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

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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 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.

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 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
 Encourage and adherences to prescribe managerial practices

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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

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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.
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

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 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 reviewed in relation to the current business and future

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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:

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  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.
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.

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  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
matches the purchase order. If there is a shortage in the delivery

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 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

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 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.
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.

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 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.

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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, poultryand 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.

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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.

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-ordinating 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

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 (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.

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

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 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.
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.

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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
establishmentwill 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.

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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

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

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 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 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, e.t.c 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

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 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
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

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 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 e.t.c

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,

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 duplicate to the accounts clerk or accounts office for payment and
triplicate used for receiving items against the delivered goods.

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

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 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.

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 [Link]
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

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 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 upto 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.

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

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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.

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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.
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

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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.
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

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 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 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.

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 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
3. Stamping

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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 eg counting, measuring in case of
liquids. The number received should correspond to what was ordered e.g
200 ripe mangoes, e.t.c
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 e.t.c. 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.

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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.

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

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 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. 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

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 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.

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

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 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
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)

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 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
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

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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

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 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
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
Ch
Therefore Q 2DCo
Ch
Therefore EOQ= 2DCo
Ch

The EOQ model assumes:

 Annual demand is known
 Hold costs are constant and known
 Ordering costs are known and constant

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  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

Solution

EOQ = 2DCo  2 X 1200 000X1000  4899 units

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.

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 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.

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.

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 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.

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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 130,000
used

Closing stock is valued as

Jan 2 200 units x 200 =
shillings 40,000
Jan 3 800 units x 400 = 320,000
shillings
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 150,000
stocks

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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 =

500 (100)  600 (200)  800 (400) 490,000

Unit Price =   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


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 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 centre.
 Preparation of separate budgets for each “budget centre”.
 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.

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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)

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

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 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.
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.

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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

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

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 Long-term budgets are prepared for those organizations, which deal in
regular product line. Here organizations are not suppose 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 suppose 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.

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  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
 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 / 20 22 25 27
unit
Total 2400 2860 3750 4455 13465
sales
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

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figures at the end of each 4-weekly period. The sales of the restaurant for the
past 3 years has been as follows;

Analysis of Past Sales

1993 (£) 1994 (£) 1995 (£)
Restaurant sales 179,500.00 186,500.00 190,200.00
% increase on the 7% 4% 2%
previous year
Bar sales 91,000.00 95,500.00 102,200.00
% increase on the 4% 5% 7%
previous year
Sundry sales 30,500.00 32,000.00 34,000.00
% increase on the 5% 5% 6%
previous year
Total Sales 301,000.00 314,000.00 326,400.0
0
% increase on the 6% 4.3% 4%
previous year

The following supplementary information is also made available.

(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

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 (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 179,500.00 186,500.0 190,200.00 197,800.0 197,800.0
sales 0 104/100*190 0 0/13
200 =197808
=
12,215.00
% increase on 7% 4% 2% 4%
the previous
year
Bar sales 91,000.00 95,500.00 102,200.00 109,350.0 109,350.0
107/100*102 0 0/13
200 =109354
= 8,411.00
% increase on 4% 5% 7% 7%
the previous
year
Sundry sales 30,500.00 32,000.00 34,000.00 36,380.00 36,380.00
106/100*340 /13
00
=36040 = 2,798.00
% increase on 5% 5% 6% 7%
the previous
year
Total Sales 301,000.00 314,000. 326,400.00 343,530.0 26,400.00
00 0
% increase on 6% 4.3% 4%
the previous
year

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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

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

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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

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.

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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.

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

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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
labouretc 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, laundy, 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

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 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 equipments
 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.

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 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

 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

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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%

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: -

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 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 6,000.00 2,400.00
May
40% from 6,500.00 2,600.00
June
Credit 1 50% from 6,000.00 3,000.00
March
50% from 7,500.00 3,750.00
April
50% from 6,000.00 3,000.00
Feb
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
 It reveals the top management’s goals of revenues, expenses, net
income, cash inflows and financial positions

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  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

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 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
 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”.

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 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
(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.

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  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

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 has an important bearing on the volume of sales. Similarly the speed with
which waiters serve customers can affect the volume of sales considerably.
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.

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 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

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

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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.

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.

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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.
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

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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

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 Ensure overall customer satisfaction

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

 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

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 - 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.

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

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 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.
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

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 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

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 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
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

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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
 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

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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

TOPIC 8: COSTING AND PRICING

The Elements of Cost
Includes the following: -
a) Food cost
b) Labour cost
c) Overhead cost
9
1. Material Cost

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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 8
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
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

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 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/=

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 =18000/=

Therefore Net Profit = 30000/= - 18000/=

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

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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/=
= 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

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The following information was extracted from the books of Mara Restaurant in
respect of June 2006
Sales = 30000/=
Opening Stock (1 June 2006) = 3000/=
st

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
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

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 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.

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.

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 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

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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
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

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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;
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%

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 = 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
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

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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
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

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 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/=

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 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
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

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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 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.

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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.

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 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.
 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)

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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.
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: -

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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

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

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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

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 = 200/= + 300/=

0.20/=
= 2500 Cups

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

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 = 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/=
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

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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/=

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.

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 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.

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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

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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
 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.

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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
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:

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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
Desired Prime Cost age%
B.S.P. = $ 6.55 / 62 % = $ 10.56

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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

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 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.

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 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.

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.

[Link] 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

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  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.
 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: -

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 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.

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  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

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.

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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

 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

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 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

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inefficiency of labour, ineffective supervision, ideal time, unusual 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.

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 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."

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.

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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 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.

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(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:
(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.

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(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:

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(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.
(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.

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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.

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 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

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A B C D E F G H I J K L
Today To Date
Da Da Open Purc Tota Food Fo Food Food Food Fo Food
te y ing hase l requisi od cost purc requis od cost
food s food tioned sa % hase itions sal %
Store Avail les (F/G) s es (J/K)
room able *100 *100
inven (C +
tion D)
Ma £ £ £ £ £ % £ £ £ %
rch
1 M 2220 321 254 290 82 335. 321 290 82 35.3
1 0 37% 0 7%
2 T 2251 385 263 370 98 37.7 706 660 18 36.6
6 0 6% 00 7%
3 W 2266 404 267 440 11 40.0 1100 1100 29 40.0
0 00 0% 00 0%
4 T 2230 480 271 480 10 45.7 1580 1580 39 40.0
0 50 1% 50 5%
5 F 2715 890 312 405 10 40.2 1985 1985 49 39.0
0 05 5% 55 9%
6 S 2383 203 291 535 14 35.9 2520 2520 64 38.5
8 90 1% 45 1%
7 S 0 238 240 72 33.3 2760 2760 71
3 0 3% 65
8 M 380 310 92 80
0 85
9 T 402 395 10 91
15 00
10 W 425 345 92 10
5 02
5
11 T 464 427 11 11
60 18
5
12 F 844 463 12 12

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 20 40
5
13 S 185 512 14 13
05 81
0
14 S 0 265 69 14
0 50
0
Tot 5382 5477
als:

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

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 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.

Day March- March- March-

2001 2002 2003
M T W
A Stock levels at the beginning of 2220.00 2250.50 2265.50
each day
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

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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 – Cost of food sold 255.00 350.00 410.00
I)
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, 255.00 605.00 1015.00
running total of J)
N Food sales (to-date, running 820.00 1800.00 2900.00
total of K)
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

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 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.

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  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:
 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.

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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.

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