Cost concepts, elements of cost and behaviour of cost
Every rupee of cost is material, labour or overheads. By behaviour, costs are fixed, variable or semi-variable as the number of meals changes.
Basic cost concepts
Cost is the amount spent to produce and serve a product. A cost unit is the unit for which cost is found: one meal, one plate, one patient-day. A cost centre is a section whose costs are collected separately: the bakery, the diet kitchen, the coffee counter. Direct costs can be traced to a unit (rice in a plate of pulao); indirect costs are shared (rent, manager's salary). The basic cost sheet is: Prime cost = direct material + direct labour + direct expenses; Total cost = prime cost + overheads; Selling price = total cost + profit.
Elements of cost in food service
| Element | Includes | Direct or indirect |
|---|---|---|
| Material | Food and beverages used: rice, dal, vegetables, milk, oil, spices | Mostly direct |
| Labour | Wages and salaries, overtime, bonus, staff meals, employer's share of PF and ESI | Direct (cooks) and indirect (manager, cleaners) |
| Overheads | Rent, gas and fuel, electricity, water, repairs, depreciation of equipment, insurance, cleaning materials, laundry, licences, advertising, telephone | Indirect |
Cost per meal from the three elements
A hostel mess serves 6,000 lunches in a month. Food cost is ₹1,80,000, labour ₹90,000 and overheads ₹60,000. Find the total cost per meal and the share of each element.
- Total cost = 1,80,000 + 90,000 + 60,000 = ₹3,30,000
- Cost per meal = 3,30,000 ÷ 6,000 = ₹55
- Food per meal = 1,80,000 ÷ 6,000 = ₹30; labour = 90,000 ÷ 6,000 = ₹15; overheads = 60,000 ÷ 6,000 = ₹10
- Check: 30 + 15 + 10 = ₹55
- Shares of total cost (one decimal): food 30 ÷ 55 = 54.5%; labour 15 ÷ 55 = 27.3%; overheads 10 ÷ 55 = 18.2%
₹55 per meal: food ₹30 (54.5%), labour ₹15 (27.3%), overheads ₹10 (18.2%).
Behaviour of cost
| Type | Total cost as meals rise | Cost per meal as meals rise | Examples |
|---|---|---|---|
| Fixed | Stays the same (within a range and period) | Falls | Rent, permanent staff salaries, insurance, depreciation, interest |
| Variable | Rises in direct proportion | Stays the same | Food, disposables, packaging, delivery commission |
| Semi-fixed or semi-variable | Has a fixed part and a part that rises; or jumps in steps | Falls, but less sharply | Electricity and phone (fixed charge plus usage), casual staff added at peaks, maintenance |
Why cost per meal falls as volume rises
A canteen's fixed costs are ₹60,000 a month and variable cost is ₹30 a meal. Find the total cost and the cost per meal at 2,000 and at 4,000 meals a month.
- At 2,000 meals: variable = 2,000 × 30 = ₹60,000; total = 60,000 + 60,000 = ₹1,20,000
- Cost per meal = 1,20,000 ÷ 2,000 = ₹60 (fixed share ₹30)
- At 4,000 meals: variable = 4,000 × 30 = ₹1,20,000; total = 60,000 + 1,20,000 = ₹1,80,000
- Cost per meal = 1,80,000 ÷ 4,000 = ₹45 (fixed share ₹15)
Doubling meals cuts cost per meal from ₹60 to ₹45, because the same fixed cost is spread over more meals.
Because fixed costs are spread over every plate, a mess that serves more students can afford better food for the same fee. Unused capacity in a canteen is expensive.
2 marks: “Distinguish fixed and variable cost.” Fixed cost stays the same in total whatever the number of meals (rent); variable cost changes in proportion to the number of meals (food).
5 marks: “Explain the elements of cost in a food service establishment.” Material, labour, overheads with examples; direct and indirect; prime cost, total cost and selling price formula.
10 marks: “Explain the basic cost concepts, elements of cost and the behaviour of cost with examples.” Cost, cost unit, cost centre, direct and indirect; three elements; cost sheet; fixed, variable and semi-variable costs with a two-volume example.
M-L-O makes the cost (Material, Labour, Overheads); F-V-S is how it behaves (Fixed, Variable, Semi).