Food and beverage costing and pricing are fundamental for the financial health of any hospitality business in Kenya. Accurate costing ensures that the business covers its expenses while setting competitive prices that attract customers and maintain profitability. This chapter explores the critical elements involved in beverage pricing, focusing on understanding cost dynamics, performing cost analysis, and managing overheads through allotments and absorption techniques. Mastering these concepts enables food and beverage professionals to make informed pricing decisions that reflect both market conditions and operational realities.
Every food and beverage operation incurs costs in three main groups, known as the elements of cost: material cost, labour cost and overhead cost. Knowing what each element is, how large it is in relation to sales and how it behaves as business rises and falls is the basis for setting selling prices, preparing budgets and controlling spending. The elements are usually expressed as a percentage of sales so that they can be compared from period to period and with targets. Example: a highway restaurant at Mai Mahiu reviews each month what percentage of its sales went on food, beverages, wages and overheads, and acts when any element rises above target.
Material cost is the cost of the food and beverages used to produce the items sold, such as meat, vegetables, flour, spices, wines, spirits, beers and soft drinks. It is usually the largest single cost, commonly about 30 to 40 per cent of food sales and 25 to 50 per cent of beverage sales, depending on the type of operation. It is calculated as:
Cost of materials consumed = opening stock + purchases − closing stock
Material cost varies directly with the volume of business and is controlled through standard recipes, standard portions, purchasing, receiving, storage and issuing controls.
Labour cost is the cost of the people who produce and serve the food and beverages and manage the operation. It includes basic wages and salaries, overtime, allowances, service charge distributed to staff, staff meals and uniforms, employer contributions such as NSSF, housing levy and medical cover, leave pay and training. In most operations it is the second largest cost, often 20 to 35 per cent of sales, and it is controlled through staffing plans, rotas, productivity standards and training.
Overhead cost covers all the other costs of running the business that are not materials or labour, such as rent, rates, electricity, water, fuel and gas, insurance, repairs and maintenance, depreciation of equipment, cleaning materials, laundry, licences, advertising, telephone and internet, and administration. Overheads cannot usually be traced to a single dish or drink and so are shared out among departments and products, as explained in 3.1.3 and 3.1.4.
Sales revenue must cover all three elements and leave a profit. Two profit measures are used in food and beverage control:
Gross profit = sales − material cost
Net profit = sales − (material cost + labour cost + overhead cost)
The amount left after material and labour costs (sales − material cost − labour cost) is sometimes called net margin.
Cost dynamics describes how each cost behaves when the volume of business changes, for example when the number of covers served rises or falls. Some costs stay the same whatever the volume, some change in direct proportion to it and some change only partly. Understanding this behaviour explains why profits rise sharply as business grows past a certain level and fall quickly when it declines.
Fixed costs are costs that remain the same in total over a period, regardless of the volume of sales, within normal limits of activity. Examples are rent, rates, insurance, licences, depreciation, the salaries of permanent management staff and loan interest. Because the total is fixed, the fixed cost per cover falls as more covers are served: Ksh 300,000 of rent is Ksh 300 per cover at 1,000 covers a month but Ksh 150 per cover at 2,000 covers. Fixed costs must be paid even when the business is quiet, which is why low occupancy is costly.
Semi-fixed (semi-variable) costs are costs that have a fixed part and a variable part, or that stay fixed over a range of activity and then rise in a step. Examples are electricity, water and telephone, which have a fixed standing charge plus a charge for each unit used; and staffing, where one more waiter is needed for every additional 40 covers. Semi-fixed costs are controlled by separating the fixed part, which is planned, from the variable part, which is monitored against business volume.
Variable costs are costs that change in total in direct proportion to the volume of sales: if covers double, these costs double. Examples are food and beverage costs, disposable packaging, guest supplies, credit card commissions and casual labour paid per function or per hour of business. The variable cost per cover stays constant, so these costs are controlled per unit through standard recipes, standard portions and productivity standards.
Cost analysis is the breaking down and examination of costs to find out how much each element is, how it relates to sales and to the number of covers, and where action is needed. It turns accounting figures into information managers can use to set prices and control costs.
Example: in one month a restaurant had sales of Ksh 2,000,000 from 2,000 covers, material cost Ksh 700,000, labour cost Ksh 500,000 and overheads Ksh 400,000.
| Item | Ksh | % of sales |
|---|---|---|
| Sales | 2,000,000 | 100 |
| Material cost | 700,000 | 35 |
| Gross profit | 1,300,000 | 65 |
| Labour cost | 500,000 | 25 |
| Overhead cost | 400,000 | 20 |
| Net profit | 400,000 | 20 |
Material cost % = material cost ÷ sales × 100
Material cost % = 700,000 ÷ 2,000,000 × 100
Material cost % = 35%
Each element is compared with the budget and with past months; a material cost of 38% against a target of 35% would point to waste, over-portioning, theft or rising prices.
Average spend per cover = sales ÷ number of covers = 2,000,000 ÷ 2,000 = Ksh 1,000
Total cost per cover = (700,000 + 500,000 + 400,000) ÷ 2,000 = 1,600,000 ÷ 2,000 = Ksh 800
Food cost per cover = 700,000 ÷ 2,000 = Ksh 350
Break-even is the level of sales at which total sales exactly equal total costs, so there is neither profit nor loss. It uses the split of costs into fixed and variable. Suppose that, of the restaurant's Ksh 1,600,000 costs, Ksh 600,000 are fixed and Ksh 1,000,000 are variable, which is Ksh 500 per cover.
Contribution per cover = average spend per cover − variable cost per cover
Contribution per cover = 1,000 − 500
Contribution per cover = Ksh 500
Break-even covers = fixed costs ÷ contribution per cover
Break-even covers = 600,000 ÷ 500
Break-even covers = 1,200 covers per month
Break-even sales = 1,200 × 1,000 = Ksh 1,200,000
Every cover above 1,200 adds Ksh 500 to profit: at 2,000 covers, profit = (2,000 − 1,200) × 500 = Ksh 400,000, which agrees with the table above.
Overhead allotment (apportionment) is the sharing of overhead costs among the departments or cost centres that benefit from them, such as the kitchen, restaurant and bar, on a fair basis. Costs that belong entirely to one department, such as the bar's licence, are allocated straight to it; shared costs, such as rent and electricity, are apportioned using a basis that reflects how much each department uses. Example: a conference hotel in Kabarnet shares its monthly overheads among its kitchen, restaurant and bar as follows.
Monthly overheads: rent Ksh 300,000, electricity Ksh 120,000 and administration salaries Ksh 150,000, a total of Ksh 570,000. The kitchen has 200 m², the restaurant 250 m² and the bar 50 m² (total 500 m²); electricity use is 60%, 30% and 10%; staff numbers are 12, 15 and 3 (total 30).
Kitchen rent = 300,000 × 200 ÷ 500 = Ksh 120,000
Restaurant rent = 300,000 × 250 ÷ 500 = Ksh 150,000
Bar rent = 300,000 × 50 ÷ 500 = Ksh 30,000
| Overhead | Basis | Kitchen (Ksh) | Restaurant (Ksh) | Bar (Ksh) | Total (Ksh) |
|---|---|---|---|---|---|
| Rent | Floor area | 120,000 | 150,000 | 30,000 | 300,000 |
| Electricity | Units used | 72,000 | 36,000 | 12,000 | 120,000 |
| Administration | Number of staff | 60,000 | 75,000 | 15,000 | 150,000 |
| Total | 252,000 | 261,000 | 57,000 | 570,000 |
The totals for each department are then absorbed into the cost of the products it makes, as shown in 3.1.4.
Overhead absorption is the charging of each department's overheads to the products or services it produces, so that the full cost of a dish, drink or function includes a fair share of overheads. It is done by calculating an overhead absorption rate in advance from budgeted figures and applying it to each unit of activity.
Overhead absorption rate = budgeted overheads ÷ budgeted units of activity
The unit of activity may be a direct labour hour, a cover, a machine hour or a percentage of material or labour cost. Labour hours are common in kitchens because production is labour-intensive.
Example: the kitchen in 3.1.3 has budgeted overheads of Ksh 252,000 and 2,520 budgeted labour hours per month.
Overhead absorption rate = 252,000 ÷ 2,520
Overhead absorption rate = Ksh 100 per labour hour
A dish uses Ksh 180 of ingredients and 15 minutes (0.25 hours) of a cook's time, paid at Ksh 200 per hour.
Material cost = Ksh 180
Labour cost = 0.25 × 200 = Ksh 50
Overhead absorbed = 0.25 × 100 = Ksh 25
Full cost = 180 + 50 + 25
Full cost = Ksh 255
Because the rate is set from budgets, the overhead absorbed rarely equals the overhead actually incurred.
Overhead absorbed = actual labour hours × absorption rate
If the kitchen actually works 2,450 hours and actual overheads are Ksh 258,000:
Overhead absorbed = 2,450 × 100 = Ksh 245,000
Under-absorbed overhead = 258,000 − 245,000 = Ksh 13,000
Under-absorption means prices based on the rate did not recover all overheads, and the shortfall reduces profit; over-absorption means overheads were over-recovered. Persistent differences show that the rate must be revised.
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Create a free accountThis chapter explored the critical elements involved in food and beverage costing and pricing, starting with an understanding of cost dynamics, cost analysis, and the allocation and absorption of overhead expenses. It detailed how these cost elements influence pricing decisions and profitability. Various pricing methods were examined, including informal and competitive approaches, as well as formal strategies such as cost-based and market-based pricing, highlighting their application in different business contexts. The chapter also covered the practical application of menu pricing, demonstrating how costs and market factors shape the final prices offered to customers. Additionally, it addressed sales analysis as a tool for monitoring performance and informing pricing adjustments. Finally, the chapter discussed different approaches to recording and controlling food and beverage sales, emphasizing accurate documentation and control mechanisms to ensure financial efficiency and reduce losses. Together, these topics provide a comprehensive framework for managing food and beverage costs and pricing effectively in hospitality operations.