Finance in the Hospitality Industry
The cost of the recipes determines the food prices in the hospitality industry. The total cost in a
restaurant includes the fixed and the variable costs. The fixed costs mostly don’t vary with sales
or the general output or production levels. The fixed remain constant whether the sales levels
increase or decrease. For example, the rent payables remain constant whether sales have
increased or decreased. They are not dependent on the levels of sales or production outputs but
they are normally expressed periodically for example monthly or annually. (Adams 1997)
Variable cost on the other hand varies with the rate of production or sales made. They variable
proportionally to the volume or levels of sales made. When sales increase, variable costs also
increase when it decreases the sales also decreases. The cost of direct materials and labour vary
proportionally with the levels of productions. (Atkinson, Berry & Jarvis 1995)
Some costs have both the elements of fixed and also variable costs. They are referred to as the
semi-variable costs. (Harris & Hazzard 1994)
The gross profit is arrived at by getting the difference between the total sales and the variable
costs. This difference is known also as the contribution margin. This margin is normally
Unit 2: Finance in the Hospitality Industry 2
represented by the difference between the cost of a product and its selling price in a shop. GP
indicates the difference as a total percentage to sales. (Dyson 1996)
Breakeven levels occurs when the total sales revenues equals to the total costs which includes the
fixed as well as the variable costs. Any earnings above the breakeven levels are profits to the
company. (Drury 2004)
The major costs in the hospitality industry include the cost of food, labor, fuel, rent, marketing
and advertisement, transport among other expenses.
Ingredients Quantity Ingredient cost Recipe cost
Chicken breasts 4 pcs 1.5 each 6.00
Plain flour 15g 0.66 per kg 0.01
Olive oil 30ml 3.78 per litre 0.11
Shallots 100g 3.49 per kg 0.35
Brandy 60ml 13.07 per litre 0.78
Chicken stock 300ml 1.67 per litre 0.50
Asparagus spears 600g 5.83 per kg 3.50
Crème fraiche 50ml 3.6 per litre 0.18
Total recipe cost 11.44
Cost per portion 11.4355/4 2.86
To arrive at the total recipe cost in the table above, the ingredient cost is a calculated as
purchased (AP) to basically determine the value and the amount purchased. The as served (AS)
is calculated by dividing the ingredients required to make the portions and the cost of the single
serving item in the menu. For example, the quantity of plain flour required to make four portions
of flambéed chicken with asparagus is 15g and it’s purchased at 0.66 per kg. Each portion
requires 3.75g of plain flour which cost £ 0.0025 pounds for a portion of Flambéed chicken as
served and £1.069 pounds for 70 portions of flambéed chicken. (Epstein & Lee 1999)
Unit 2: Finance in the Hospitality Industry 3
The total cost of four portions of Flambéed chicken with asparagus is 11.44 as per the recipe
costs. To arrive at the cost of a single portion, the total cost of the four portions is divided by four
which equals to £ 2.86 per portion. (Faul, du Plessis & van Vuuren 2001)
Ingredients Quantity Ingredient cost
Chicken breasts 4 pcs 1.5 each 6.00 280 pcs 420.00
Plain flour 15g 0.66 per kg 0.01 1.05 kg 0.69
Olive oil 30ml 3.78 per litre 0.11 2.1 litres 7.94
Shallots 100g 3.49 per kg 0.35 7kgs 24.43
Brandy 60ml 13.07 per litre 0.78 4.2litres 54.89
Chicken stock 300ml 1.67 per litre 0.50 21 litres 35.07
Asparagus spears 600g 5.83 per kg 3.50 42 litres 244.86
Crème fraiche 50ml 3.6 per litre 0.18 3.5 litres 12.60
Total recipe cost 11.44
Cost per portion 11.4355/4 2.86
Total cost for 70 portions 200.2 800.49
SP per portion to produce 85% GP 5.29
To obtain the total cost of 70 portions is obtained by dividing the total cost of the four portions
which equals to £800.49 divided by 4 which equals to £200.2. Each portion costs £2.86, so
seventy portions will cost £2.86 × 70 = 200.2 (Garrison, Noreen & Brewer 2006)
To calculate the selling price to produce 85% gross profit on cost, the total cost per portion
which equals to £ 2.86 and multiplied by 1.85 to add the 85% profit margin on the total costs =
£ 2.86 × 1.85 = 5.29 (Kotas 1999)
Unit 2: Finance in the Hospitality Industry 4
Gross profit margin is calculated by subtracting the total cost of sales, both fixed and also
variable costs, from total sales. The other operating costs are deducted when net profit is being
To calculate airlines breakeven point in terms of pounds, the contribution margin method was
applied and it’s based on the cost volume profit analysis. (Contribution ratio) When it refers to a
single unit it’s known as the unit contribution. (Messenger & Shaw 1993)
Contribution margin = Price – variable costs
Total seats 48
Total cost seats 7120
Other charges 35 pp 1680
Canal hotel (half board) 5520
Coach transfers 384
Total cost for package deal 14704
Cost per person 306.33
Cost of 36 seats 11028
Breakeven cost of seat 229.75
To get breakeven level, the total cost of the package is calculated which equals to £14,704/48
seats = £306.33 per person. (Guilding 2002) The breakeven costs for 36 seats equals to £11,028.
Each seat will cost £ 11,028/36 = £ 229.75 (Hansen & Mowen 2005)
The formula for calculating the contribution margin which is also known as the cost volume
analysis is simply arrived at by substituting the parts of the equation and rearranging the
Unit 2: Finance in the Hospitality Industry 5
contribution margin formula. At breakeven level the company makes no profits or losses, the
total costs equal the contribution margin. (Atkinson, Berry & Jarvis 1995)
Finally, a significant reduction in fixed expenses or costs has little effect on a company’s cost
structure. The same case applies to the increment in total fixed costs. But the variable costs
changes usually heavily affect a company’s total expenses or costs. A relative small increase in
variable costs may lead to a very large increase in a company’s total cost.
Adams, D., 1997, Management Accounting for the Hospitality Industry: A Strategic Approach.
Atkinson, H., Berry, A. & Jarvis, R., 1995, Business Accounting for Hospitality and Tourism.
Drury, C., 2004, Management and Cost Accounting. Thomson Learning.
Dyson, J., 1996, Accounting for Non-Accounting Students. FT Prentice Hall.
Epstein, M.J. & Lee, J.Y., 1999, Advances in management accounting, 8.
Stanford, Con.: JAI Press.
Faul, M., du Plessis, P.C. & van Vuuren, S.J., 2001, Fundamentals of cost and
management accounting. Durban: Butterworths.
Guilding, C., 2002, Financial Management for Hospitality Decision Makers. Butterworth-
Unit 2: Finance in the Hospitality Industry 6
Garrison, R.H., Noreen, E.W. & Brewer, P.C., 2006, Managerial accounting
(11th Ed) Boston: McGraw-Hill.
Hansen, D.R. & Mowen, M.M., 2005, Management accounting (7th Ed) Mason,
Ohio: Thompson/ South-Western.
Harris, P. & Hazzard, P. 1994, Accounting in the Hotel and Catering Industry. Nelson Thornes.
Kotas, R., 1999, Management Accounting for Hospitality and Tourism. Thomson Learning.
Messenger, S. J. & Shaw, H., 1993, Financial Management for Hospitality, Leisure and
Tourism. Palgrave Macmillan.