the kitchen for control
purposes. The portion of tag sent to kitchen also contains the desired information of the
product.

The operation of tagging of expensive items is as follows;

1. On receiving the items, they are checked against the purchase specification as to being accepted or
not.

Page 18 of 98
 2. If suitable a tag is made out for each item received with the main information being taken from the
invoice or delivery note. The weight recorded on the tag is obtained by actually weighing each item
individually.
3. The tag is then separated along the perforation with the control office copies being sent direct
control with the invoice or delivery note and the kitchen copy being attached by string or wire to the
food item.
4. When the item is issued at a later date to the kitchen for use, the tag attached to the item is removed
and sent to the control with the date of issue filled in.
5. The control office will usually operate a reconciliation of meats rates from the supplier and from the
kitchen. Thus the total value of tags of each specific expensive would be known for;
A. Daily purchases
B. Daily issues to the kitchen for immediate use
C. Balance shown would give the stock value of those items.

An example of a meat tag

Meat tag
Item lamb
Cut full carcass
Total weight 8 kilogram
Price per kg shs 400
Total price shs 3200
Supplier XYZ and co.
Date 18 aug 2016
Food control copy no. 12345

Receiving of beverages
The objectives for beverage receiving are similar in many ways to those of food receiving. However, as the
value of beverage purchases is high and the potential for losses is also high, it is important that due attention
is given to the receiving of beverages.

The main objectives are as for receiving food deliveries plus:

1. Crates and cases should be opened to check for such things as empty, missing or broken bottles.
2. An accurate record is kept of all chargeable empties delivered and returned.

Page 19 of 98
 3. Deliveries of beverages are timetabled with the suppliers so that those responsible for liquor storage
are available.

Documents used in receiving goods

Delivery note
Delivery note comes along with each supply and this delivery note is sent by the supplier. The
delivery note is compared with the purchase order for the quantity ordered. The delivery not is
usually in duplicate. Goods received are as per the purchase order and delivery note then the original
copy of the delivery note is retained by the receiving department and the duplicate copy is signed by
the receiving department's official and send back to supplier through delivery man.

Credit note
In case the goods supplied are not as per specifications or the goods supplied are less then ordered
then credit note is prepared and is signed by the delivery man. A copy of the credit note is send to
supplier through delivery man, a copy is send to purchase department, accounts department,
control department and a copy is also retained by the receiving department.
An example of a credit note

The invoice
Every time food is delivered to an establishment, it should be accompanied by a document that lists
the items being delivered. For food, the document is normally an invoice, which is the same as a bill.
An invoice is usually presented to the receiving clerk in duplicate by the person making the delivery,
who will expect the receiving clerk to sign and return the second copy. This serves as an
acknowledgment to the purveyor that the establishment has received the products listed on the
invoice. The original is, in effect, a bill that must be routed to the bookkeeper or other individual

Page 20 of 98
 responsible for paying bills.
This routing procedure is dealt with later in this chapter. The acceptance of invoices not listing prices
should be discouraged: Prices should be checked as the food products are received. Otherwise, it is
possible that a purveyor may bill at the wrong prices, either by accident or by design.
An example of an invoice

Goods received book

All goods received are recorded in the Goods Received Book. This remains as a permanent record of
all the goods received by the receiving department. For each day a separate goods received book's
page is allotted. This is usually maintained by small hotels. Larger hotels prefer to maintain analytical
receiving book. Separate columns are made for meat, chicken, vegetables, frozen food, milk, grocery,
etc. This gives information at a glance that how much quantity under various head is received on a
particular day.
An example of a goods received book

Inspecting commodities
1. Weighing
2. Quantity and quality

Page 21 of 98
 3. Stamping

Weighing
Weighing is done to all items. Items can be received in various weights which may vary as per the
food item. Items can be of weights in terms of grams, kilograms, etc.
A weighing scale of varying weights should be available to cross check the weights. The weights
should be checked against the one indicated in the order sheet. This is important so as to avoid short
weights.

Quantity and quality

Quantity of items is checked by e.g. counting, measuring in case of liquids. The number received
should correspond to what was ordered e.g. 200 ripe mangoes, etc.
In case of a shortage, a credit note is given to the supplier.
Quality of items should correspond to what is indicated in the order sheet e.g. ripe bananas, steak
beef meat(sirloin), fresh sukumawiki, beef with bones etc. quality is checked in order to avoid wastes
due to the poor quality during production, or preparation . Also to avoid loss of profits in terms of
sales e.g. affecting the number of portions in service such as beef with bones compared with steak
beef.

Stamping
Stamping is done to all meat commodities to ensure that an assurance is given to the seller to sell the
meat to customers. Stamping is done after meat has been checked for any disease which may cause
human sickness. When the meat is found to be fit for human consumption, it is then stamped by the
health officers. Meat is not supposed to be sold to customers before it is checked and satisfied by the
health personnel as being fit for consumption. This is normally the first step before the quantity and
quality is checked.

Treatment of beverages and damaged goods

Though the breakages, spoilage and damage of goods should be avoided as far as Possible, but the spoilage
cannot be eliminated altogether. In case management is of the view that the breakage / spoilage / damage of
goods is due to the negligence of the store department then it is charged to the stores personnel. All
breakages are recorded in damaged goods book. The book would record the date, description of item, details
of purchase, value, reasons for spoilage, action taken by the store in charge and remarks. Normally the
spoilage of items due to unavoidable reasons are written off by the management.

Page 22 of 98
 TOPIC 5: STORING AND ISSUING

Documents used in issuing goods

These includes the following
1. Bin card
Bin Cards are prepared for each item stored in the store. It contains the description of the item,
balance of the item, quantity of goods received; the quantity of goods issued and the balance of the
item are shown on daily basis. It also shows the minimum stock, reordering point / level, maximum
stock, danger point / level economic ordering quantity. The bin cards are either kept along with each
item or they are stored near the store keeper working table.
2. Store issues
For each department the schedule for issuing stores is made. All departments are required to come to
stores at specific date and time. The person receiving stores is required to bring along with him store
requisition register / slip. Against the requisition slip the store is issued by the store department.
While issuing him physically measure / counts the items to be issued and record them in the
requisition slip / register. The person receiving signs the slip. The store keeper retains the original
copy of the slip and the carbon copy is returned to the department receiving stores for record
purposes. In case of large requisitions the store keeper requests the department to give him the
requisition a day in advance or at least hours before so that he can issue the stores without delay.
3. Transfer notes
Transfer of food items both in the raw form or cooked / semi cooked form from one department to
another department within the hotel is done through transfer notes. For example, the kitchen may make
out a transfer note to the room service bar for Irish Whisky for making an Irish coffee. Usually bar makes
its own requisition for fresh fruits and picks them up from stores. But at times the bar may make a
transfer note for fresh fruits like oranges, pineapple, lemons, etc. and pick them up from kitchen. The
columns of the transfer form may be quite similar to the requisition form. Both transfer notes and
requisition slips are internal invoices.
All requisition slips and transfer notes are sent to control department and accounts department for
control and accounting purpose.
4. Stock cards
Instead of using Bin Cards, Stock Cards can be used. These should be kept either in tray file, loose leaf
holder or in a cupboard. The stock cards are stored either alphabetically or they are stored numerically.

Page 23 of 98
 Each item is given a serial- number. A card is kept for each item and while issuing the items the stock
card is filled up and subsequently the entry is made in the bin card at any given time if inventory is taken
then the quantity shown in the stock card must tally with the actual quantity available in the store.
5. Perpetual inventory records
Perpetual Inventory means checking of stock items from one day to another. The control
department maintains the inventory control card / record for each item held in stores. All
commodities received and issued are recorded date wise. The goods are received by the receiving
department as per the purchase order, supply order, invoice and records the goods received in the
goods received register. He transfers the goods received to stores. The store department enters the
goods received in its records and also records them on all bin cards and stock cards. If the records
are maintained properly by stores, receiving department then it becomes very easy to check it at any
time for accuracy of entries and for control purposes.

6. Internal requisition
Is the form filled in by a member of the kitchen staff. It lists the items and quantities of stores the
kitchen staff needs for the current day‟s production. Each requisition should be reviewed by the head
chef.

Stock control
Stock classification
Stock is defined as the amount of available inventory being held in the store of food and beverage.

Types of stock
There are three types of stores namely;
1. Minimum stock
This is the number of purchase units that must always remain in storage
2. Minimum stock
This is the number of purchase units that can be held in storage at one particular period or time
3. Safety or buffer stock
This is the number of purchase unit that must always remain in storage that allows for delivery
delays or greater than normal usage. It is the stock that prevents stoppage of production.

Classification methods of stock

There are two methods of classifying stock; these are;
1. Fast moving

Page 24 of 98
 When a stock has a high rate of demand in consumption, it is said to be „fast moving‟.
2. Slow moving
This stock has a low demand in consumption rate. The rate at which the stock moves out of
the store is said to be very low hence, the stock can take sometimes been held in the stores.

Store organization
The purpose of proper store organization is to enhance the following
 Receiving and issuing of commodities
 Good storage of items
 Security of items in stores
 Easy stock taking of items
 Cleanliness of the store
 Proper record keepings

Storage areas
The storage areas within the stores include;
 Shelves
 Drawers( lockable drawer)
 Racks
 Cold room
 Freezer
 Fridge

Layout and work flow

The layout of stores should ensure
a) Ease of access for movement of material in and out of stores
b) The issue of perishable materials on a first in first out basis
c) The segregation of toxic and dangerous materials in a separate location
d) Security of materials by restriction of access to authorized personnel only

Stock Level and its control

Management must make decisions about the control of stock levels with a view to minimizing the cost of the
company while achieving more efficiency in the availability of material to fulfill planned usage requirements.
Consideration should be given to the following control levels:
a) Minimum stock level
b) Maximum stock level

Page 25 of 98
 c) Re-order level
d) Re order quantity (Note the re-order quantity is not necessary the EOQ)
a) Minimum stock level
This is the level below which stock should not fall. It is essentially a base (buffer) stock level. If stock falls
below this point, there is a danger of stockout.
Minimum stock level = Reorder level – (Normal consumption x normal reorder period)
b) Maximum stock level
This is the upper limit above which stock should not be allowed to rise. Each material to be kept in store
must have a maximum level and stock should not be allowed to go beyond this level
Maximum stock level = Re-order level +re-order Quantity - (Minimum consumption x minimum re-
order period)
c) Re-order level
Is a point that lies between minimum and maximum stock levels at which purchase orders must be
placed to ensure that goods ordered are received before the minimum stock level is reached? It is the
level of stocks at which replenishment must be made to avoid a stock-out.
Re-order level = maximum consumption X maximum re-order period
d). Re-Order quantity
This is the quantity of stock ordered once the re-order point is reached. The quantity is such as to
minimize stock costs taking into consideration the cost of holding stocks and making an order. This is
also regarded as the Economic Order Quantity (EOQ). It is computed as follows:
Where D is the annual demand (knits)
Co is the cost of making one order
Ch is the holding cost per unit per annum

EOQ 2DCO
Ch

Economic Order Quality (EOQ)

Define the EOQ model and the three methods of computing EOQ.
- Assumptions of the model.
Illustration
The following information was extracted from the books of Danex Holdings regarding its stocks:
i. Reorder quantity 1,800
ii. Reorder period 4 weeks
iii. Maximum consumption 450 units/week
iv. Normal consumption 300 units/week
v. Minimum consumption 150 units/week

Page 26 of 98
 Vi Maximum reorder period 5 weeks
Vii Minimum reorder period 3 weeks

Required
Determine the following stock levels for Danex Holdings:
i. Re-order level
ii. Maximum stock level
iii. Minimum stock level

Page 27 of 98
Solution
i) Re-order level = Maximum consumption X maximum reorder period
= 450 units X 5 weeks = 2,250 units
ii) Maximum stock level = reorder level + reorder quantity-
(Minimum consumption X minimum reorder period)
= 2250 + 1800 – (150 X3) = 4050 – 450 = 3600 units
iii) Minimum stock level = Reorder level – (Normal consumption X
normal reorder period)
= 2,250 – (300 X 4) = 2250 – 1200 = 1050 units

Economic Order Quantity (EOQ):

It constitutes the quantity purchased of either stocks or raw materials that is considered most optimum. This
is the quantity that minimizes both holding costs and ordering costs, As the quantity of purchase increases
there is a reduction in ordering costs, but an increase in holding costs as illustrated in the graph below:

Total cost
Ordering costs Total cost

Holding Costs Holding costs

Ordering costs

0 Qx Quantity of Inventory

Qx represents the EOQ where the aggregate stock cost is lowest

Total cost = Total ordering costs + Total holding costs

Page 28 of 98
 Total ordering costs = cost per order X no of orders in a period
Total holding cost = average stock quantity X holding cost per unit

The EOQ can also be delivered mathematically as explained below:

Mathematical Derivation of EOQ
Let cost per order be represented by Co. This is the cost incurred every time one order is placed.
Let the economic quantity purchase every time be represented by Q
Let holding cost per unit be represented by Ch
Let total demand be represented by D
The total holding cost = ½ QCh
The total Ordering cost = D Q CO: Note that D
Q
gives you the number of order in the period

Then total cost = ½ Qch + D/Q CO (or simply the total holding up cost plus the total
ordering costs)
EOQ is at the point where holding cost is equal to ordering costs
i.e. ½ Ch = D/Q CO

 ½ Q2Ch = D CO Q2= 2DO

h

Q2Ch = 2D CO

Q2 = 2DCo Therefore Q 2DCo Therefore EOQ= 2DCo

Ch Ch Ch

The EOQ model assumes:

 Annual demand is known
 Hold costs are constant and known
 Ordering costs are known and constant
 The same quantity is ordered every time an order is made since demand as assumed not to fluctuate
significantly.
Example
ABC Ltd has an aggregate demand of 1.2 Million units. Each time they place an order there is an ordering
cost of shs 1,000, holding cost is shs 100 per unit. Determine:
i. EOQ
ii. No. of order to be made based EOQ
iii. Total cost of stocks based on the EOQ

Page 29 of 98
 Solution

EOQ = 2DCo  2 X 1200000X1000  4899units

Ch 100

i) No of order = 1200000 = 244.9 ≈ 245 Orders

4899
ii) Total cost = DCo + ½ QCh = 1200000(1000) + ½ (4899)100 = 489,900
Q 4899

3.4 Valuation of inventory (Issues and closing stocks)(methods of pricing issues)

Valuation of inventory aims at attaching a monetary value in the stores or issued for production. This
is useful in producing. State costing the output and pricing production, as well as decision making.
Methods used in valuing inventory:
a) First In First Out
b) Last In Last Out
c) Weighted Average method
3.41 First in First out (FIFO)
This method is based on the assumption that stock purchased first is issued first. Prices of stock purchased
first are used to determine the cost or value of inventory issued. Closing stocks are carried at the latest
costs.
Advantages
1. It is a realistic system: oldest items are usually issued first out.
2. Unrealized profits or losses do not arise
3. It is easy to calculate if prices of materials don‟t fluctuate
4. Closing stocks values reflect the latest costs thus tend to reflect the current market values.
5. It is acceptable to many tax authorities and is also consistent with accounting practices e.g. IAS/IFRS.
Disadvantages
1. It involves tedious calculations if the price of materials fluctuate from time to time
2. Product costs, based on the oldest material prices, lag behind current conditions especially in inflationary
markets.
3. Comparison of one job with another may be difficult if materials are issued at different prices.

3.42 Last in first out (LIFO)

Is based on the assumption that the stock purchased last is issued first. Stock valuation should therefore be
based on the prices ruling on the acquisition of the last stocks.

Page 30 of 98
 Advantages
1. Product costs tend to be based on current market prices and is therefore realistic.
2. A charge to production is as closely related to current price levels as possible
Disadvantages
1. Stocks are valued at the oldest prices.
2. It involves tedious calculations if the price of materials fluctuate from time to time.
3. Comparison of one job with another may be unfair and difficult
3.43 Weighted average method
i. This method is a perpetual weighted average system where the issue price is recalculated after each
receipt of stocks taking into account both quantities and money vale of the stocks received.
In this case stock used or unused is based on the average price per unit where the average price per unit is
calculated as follows:
= Total value of stocks = Average Price Per Unit
No. of units of stock

= (Money value of old stocks + Money Value of New Stocks)

(Quantity of old stocks + Quantity of New Stocks)

Illustration
Assume the following purchases were made in ABC Ltd
Date of purchase Units purchased Price/unit
1st January 500 100
2nd January 600 200
3rd January 800 400
Units used on 4th January are 900. Determine the value/cost of units used by using FIFO, LIFO and
weighted average.

Required:
Determine the cost of units used and the value of the closing stocks using FIFO, LIFO and Weighted
Average.

Page 31 of 98
Solution
1. FIFO
Cost of units used
Date Units Unit price Total cost
Jan 1 500 100 50,000
Jan 2 400 200 80,000
900 Cost of units used 130,000

Closing stock is valued as

Jan 2 200 units x 200 shillings = 40,000
Jan 3 800 units x 400 shillings = 320,000
1,000 360,000

2. LIFO
Cost of units used
Date Units Unit price Total cost
Jan 3 800 400 320,000
Jan 2 100 200 20,000
900 Cost of units used 340,000

Closing stock is valued as

Date Units Unit price Total cost
Jan 2 500 200 100,000
Jan 1 500 100 50,000
1,000 Value of closing stocks 150,000

Page 32 of 98
3. Weighted average
Date Units Unit price Total Cost of Issues

0–0 900 257.8 232,105.20

Closing Stock Valuation = (Goods Available – Goods Issued) x Unit Price =

Unit Price = 500 (100) 600 (200) 800 (400)  490,000  257.8
1,900 1,900

Other methods include

 Standard cost
 Replacement cost
 Next in first out
 Base stock
 Simple average
 Highest in first out
Stores records
These includes
 Goods received book
 Stores ledger
 Stock taking records
 Cellar records


Page 33 of 98
 TOPIC 6: BUDGET AND BUDGETARY CONTROL

Budget
A budget is a plan expressed in monetary or other terms which govern the operation of a business over a
predetermined period of time.
It is a detail plan of operations for a specific period of time and is prepared for the effective utilization of
resources, which will help in achieving the set objectives. Whereas most budgets (e.g. sales budget, labour
cost budgets) are expressed in terms of money, some are expressed in terms of units or percentages
A personnel budget may be expressed in terms of numbers of employees to be replaced or engaged over a
period of time
A sales budget invariably shows the budgeted value of sales, number of covers or the budgeted rate of room
occupancy

Budget Control
It is a means of control by which responsibility for various budgets is assigned to the managers concerned
and a continual comparison is made of the actual results with the budgeted results / figures and if there is a
variance, an inquiry and corrective action follows

Therefore a budget is the plan on which a system of budgetary control is based. The budget sets standards of
performance (targets) for the managers of a business while budgetary control is a means of ensuring that the
objectives set for the managers are fulfilled

Budgetary control is the use of the comprehensive system of budgeting to aid management in carrying out its
functions like planning, coordination and control.
This system involves:
 Division of organization on functional basis into different sections known as a budget center.
 Preparation of separate budgets for each “budget center”.
 Consolidation of all functional budgets to present overall organizational objectives during the
forthcoming budget period.
 Comparison of actual level of performance against budgets.
 Reporting the variances with proper analysis to provide basis for future course of action.

Objectives
The main objectives and advantages of budgeting are as summarized below: -
 The budget is a detailed plan of action which guides and regulates the progress of a business (improved
planning)
 Budgeting results in a better coordination of all activities of a business
 The budget sets standards against which the performance of those responsible may be measured and
assessed (clearer standards of business performance)
 Budgeting is an important method of expense and revenue control; it establishes clear lines of cost
responsibility and promotes cost consciousness (improved control of income and expenditure)
 Budgeting ensures an economical utilization of the resources of a business and thus helps to maximize
profits (clearer lines of cost and profit responsibility)

Page 34 of 98
For effective running of a business, the management must know:
 Where it intends to go i.e. organizational objectives
 How it intends to accomplish its objective i.e. plans
 Whether individual plans fit in the overall organizational objective. i.e. coordination
 Whether operations conform to the plan of operations relating to that period i.e. control

Formulation of the Budget

Budget Committee
Where there is a system of budgetary control in operation there is always constituted a budget committee.
This consists of: -
 A senior executive of the business (managing director / general manager) acts as the chairman
 Several managers (food and beverage manager, executive chef, executive house keeper, banqueting
manager)
 An accountant who acts as the secretary of the budget committee

Before any budgets are drawn up the budget committee must decide how the overall system of budgeting will
fit into the existing structure of the business
This entails: -
 A review of the organizational structure of the business
 A definition of each managers authority and responsibility
 After preliminary work, various departments and other budgets set appropriate targets expressed in terms
of
- Turn over
- Profit margins
- Operating ratios and
- Cost limits

Main Function of the Budget Committee

1. Prepare budget proposals (draft budgets) for submission to board of directors.
When preparing budget proposals, the budget committee will take into consideration the following: -
a) Past performance – entails a thorough analysis of past income, expenditure, trends in income and
expenditure, etc.
b) Current trends – this necessitates a review of the current position with regards to the items mentioned in
(a) above
c) Other information – would include a consideration of the prosperity of the particular sector of the
hospitality industry, the condition of the local industries, the degree of unemployment, if any, the degree
of competition.

2. Choose an appropriate budget period; in most cases this will be a one calendar year.

Page 35 of 98
 All businesses whether large or small have budgets covering a period of one year. Where the budget year
runs from January to December, work on the following years budget will start early in October to that
the budget proposals are ready for submission to the board of directors early in December

3. Choose an appropriate review period also referred to as control period

An essential part of budgetary control is the continual comparison of the actual with the budgeted results.
Budget reports will be submitted at various intervals i.e. (one week, one month, quarterly, biannual and
annual reports)

Types of Budgets
Budgets are prepared to check the availability of finance according to the demand of project while budgetary
control is also essential tool of management to control cost and maximizes profits.
A budget is a quantitative statement, for a defined period of time, which may include planned revenues,
expenses, assets, liabilities and cash flows; it provides a focus for the organizations, aids in the co-ordination
of activities and facilitates control

The following are the essential of a budget:

 It is prepared in advance and is based on future plan of action
 It relates to a future period and is based on objectives to be attained.
 It is a statement expressed in monetary or physical unit prepared for the formulation of policy

General Classification of Budgets

a) On the basis of functionality; Sales budget, Production budget, Material budget, Labour budget,
Manufacturing overhead budget, Administrative expenses budget, Selling and distribution budget, Cash
budget

b) On the basis of flexibility; Fixed budget, Flexible budget

c) On the basis of period / time; Long term, Short Term

There are several kinds of budgets used in hospitality establishments and are based on the following
classifications: -
1.) From the point of view of the subject matter budgeted for; we may distinguish: -
 Capital budgets
 Operating budgets

2.) From the point of view of the comprehensives of budgets for; we may distinguish: -
 Master budgets
 Departmental budgets

3.) From the point of view of the level of sales assumed; we may distinguish: -
 Fixed budgets
 Flexible budgets

Page 36 of 98
1. On the Basis of Period / Time
 Long Term Budget - A systematic and formalized process for directing & controlling operations for
period extending beyond one year
Long-term budgets are prepared for those organizations, which deal in regular product line. Here
organizations are not supposed to change their proceedings in short time periods.
Examples include; sales budget, fixed budget
These are prepared for those organizations, which deal in regular product line and organizations are not
supposed to change their proceedings in short time periods
 It evaluates future implications associated with present decisions
 Market trends, change in demographics, national income, etc. play important role in preparing
long term budget
 It proves useful in forecasting and evaluation of an organization over period of time

 Short Term Budget - May cover periods of 3 – 12 months depending upon nature of business; budgets
are prepared for short time periods which work for seasonal product line
 Should be long enough to allow completion of a season or all aspects of a business
 The period should coincide with financial accounting period to facilitate evaluation of
performance e.g. A budget allocated to manufacturing of lots for spring- summer season,
Fashion Retailing, etc

Short-term budgets are prepared for small time periods which work for seasonal product line. Here products
may change in near future.
Examples include; production budget, flexible budgets

2. According to Function
 Sales Budget - Sales budget is the primary budget; it is the most important budget upon which all the
other budgets are built up
It is the most important budget to prepare and the other budgets are prepared on the basis of sales
budget
It is most important because it affects the accuracy of most other budgets thus if budget sales are forecast
inaccurately, budgeted variables and semi variable costs will also be inaccurate. Similarly the cash budget
which is obviously affected by the volume of sales will be inaccurate
 It forecast on quantities and values of sales to be achieved in a budget period
 In this budget the in-charge or expert forecast the future expected sales of the firm.
 The sales manager is responsible for the accuracy of the budget.
 Sales forecasting: Developing a sales budget requires forecasting future sales, which depends upon
the following 4 main factors:
 Past performance - is information concerning past performance (a) actual sales of previous
periods; (b) sales mix; (c) trends in sales and sales mix
 Current trends – is information about present conditions within industry and sales territory
(a) trends in sales and sales mix; (b) bookings reserved for accommodation, banquets etc
 Limiting factors: (a) where the increase in sales is considered inadequate, limiting factors
should be identified and dealt with accordingly

Page 37 of 98
  Other information - data concerning the industry and general business conditions (a)
condition of local industries ; (b) state of employment and prosperity in the locality
concerned; (c) political situation, government policy etc and their effect on future turnover

 In preparation of sales budget the following should be taken into consideration;

- Past sales
- Sales man estimates
- Plant capacity
- Raw material
- Orders in hand
- Seasonal fluctuations
- Competition etc.

Example 1
Production budget, selling and distribution, etc. are affected by sales budget e.g.
Q1 Q2 Q3 Q4 Yearly Sales

Sales 120 130 150 165 565

Price / unit 20 22 25 27

Total sales 2400 2860 3750 4455 13465

Example 2
Omega Pearl Restaurant is a large, licensed establishment and budgets its sales a year in advance; actual sales
are reviewed in the light of the budgeted figures at the end of each 4-weekly period. The sales of the
restaurant for the past 3 years have been as follows;

Analysis of Past Sales

1993 (£) 1994 (£) 1995 (£)
Restaurant sales 179,500.00 186,500.00 190,200.00

% increase on the previous year 7% 4% 2%

Bar sales 91,000.00 95,500.00 102,200.00

% increase on the previous year 4% 5% 7%

Sundry sales 30,500.00 32,000.00 34,000.00

% increase on the previous year 5% 5% 6%

Total Sales 301,000.00 314,000.00 326,400.00

% increase on the previous year 6% 4.3% 4%

The following supplementary information is also made available.

Page 38 of 98
 (a) Restaurant sales – the rate of increase in this section of the turn over if falling off. This is due to
the limited dining room space available. It is thought that, in the circumstances, little increase in
sales is possible
(b) Bar sales – the turnover has been rising satisfactorily but in view of the limiting factor restricting
restaurant sales a higher rate of increase cannot be expected
(c) Sundry sales – this is expected to increase at least as in 1995

Determination of Sales Target

Having due regard to the past trends in sales and all other relevant factors, the following sales target are set
for 1996
(a) Restaurant sales – it is decided that that these ought to be increased by 4%. In view of the limited
space available the increase in sales is to be achieved through increased prices. This end, all restaurant
prices are to be revised yearly in the year
(b) Bar sales – these ought to show an increase of 7% on the previous year
(c) Sundry sales – in view of the past trend, an increase of 7% should be aimed for

Thus the budgeted sales for 1996 are therefore as shown below;
1993 (£) 1994 (£) 1995 (£) 1996 (£) The budgeted
sales for each 4-
weekly period
Restaurant sales 179,500.00 186,500.00 190,200.00 197,800.00 197,800.00/13
104/100*190200
=197808 = 12,215.00
% increase on the 7% 4% 2% 4%
previous year
Bar sales 91,000.00 95,500.00 102,200.00 109,350.00 109,350.00/13
107/100*102200
=109354 = 8,411.00
% increase on the 4% 5% 7% 7%
previous year
Sundry sales 30,500.00 32,000.00 34,000.00 36,380.00 36,380.00/13
106/100*34000
=36040 = 2,798.00
% increase on the 5% 5% 6% 7%
previous year
Total Sales 301,000.00 314,000.00 326,400.00 343,530.00 26,400.00

% increase on the 6% 4.3% 4%

previous year

At the end of each 4-weekly period, the actual sales would be compared with budgeted sales and any
discrepancies (variance) would then be investigated and the necessary corrective action would be taken
The following is a monthly sales report based on the figures given above

Page 39 of 98
 Pearl Omega Restaurant

Monthly sales report for four weeks ended 28th January, 1995

To: Managing Director

General Manager

From: Catering Controller

Budgeted Sales (£) Actual Sales (£) Variance (+ or -)
Restaurant sales 15,200.00 14,400.00 -800.00
Bar sales 8,400.00 8,500.00 +100.00
Sundry sales 2,800.00 2,950.00 +150.00
Total 26,400.00 25,850.00 -500.00

NB: Only a small partial revision of restaurant prices has taken place; a complete revision is called for

 Production Budget - It is stated in physical units

It specifies the number of units of each product that must be produced to satisfy the sales forecast
It involves planning the level of production which in turn involves the answer to the following questions:
(a) What is to be produced?
(b) When is it to be produced?
(c) How is it to be produced?
(d) Where is it to be produced?
After preparing sales budget the next budget will be production budget.
In this budget works manager prepare schedule of production by breaking large production in small units to
fulfill the target production.
A properly operated budgets leads to inventory control, improved maintenance of production schedules
and production targets.

Example 1
Suppose, if the estimated opening stock is 5000 units and estimated sales are 25000 units and closing stock of
the product is 3000 units the estimated production will be: -

Sales + Closing stock – Opening stock = Estimated production

25000 + 3000 – 5000 = 23000 units

Example 2
The number of units to be produced can be formulated using:

Units to Produce = Budgeted sales + Desired closing inventory of finished goods – Beginning inventory of
finished goods

e.g.
Budgeted sales = 70,000
Desired closing finished goods inventory = 20,000
Beginning finished goods inventory = 40,000

Page 40 of 98
Units to be produced = (70,000 + 20,000 – 40,000) = 50,000

Schedule of production is prepared by breaking large production in small units to fulfill the target production.
A properly operated budget leads to
 Inventory control
 Improved maintenance of production schedules and production targets.

 Cost of Production Budget - It summarizes the materials budget, labor budget and the factory
overhead budget
This budget is an estimate of cost of output planned for a budget period and may be classified into three
budgets: -
a. Material Cost Budget
b. Labour Cost Budget
c. Overhead Cost Budget / Factory Overhead

(a) Material Budget - In the production budget material is the first requirement to be considered and are
basically divided into two categories i.e.
 Direct and
 Indirect material.

Direct materials budget: It specifies the cost of direct materials used and cost of the direct materials
purchased.
It helps in developing purchasing and delivery schedule
Helps to meet production targets
Material budget includes the preparation of estimates of different types of the raw material needed for various
products and purchasing raw material in required number at a required time.
The following are factors to be taken under consideration;
- Requirement of raw material
- Company‟s stocking policies
- Price trend, and
- Cost of raw material

(b) Labour Budget - Labour is an important factor in every production organization. It plays an important
role in converting raw material into finished product.
It is evolved in relation to the budgeted volume of sales.
When an increase in sales is budgeted for it is necessary to establish how much of the increase can be dealt
with by the existing staff of the establishment
A labour cost budget cannot be realistic unless it is based on a detailed analysis of the staffing of each
department vis-à-vis the budgeted turnover
There exist two types of labour: -
 Direct and
 Indirect labour.

Page 41 of 98
In this budget company has to budget the required number of hours and the expected pay scales of the
employees. This budget gives information about personnel specifications for the job for which workers are to
be recruited, the degree of skill and experience required and rates of pay.

Direct Labor Budget: Labour requirement budgets are prepared on basis of production budget.
It must disclose: - Grade of labor along with cost (wages)
- Period of training to enable production budget to be achieved
- Casual labour and authorized overtime
- Proposed changes in staffing, rates of pay and grading of staff
- Staff meals, holiday pay and other labour costs

Summary
This budget gives information about personnel specifications for the job for which workers are to be
recruited, the degree of skill and experience required and rates of pay

(c.) Factory / manufacturing Overhead Budget: Prepared on basis of chart of accounts which reflects
different accounts expense and details of cost center or departments
This budget gives the works overhead expenses to be incurred in a budget period to achieve the production
target. The cost of indirect material, indirect labour etc can be calculated with the help of this budget.
For making proper control especially in larger establishments tend to have separate budgets for the various
component parts of overhead expenditure i.e. it can be divided into departmental overhead budget such as
maintenance, office and administration costs, marketing etc.
The overhead cost budget is also evolved in relation to the budgeted sales therefore it must clearly distinguish
between fixed overheads (rates, depreciation of premises, licenses etc) and variable and semi-variable
overheads (gas, electricity, telephone, laundry, cleaning materials etc) thus variable expenses are estimated on
the basis of the budgeted output because these expenses are bound to change with the change in output.
This budget gives the work overhead expenses to be incurred in a budget period to achieve the production
target.

Example on Production Cost budget

Material Usage budget Product A Product B Total Budgeted production 50,000 80,000 Direct materials
requirements Product A X 5 Product B X 8 Direct materials usage (kg) 250,000 480,000 Cost per kg Rs. 1 Rs.
1.50 Cost of Direct materials used Rs. 2,50,000 Rs. 7,20,000 Rs. 9,70,000

 Purchase Budget - This budget provides information about the materials to be acquired from the
market during the budget period.

 Personnel Budget - This budget gives an estimate of the requirements of direct labour essential to meet
the production target.
This budget may be classified into: -
a. Labour requirement budget
b. Labour recruitment budget

 Research &Development Budget - A tool for planning and controlling research and development
costs

Page 42 of 98
 This budget provides an estimate of expenditure to be incurred on research & development during the
budget period. A R&D budget is prepared taking into consideration the research projects at hand and
new research & development projects to be taken up.

 Helps in coordination with company‟s other plans and projects

 Helps allocation of funds for R&D by coordinating company‟s immediate and long-term plans
 Helps in planning staff and equipment requirements for R&D
 It contains details of cash inflows and cash outflows for the budget period of some other specific
period.
 It indicates effect on cash positions of seasonal requirements, unusual receipts and slowness in
collecting receivables
 Indicates availability of cash
 Shows availability of excess funds for short term investments
 Helps in planning bond redemptions, income tax installments and payments to employees

 Administration Expenses Budget - The budget covers the expenses incurred in framing policies,
directing the organization and controlling the business operations.
In administration expense budget an estimate of expenses is prepared regarding central office and of
management salaries and the most important items covered in this budget include: -
 Office salaries
 Depreciation of office equipment
 Telephone
 Printing and stationery
 Insurances, bank charges and audit fees

The budget may be prepared at department level for effectiveness in budgeting system with the past
experience and anticipated changes taken into consideration.
As with all other budgets, the office and administration budget will distinguish between fixed and variable
costs.

 Selling and Distribution Budgets -This expense is related to the selling and distribution of material. In
this budget experts have to plan for the expected selling and distribution expenses of the firm.
Certain items of selling and distribution costs includes cost of transportation, salesman salaries etc.

 Capital Expenditure Budget - This is an important budget providing for acquisition of assets
necessitated by the following factors:
(a) Replacement of existing assets.
(b) Purchase of additional assets to meet increased production
(c) Installation of improved type of machinery to reduce costs.

These are budgets dealing with the assets and the capital funds of a business and more specifically they
are budgets in respect of matters such as; capital expenditure on new fixed assets, cash, debtors, stock;
the raising of fresh capital by the issue of shares or debentures
The most common of such budgets is the cash budget

Page 43 of 98
 Cash Budget - Predict the inflow and outflow of cash during the budget period and is prepared from
the various operating and capital budgets. Cash sales, credit collection and other receipts in cash
payments are considered.
Particulars of cash payable over the budget period will be extracted mainly from the operating (expense)
budgets and budgets in respect of any planned acquisition of fixed assets
This budget gives an estimate of the anticipated receipts and payments of cash during the budget period.
In cash receipt we consider cash sales, credit collection and other receipts in cash payments for
example; we consider cash payments, tax payable, dividend payable etc. Without cash organizations
cannot work so prediction thus cash is very important.
A cash budget makes provision for a minimum cash balance which will be available at all times; may be
prepared monthly, weekly even daily to meet requirements
Short range: Prepared annually and is in correspondence with annual profit plan.
 Indicates cash inflows and outflows as generated by annual profit plan

Long range: Does not disclose detailed estimates of revenue and expenses. It is prepared according
to:
 The timing of the capital expenditure projects
 The timing of long range profit plan

Differences between Cash budgets and Operating budgets

Cash budgets may look similar to operating budgets because they use much of the same information,
however;
 Operating budgets forecast income, expenditure and the level of profits over the coming years
whereas cash budgets are concerned only with the actual receipt and payment of cash
 Depreciation for example will never feature in a cash budget because no cash changes hands, it is
however a legitimate expense in an operating budget
 In cash budgeting, receipt of cash will not always coincide with the sale of goods nor with
payment of cash with the purchase of goods (it depends on the terms of credit)

Example 1
Forecast Receipt of Cash
The following is the forecast sales budget for a restaurant for 6 months starting January

January February March April May June

Forecast £ £ £ £ £ £
Sales 4,000.00 5,000.00 6,000.00 7,500.00 6,000.00 6,500.00

Past experience has shown that 40% are for cash and 60% are on a credit basis with cash from the above
sales being received as follows: -
Expected Receipt of Cash

Cash sales 40% Straight away

Credit sales 1 50% after 4 weeks
Credit sales 2 10% after 6 weeks

Total sales 100%

Page 44 of 98
 Using the above information, you are required to complete the cash received section of the cash budget
statement for April, May and June

Proceed as shown below: -

Cash budgets for 3 months ending 30th June
(Forecast cash receipts only)
April (£) May (£) June (£)
Cash Receipts
Sales
Cash 3,000.00 2,400.00 2,600.00
Credit 1 3,000.00 3,750.00 3,000.00
Credit 2 500.00 600.00 750.00
Total Cash received 6,500.00 6,750.00 6,350.00

The figures in the solution above were calculated as follows: -

It shows pattern of cash receipts and payments
(£) April (£) May (£) June (£)

Cash 40% from 7,500.00 3,000.00

April
40% from May 6,000.00 2,400.00

40% from June 6,500.00 2,600.00

Credit 1 50% from 6,000.00 3,000.00

March
50% from 7,500.00 3,750.00
April
50% from Feb 6,000.00 3,000.00

Credit 2 10% from 5,000.00 500.00

April
10% from 6,000.00 600.00
March
10% from 7,500.00 750.00
April

 Master Budget - It is the summary or total budget package for a business firm; The master budget is the
aggregation of all lower-level budgets produced by a company's various functional areas, and also
includes budgeted financial statements, a cash forecast, and a financing plan
 It can be called end product of budget making process

Page 45 of 98
  It reveals the top management‟s goals of revenues, expenses, net income, cash inflows and
financial positions
 Takes the macro view of business and coordinates with production, raw materials, manpower
and other resources with production targets
 It cuts across divisional boundaries to coordinate firms‟ diverse activities
 The operating budgets constitute the building block used to complete the master budget

A master budget may be a budgeted profit and loss account, incorporating all income and all expenditure of a
business.
It may also be a budgeted balance sheet incorporating all assets and liabilities of a business.
It is a summary budget incorporating all components of a functional budget and which is finally approved,
adopted and employed”. Thus a master budget is a summary of all functional budgets in capsule form
available in one report.

 Departmental Budgets - These are concerned with a particular department of a business.

Examples include; banqueting budgets, maintenance budget, rooms division budgets, food and beverage
budget

 Performance Budget - These days budgets are established in such a way so that each item of
expenditure is related to specific responsibility centre and is closely linked with the performance of that
standard.

 Marketing Budget - In smaller establishments any marketing and sales promotion expenditure would be
included in the overhead cost budget.
In larger business: hotels rather than restaurants, the marketing will involve a large amount of expense
and include amongst others
 Salaries of the marketing staff
 Cost of press and television advertising
 Cost of printing brochures and other promotional materials
 Other expenditures i.e. office expenses, travel, entertainment
 Maintenance Budget - Whilst most smaller hospitality establishments include maintenance cost in a
total expense budget or overhead cost budgets, larger units tend to have a separate maintenance budget.
A well prepared maintenance budget will accomplish the following two functions;
 It will predetermine the maintenance costs
 It will show the sequence of the work to be done over the budgeted period

The following key points will inform budgeted maintenance cost;

 The state of the premises, kitchen plant, furniture and other equipments
 The standard of comfort which is necessary to provide with regards to the type of customer
catered for
 The current availability of funds

The following costs have to be taken into account;

 Maintenance materials and supplies include items such as paints, wall paper, electrical
components, loose tools and other supplies required by the maintenance department

Page 46 of 98
  Maintenance labour cost includes all wages and salaries payable to the maintenance staff and
 Other costs i.e. depreciation of maintenance department‟s equipment, stationery, office supplies

3. According to Flexibility
 Fixed Budget - This is the rigid budget and it is drawn on the assumption that there will be no change in
the budgeted time period. A fixed budget will be helpful only when actual level of activity is equal to
budgeted level of activities
It is defined as a budget which is designed to remain unchanged irrespective of the level of the volume of
output or turnover attained or irrespective of activity actually attained.
 It is based on single level of activity
 It compares data from actual operations with single level of activity reflected in budget
 Fixed budget is good for performance measurement, if output can be estimated within close limits

 Flexible Budget - It is prepared for a range, for more than one level of activity and is also called a
variable budget
A flexible budget predetermines costs in relation to several possible volumes of sales. It also gives
different budgeted costs for different levels of activities.
Is one “which, by recognizing the difference in behavior between fixed and variable costs in relation to
fluctuations in output, turnover or other variable factors such as number of employees, is designed to
change appropriately with such fluctuations”.

Important Features of Flexible Budget:

 It covers a range of activity
 It is easy to change with variation in production levels
 It facilitates performance measurement and evaluation

Advantages of Flexible Budgeting:

 Accurate budgeting: Output factor is considered during preparation, since cost of goods may
fluctuate from time to time
 Coordination: Production is planned in relation to expected sales, materials and labor are acquired to
meet expected production requirements
 Control tool: Comparison between the budgeted costs and actual costs form basis for analyzing cost
variances and fixing responsibility for same. This motivates managers to feel themselves motivated in
controlling costs for which they are responsible.

A flexible budget gives different budgeted costs for different levels of activities. This budget is applicable
where;
 Activity levels vary from period to period.
 The business is new and it is difficult to predict
 The industry is influenced by change in fashion, where there are changes in sales

Responsibility Accounting
Responsibility accounting fixes responsibility for cost control purposes by establishing responsibility centres
namely: -
(a.) Cost centre
(b.) Profit centre

Page 47 of 98
 (c.) Investment centre

Principles of responsibility accounting are as follows:

 Fixation of targets for each responsibility centre
 Actual performance is compared with the target
 The variances therein are analyzed so as to fix the responsibility of centres
 Taking corrective action.

Conclusion:
 Preparation of budgets is the first step in the budgetary control system.
 Implementation of budgets is the second phase.
 But preparation and implementation of budgets alone will not achieve much unless a comparison is
made regularly between the actual performance and the budgeted performance.
 Continuous and proper reporting makes this possible.
 To ensure the success of budgetary control system, proper follow up action has to be taken
immediately for the reports submitted.

The Limiting Factor

The first step in the preparation of a budget is to forecast the volume of sales (as this affects most of other
parts of the budget).
The forecast volume of sales will: -
 Determine the level of all variable and semi fixed costs
 Affect the cash position of the business which in turn may determine the amount of capital expenditure
planned for the period

When forecasting the future volume of sales it is important to remember what is known as the limiting
factor (also referred to as the „key factor‟, „governing factor‟, and „principal budget factor‟
A limiting factor - is the factor that limits the volume of sales and makes a further increase in sales
impossible

Limiting Factors
The following limiting factors will be found operating in hospitality establishments
(a) Accommodation Availability – this operates in residential establishments namely hotels, motels,
hostels, etc Once all the accommodation available has been let it is impossible to increase the volume of
sales except by raising prices
(b) Seating Capacity – this applies particularly to restaurants where the seating capacity is fixed; also to
banqueting sales, and insufficient seating capacity may well result in loss of potential sales
(c) Insufficient Capital – in a multiple catering business an expansion of sales through the acquisition of
further units may be impossible due to insufficient capital

(d) Shortage of Efficient Labour – many hospitality establishments could increase their sales by improving
the efficiency of their labour. Thus the speed with which cash is taken by the cashier in a self service
restaurant has an important bearing on the volume of sales. Similarly the speed with which waiters serve
customers can affect the volume of sales considerably.

Page 48 of 98
 The abilities of the chef and other kitchen staff are equally important with this respect

(e) Shortage of Efficient Executives – more important than even the shortage of efficient labour.
Inefficient management makes an expansion of sales difficult through bad organization, unimaginative
menu planning and failure to take advantage of any opportunities to increase sales that may present
themselves

(f) Management Policy – An increase in sales may be impossible as a result of the deliberate policy of a
business. Thus restaurants may discourage the „wrong‟ type of customer; a hotel may refuse to accept
coach tour business, football teams etc

(g) Consumer Demand – This is a limiting factor in the operation of which is most difficult to remove.
Consumer demand may be limited in several ways: by the prices charged, through completion, as a result
of a fixed potential demand e.g. in industrial canteens.
When an increase in sales proves difficult, it is important to identify the limiting factor(s). The nature of
the limiting factor will then indicate the most appropriate method of dealing with the problem

Capital Budgeting
Capital budgeting is a decision situation where large funds are committed (invested) in the initial stages of the
project and the returns are expected over a long period of time. These decisions are related to allocation of
investible funds to different long-term assets. Capital budgeting is a continuous process and it is carried out
by different functional areas of management such as production, marketing, engineering, financial
management etc.

Basic Features of Capital Budgeting

b. Capital budgeting decisions have long-term implications.
c. These decisions involve substantial commitment of funds.
d. These decisions are irreversible and require analysis of minute details.
e. These decisions determine and affect the future growth of the firm.

Capital Budgeting Decisions Involves the following three steps

i. Estimation of costs and benefits of a proposal or of each alternative.
ii. Estimation of the required rate of return, i.e., the cost of capital
iii. Selection and applying the decision criterion

Estimation of Cash Flows

 The costs and benefits for a capital budgeting decision situation are measured in terms of cash flows.
 An important point is that all cash flows are considered on after tax basis.
 The rule is that all financial decisions are subservient to tax laws.
 The cash flow from the project are compared with the cost of acquiring the project.

The cash flows may be grouped into

 Relevant and
 Irrelevant cash flows as follows:

(a) Relevant cash flows Irrelevant cash flows

Page 49 of 98
 i. Cost of new project Sunk cost
ii. Scrap value of old / new plant Allocated overheads
iii. Trade-in-value of old plant Financial cash flows
iv. Cost reduction / savings
v. Effect on tax liability
vi. Incremental repairs
vii. Working capital flows
viii. Revenue from new proposal
ix. Tax benefit of incremental
x. Depreciation

Budget methods

Main contents

• Incremental budgeting vs. Zero-based budgeting

• Top down budgeting vs. bottom up budgeting

Incremental budgeting and Zero-based budgeting

Incremental budgeting definition: Prepared based on the current period‟s budget with some added amounts
regarding inflation or planned increases in sales and costs

Advantages:

• Simple to prepare and understand

• Consistent basis

• Better co-ordination between budgets

Disadvantages:

• Totally ignore the impact of changes

• No incentive in development and innovation

• Encourages spending up to the budget

• This approach is not recommended as it fails to take into 4 account changing circumstances

Zero-based budgeting
It is also referred to as priority based budgeting. It is a cost benefit approach budgeting where it is assumed
that the cost allowance is Zero for any item until the manager responsible justifies its existence in terms of
costs and benefits.

Page 50 of 98
CIMA definition: A method of budgeting whereby all activities are re-evaluated each time the budget is set.
It is concerned with alternative means that established activities have been compared with alternative uses of
the same resources.

It takes away the implied right of existing activities to continue receiving resources unless they can be shown
to be the best use of such resources.
Stages of Implementation
1. Definition of decision package.
This is the comprehensive description of the organizations functions or activities.
2. Evaluation and ranking of packages.
This is on benefit basis.
3. Resource allocation according to priorities.

Advantages
1. More efficient allocation of resources.
2. Focus attention on values for money and makes clear relationship between input and output.
3. Develops a questioning altitude and makes it easier to identify obsolete, inefficient and less cost effective
operations.
4. Leads to greater staff and management knowledge of operations.

Disadvantages
1. Time consuming.
2. High skills required.
3. May encourage wrong impression that all decisions must be made through budgets.
4. Short – term benefits may be emphasized to the detriment of long-term benefits.

TOPIC 7: Food and beverage production, planning and

control

Production Planning
Production is the transformation of raw materials to finished goods.
Planning looks ahead, anticipates possible difficulties and decides in advance as to how the production, best,
be carried out.
Control phase makes sure that the programmed production is constantly maintained.

Page 51 of 98
Production System is a system whose function is to convert a set of inputs into a set of desired outputs.
Production Planning given a specific process planning, process technologies and production conditions
predetermine varieties, quantities, quality, and scheduled of products to be produced according to market
demand of products

Thus Production planning may be defined as the technique of foreseeing every step in a long series of
separate operations, each step to be taken at the right time and in the right place and each operation to be
performed in maximum efficiency. It helps entrepreneur to work out the quantity of material manpower,
machine and money requires for producing predetermined level of output in given period of time.

 Production planning is defined as the technique of foreseeing every step in a long series of separate
operations, each step to be taken at the right time and in the right place and each operation to be
performed in maximum efficiency.
 It is concerned with the organization of the supply and movement of materials and labour, machines
utilization and related activities, in order to bring about the desired manufacturing results in terms of
quality, quantity, time and place.
 Production Planning may be said to be a technique of forecasting ahead every step in the long process of
production, taking them at right time and in the right degree and trying to complete operations at the
maximum efficiency

Production planning and control is important for the following reasons

 For Increasing Production
 Main purpose of production planning is to arrange inputs.
 Production control programme minimizes idleness of men and machines.
 It thus helps in raising industrial output.
 For co-ordinating plant activity
 In planning production is carried out in a number of processes and thus activities are synchronized for
smooth working.
Objectives of Production Planning and Control
 Optimum Utilization of Capacity
 Inventory control
 Economy in production time
 Ensure quality
 To establish routes and
 Schedules for work

There are four major stages in controlling the preparation of food and beverages which together should
 Reduce over production (and possibly wastes)
 Loss from inefficient purchasing and processing
 Loss from excessive portion sizes.

The operation of the four stages in a food and beverage control system should
 Aid management in controlling costs efficiently and maximizing the profitability of the operation
 Assist in setting the standards for the establishment and
 Ensure overall customer satisfaction

Four stages involved in the preparation of food and beverages are: -

Page 52 of 98
  Volume forecasting
 Standard yields
 Standard recipes
 Standard portion sizes

1. Volume Forecasting
This is often referred to in other industries as production planning. It is a method of predicting the volume of
sales of an establishment for a specified future period. This can be done by use of past records, current
trends, current events
The sales of the establishment are broken down into the sales of each selling outlet and then broken down
into the sales per main item.
Volume forecasting is not a perfect method of prediction, but with study and application and with the
collection of analysis of all sales information, a high level of prediction is possible, helping to minimize the
common problem of the shortage or over-production of items
The aim of volume forecasting is to maintain good stock in all outlets and its size being calculated by
management. Requisitions should be made each day to bring the bar up to its full bottle for stock.
In comparison with most food outlets; no drink preparation or processing should be undertaken until a drink
is actually ordered by a customer and all that a barman is required to do is to serve the drink to its correct
quantity using correct glass.

Objectives of Volume Forecasting for Food are: -

 To predict the total number of meals to be sold in each selling outlet of an establishment at each meal
period (e.g. the number of breakfasts to be sold in the restaurant, the coffee shop and by flour service)
 To predict the choice of menu items by customers
 To facilitate purchasing
 To ensure availability of all necessary ingredients
 To ensure that appropriate stock levels are held
 To control food costs in relation to sales (or within cost limits in non profit making establishments)
 To enable the food controller to compare the actual volume of business done by each of the selling
outlets with the potential volume of business as forecast and for management to take action where
necessary
The comparison may be by - Total volume of sales
- Total number of customers
- Total number of main course items

Methods of Volume Forecasting

a) Time Series Analysis Method
This is a quantitative method of forecasting. It is a procedure which identifies information that forms pattern
over a period of time.
When using this method, forecasting is based on the basis of past data; the projection is made from the past
experience.
It should be used when data are available and reliable.
Forecasts are based on what has happened on a certain period of time in the past.
What has happened in a certain period in the past may indicate what is likely to happen in the future e.g. sales
in the past 5 years may be used to predict sales in the future.

Page 53 of 98
For example
Birth Rate / Parent Sales (f)
1982 2% 10000
1984 4% 15000
1985 5% 17000

b) Delphi Technique
This method is used when past data are not available or reliable e.g. if a new product is introduced and past
data is not available;
It is a procedure for arriving at an agreement of opinion among a group of experts; each expert gives his own
opinion regarding what the future is likely to be.
Each expert then reads the opinions of the other experts and then he can revise his own opinion.

Stages of Volume Forecasting

Initial Forecast –It is done once a week in respect of each day of the following week.
It is prepared a week in advance and shows
- The estimated total number of meals to be taken in each selling outlets
- The estimated total of each menu item for each day of the following menu week.

Initial Forecast would be based on the following: -

 Past records (sales histories) – Involves referencing figures recorded for the same period the previous
year. It involves examining graphs showing sales for the previous year to check if there is the likelihood
of a particular trend at this period in the year as well as looking at the sales results for the last trading
period.
 Advance bookings – The typical factors which would be taken into account would be the known
advance accommodation bookings, from which a breakdown estimate of usage by selling outlets should
be known and applied; known banquet and party bookings, the numbers of which would have to be
confirmed prior to the event.
 Current events – These should be taken into account in order to forecast with any accuracy. Trade fairs,
shows, exhibitions would have an influence on the business.
 Current trends – These should be watched frequently so that any unfavorable trends can be corrected
before it is too late. What is essential is for management to be aware of any decrease or increase in the
business and to be up to date with the trends of the present customers‟ requirements so that these can be
provided. Some of this information will usually be obtained from the restaurant cashier‟s sheet which
would give the total takings and number of covers served.
Additional information (such as the average spending power (ASP) of customers per meal period, the
most popular and unpopular menu items, the percentage of customers eating from each section of the
menu etc) would provide some guidance on which decisions to correct unfavorable trends or to further
develop favorable trends may be taken

b) Final Forecast – The final more accurate forecast usually takes place the day before the preparation and
service of the particular meal. This takes into account the following: -
 The previous day’s food production and food sales figures – If the actual food sales figures is in line
with the potential food sales figures (obtained from extending the potential food production figures with
the individual selling price for each item), no further action is necessary as the actual business is in line
with the forecast volume of business.

Page 54 of 98
 Should there be a difference, it would be necessary to check where and why the difference has arisen thus
if there were a trend of either increase or decrease in business, this would need to be taken into
consideration when producing the final forecast.

 The weather conditions – must be taken into account as the weather forecast for the next day will
without doubt be much more accurate than that made over a week before and will frequently cause
adjustments to be made to the final forecast figures

Aids to Forecasting
 Cyclic Menus – these are a series of fixed or semi fixed menus which are repeated at a set period. The
length of the period is usually related to the length of the menu e.g.
- 21 days for a menu of 3 main courses
- 14 days for a menu of 5 main courses
Thus the greater the choice of menu items, the shorter could be the length of the cycle of menus. In
practice, cyclic menus cover various periods, usually from 10 – 28 days
Cyclic menus are often used in canteens, hospitals and in restaurants offering a table d’hotemenu

Advantages of Cyclic Menus

 By using cyclic menus a pattern will emerge which will show clear trends in customers‟ likes and dislikes
of menu items, particularly when offered with a specific range of alternatives
With an established pattern of customer demand for a menu item, volume forecasting, purchasing and
preparation will tend to become more accurate.
 The staffing requirements may be worked out very accurately when fairly precise production
requirements are known. This assist not only in the preparation of staff rotas of duty, days off, holidays
etc but may result in the total number of staff being reduced thus savings in the kitchen and restaurant
wage bill

 Sales Histories – Is a detailed record of actual sales, or potential and actual sales for a selling outlet.

Purpose of Sales History

 Provide an accurate record of food produced and sold compared with the forecast figures which can be
used as a reference for forecasting future demand

A sales history record sheet should be prepared for each selling outlet and where necessary for each meal
period if the menu should change

Factors to Consider in Forecasting

 Study the previous years of business records along with these records; it is important to be informed the
reasons behind the policy, the outcome and accuracy of past forecast. Keeping these records in mind, we
should consider present policies and evaluate their effect.
 Consider the competition; competitors‟ successes and failures can often provide hopeful guides for the
way to conduct one‟s own business.
 General economic situation of the nation and the industries can also be studied
 Keep in touch with all publications in the field to help understand trends.

2. Standard Yields

Page 55 of 98
Standards are aids to management for the measurement of efficiency, particularly of kitchens and bars.
The term „standard‟ is synonymous with the phrase “what it should be”
It is necessary to establish the standard number of portions that are obtainable from all major items that
appear on an establishment‟s food and beverage menus. Having established the standard yields for all major
items, it is possible to be much more accurate with menu costing and pricing as well as being able to convert
the volume forecasts for specific items into raw material requirements.

The term „Yield‟ may be defined as the edible or the usable part of a food item which is available after
preparation or preparation and cooking

A standard yield is the yield obtainable when an item is processed in the particular standard methods of
preparation, cooking and portioning of an establishment, the items having firstly been purchased to a known
standard

The Main Objectives of Standard Yields

 To establish a standard for the quantity and number of portions obtainable from a specific item of food
 To establish a standard for comparison with operating results and thereby measure the efficiency of the
production departments
 To establish an objective method of further evaluating standard purchasing specifications
 To establish a standard cost factor for the item of food
 To assist in menu coasting and pricing
 To assist in converting forecast requirements into raw materials requirements

The method of determining the standard yield of a commodity is one of experimentation in order to arrive at
an acceptable product for the customer and an acceptable commodity cost and labour cost to the
establishment

3. Standard Recipes
A standard recipe may be defined as a written formula for producing a food or beverage item of a specified
quantity or quality for use in a particular establishment
It should show precise quantities and qualities of the ingredients to be used, together with the sequence of
preparation and service of the item
It is common practice for photographs of the finished product to be produced and placed with the standard
recipes, to show not only the finished item but also its method of service and presentation.

Objectives of Preparing Standard Recipes are: -

 To predetermine the quantities and the quality of the ingredients to be used, stating the standard
purchase specification whenever possible
 To predetermine the yield obtainable from a recipe if a standard yield has not been prepared
 To predetermine the food cost per portion. This can be accurate when known quantities and qualities of
ingredients will be used for a particular dish
 To predetermine the nutritional value of a particular dish. Again this can be accurate when known
quantities and qualities of ingredients will be used

Page 56 of 98
 To facilitate menu planning. This is achieved by knowing precisely what the ingredients of each dish are
and then being able to restrict the dominance of a meal by a particular colour, ingredient, flavor or
texture
 To facilitate purchasing and internal requisitioning. An approved standard recipe establishes the quality
and quantity of the ingredients to be used.
 To facilitate food preparation. This is achieved by using standard products for a particular dish and
processing them by a standard method. This ensures a standard quality of a particular dish for the
customer at all times.
 To facilitate portion control. The standard recipe sets out the portion size of a dish in one of the
following three ways as a: -
- Raw weight figure (often abbreviated to R.T.C or ready to cook
- As purchased (often abbreviated to A.P or
- The last need little, if any preparation before serving and a precise portion weight may not be
possible, necessary or desirable
 To provide an accurate source of reference to all staff concerned. The standard recipe manual would be
available in particular to the control office staff for costing purposes, the food and beverage manager,
and all kitchen and restaurant staff

4. Standard Portion Sizes

A standard portion is the established number of ounces of a food or beverage item to be served to a
customer in relation to the food or beverage cost and the selling price of an item.
 The standard portion size is usually established when the standard recipe is being prepared
 It represents the number of onces of a food item to be served to customers in relation to the food cost
and selling price of the item
 The portion sizes is determined by the management of the establishment in conjunction with the head
chef and restaurant and canteen supervisor
 There may well be two standard portion sizes for the same commodity in an establishment, depending on
whether the commodity is being offered on a table d’hoteor an a’ la carte menu

Importance of Standard Portion Sizes

 All customers should be served as accurately as possible the quantity of food for which they are paying.
Irregular portion sizes of item served to customers eating at the same table may lead to customer
dissatisfaction. Too small a portion will usually result in the loss of a customer, whereas a correct and fair
portion may well result in repeat business being secured
 As the standard portion size is related to the price to be paid for an item, any excess in portion size
causes a higher food cost for that dish and a reduced gross profit

N/B: Assistance must be given to staff by posting lists of the standard portion sizes in prominent places in
preparation and service areas, these lists should have been extracted from the standard portion size manual
which should be freely available to all staff
Assistance given should also be by means of equipments such as ladles and scoops of specific capacities,
easily-readable scales

Page 57 of 98
 TOPIC 8: COSTING AND PRICING
The Elements of Cost
Includes the following: -
a) Food cost
b) Labour cost
c) Overhead cost

1. Material Cost
Refer to food and beverage costs.
Food cost consists of the cost of food consumed less the costs of the staff meals.
Staff meal is usually debited to the cost of labour

Food Costing
Food costing focuses on costing of the following: -
 Ingredients
 Individual dish costing
 Meal costing (total cost of a meal)

2. Labour Costing
Is the cost of manufacturing an item i.e. employees salaries, staff meals, staff accommodation, bonuses,
commissions etc.
Labour costing focuses on the following: -
 Wages
 Staff meal

3. Overhead Costs
Are all costs other than material and labour costs. They include rent, rates, gas, water, electricity, water,
insurance, repairs and maintenance, stationeries and printing, depreciation, Sundry expenses (such as those of
tobacco, cigarettes)
etc.
Gross Profit / Net Profit
 Net profit percentage in food and beverage
 Calculation of gross profit and gross percentage
 Food cost percentages - In welfare institutions
- In profit making institutions

Pricing
This entails pricing of: -
 Dishes
 Meal
 Banquet
 Beverages (non alcoholics and alcoholics)

Basic Concepts of Profit

There are 3 main concepts of profits used in catering establishments

Page 58 of 98
a) Gross Profit – Is the excess of sales over the cost of material, i.e. it is the profit got before paying for
labour and overheads. It is also refered to as kitchen profit or bar profit depending on whether it is the
Gross Profit on food operations or beverage operations
e.g.
Given that Materials (Food cost) cost 400/= and Sales of Food cost 1000/=

Then Gross Profit = 1000/= - 400/= (refer to definition)

= 600/=

Gross Profit expressed as a %age = 600 / 1000 x 100 = 60%

Materials (Food cost) expressed as a %age = 400 / 1000 x 100 = 40%

Problem
The Sales for CIT restaurant is Sh.2000 (100%)
i. Calculate the gross profit given the food cost as Sh.600
ii. What %age is the Gross Profit to sales

Solution
i. If sales is Sh.2000 (100%)
Then Gross Profit = Sales – Food Cost
= Sh.2000 –Sh. 600= Sh. 1400
ii. Percentage
If sales = 2000/= (100%)
Then Gross Profit =?
=1400 / 2000 x 100 = 70%
b) Net Profit (after wage profit) – Is the excess of sales over the total cost i.e. it is what remains after buying
food, paying labour and overheads.
e.g.
Sales Total = 30000/= (100%)
Food costs / material = 5000/=
Labour cost = 10000/=
Over head costs = 3000/=

Total (FC + LC + OC) = 5000/= + 10000/= + 3000/=

=18000/=

Therefore Net Profit = 30000/= - 18000/=

= 12000/=
%age Net Profit = 12000/= / 30000/= x 100%

Page 59 of 98
 = 40%
Problem
The total cost in CIT restaurant is 8400/= while the sales is 20000/=

i. Calculate the Net Profit

ii. What %age is Net Profit to Sales?

Solution
i. Net Profit = Sales – Total Cost
= 20000/= - 8400/=
= 11600/=

ii. %age = 11600/= / 20000/= x 100%

= 58%

c) Net Margin Profit – This is the excess of sales over the cost of materials and labour cost. i.e. it is the
profit incurred after one pays for materials and labour only and no payment of overhead is made.
e.g.
Sales = 90000/= (100%)
Material and Labour costs are as follows: 10000/= and 50000/= respectively
Total Material and Labour Cost = 60000/=
Therefore Net Margin Profit = 90000/= - 60000/=
= 30000/=
%age Net Margin Profit = 30000/= / 90000/= x 100%
= 33.33%
Problem
Calculate the Net Margin Profit from the following information
In Rock Restaurant, the management paid the following in the 2005 – 2006 business year.
Labour = 20000/=
Material / Food costs = 30000/=
Total Material / Food cost = 50000/=
The sales for the period was = 70000/= (100%)
(i) What %age was Net Margin Profit for sales?
(ii) According to the information above, what do you think was the overhead cost?

Solution
i. Net Margin Profit = Sales – (Material Cost + Labour Cost)
= 70000/= – (30000/= + 20000/=
= 70000/= – 50000/=

Page 60 of 98
 = 20000/=
%age NMP = 20000/= / 70000/= x 100%
= 28.5%
%age Total Cost = 50000/= / 70000/= x 100%
= 71.4% (Material / Food cost and Labour cost)

Costing
It is the analysis of income and expenditure for the purpose of determining the cost of each product, service
and department and the contribution that each of these make to the total profit of a business.

Formula for Calculating Food Cost

FC =OS + (P – SM) - CS

Food Cost= Opening Stock+ (Purchases – Cost of Staff) - Closing Stock of

of Materials Meals Materials

Practice: Refer to problem and solution on page 16 of F&B Control by Kotas

Problem
The following information was extracted from the books of Mara Restaurant in respect of June 2006
Sales = 30000/=
Opening Stock (1st June 2006) = 3000/=
Closing Stock (30th June 2006) = 4500/=
Purchases = 10000/=
Wages and Salaries = 6300/=
National Insurance = 200/=
Staff meals = 900/=
Gas and Electricity = 7000/=
Repairs and Renewals = 800/=
Rent and Rates = 2000/=
Insurance = 300/=
Postage and Telephone = 150/=
Printing and Stationary = 200/=
Depreciation = 1000/=
You are required to: -
a. Calculate the elements of cost and to express each as a percentage of sales
b. Calculate the Average Spending Power per customer assuming that 6000 customers were served
in June 2006

Solution
a) Calculating elements of costs and expressing each as a percentage of sales
Opening Stock 3000.00

Page 61 of 98
Add Purchases 10000.00
13000.00
Less Closing Stock 4500.00
8500.00 (Cost of Materials Consumed)
Less Staff Meals 900.00
7600.00 (Cost of Materials – Net)
Materials as a %age of Sales
Materials / Sales x 100% = 7600/30000 x 100%
= 25.33%
Labour Cost
Wages & Salary 6300.00
National Insurance 200.00
Staff Meals 900.00
7400.00
Labour Costs as a %age of Sales
Labour Cost / Sales x 100% = 7400 / 30000 x 100%
= 24.66% or 24.7% or 25%
Overhead Costs
Gas & Electricity 7000.00
Repairs & Renewals 800.00
Rent & Rates 2000.00
Insurance 300.00
Postage & Telephone 150.00
Printing & Stationery 200.00
Depreciation 1000.00
11450.00
Overhead Costs as a %age of Sales
Overhead / Sales x 100% =11450 / 30000 x 100%
= 38.17%
Average Spending Power (ASP) Per Customer = Sales / No. of Customers Served
= 30000 / 6000
= 5.00 per Customer
Labour Costing
When costing for labour, wages and staff meals have to be considered.

Page 62 of 98
Procedure for Labour Costing
1. Remuneration – This is a payment or reward given to someone for the work or services provided

Basic Methods of Remuneration

Two basic methods of remuneration exist namely: -
 TimeRate – This refers to all wage payments which are based on a measured unit of time i.e. hour, day,
week, and year. Each worker is paid a time rate depending on his individual job grade which in turn
depends on the nature of the work handled by the employee.
Computation of wages is relatively straight forward as the basic rate is multiplied by the number of time
units worked to arrive at the amount payable.

Example:
John is an employee of a certain firm. He is paid an hourly rate of wages earned by workers will be irregular
from week to week.
NB:
The method cannot be used for a large number of jobs that are incapable of being broken into uniform units
The method is also despised by trade unions who prefer their members to get assured monthly incomes.

2. Staff Meals
Staff meals are a labour cost i.e. part of salaries and wages, as food provided for staff is not available for sale
to customers, a weekly or monthly charge should be made to a staff meals account.
This may be determined by making the kitchen department an allowance for food cost per day or per meal,
per member of staff.
According to management policy, this may include full time, part time and casual employees. Double entry
for the above may be completed by debiting staff meals account and crediting purchases accounts.

Overhead Costing
Consist of - Rent
- Water
- Fuel (gas, electricity, kerosene, charcoal, firewood, etc)
- Insurance
- Stationary & Printing,
- Repairs and maintenance
- Depreciation

Classification of Overheads
1. Production Overheads – Include all expenses related to the running or maintenance of a production
factory e.g. rent and rates, insurance, depreciation, machinery, salary, etc
2. Administration Overhead – Include costs related to the general organization of the company e.g. office
expenses, office salaries, rent and rates, and insurance, legal and financial expenses, etc
3. Selling Overheads – include expenses related to marketing and sales promotion e.g. advertising costs, free
samples, etc
4. Distribution Overheads – Include expenses related to keeping finished products in factory warehouse or
to deliver them to customers e.g. delivery van expenses, packages, maintenance of warehouse, etc.

Apportionment of Overheads

Page 63 of 98
As overheads are indirect expenses, it is necessary to assess at the time of preparing cost statements for
different departments within the factory to know exactly what amount to charge from each e.g. the rent is
paid monthly for the whole factory therefore it is necessary to make a decision as to how much of the total
rent paid should be deducted or born by each department within the factory.
The process of allocating various overhead cost departments is called Apportionment of Overheads

Basis of Apportioning Overheads

There are various bases upon which overheads may be apportioned over different cost centres (departments)
Once the total cost of each department is known, it is divided over its various products or services to arrive at
unit cost of these basis of apportioning overheads.
They are as follows: -
Bases of apportionment Examples
 Area Occupied Expenses include; rent, rates, lights & heat, maintenance of the premises,
insurance, repairs, etc
 Number of Employees Related to expenses which benefit employees equally like personnel office,
staff canteen, medical
expenses, basic supervision
 Direct wages Expenses which benefit employees in proportion to their earnings e.g.
contributions i.e. NSSF, NHIF,
Training
 Cost of Assets Depreciation of related fixed assets, insurance, plant repair and
maintenance, etc
 Cost of Materials Used Material handling expenses, warehouse cost, packages, etc
 Technical Estimate of Usage. Power and electricity consumption, machine and warehouse usage, etc
 Machine Hours Worked Depreciation, maintenance, insurance, etc
 Sales Revenue Advertising, sales promotion, distribution, etc

Meat Costing
The caterer usually decides to buy meat either in wholesale cuts or in a pre-portioned form. If bought in a
pre-portioned form, then costing is made simple through the labour of preparation and packing will reflect in
the producer‟s costs and this can be quite expensive
If pre-portioned cuts are used, the caterer saves time and labour in the kitchen. The increased food cost
which occurs as a result of pre-portioned cuts of meat can always be offset by decrease in labour or overhead
costs.
If wholesale cuts are used on time, labour and overheads but a decrease in the producers cost

The following should be calculated by the caterer

 Cost of cooked meat
 Cost of labour for preparion
 Cost of overheads
 Net profit
 Selling Price
NB: These must be expressed as a percentage

Since selling prices are calculated at a cost of portion cooked, the caterer should consider the following when
buying wholesale cuts;

Page 64 of 98
1. Establish the raw price ratio of different cuts of meat since the meat will be sold at a set price per kg for
the total weight. This calculation is presented by use of the following formulae shown below: -

Raw Price Ratio = Total Wholesale Cost xRetail Price per kg

Total Retail Cost
2. Establish the bone and the cooking loss of the meat in order to be able to calculate the price of cooked
meat. Bone and cooking loss comes in trimmings, bones and shrinkage in cooking.
This is usually calculated as the percentage of the weight of raw meat purchased and is done as shown
below: -
 Meat is weighed before cooking and weight recorded
 Meat is weighed after cooking and weight recorded
 Cooking loss as a percentage is calculated

Example:
Joint before cooking = 8kg
Joint after cooking = 6.5kg
Cooking loss = 1.5kg
%age loss = Loss / Weigh of meat before cooking x 100%
= 1.5kg / 8kg x 100%
= 18.75%
 After carving; the bones and scraps are weighed to establish trimming and bone loss
Total weight = 8kg (100%)
Bone loss = 2kg
= Bone loss / Total weight x 100%
= 2kg / 8kg x 100%
= 25%
Cooking loss = 1.5kg
Total loss = 2kg + 1.5kg
= 3.5kg
%age Total loss = 3.5kg / 8kg x 100%
= 43.73%
Usable meat = 8kg – 3.5kg
= 4.5kg
%age Usable meat = 4.5kg / 8kg x 100%
= 56.25%
 If the standard portion of cooked meat is 150g, then the person carving has the responsibility of
producing 30 portions as follows: -
4.5kg / 150g = 4500g / 150g = 30 Portions

Page 65 of 98
Establish the portion sizes of meats to be served in order to be able to calculate the selling price at a given
gross profit percentage.

To calculate the price per kg and the price per portion of meat served, any of the 3 formulas can be used

Formula 1:
Weight of Raw Meat x Raw Meat Price per kg
Weight of Usable Cooked Meat

e.g. 8 x 160 = 284/=

.5

Formula 2:
Served meat price per kg

Raw Meat Price per kg x 100

Usable Cooked Meat %age of Raw Meat

e.g. 160 x 100 = 284.40 = 284/=

56.25

Formula 3
Served meat price per portion

Weight of Raw Meat x Raw Price per kg

Number of Portions of Cooked Meat Served

e.g. 8 x 160 = 42.666 43/=

30
Problem
A joint weighing 10kg is purchases at 50/= per kg. The bone and cooking loss is 40%. Calculate the
following: -
i. The price per kg of served meat
ii. The number of 150g portions obtainable from the served meat
iii. The cost per portion of cooked meat
iv. The selling price of 150g portions of cooked meat at 65% gross profit margin

Solution
i. The price per kg of served meat
Using Formula 1
Served meat price per kg = 50 x 100 = 83.33/= per kg
60

Page 66 of 98
 Using Formula 2
Served meat price per kg = 10kg x 50 = 83.33/= per kg
6kg
ii. The number of 150g portions obtainable from the served meat
If the bone and cooking loss is 40%, therefore the remaining weight of cooked meat is 60%.

If 100% is equivalent 60% weight of cooked meat

Therefore 10kg would be equivalent to? = 10 x 60 = 6kg

100

iii. The cost per portion of cooked meat

The number of 150g portions of served meat obtainable from 6kg = 6kg = 6000g = 40
Portions
150g 150g
Using Formula 3

For Served meat price per portion = Weight of Raw Meat x Raw Price per kg
Number of Portions of Cooked Meat Served

= 10kg x 50
40

= 12.50/= per Portion

iv. The selling price of 150g portions of cooked meat at 65%

To calculate the selling price of 150g portions of served meat at 65% gross profit margin; proceed as
follows: -

Sales = 12.50/= (100% sales)

Material / Food Cost = Sales - Gross Profit = 100% - 65% = 35%

If
Sales - 100% (12.50/=)
Gross Profit - 65% 65% /100% x 12.50 = 8.125/=
Material / Food Cost - 35% 35% / 100% x 12.50 = 4.375/=
Therefore Selling Price (SP) = Total Cost (TC) + Gross Profit (GP) =
20.60/=
12.50/=+ 8.125/=
= 20.60/= per portion

Page 67 of 98
Assignment
1. A joint weighing 12kg is purchased at 45/= per kg. After cooking and carving, it produces 56 portions by
140g. Calculate the following: -
a) Cooking loss as a percentage
b) The Cost per portion of meat served
2. State and explain 3 factors that influence price policies (Customer‟s demand, cost of production and
completion)
3. Define costing
4. State and explain 6 advantages of costing.

Cost Dynamics / Behaviour or Elements of Costs

 Cost has until now been considered in basic elements of material (e.g. food), labour (e.g. wages), expenses
or overheads (e.g. laundry)
 Cost should also be considered from the point of view of how it responds to various influences i.e. their
behaviour in relation to the volume of sales.
 Costs may be classified into - Materials
- Labour
- Overhead
These constitute the “Total Cost” of a business.
 It is also possible to classify the same Total Cost by the way it behaves, namely
- Variable Cost
- Fixed Cost
- Semi Fixed Cost
1. Fixed Cost
These are the costs which remain fixed irrespective of the volume of sales e.g. salaries, rates, insurance,
NHIF, etc. For example take the case of a manager who is pain an annual salary of 250000/=, if he manages
to increase sales by say 20%, his salary will remain the same throughout the sales period.

2. Semi – Fixed Costs or Semi – Variable Costs

They are costs which move in sympathy with but not in proportion to the volume of sales e.g. gas, electricity,
laundry, wages, etc.
Take the case of a gas, if double the number of meals is sold, the gas bill will increase but the cost will not
double.
NB: Semi – Fixed or Semi – Variable costs are incurred even when output is nil, e.g. a business may be closed
by the health personnel due to poor sewage disposal. For the closed period, e.g. one month, the business will
still pay the wages and the gas, electricity, etc.

3. Variable Costs
These are costs which in total tend change directly in proportion to the sales e.g. cost of food, drink,
cigarettes and tobacco and casual labour.
For instance, if the food cost of a certain dish is 100/=, then the cost of producing 50 pcs of this dish would
be as shown below: -
50pcs x 100/= = 5000/=
Break Even Charts
A break-even chart is a graphical presentation which indicates the relationship between cost, salesand profit.
The chart depicts fixed costs, variable cost, break-even point, profit or loss, marginof safety and the angleof

Page 68 of 98
incidence. Such a chart not only indicates break-even point but also shows the estimatedcost and estimated
profit or loss at various levelof activity. Break-even point is an important stage in thebreak-even chart which
represents no profit no loss.

From the above break-even chart, we can understand the following points:
a) Cost and sales revenue are represented on vertical axis, i.e.,Y-axis.
b) Volume of production or output in units are plotted on horizontal axis, i.e., X-axis.
c) Fixed cost line is drawn parallelto X-axis.
d) Variable costs are drawn above the fixed cost line at different levelof activity. The variable
cost lineis joined to fixed cost line at zero level of activity.
e) The sales lineis plotted from the zero level, it represents sales revenue.
f) The pointof intersection of total cost line and sales line is called the break-even point
whichmeans no profit no loss.
g) The marginof safety is the distance between the break-even point and total output
produced.
h) The area below the break-even point represents the loss area as the total sales and less than
the total cost.
i) The area above the break-even point represents profit areaas the total sales more than the
cost.
j) The sales line intersects the total cost line represents the angle of incidence. The large angle
ofincidence indicates a high rate of profit and vice versa.

Uses of Break Even Charts

 It enables to determine the profit or loss at different levels of activities.

Page 69 of 98
  It is useful to measure the relationship between cost volume and profit.
 It helps to determine the break-even units, i.e., output and sales volume.
 It helps to measure the profitabilityof various products.
 It facilitates most profitable product mix to be adopted.
 It assists future planning and forecasting.
 It enables to determine total cost, fixed cost and variable cost at different levelsof activity.
 This chartis very useful for effective cost control.
Assumptions of Break Even Chart
1. The selling price and variable cost per unit remain the same at various level of output
2. Fixed cost remain unchanged at all levels of fixed activity
3. It is possible to distinguish between fixed cost and variable cost
4. This chart shows the relationship between the sales and cost of a single product only
5. The method of production remains the same

Margin of Safety
This represent the difference between the actual level of activity and the break – even level of production or
activity or
It‟s the range of output between break - even point and the actual output achieved, e.g. if the actual level of
activity is 80000 units and the break – even point lies at 30000 units, therefore the margin of safety would be
as shown below: -

Margin of Safety = 80000 unit - 30000 units = 50000units

Cost Behaviour Equations

As discussed earlier, cost behaviour is the manner in which a cost reacts to a change in level of production

Total Cost thus can be represented by the following equation: -

Total Cost (TC) = Variable Cost (VC) + Fixed Cost (FC)

Further analysis of the above equation, we can say that total cost plus profit equals selling price

Selling Price (SP) = Total Cost (TC) + Profit (P)

But note that
Total Cost (TC) = Variable Cost (VC) + Fixed Cost (FC
Therefore
Selling Price (SP) = Variable Cost (VC) + Fixed Cost (FC) + Profit (P)
You will notice that SP is a variable cost or item as sales revenue must increase or decrease almost exactly in
the same proportion as sales volume goes up or down.
The excess of selling price of a product over its variable cost is called „„contribution‟‟

The contribution equation is as shown below: -

Contribution = SP - VC = FC +
P
This equation above is as correct for each unit of the product as it is for the entire lot.

Page 70 of 98
In other words we can say

Contribution per unit = Selling Price per Unit - Variable Cost per Unit

Or
Total Company Contribution = Total Sales Revenue - Total Company Variable
Costs for all Units Sold
And

Total Company Contribution = Total Company Fixed Cost + Total

Company Profit

NB: The above equations are VERY important and must be remembered by heart if possible.

Application of the above equations is as follows: -

Break Even Point

This is the point at which the company‟s sales revenue is just equal to cover its variable and fixed costs and
leave no profit or loss. When the company is getting no profit and no loss, it is said to be operating at a
break-even point
The Company‟s equation would be: -

SP = VC + FC Or

FC = SP - VC

It follows therefore that if a company operating at a break – even point, its contribution (i.e. excess of sales
revenue over variable costs) is exactly equal to Fixed Costs

Contribution = SP - VC = FC

To calculate Break Even Point, the following formula is used

Break Even Point (BEP) = Total Fixed Cost

Contribution per Unit
Problem 1
NITTI is planning to start a tea kiosk where he will sell only tea thus he makes the following estimates: -
Variable Cost per Cup
Water - 1 cent
Milk - 10 cents
Sugar - 12 cents
Tea Leaves - 17 cents
Fixed Cost per Month
Rent - 80/=
Attendant Wages - 120/=
Selling Price per Cup - 60cents

Page 71 of 98
How many cups of tea must he make and sell each month to break even?

Solution
Break Even Point = Total Fixed Cost
Contribution per Unit (Cup)
Thus
Total Fixed Costs = Rent + Wages = 80/= + 120/=
= 200/=
Contribution = SP - VC
SP = 60 cents
VC per Cup = Water+ Milk + Sugar + Tea Leaves
1 + 10 + 12 + 17
= 40 cents
Therefore
Contribution = SP - VC
= 60 cents - 40 cents = 20 Cents equivalent to 0.20/=
Break Even Point = Total Fixed Cost = 200/= / 0.20/= =1000
Cups Contribution per Unit (Cup)
Problem 2
Lets assume that NITTI wishes to make a profit of 300/= per month from his tea kiosk. How can he
calculate the number of cups that he must make and sell each month in order to record or realize this profit?

At Break Even Point = Total Fixed Cost

Contribution per Unit (Cup)
If Profit is desired, the contribution must cover both Fixed Costs and intended Profit

Desired Level of Production = FC + Desired Profit

Contribution per Unit

Desired Level of Production

Expected output unit = 200/=
Desired Profit = 300/=
Contribution per Unit = 0.20/=

Therefore
Desired Level of Production or output will be = FC + Desired Profit
Contribution per Unit

= 200/= + 300/=
0.20/=
= 2500 Cups

Page 72 of 98
Problem 3
A restaurant has a seating capacity to serve 10,000 customers per 28 days of the trading period. The Average
Spending Power of the customer is 2/=. The FC of the restaurant are 5000/= per period and VC are 40% of
Sales.

1. Calculate the Break Even Point of the restaurant

Solution
a) At Break Even Point = Total Fixed Cost
Contribution per Unit (Cup)

Contribution = Selling Price - Variable Cost = Fixed Cost

Selling Price =2 x 10000 = 20000
Variable Cost is 40% of Sales = 40% x 20000
= 8000/=
100%
Therefore
Contribution = 20000/= - 80000/= = 12000/=

Contribution per Unit = 12000/= / 10000 Customers

= 1.2/=
Break Even Point = 5000/= / 1.2/= = 4166.66 Units

b) The total number of meals the restaurant should sell in order to realized a net profit of 2000/=

Desired Level of Production or output will be = FC + Desired Profit

Contribution per Unit
= 5000 + 2000 =
5833.33 Units
1.2
Problem 4
In a city restaurant, the average price per meal is 120/=, Fixed Cost per week are set at 82000/=, Variable
Costs are 36% of the Average Selling Price. Show the formula used for calculating the following: -
i. The number of meals to the nearest whole number the restaurant must sell in order to break even
ii. The Break Even Point in Shillings.

Solution
The number of meals
Selling Price = 120/=
Variable Cost = 36% / 100% x 120/= = 43.20/=

Page 73 of 98
Contribution per Unit = Selling Price - Variable Cost = Fixed Cost
120/= - 43.20/=
= 76.80/=

Break Even Point = Total Fixed Cost = 82000/= / 76.80

Contribution per Unit (Cup)
= 1067.70 Meals
Break Even Point in Shillings = 1067.70 meals x 120/= = 128040/=
Assignment
A popular restaurant in a remote area has the following information at the end of a 28 day trading period
a) Maximum seating capacity 10000 Customers
b) Average Spending Power 2/=
c) Fixed Costs 6000/=
d) Variable Costs 40% of Sales

A. Calculate the following in shillings

a) Total Sales (2mks)
b) Variable Costs (2mks)
c) Total Cost (2mks)

B. Using graph paper, draw the break even chart and label the following: -
a) Sales Cost axis
b) Total Cover axis
c) Total Sales Point
d) Fixed Costs
e) Total Cost
f) Variable Costs
g) Break Even Point
h) Shade Net Profit Area
i) Shade the Net Loss Area

j) Explain - The Margin of Safety

- When the restaurant will be making a Net Loss according to the chart

Solution
a. Total Sales = Maximum Seating Capacity x Average Spending Power
10000 x 2/=
= 20000/=

b. Variable Cost is 40% of Sales = 40% / 100% x 20000 = 8000/=

c. Total Cost = FC + VC = 6000/= +

8000/= = 14000/=

Page 74 of 98
Pricing Policy
Prices are always subjected to change, when demand is great; prices can be increased and when sales is low,
prices can be decreased to boast the sales.
Price policies are usually influenced by the following 3 factors:
 Customers Demand – This applies to what the customers are able to spend as per their capability.
It the prices given are beyond what the customers are able to offer, therefore we can say that the
price given is beyond the customers spending power.
Prices should be what the customers are able to offer as per their pockets
 Cost of Production – If the cost e.g. 60% Gross Profit Margin was the previous year‟s sales was
necessary to cover labour and overhead costs and give a reasonable Net Profit.
The percentage must be the minimum to aim for when deciding on a future price.
 Competition – A study of competitor‟s price could also dictate in what range the prices have to be
fixed in order to attract customers.

Production Cost
There are three methods of production in the food industry; the method adopted will be a chief factor in
determining pricing policy
 Cooking Order – This is the most expensive method because it requires a wide variety of fresh
foods. The fixing of selling price on the A la Carte menu is relatively simple as each dish is
individually priced.
The cost of one portion of every dish offered on the menu is obtained from the unit cost card.
 Table d hote – Some or all orders are prepared in advance to cope with the lunch or dinner. Dishes
from the are used to compile the menu and by a use of the appropriate dish costing card, an accurate
food cost for the menu is quickly obtained. This method has got an advantage in that it controls cost
by restricting.
 ContinuousFlow of Production – The quantities prepared are small and continuous. Here the use
of the unit cost card provides the cost per dish or portion

Production Material
When costing a menu, you must account for all the raw materials you used in the preparation of each item in
figuring or determining an adequate Selling Price.
Standardized recipes are important in production because ingredients are still the same and should be
followed closely if you are to price accurately.

Special Functions
Include weddings, receptions, special parties, conferences and other special functions require additional food
costs, labour and overheads therefore when costing for functions, extra labour e.g. casuals should be
considered as well as extra overheads e.g. cost of decorations used should also be considered.
There is also the need to include; transport cost, equipment (both production and service) premises e.g. rental
hall etc.

Page 75 of 98
Methods of Costing

Pricing Methods
There are two main types of Pricing Techniques.
1. Objective Pricing Method
2. Subjective Pricing Methods

Prices determine to a large extent whether the financial goals of the Operation are met, many managers use
very Subjective Pricing Methods to establish Prices, however, fail to relate them to Profit Requirements and
even Costs. This Pricing method is based merely on assumptions.

1. Subjective Pricing Methods

 Reasonable Price Method: The method uses a price that the Operator thinks will represent value to the
guest. In other words, the Operator puts himself in the guest‟s shoes and asks “How much am I willing
to pay for this Item, considering the type of setting? ” The answer to this is the Reasonable Pricing
Method.
 Highest Price Method: Using this Pricing Method, the Operator sets the Highest Price for an Item that
he thinks the Guest is willing to pay. This is pushing the concept of Value to the Maximum. A High Price
is set then “Backed Of” in order to provide for an Error Margin in the estimate.
 Loss Leader Pricing Method: In this type of Pricing Method, the Menu Items are Priced very low. The
philosophy for this Pricing method is that the Guests will be attracted to the Operation due to Low
Prices and will then buy other items while they are there (Spin Off Business). In this case, it is very
important to sell other items to make Profit. This Pricing method is used as an Early Bird Promotion to
attract specific market segments.
 The Intuitive Price Method: Like the name suggests, Prices are set by Intuition of the Operator alone.
The Operator takes a little more than a “Wild Guess” about the Selling Price. It differs from the
Reasonable Price Method in that it takes a little less effort to determine the price as one does not
consider what would represent Value to the Customer

Limitations of Subjective Pricing Methods / Drawbacks:

 Cannot relate to the Profit Requirements of the Operation.
 Cannot relate to the Cost of a Menu Item.
 Solely based on Assumptions, Guess Work and Hunches.
 Seldom works in an era where Consumers are looking for “Value for Money” and
 AP Prices of Ingredients are sky rocketing.

2. Objective Pricing Methods

a) Simple Mark –Up Pricing Methods
 Ingredient Mark – Up
 Prime Ingredient Mark – Up
 Mark – Up with Accompaniments Costs
b) Contribution Margin Pricing Method
 Ratio Pricing Method
 Simple Prime Costs Method

Page 76 of 98
  Specific Prime Costs Method

a. Simple Mark – Up Pricing Methods

 It considers a Mark – Up from the Cost of Good Sold (In the case of a Menu Item, that would be the
Standard Food Cost).
 The Mark – Up is designed in such a way that it covers all Costs to Yield the Desired Profit Levels.

i) Ingredient Mark – Up Method; This Pricing method attempts to account for all Product Costs (Food
Cost in case of Food and Beverage cost in case of Beverage). Determine Ingredient Costs; Determine
Multiplier to Mark – Up Ingredient Costs; Determine the Base Selling Price.
Ingredient Mark – Up Pricing Assume that a Seafood Platter has a Standard Food Cost / Portion of a
Seafood Platter is $ 5.32
If a Food Cost % of 40% is desired:
Then; Base Selling Price (B.S.P.) = $ 5.32 x 2.5 = $ 13.30
ii) Prime – Ingredient Mark – Up Method; differs from the Ingredient Mark – Up Pricing in that it
concerns itself with only the Prime Ingredient of the Menu Item. Only the Cost of the Prime Ingredient is
Marked Up. The Multiplier is usually higher in Order to account for the Cost of the ancillary ingredients in
the recipe.
(Example) Using the same example as above, Consider the Cost of Prime Ingredient in a Seafood Platter as $
2.65 (Prime Ingredient being Lobster) The Multiplier = 5 (Higher than the regular M to account for other
ingredients) Hence, B.S.P.
If the Cost of the Prime Ingredient increases to $ 2.75 per Dinner Portion, then the new B.S.P. = $ 2.75 x 5 =
$ 13.75
The Pricing method approach assumes that the Cost of other Recipe Ingredients increases in Proportion to
the Cost of the Prime Ingredient.
iii) Mark – Up with Accompaniment Costs; In this pricing method, the Operator determines the
ingredient costs based only upon the Entrée items and then a Standard Accompaniment cost / Plate Cost is
added before Multiplying by a Mark – Up. Example: Entrée / Primary Costs = $ 3.15, Plate Cost = $ 1.25
therefore the Estimated Food Cost = $ 4.40. If the Mark – Up Multiplier = $ 3.30 then the Base Selling Price
= 14.52

Determining the Multiplier:

The Mark – Up Pricing Methods are simple to use and hence are commonly used in the Hospitality Industry.
A significant disadvantage involves determining the Desired Food Cost %.
Pricing method does not reflect higher / lower Labor Costs / Utility Costs associated with the Menu Item.

b). Contribution Margin Pricing Method:

Contribution Margin = Selling Price – Food Cost
Contribution Margin can be defined as the Amount left after deducting the Food Cost from the Selling
Price of the Menu Item. This is amount left behind to meet all Non Food Expenditure and Profit
Requirements.
Example: Consider the given data obtained from the Operating Budget of the Restaurant:
Non – Food Costs = $695,000
Profit Required = $ 74,000
No. of Guests Expected to be served = 125,000

Page 77 of 98
With the above information, compute the Base Selling Price of a Menu Item with a Food Cost per portion of
$4.60.

Determine the Avg. Cost of Meal per Guest:

Avg. Cost of Meal / Guest = (Non F.C. + Profit Req.)
Total No. of Guest Served = ($ 695000 + $ 74000) / 125000 = $ 6.152
Determine the Base Selling Price:
B.S.P. = $ 4.60 + $ 6.152 = $ 10.8

i) Ratio Pricing Method:

Consider the data given below:
Food Costs = $ 435,000
Non – Food Costs = $ 790,
Profit Requirement = $ 95,000
Standard Food Cost of Menu Item = $ 4.75
Step A) Determine the Ratio of Food Costs to Non Food Cost and Profits:
All N.F.C. + Profit) / Food Costs = Ratio (R)
Ratio = ($ 790000 + $ 95000) / $ 435000 = 2.03
This Ratio implies that for every $ 1 earned to cover Food Cost we have to earn $ 2.03 to cover Non Food
Cost and Profit Requirements
Step B) Amount of N.F.C. and Profit Required:
The Cost of the Menu Item is $ 4.75
Amount required to cover all Non Food Costs and Profit Requirements = $ 4.75 x 2.03 = $ 9.64
Step C) Determining the Base Selling Price for Menu Item:
Base Selling Price = $ 4.75 + $ 9.64 = $ 14.39
ii) Simple Prime Costs Method:
The term Prime Costs refers to the most significant Costs in a Food & Beverage Service Operation. Prime
Costs for any F&B Operation would be: - Labor Costs
- Food Costs
This method involves assessing Labor Costs and Food Costs for the operation and then factoring these into
the Pricing Equation.
Consider the following data given below:
Menu Item Food Cost = $ 3.75
Labor Cost = $ 210,000
Number of Exp. Guest = 75,000
Desired Prime Cost % = 62%
Step A) Labor Costs per Guest = $ 210,000 / 75,000 =$ 2.8
Step B) Determine the Prime Cost per Guest = $ 3.75 + $ 2.8 = $ 6.55
Step C) Computing Base Selling Price: = Prime Costs per Guests

Page 78 of 98
Desired Prime Cost age%
B.S.P. = $ 6.55 / 62 % = $ 10.56
An obvious disadvantage of this Pricing method is to assign an equal share of Labor Costs to all Menu Items.
This is not true as the Labor Cost of each item may greatly differ.

iii) SpecificPrime Costs Method: - In this type of Menu Pricing the F&B Operator develops mark –ups for
Menu Items which takes into account their Food Costs and also their Fair Share of Labor Costs.
This method tries to overcome the limitations of the Simple Prime Costs Method. In this method, Menu
Items requiring more labor intensive preparation would have a higher mark – up and those involving less
labor during preparation would have a lower mark – up.

Disadvantages of Specific Prime Costs Method:

Very Time Consuming as All Menu Items have to be Classified and then the % Costs have to be allocated to
each Category.
Assumption that all other Costs vary in relationship to the Food Cost Associated with the Menu Item.

Pricing Considerations
The Base Selling Price is the Starting Point for deciding the Selling Price of a Menu Item. The Base Selling
Price is further subjected to further assessment based on several factors as shown below
- Concept of Value
- Law of Supply and
- Volume Concerns – Higher the Volume / Turn Over lower the Overheads and vice versa.
- Competition
- USP – Unique Sales Proposition

Evaluating the Menu

The menu is the most important tool influencing the success or failure or a Food & Beverage Operation.

The Process of Menu Engineering is an increasingly popular tool in Evaluating the menu. Any menu item is
evaluated on the basis of two criteria - Popularity and

- Profitability

Page 79 of 98
 TOPIC 9 : REVENUE CONTROL SYSTEMS
To control the revenue of a unit, particular attention must be paid to the major factors which can have
influence on the profitability. Therefore it is essential to control the main factors which can affect the revenue
of a business; they include: -
 Menu – beverage list
 The total volume of food and beverage sales
 The sales mix
 The average speed of customers in each selling outlet at different times of the day
 The number of customers served
 The gross profit margins

Total control system in commercial operations, is of particular importance; there is need for the
accountability of what has been served to the customer and the payment for what has been issued from the
kitchen or the bar.
Food and beverage payment may be made in many forms such as cash, foreign currency, credit cards,
cheques, traveler‟s cheques, luncheon type and signed bills.
All staff handling cash should be adequately trained in the respective company‟s methods
It is common practice for a cashier‟s or waiter‟s handbook / manual to be produced so that an established
procedure may be followed with the specific aim of ensuring that cash security is sufficiently carried out at all
times.
A typical handbook / manual would contain information on the standard procedure to follow to be followed
for such things as: -
 Opening procedure – instructions here would include procedures about checking the float, having a float
of specific denominations, checking the till roll, recording waiters‟ bill pad numbers etc
 Working procedure – instructions on how to accept payment and the procedure to follow
 Closing procedure – instructions on any documentation and recordings to be completed, cashing up,
recording of credit cards, chequesetc
 Procedure for accepting foreign currency – what currency is to be accepted, how to obtain the current
exchange rates, how this is to be recorded etc.
 Procedure for accepting credit cards – which credit cards are to be accepted, how they are to be checked,
methods of processing credit cards for payments, recording of credit vouchers, etc.
 Procedure for accepting vouchers i.e. luncheon vouchers – which vouchers are acceptable, how is it to be
recorded, etc.
 Procedure for accepting cheques – how cheques are to be made out, customers to produce a valid cheque
guarantee card, checking that signatures correspond, etc.
 Procedure for accepting travellers‟ cheque – what travelers cheques are acceptable, what currencies are
acceptable, witnessing and checking signatures, how this is to be recorded
 Procedure for a complementary or signed bill – check against current list of authorized persons and their
signature, how this is to be recorded.

Systems of Revenue Control

There are two basic approaches to recording and controlling food and beverage sales
 A manual system – which is commonly used in small and in exclusive type catering units
 An automated system – which is commonly used in units with several outlets, in units with a very
high volume of business and in up-to-date companies with many units.

Page 80 of 98
1. Manual System
Here we examine two basics of a manual system; the sales check, and the role of the cashier which is a
computerized system it becomes defunct as every server can his /her own float as the adding and printing of
the bill is automatically done.

i.Sales Checks – One of the simplest steps to take when attempting to establish sales control procedures is
to require that each item ordered and its selling price are recorded on a waiter‟s sales check.
Using some form of a check system serves the following functions: -

 To remind the waiting staff of the order they have taken

 To give a record of sales so that portion sales and sales mixes and sales histories can be compiled
 To assist the cashier and facilitate easy checking of prices charged
 To show the customer a detailed list of charges made

ii. Use of numbered checks and control – control these tightly, recording all cancelled and missing checks.
It is more common to find duplicated or triplicate checks being used as an aid to control for the following
reasons
 They provide the kitchen, buffet or bar with a written record of what has been ordered and issued
 They authorize the kitchen, buffet or bar to issue the food and / or beverage
 They provide the opportunity to compare the top copy of the check with the duplicate to ensure that
all that has been issued has been charged and paid for

The Cashier’s Role

In addition to following precisely the unit‟s procedure for the handling of all revenue transactions within the
restaurant or bars, it is normal practice for the cashier working a manual system to be required to complete
the following: -
 To issue check pads to the waiting staff prior to a meal period, to record the numbers of the checks
issued in each pad, and obtain the waiting staff‟s signature for them, and on the completion of the meal
period to receive from the waiting staff their respective unused check pads, record the numbers, and sign
for the receipt of those returned.
This information to be recorded on the check number issue control sheet.
 To check the pricing, extensions and subtotals of all checks and to add any government tax charges and
to enter the total amount due.
 To receive and check money, credit or, when applicable, an approved signature in payment for the total
amount due for each check.
 To complete the missing checklist for each meal period. This is an aid to the cashier in controlling what
checks are used. The respective check numbers on the list are crossed out when payment is made.
When a missing check is identified, investigation to be carried out to find the reason for this, and if no
satisfactory explanation is forthcoming, inform a member of management on duty.
Missing checks to be marked on the missing checklist.
 To complete the restaurant sales control sheet for each meal period. This form requires that all revenue
received (or its equivalent) is recorded under specific headings such as cash, cheques, credit card
transactions etc. From this control sheet, basic data; such as the number of covers served, or the average
spending per customer on food and beverage – is quickly obtained.

Page 81 of 98
 To complete the necessary paying in of all cash etc. in accordance with the unit‟s established practice.
This could be a direct to a bank whether a small independent unit, or a unit of a large company, or th the
head cashier‟s office if a large unit within many outlets.
Problem of the Manual System
The basic problems of controlling any food and beverage operation are: -
 The time span between purchasing, receiving, storing, processing, selling the product, and obtaining the
cash or credit for the product is sometimes only a few hours.
 The number of items (food and beverage) held in stock at any time is high
 A large number of finished items are produce from the combination of the large number of items held in
stock
 The number of transactions taking place on an hourly basis in some operations can be very high
 To be able to control the operation efficiently, management ideally requires control in formation of many
types to be available quickly and to be presented in a meaningful way.

NB: The full manual control of a food and beverage operation would be costly, time consuming and data
produced would frequently be far too late for meaningful management action to take place. Therefore
regularly updating the costing of standard recipes, calculating gross profit potentials and providing
detailed sales analysis would seldom be done because of the time and labour involved.
A manual system providing a restricted amount of basic data is still widely used in small and medium size
units, however, these are likely to be replaced in the near future by machine or electronic systems

The day to day operational problems of a manual system include the following: -
 Poor hand writing by waiting staff resulting into; incorrect order given to the kitchen or dispenser
bar, wrong food being offered to the customer, incorrect prices being charged to the customer,
poorly presented bill for the customer
 Human error can produce such mistakes as; incorrect prices charged to items on a bill, incorrect
additions to a customer‟s bill, incorrect service charge made, incorrect government tax (e.g. VAT)
charge made
 Communication between departments i.e. restaurant, dispense bar, kitchen and cashiers has to be
done physically by the waiting staff going to the various department. This is not only time consuming
but inefficient.
 Manual systems do not provide any quick management information data, any data produced at being
best being normally 24 hours to 48 hours old as well as being old.
 Manual systems have to be restricted to the bare essentials because of the high cost of labour that
would be involved in providing detailed up-to-date information

2. Computerized Systems
EPOS technology and windows based software specifically designed for the food and beverage operations
seems to have replaced every other type of machine based systems. Other than EPOS, worth noting that
some other older technology exist and may still be in use in other countries and in very small operations in
the world.

i. Pre-checking systems – Pre-check machines are somewhat similar in appearance to a standard cash
register and are designed to operate only when a sales check is inserted into the printing table to the side of
the machine

Page 82 of 98
Advantages
 The sales check is made out and a record of it made on the audit tape before the specific items can be
obtained from the kitchen or bar
 Analysis of total sales per waiter is made on the audit tape at the end of each shift
 No cashier is required as each waiter acts as his / her own cashier, each keeping the cash collected from
the customers until the end of the shift and then paying it in.
 As each waiter has his / her own security key to operate the machine, there is restricted access to the
machine and no other way by which pre-checks can be provided and used in exchange for items from the
kitchen or bar.

ii. Pre-set pre-checking system – This is an up-date on the basic pre-check machine. The keyboard is much
larger than the previous machines, and has descriptive keys corresponding to all items on the menu which are
pre-set to the current price of each item. For example a waiter pressing the key for say one cheeseburger
would not only have the item printed out but also the price.
A control panel, kept under lock and key, would enable management to change the price of any item, if
required very quickly.
It is also possible to have a running account kept of each item recorded and at the end of a meal period, by
depressing each key in turn to get a printout giving a basic analysis of sales made.

iii. Electronic cash registers – Are very high speed machines which were developed mainly for operations
i.e. super markets and were further adopted for use in high volume catering operations.
They have the capability of printing the customer bill as well as provide basic reports such as sales by type of
product, payment method etc
The advancement in EPOS technology and the low costs are making electronic cash registers (ECRs) a thing
of the past, although in small operations that do not require heavy inventory control and detailed reporting.
ECR is still the choice due to its much lower cost.

iv. EPOS control system – At a basic level, a point-of-sale control system is no more than a modern ECR
with the additional feature of one or several printers at such locations as the kitchen (or sections of the
kitchen) or dispense bar. Some systems replace the ECR with a „server terminal‟ (also called „waiter
communication‟ systems), which may be placed at several locations within a restaurant, and is a modification
of an ECR in that the cash features are eliminated making the terminal relatively small and inconspicuous.

Objective of the Printers

 To provide an instant and separate clear and printed order to the kitchen or bar, of what is required, and
by, and for whom
 To speed up the process of giving the orders to the kitchen or bar
 To aid control, in that items can only be ordered when they have been entered into the ECR or terminal
by an identifiable member of the waiting staff and printed.
 To reduce the time taken by the waiter in walking to the kitchen or bar to place an order and as,
frequently happens to check if an order is ready for collection
 To afford more time if required for customer contact.

Advantages of computerized point-of-sale system

Page 83 of 98
 It is capable of processing data as activities occur, which makes it possible to obtain up-to-the-minute
reports for management who can be better informed and able to make immediate and accurate corrective
action if necessary

This type of point-of-sale control system has been taken one step further with the introduction of hand-held
terminals, or radio frequencies or infrared or blue tooth technology to communicate from the quests table
direct to the kitchen or bar preparation areas.

Advantages of mobile point of sales

 Food and beverage orders are delivered faster and more efficiently to preparation sites
 Waiters in turn can attend more tabled;
 With two way communication service staff can be notified if an item is out of stock
 All food and beverage items ordered are immediately charged to the guest‟s bill, which is accurate and
ready to write
 Operation can reassess their labour utilization and efficiency
 Certain members of the service staff for example can take the simple orders, while others can spend
more time with customers to increase food and beverage sales

NB: Touch screen technology utilized by the systems enables the server to use EPOS and MPOS technology
with minimal training as the system often resemble a Microsoft windows type interfaces.

TOPIC 10: LABOUR COST CONTROL

Introduction
Labour cost is the second important element of cost of production. Wages, salaries and other forms of
remunerations represent a major portion of the total cost of a product or services. The growth and
profitability of the concern depends upon proper utilization of human resources or labour forces which in
turn needs proper accounting and control of cost. Thus, control of labour cost is a very significant issue from
the viewpoint of management.

Types of Labour Cost

The labour cost can be classified into two types:
(1) Direct Labour Cost.
(2) Indirect Labour Cost.
1. Direct Labour Cost: Any labour cost that is specially incurred for or can be readily charged to or
identified with a specific job, contract, work order or any other unit of cost is termed as direct labour cost.
Wages for supervision, wages for foremen, wages for labours who are actually engaged in operation or
process are the examples of direct labour cost.
2. Indirect Labour Cost: Indirect labour is for work in general. The importance of the distinction lies
in the fact that whereas direct labour can be identified with and charged to the job, indirect labour cannot be
so charged and has, therefore to be treated as part of the factory overheads to be included in the cost of
production. For example, salaries and wages of supervisors, storekeepers and maintencelabour etc.

Control of Labour Cost

Control of labour cost is a significant influence on the growth, profitability and cost of production. Labour
cost may become unduly high rate due to inefficiency of labour, ineffective supervision, ideal time, unusual

Page 84 of 98
overtime work etc. The primary objectives of the management therefore is to efficiently utilize the labour as
economically as possible.

Techniques of Labour Cost Control

In order to achieve the effective utilization of manpower resources, the management has to apply proper
system of labour cost control. The labour cost control may be determined on the basis of establishment of
standard of efficiency and comparison of actuals with standards. The management applies various techniques
for the effective control of labour costs as under:
1. Scientific method of production planning.
2. Use of labour budgets.
3. Establishment of labour standards.
4. Proper system of labour performance report.
5. Effective system of job evaluation and job analysis.
6. Devise a proper system of control over ideal time and unusual overtime work.
7. Establish a fair and equitable remuneration system.
8. Effective cost accounting system.

Organisation for Control of Labour Cost

The objectives of proper control on labour cost is effectively achieved through the functions of various
departments responsible for controlling labour cost in an organisation. The following are the important
departments for control over labour costs:
1. Personnel Departments
2. Engineering and Works
3. Study Department.
4. Time Keeping Departments.
5. Pay Roll Department
6. Cost Accounting Department.
1. Personnel Department
Personnel department plays a very important role in control of labour costs. It is primarily concerned with the
recruitment of labours on the basis of employee placement requisition and imparting training to them. And
thereafter placing them to the job for which they are best suited.
In order to achieve the efficient utilization of manpower resources, this department is responsible to
execution of labour policies which have been laid down by top management.
2. Engineering and Works Study Department
Engineering department is primarily concerned with maintaining control over working conditions and
production methods for each job, process, operation or departments. It is performed by undertaking the
following functions :
a. Preparation of plan and specification of each job.
b. Maintaining required safety and efficient working conditions.
c. Making time and motion studies.
d. Conducting job analysis, job evaluation and merit rating.
e. Setting fair and equitable piece rate or time wage system.
f. Conducting research and experimental work.

Job Analysis:
Job Analysis is a formal and detailed study of jobs. Job analysis may be defined as "the process of
determining by observation and study the task, which comprise the job, the methods and equipment used
and the skills and attitudes required for successful performance of the job."

Page 85 of 98
Advantages of Job Analysis
The following are the important advantages of job analysis:
1. It is useful in classifying job and interrelationship among them.
2. If facilitates forecasting of manpower requirements.
3. It helps in effective utilization of manpower resources.
4. Effective employee development programme can be established.
5. Enables in determining performance standards of each process or job.
Timekeeping:
It refers to recording of each worker's time of coming in and going out of the factory during engagement of
the factory. It is essential for the purpose of attendance and determination of wage payable to each worker.
Objectives of Timekeeping: The following are the important objectives of timekeeping:

 Preparation of payrolls
 Ensuring discipline in attendance
 Apportionment of overhead on the basis of labour hours
 Effective utilization of human resources
 Minimization of labour costs
 Ascertaining ideal labour time and ideal machine time.

Methods of Timekeeping:
The following are the two important methods of timekeeping:
1. Manual Method:
a. Attendance Register Method.
b. Token or Disc Method.

2. Mechanical Method:
(a) Time Recording clocks.
(b) Dial Time Records.
(c) Key Recorder System.

Manual Method:
The choice of the manual method adopted by the factory depends upon its size, number of workers
employed, nature of the business and policy of a firm. Under manual methods, there are two important
methods which are in use: (a) Attendance Register Method and (b) Token or Disc Method.
a. Attendance Register Method: Under this method, an Attendance Register is maintained by the
Timekeeper in the time office. This register may be filled in by the Timekeeper when the worker gets
inside the factory and the time of departure, normal time and overtime. Workers may be required to
sign both at the time of arrival and time of departure. This method is very simple and most suitable
to small-scale industries. It is very difficult to operate when the number of workers is large.
b. Token or Metal Disc Method: In this method, each worker is given a metal disc or a token bearing
his identification number. All the tokens or discs are hung on a board serially at the entrance of the
gate in the factory. As the worker enters the gates of the factory, he removes his disc from the board
and drops it into a box. This process is continued until the scheduled time expires. Latecomers may

Page 86 of 98
 drop their tokens in a separate box or handover personally to the timekeeper. In the case of
absentees the tokens are not removed from the board. Based on the above process, the Timekeeper
records the attendance in the register known as Muster Roll for the purpose of pay rolls.

This method is simple and economical. But it suffers from certain disadvantages given below:

 There is chance to remove the disc of fellow worker's token from the board to ensure his presence.
 Difficult to ascertain about overtime work, early leaving, ideal time etc.
 Lack of accuracy regarding the exact time of arrival of a worker which may result in many disputes.
 Unless there is strict supervision, the timekeeper may include dummy or ghost workers in the Muster
Rolls.

Mechanical Method
In order to achieve the accuracy and reliability of recording of time of workers, the following different
mechanical devices are used :
(1) Time Recording Clocks.
(2) Dial Time Records.
(3) Key Recorder System.
(a)Time Recording Clocks: Under this system, each worker is' given a time card for a week or fortnight. These
time or clock cards are serially arranged in a tray at the entrance to the factory. When the worker enters the
factory, he takes his attotted card from the tray and puts it in the time recording clock that records the exact
arrival time at the space provided on the card against the particular day. This process is repeated for recording
time of departure for lunch, return from lunch, leaving the factory after his day's work. Late arrivals, early
leavings and over time are printed in red so as to distinguish these from normal period spent in the factory.
This method is very popular for correct recording of attendance.
(b) Dial Time Records: This is a machine which is used for recording correct attendance time of arrival and
departure of worker automatically. This recorder has a number of holes about the circumference. Each hole
represents worker's number which corresponds to identification of allotted clock numbers. At the time of
arrival and departure of worker, by operating this machine, the dial arm into a hole and the time is
automatically recorded on an attendance sheet placed inside. This machine is most suitable in small scale
industries.
(c) Key Recorder System: In this machine there are a number of keys, each key denotes worker's number.
When the time of arrival and departure the worker inserts his allotted key in the key hole and gives a tum, the
ticket time and clock time are recorded on a sheet of paper. This method is economical and easy to operate.

Idle time
Idle Time is that time during which the workers spend their time without giving any production or benefit to
the employer and concern. The idle time may arise due to non-availability of raw materials, shortage of
power, machine breakdown etc.
Types of Idle Time: It refers that any loss of time is inherent in every situation which cannot be avoided. Any
cost associated with the normal idle time are mostly fixed in nature.
The normal idle time arises due to the following reasons:

Page 87 of 98
(1) Time taken for personal affairs.
(2) Time taken for lunch and tea break.
(3)Time taken for obtaining work.
(4) Time taken for changing from one job to another.
(5) Waiting time for getting instructions, tools and or raw materials, spare parts etc.
(6) Time taken by the workers to walk between factory gate and place of work.
Abnormal Idle Time
Abnormal idle time refers that any loss of time which may occur due to some abnormal reasons. Abnormal
idle time can be prevented through effective planning and control. The abnormal idle time may arise due to
the following avoidable reasons:
(1) Faulty planning.
(2) Lack of co-operation and co-ordination.
(3) Power failure.
(4) Time lost due to delayed instructions.
(5) Time lost due to inefficiency of workers.
(6) Time lost due to non-availability of raw materials, spare parts, tools etc.
(7) Time lost due to strikes, lock outs and lay-off.
Accounting Treatment of Normal Idle Time and Abnormal Ideal Time
Normal Idle Time: Normal idle time wages is treated as a part of cost of production. Thus, in case of direct
workers an allowance for normal idle time is built into labour cost rates. In the case of indirect workers,
normal idle time wage is spread over ,all the products or jobs through the process of absorption of factory
overheads.
Abnormal Idle Time: Abnormal idle time cost is not included as a part of production cost and is shown as a
separate item in the Costing Profit and Loss Account. So that normal cost are not distributed.

Over Time:
The term "over time" refers to when a worker works beyond the normal working hours or scheduled time is
known as 'overtime.' According to Factories Act, the wage rate of overtime work to be paid at double the
normal rate of wages. The extra amount of remuneration is paid to the worker in addition to normal rate of
wages is said to be overtime premium.
Effect of Over Time Payment on Productivity: The following are the effects of over time payment on
productivity:
(1) Overtime premium is an extra payment over normal wages and hence will increase the production cost.
(2) The efficiency of workers during overtime work may fall and hence output may be reduced.

Page 88 of 98
(3)To earn more, workers may not concentrate on work during normal hours, and thus the output during
normal hours may fall.
(4) Reduced output and increased premium will increase the cost of production.
Accounting Treatment of Overtime Wages
The following are the ways of charging of overtime premium:
(I) If overtime is resorted to at the desire of the customer then overtime premium is charged to concerned
job directly.
(2) If overtime is required to cope with general production schedule or for meeting urgent orders, the
overtime premium should be treated as overhead cost of particular department or cost center which works
overtime.
(3) If overtime is worked on account of abnormal conditions such as flood, earthquake etc. that should be
charged to costing profit and loss account.
Control of Overtime: Control of overtime is essential to minimize the cost of production and increase the
overall performance of the efficiency. Effective control of overtime can be possible through the following
ways :
(1) Effective sound planning of production
(2) Adequate supervision
(3) Ensuring availability of raw materials, spare parts
(4) Encouraging productivity
(5) Reducing labour turnover
(6) Ensuring effective system of repairs and maintenance, material handling and smooth flow of production
(7) Fair and equitable remuneration to efficient and inefficient workers.

LabourThrnover:
Labour Turnover may be defined as "the rate of changes in labour force, i.e., the percentage of changes in the
labour force of an organization during a specific period. Higher rate of labour turnover indicates that labour
is not stable and there are frequent changes in the labour force in the organization. It will affect the efficiency
of the workers and overall profitability of the firm. The determinant result of labour turnover is expressed in
terms of percentage.

Page 89 of 98
Page 90 of 98
Page 91 of 98
Page 92 of 98
 TOPIC 11: FOOD AND BEVERAGE REPORTS

Identification
Weekly / monthly food cost reports – This is a reconciliation report on an activity that it tightly controlled
daily by management.
It is an example for the calculation of the monthly food costs for an operation where detailed information is
not thought to be necessary or for a small or owner managed unit where the control is an everyday part of the
manager‟s activity, in order for the operation to be successful.

Example of a monthly / weekly food cost report

Kshs.
Opening food cost 15000.00
Purchases for period (4weeks day 1-28) 28525.00
Sub total 43528.00
Less closing food stock level at end of day 28 14800.00
Total cost of food consumed 28725.00
Total food sales 75836.00
Food Cost %age 37.87%
Preparation of weekly / monthly food cost report

Advantage of a weekly / monthly food cost report

 It is simple and quick to produce
 It can give an indication of the general performance of the unit

Disadvantages of a weekly / monthly food cost report

 This information is only produced after seven or twenty eight days of operation
 It provides no intermediate information so that any undesirable trends (e.g. food costs too high) may be
corrected earlier
 It does not provide the daily or to-date information on purchases, requisitions and sales for a unit with an
average of £2700 a day turnover

A Daily Food Cost Report

This food cost method is suitable for a small to medium-sized operation, or one where a not too
sophisticated method is required or where the costs involved in relation to the savings to be made do not
justify a more involved method

Page 93 of 98
A B C D E F G H I J K L
Today To Date
Dat Day Openin Purcha Total Food Fo Food Food Food Foo Food
e g food ses food requisitio od cost % purcha requisiti d cost %
Storero Availa ned sale (F/G)* ses ons sale (J/K)*
om ble s 100 s 100
inventi (C +
on D)
Mar £ £ £ £ £ % £ £ £ %
ch
1 M 2220 321 2541 290 820 335.37 321 290 820 35.37%
%
2 T 2251 385 2636 370 980 37.76% 706 660 180 36.67%
0
3 W 2266 404 2670 440 110 40.00% 1100 1100 290 40.00%
0 0
4 T 2230 480 2710 480 105 45.71% 1580 1580 395 40.05%
0 0
5 F 2715 890 3120 405 100 40.25% 1985 1985 495 39.09%
5 5
6 S 2383 203 2918 535 149 35.91% 2520 2520 644 38.51%
0 5
7 S 0 2383 240 720 33.33% 2760 2760 716
5
8 M 380 310 920 808
5
9 T 402 395 101 910
5 0
10 W 425 345 925 100
25
11 T 464 427 116 111
0 85
12 F 844 463 122 124
0 05
13 S 185 512 140 138
5 10
14 S 0 265 690 145
00
Tota 5382 5477
ls:

Proof of Inventory
Opening Stock – 2220
Plus Purchases – 5382
Sub Totals – 7602
Less requisitions – 5477
Closing Stock – 2126

Page 94 of 98
Preparation of a daily food cost report

Advantages of producing a daily food cost report

 It is simple and easy to follow
 It gives a reasonably detailed account of the general performance of the business on a day to day business
 It records the daily stock levels, daily purchases, daily food requisitioned and daily food sales and enables
the daily food cost percentage to be calculated
This information is used for preparing to-date totals (i.e. running totals to date)
 The to-date food cost percentage smooths out the uneven daily food cost percentage and highlights the
corrective action to be taken, if necessary, early in the month
The uneven daily food cost percentage is often caused when food when food is requisitioned on one day
to be processed and sold on subsequent days

Advantages of producing a daily food cost report

 Although simple and easy to prepare, the report relies heavily on the accuracy of the basic information to
be collected, for example the total of daily purchases, daily requisitions, etc
 It is not totally accurate as it ignores such things as the cost of the staff meals; food transferred to bars
for example potato crisps, nuts, salted biscuits, trays of canapés etc which are given away free in the bars
to customers and items such as limes, lemons etc. which are included in certain drinks; and beverages
transferred to kitchens, for example wine, spirits, beer etc. for use in the cooking of specific dishes.

A Detailed Daily Food Cost Report

This food cost report is a development of the previous report and refines the accuracy of the report by taking
into account the cost of beverages transferred into the kitchen, the cost of food transferred out of the
kitchens to the bars, and the cost of employees meals as shown in the table below: -
It is more accurate that the weekly / monthly and daily food cost report in that it includes additions to the
cost of food for beverages transferred to the kitchen (e.g. cooking wine etc.) and deductions for the cost of
food transferred from the kitchen to the bars (e.g. lemons, oranges, olives, nuts, etc.) and for the cost of all
employees‟ meal.
It is also separates purchases into those that go straight to the store rooms and those that go direct to the
kitchen and are charged immediately to the kitchen.

Page 95 of 98
 Day March-2001 March-2002 March-2003
M T W
A Stock levels at the beginning of each day 2220.00 2250.50 2265.50
B Storeroom purchases 120.50 200.00 204.00
C (A + B) Total food available in storeroom 2340.50 2450.50 2469.50
D Food requisitioned 90.00 185.00 240.00
E Direct purchases 200.00 185.00 200.00
F Beverage transfer to kitchen 0.00 5.00 5.00
G (D + E + Cost of food used 290.00 375.00 445.00
F)
H Cost of employee meals 35.00 25.00 30.00
I Transfer of foods to bars 0.00 0.00 5.00
J (G – H – I) Cost of food sold 255.00 350.00 410.00
K Food sales 820.00 980.00 1100.00
L Food cost %age 31.09 35.71 37.27
M Cost of food sold (to-date, running total of 255.00 605.00 1015.00
J)
N Food sales (to-date, running total of K) 820.00 1800.00 2900.00
O Food cost %age (to-date) 31.09 33.61 35.00
A detailed daily food cost report
NB: The accuracy of the to-date food cost percentage is refined to take into account all daily transaction and
these figures should be fully relied upon to be the basis against which corrective action may be taken.

Disadvantage of a detailed daily food cost report

 It is more detailed than weekly / monthly and daily food cost report
 It relies very much on the accuracy of the collected information for example the collection of all the
requisition notes and the accurate extensions of the pricing of items; the collection of the goods received
sheet and the checking of it against delivery notes, credit notes, invoices, etc

Page 96 of 98
 TOPIC 12: Emerging Trends

CONSUMER TRENDS
One of the biggest changes in the past decade in the food and beverage area has been the recognition of the
importance of consumers and the choices they make. The industry has become more market led and
operators who do not take account of their customers‟ needs and wants have suffered. This change has been
partly reflected in the growth of food-related issues reported in the media and the wide array of television
programmes with food, cooking, chefs and restaurants as their focus.

10 key food trends

 Contrary to trends in the UK, economic pressures are encouraging more Americans to eat and cook
more dinners at home, with three quarters of the respondents eating dinner at home atleast five days
a week – although many of these will be restaurant branded meals from a food store or takeaways. At
the same time, however, eating out for breakfast and lunch is continuing to grow.
 There is a growing „foodie‟ culture and many customers are „trading up‟ to more exotic and gourmet
meals, both in restaurants and as indulgent treats to cook at home.
 There has been a growth in pre-prepared convenient products,such as peeled and chopped, and even
cooked, vegetablesand upscale frozendinners. Portion sizes arehoweverreducing,with TGI Fridays
Right Portion Right Price promotion(30% smaller portions for between $6.99 and
$8.99)beingreflectedin smaller cook at home portions.
 More foods with greater sensual appeal in both flavour,aroma and texture.
 Increasing numbers of children but increasing awareness ofchild obesity and so interest in healthier
options.
 For grown ups, there is a trend towards foods „ without ‟ – fatfree, dairy free, sugar free, caffeine
free and so on.
 There has been a growing interest in locally sourced, seasonalproduce from specialist or artisan
producers,with astrongassociation with a reductionin food miles – the distancebetween the producer
and the plate.
 This is linked to an interest in more healthy eating, eitherto reduce the risk of developing a health
problem or to helpwith an existing issue.
 A new interest in unusual beverages, ranging from highenergy drinks to ready-to-drink tea and
coffee, and bottledmineral waters and even Health Colas.
 Snacking and sharing extends from new snack offers inthe mid afternoon and late at night growing
in popularityin fast-food operations, to ranges of upscale bite size appetizersfor sharing and even the
appearance of bite size dessertplatters.

ENVIRONMENTAL ISSUES
There are a number of environmental issues of which food and beverage operations must be aware. Three of
those issues strongly related to food and beverage operations are explored. The issues of waste management,
energy and water consumption, and the effects to the environment by procuring products from far away parts
of the world.

Waste management
So what can operators do to ensure they minimize waste? Depending on the size of the operation the
operator could do some or all of the following:

Page 97 of 98
  Invest in waste minimizing technology such as grinders andincinerators not unlike the ones that are
currently utilized insome cruise ships.
 Reuse items such as printer paper, envelopes, packaging.
 Reduce usage of things like paper, for example do not print what does not need printing.
 Compost as much of the waste as possible.
 Recycling glass, paper, aluminium and plastic can reduce an operations waste by up to 35%.
 Invest in a vacuum drainage system
 Ensure you operate a waste minimization programme and hat you evaluate the amounts of waste
your business generate regularly.
 Educate your staff, suppliers and customers so that they also minimize waste whilst on your
premises. The Acorn House restaurant, for example, offers various portion sizes in an attempt to
reduce customer wastage and at the same time offer better value for money.

Energy and water consumption

Ways of reducing energy and water consumption can be achieved by:
 Using energy efficient equipment and light bulbs.
 Recycling of grey water.
 Utilizing alternative energy sources, such as solar power.
 Adjusting taps and toilet water tanks.
 Minimizing water leakages.
 Training staff to switch off lights when not needed and use water responsibly.

ETHICAL ISSUES
Ethics in food and beverage management is an important area and one that could easily be the focus of
another book. Here, the reader is directed towards two issues that are current and will probably continue to
be so in the next few years. Ethical food production and a debate on ethics in tipping practices

HIGH TECH FOOD

As new technologies in food production emerge, this book would not be complete without mentioning the
emergence of high tech foods. In more and more restaurants around the world, chefs decide to use
convenience products in their menus either because of the lack of staff in their kitchen or because of the lack
of kitchen space or equipment.
But what does high tech food really means? Is there a cleardefinition? High tech food can be defined in two
ways:.
 As food that has been manipulated at a base level.
 From a more generic point of view; from convenience goods to high tech equipment.

Page 98 of 98