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COST ACCOUNTING
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CIA 3

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COMPONENT 1

Aditya Jain
1620203

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4 BBA ‘B’

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Background

Service costing is a type of operation costing which is used in organizations which provide
services instead of producing goods. In this method of cost accounting, all the costs incurred
in the production of a service are added together. For calculating the price of each service, it
is very necessary to collect all the expenses relating to those services. These costs are
calculated on the time basis. They are then divided by the total number of service units
rendered. The total cost is then divided by the total units to arrive at per unit cost.

In a highly competitive market, service providers are continually looking for ways to manage
their costs and increase productivity. Although cost accounting was originally developed for
the manufacturing industry, it has proven useful in the service industry as well. Cost
accounting provides an accurate picture of the connection between specific costs and specific
outputs because it traces resources as they move through the company. By adopting cost
accounting for your service business, you can learn where resources are being wasted and
which resources are most profitable.

The service industry which I have chosen is Hospitality. I’ve contacted ‘Little Italy’, an
authenthic Italian restaurant, located in BTM Layout, Bengaluru. It was established in the
year 2013.

Seating capacity in the restaurant- 60 People

The number of employees – 16

Person Contacted- Mr. Ratnakar Patil, Manager

Mobile number- +91 9538779348

Problem Identification

There are various problems that I’ve identified after contacting Mr. , Manager at Little Italy:

Relating to Material Management:

 The Change in the prices of raw materials i.e. Vegetables and other essentials
Relating to Labour:

 Employee Turnover (Attrition)

 Managing wage rates
 Customer Service
 Management
 Hiring and Training Staff

Relating to Overheads:

 Menu costs
 Cost of replacing employee uniforms
 Cost of replacing crockery and cutlery.
 Cost of maintaining tables and chairs
 Cost of maintaining table sheets and napkins.
 Building maintenance

Objectives

 The objective of the study is to estimate the cost of labour which the restaurant incurs
due to employee turnover and cost for hiring and training them for effective customer
service.
 The objective is to estimate the cost of overheads which the restaurant incurs which
includes Menu costs, Cost of replacing employee uniforms, Cost of maintaining
tables and chairs, Cost of replacing crockery and cutlery, etc.
 The overall cost of smooth functioning of the restaurant.

Methodology

Primary Data has been collected from Mr, Manager at Little Italy, as he is a reliable source of
information.

Interviews - An informal interview with the manager and chef, Mr. Rakesh made me make
various assumptions regarding the cost of materials and other expenses including gas, rent,
storage, electricity, salaries, etc.

Secondary Data has been collected from the internet regarding costs relating to building
maintenance and other minor repairs.
So various questions can be answered through the interview which I have conducted
explaining me about the year of Establishment, Number of Employees ,Salary of Employees,
When does the restaurant purchases material, How often does the maintenance take place and
Cost of losing one employee.

Findings and Conclusion

There are various assumptions which has been taken under consideration regarding the cost
of items, collected from primary and secondary sources.

Estimated Rough Cost Sheet for Little Italy, Bengaluru

S NO Particulars Per Month (INR)

1 Electricity 3500
2 Rent 23,000
3 Salaries 2,88,000
4 Materials 3,25,000
5 Building Maintainance 6,000
6 Overheads Cost 1,31,800

Sales estimated per month= INR. 9,50,000

Overheads Cost

Menu Cost: It the cost for printing new menu which is incurred primarily in restaurants due
to change in the cost of raw materials, Addition of food items in the menu, Wear and tear of
menu. Menu cost is usually around once a year but due to seasonal changes it might occur
around 2-3 times due to Govt policies. For example, Goods and Services Tax.

Cost of printing a single menu = INR 450

No of Units Printed= 12

Total Cost: INR 5400

Cost of replacing employee uniforms: Employee uniforms are changed once a year. But
many new ones are stitched due to Employee turnover. Uniforms are printed as and when
employees join.
Cost of One Uniform: INR 1300

No. Of Units: 23

Total Cost= INR 29,900

Cost of replacing crockery and cutlery: These are replaced as and when the cutlery gets
damaged. Hence there is no clear estimation of the cost of replacing the cutlery.

Total Cost of cutlery on an average: INR 15,000

Cost of maintaining tables and chairs: These are maintained from time to time i.e 2 times
in a year.

Cost of maintenance: INR 5,000

Total Cost: INR 10,000

Cost of maintaining table sheets and napkins: These are replaced thrice a year.

Cost of Maintainance: INR 12,000

Total Cost: INR 36,000

Cost of Building Maintainance: This incurs every months related to breakdown of

dishwashers, lighting problems, Plumbing, Minor Repairs, etc.

Cost of Maintainance: INR 3000

No of times: 12

Total: INR 36,000

Overheads Cost Break-Up

Particulars Amount (INR)

Menu Cost 5,400
Cost of replacing employee uniforms 29,900
Cost of replacing crockery and cutlery 15,000
Cost of maintaining tables and chairs 10,000
Cost of maintaining table sheets and napkins 36,000
Cost of Building Maintainance 36,000
TOTAL 1,31,800
Suggestions:

1. Improve Staff Quality: Restaurants rely on repeat customers and sales of non-entrée
items to maximize revenues. Paying the least amount for dining room staff can lead to
frequent turnover and poor customer service.
2. Reduce Waste and Theft: Use ordering, inventory and security techniques that
reduce food from going bad or being stolen. Keep track of monthly and annual traffic
to better project demand and prepare for sales peaks and valleys.
3. Evaluate Menu Planning: Knowing the food costs of individual dishes lets you
determine whether they belong on your menu. Menu should be carefully planned
keeping in mind the
4. Perform Food Cost Calculations: This step in controlling foods costs is to determine
what they are, per diner. You can do this by calculating the expense of each ingredient
that goes into each dish, or divide the total number of diners you serve per month by
your monthly food costs.
5. Employee loyalty Programme: The employee of the month should be rewarded in
order to increase efficiency among other employees too and reduce employee
attrition. Conduct leave interviews so that the reason for the leaving employees can be
understood.
(Starting No. of Employees + Ending No. of Employees) / 2 = Average No. of Employees

Lost Employees / Average No. of Employees = Employee Turnover

6. Overhead Rate: Overhead rate must be calculated in order to analyse the effective
amount of wages/salaries to be allocated.
Reference:
Raab, C., & Mayer, K. (2007): Menu engineering and activity-based costing - can they
work together in a restaurant? International Journal of Contemporary Hospitality
Management

Sanders, E.E., & Hill, T.H. (2001). Foodservice profitability: A control approach (2nd
ed.). Upper Saddle River, NJ: Prentice-Hall, Inc

Schmidt, A. (1996). Chef's book of formulas, yields, and sizes (2nd ed.). New York: John
Wiley & Sons, Inc.

Spears, M.C., & Gregorie, M.B (2003). Foodservice organizations: A managerial and
systems approach (5th ed.). Upper Saddle River, NJ: Prentice-Hall, Inc.