COSTING

The word cost means price (to be) paid for things, expenditure on time, labour, etc. the
term in general denotes a sum total of amount which is the total expenditure, both in terms of
actual and nominal, which has been incurred in the production of a thing and also it can be said
to be the expenditure that is attributable to a product. It indicates the amount of expenditure
(actual or nominal) incurred on or attributed to a given thing.

Costing is a branch of accounting. It means an analysis of information so as to make the

IMPORTANCE OF COSTING

1. It helps to ascertain cost of each department, service and the produce. It means in hotel
industry we can find the cost of every department, serviced organized and the cost of each dish
made.

2. Costing provides sound basis for pricing the menu by each revenue-producing
department and each unit.

3. An effective system of costing, and a realistic price policy ensure profits in operations.
It shall reveal the net profit made by each revenue-producing department and each unit.

4. It enables a periodical determination of profit or losses.

5. It provides information upon which estimates and tenders are based.

6. It gives information necessary for adoption of a sound price policy.

7. A cost system reveals, unprofitable activities, losses or inefficiency in any form such
as:

I. Wastage of manpower

II. Wastage of materials in the form of spoilage, scrap or poor utilization of food stuffs.

III. Wastage of resources, e.g. inadequate utilization of plant, machinery, etc.

IV. It reveals possible sources or economy which results in the rational utilization of
resources.

8. Cost records facilitate speedy quotation as in respect of banquets and special functions.

9. The function of cost accounting is to provide data for periodical reports on food
operations.
 10. With the help of cost accounting, it would be possible to measure and improve
efficiency. This may be achieved by comparing costs in one period with those in another or costs
of one firm with that of another.

11. It provides valuable information on the operation, and help the management to take
some important decisions:

I. In some cases and for special customers special concessions have to be given. This can
only be decided by reference to the figures of costs.

II. When it is not possible for the firm to control the prices, it has still to decide whether
certain products should be produced or not having regard to price available and the demand
known. The firm will have to decide whether the product should be sold or whether its
production stopped.

COSTING METHODOLOGY

Various costing methods are applied to finding the cost of direct materials. Aimed at only
one element of cost, they naturally have a close affinity to, and indeed often form part of, one
another. Although there are several to choose from the most commonly used are unit costing,
multiple costing, contract costing and uniform costing.

 Unit costing: This method is also known as "single output costing." This method of costing
is used for products that can be expressed in identical quantitative units. Unit costing is
suitable for products that are manufactured by continuous manufacturing activity: for
example, brick making, mining, cement manufacturing, dairy operations, or flour mills.
Costs are ascertained for convenient units of output.
 Job costing: Under this method, costs are ascertained for each work order separately as
each job has its own specifications and scope. Job costing is used, for example, in painting,
car repair, decoration, and building repair.
 Contract costing: Contract costing is performed for big jobs involving heavy expenditure,
long periods of time, and often different work sites. Each contract is treated as a separate
unit for costing. This is also known as terminal costing. Projects requiring contract costing
include construction of bridges, roads, and buildings.
 Batch costing: In batch costing the articles are manufactured in definite batches and held in
stock e.g. to prepare consommé, the stock is prepared and kept ready to prepare consommé.
Even if one or very few portions of stock is required for cooking consommé then a large
quantity of utensil is used to cook stock as it is neither economically viable nor practical to cook
just one portion of stock as it will come out to be very expensive. The usual portions of stock
can be used subsequently for cooking consommé or for other dishes.
The costing procedure in Batch Costing is very simple. One number is allotted for each
batch. All the raw material (food items) used for cooking one batch is allocated to it. (Opening
stock + Purchases-Closing stock= Raw material used for cooking a batch). All raw materials are
priced at a cost price.
The costing of a product is very important, in order to ascertain that what should be
selling price so that the hotelier can make a reasonable profit after meeting the cost of the
product. In case the costing under certain head like food cost (variable cost), semi-variable cost,
overheads, Fixed cost, etc., is increasing then the hotelier can find out the reason, control the
cost, accordingly change the recipe or change the price of the dish. While estimating the cost of
a dish, allowances should be made for fluctuations in the prices of material (raw material,
electricity, gas, fuel, etc.) for changes in wages and salary rates and for changes in market
condition. The past expenditure is costed but the future expenditure is estimated. And in case
there is a difference between actual costs and estimated costs, steps are taken so that the actual
conform to estimates.
There are two types of costs involved in Batch Costing:
(i) Set up costs
(ii) Carrying costs.
If the batch size is increased, set up cost per unit will come down and the carrying cost will
increase. If the batch size is reduced, set up cost per unit will increase and the carrying cost will
come down. Economic Batch quantity will balance both these opponent costs.

 Operating costing or service costing: Operating or service costing is used to ascertain the
cost of particular service-oriented units, such as nursing homes, busses, or railways. Each
particular service is treated as a separate unit in operating costing. In the case of a nursing
home, a unit is treated as the cost of a bed per day, while, for busses, operating cost for a
kilometer is treated as a unit.
 Process costing: This kind of costing is used for products that go through different
processes. For example, the manufacturing of clothes involves several processes. The first
process is spinning. The output of that spinning process, yarn, is a finished product which
can either be sold on the market to weavers, or used as a raw material for a weaving process
in the same manufacturing unit. To find out the cost of the yarn, one needs to determine the
cost of the spinning process. In the second step, the output of the weaving process, cloth,
can also can be sold as a finished product in the market. In this case, the cost of cloth needs
to be evaluated. The third process is converting the cloth to a finished product, for example
a shirt or pair of trousers. Each process that can result in either a finished good or a raw
material for the next process must be evaluated separately. In such multi-process industries,
process costing is used to ascertain the cost at each stage of production.
 Multiple costing or composite costing: When the output is comprised of many assembled
parts or components, as with television, motor cars, or electronics gadgets, costs have to be
ascertained for each component, as well as with the finished product. Such costing may
 involve different methods of costing for different components. Therefore, this type of
costing is known as composite costing or multiple costing.
 Uniform costing: This is not a separate method of costing, but rather a system in which a
number of firms in the same industry use the same method of costing, using agreed-on
principles and standard accounting practices. This helps in setting the price of the product
and in inter-firm comparisons.
ADVANTAGES OF COSTING
1. Shows the net profit (of each revenue producing department) and shows the cost of
each meal produced.
2. Tells about the possible sources of profit and also where the economy can be done.
3. Reveals more rational use of labour and material and also of overheads to a certain
extend.
4. Tells the management about planning a new ‘sound price policy’.
5. Provides speedy and ready quotations for banquets and functions to the manager (food
and beverage) who can quote it further to the buyer.
6. Costing is not only a cost-finding process but is a method of management information
system also. Costing should provide actual figures of cost for the purpose of comparison with
previous period and furnish the management with weekly profit and loss account.
7. The cost accountant designs objective standards against which to measure the
performance and repeat on current results.

Bibliography:
1. Managing Food & Beverage Operations – S.K. Bhatnagar
2. Hotel Accounting & Costing – Puri. R.
Webliography: 1. http://hubpages.com/business/Methods-of-Costing
2. http://www.yourarticlelibrary.com/cost-accounting/batch-costing/batch-costing-meaning-
need-and-types-with-calculations/55833/