Table of Contents
Cost
From a seller’s point of view, the cost is the amount of money that is spent to produce a good or product. If a producer were to sell his products at the production price, his costs and income would break even, meaning that he would not lose money on the sales. However, he would not make a profit.
From a buyer’s point of view, the cost of a product is also known as the price. This is the amount that the seller charges for a product, and it includes both the production cost and the markup, which is added by the seller in order to make a profit.
Elements of Cost
The cost of operating a catering unit or department is usually analysed under the three headings of the elements of cost:-
1. Material costs – cost of food and beverage consumed and the cost of additional items such as tobacco. (Note: The cost of any food and beverage provided to staff in the form of meals is deducted from material costs and added to labour costs.) The food cost is then calculated by the formula:
opening stock + cost of purchases – closing stock – cost of staff meals = material cost
2. Labour costs – wages and salaries paid to all employees, plus any employer contribution to government taxes, bonuses, staff meals, pension fund, etc.
3. Overhead costs – all costs other than material and labour costs, for example, rent, rates, insurance, depreciation, repairs, printing and stationery, china and glassware, and capital equipment.
Classification or Types of Cost
It is necessary to examine costs not only by their nature (material, labour, overheads) but also by their behaviour in relation to changes in the volume of sales. Using this criterion, costs may be identified as being of four kinds:
1. Fixed costs: These are costs which remain fixed irrespective of the volume of sales, for example, rent, rates, insurance, the management element of labour costs.
2. Semi-fixed costs: These are costs which move in sympathy with, but not in direct proportion to the volume of sales, for example, fuel costs, telephone and laundry. Semi-fixed costs contain a fixed and variable cost element, for example, the charge for the telephone service in the UK contains a fixed cost for the quarterly charge for the rental of each phone and a variable cost depending on the number of phone calls made.
3. Variable costs: These are costs which vary in proportion to the volume of sales, for example, food and beverage.
4.Total costs: This is the sum of the fixed costs, semi-fixed costs and variable costs involved.
A diagram Showing relationship between all these costs.
