By the end of this chapter, you will be able to:
Mastering these skills will help you manage costs and prices effectively, ensuring your catering and accommodation services are both competitive and profitable in the real trade.
Compiled by: Bonface Ochieng
Costing and pricing in catering and accommodation form the financial backbone of successful service delivery across various Kenyan industries. Whether managing a county referral hospital kitchen, a university hostel dining hall, or a retail business staff cafeteria, understanding the components of cost and how to price services appropriately ensures sustainability and profitability. This chapter unpacks essential terms and concepts related to costing, profit, specific costing methods such as meat costing, and the dynamic factors influencing cost fluctuations. Mastery of these concepts enables professionals across sectors to make informed decisions that balance quality service provision with financial viability.
Costing and pricing rely on a clear understanding of foundational terms that describe the financial elements involved in service delivery. This section clarifies key terminology to build a solid conceptual base for further study.
Costing is the process of working out the total cost of producing and serving a dish, a room night or an event, by identifying and adding together every labour, material and overhead cost involved. A hotel kitchen costs a plated main course by adding up the price of every ingredient on the plate, the labour time spent preparing it, and a fair share of the kitchen's running costs.
Pricing is the process of deciding the amount a guest will be charged for a dish, a room or a service, based on its cost, the profit the establishment wants to make, and what guests are willing to pay. A restaurant prices a new dessert by starting from its costed price per portion and then adding a margin that still leaves the dish looking reasonably priced next to the rest of the menu.
The elements of cost refer to the primary components that collectively constitute the total expenditure incurred in producing a catering or accommodation service. These costs must be accurately identified and quantified to establish effective pricing strategies.
Labour cost is the wages, salaries and related costs of every member of staff involved in producing and serving the dish or accommodation, including chefs, waiting staff and housekeeping attendants. A hotel's banqueting kitchen counts the hours its chefs and kitchen porters spend preparing a function's menu as part of that function's labour cost.
Material cost is the cost of the food, beverage and other consumable materials used directly to produce the dish or service, such as the ingredients on a plate or the amenities placed in a guest room. A restaurant's material cost for a grilled fish dish includes the fish itself, the accompanying vegetables and the sauce ingredients.
Overhead cost covers the indirect costs that keep the establishment running but cannot be traced to one specific dish or room, such as rent, electricity, water and administrative salaries. A hotel allocates a share of its monthly electricity bill across every dish sold in its restaurant, since no single dish can be billed for the exact power its preparation used.
Profit is the financial gain realised when revenue exceeds total costs. Catering and accommodation businesses must grasp different profit concepts to set prices that ensure sustainability and growth.
Gross profit is the difference between sales revenue and the cost of goods sold, reflecting the efficiency of direct production before overheads are considered. For example, a hotel restaurant calculates gross profit after subtracting the cost of food and beverages from sales, before deducting staff wages, rent or utilities.
Net margin profit expresses net profit as a percentage of sales revenue, showing what share of every shilling taken in sales is left as profit once every cost has been paid. A restaurant that takes Ksh 500,000 in sales for the month and ends with Ksh 75,000 in net profit has a net margin profit of 15 percent.
Net profit is the actual amount of money left after deducting every cost, including cost of sales, labour, overheads and any other expense, from total sales revenue. A hotel's catering department works out its net profit for a banqueting event by taking the total amount billed to the client and subtracting every cost incurred in planning and running that event.
Meat costing is a specialised method focusing on accurately calculating the cost of meat used in catering, which often represents a significant portion of food expenses. Careful meat costing prevents wastage and ensures menu profitability.
The cost of cooked meat is the purchase price of the raw meat adjusted for the weight lost during trimming and cooking, since the kitchen pays for the whole cut but can only serve what remains after bone, fat and moisture loss are removed. If a hotel kitchen buys 10 kilograms of beef at Ksh 600 per kilogram, a total cost of Ksh 6,000, and trimming and cooking leave only 7 kilograms of servable meat, the cost of cooked meat works out to Ksh 6,000 ÷ 7 = Ksh 857 per kilogram, considerably more than the Ksh 600 per kilogram originally paid.
The cost of labour for preparing is the wage cost of the time a butcher or chef spends trimming, portioning and cooking the meat before it reaches the plate. A restaurant costing a roast lamb dish adds the kitchen's hourly labour rate multiplied by the time spent boning and trimming the joint to the dish's total cost.
The cost of overheads for meat costing is the share of the kitchen's general running costs, such as the energy used by the oven or cold room, that is fairly attributed to preparing and storing that meat. A hotel kitchen allocates a portion of its refrigeration running cost to the meat section, since meat typically needs more cold storage time than most other ingredients.
The total cost of a meat dish is the cost of cooked meat added to the cost of labour for preparing and the cost of overheads, giving the full cost that must be recovered through the dish's selling price. Continuing the earlier example, if the cost of labour for preparing adds Ksh 400 and the cost of overheads adds Ksh 150 to the Ksh 6,000 cost of cooked meat, the total cost of that batch of beef becomes Ksh 6,000 + Ksh 400 + Ksh 150 = Ksh 6,550.
Cost dynamics describe how a catering or accommodation establishment's total costs behave as the volume of business, such as the number of covers served or rooms sold, changes.
A fixed cost stays the same regardless of how many covers are served or rooms sold in the period, such as rent for the premises or a manager's monthly salary. A hotel pays the same monthly rent whether it sells ten room nights or one hundred in that month.
A semi fixed cost, also called a semi-variable cost, has both a fixed part that is paid regardless of volume and a variable part that changes with volume. A restaurant's electricity bill includes a fixed standing charge paid every month plus a variable charge that rises as more covers are cooked and more equipment runs.
A variable cost changes in direct proportion to the volume of business, rising and falling with the number of covers served or rooms sold. The cost of food ingredients used by a restaurant rises in direct proportion to the number of meals it serves that day.
Total cost is the sum of all fixed, semi fixed and variable costs incurred over a period, and is the figure an establishment must recover through its sales revenue to avoid a loss. A hotel's monthly total cost combines its fixed rent and salaries, its semi fixed utility bills, and its variable food and beverage costs, into one figure that its sales for the month must exceed if it is to make a profit.
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Create a free accountThis chapter explored key concepts essential to catering and accommodation costing and pricing, beginning with clear definitions of terms such as elements of cost, profit concepts, meat costing, and cost dynamics. It examined various methods of pricing, highlighting how each approach influences financial outcomes and market positioning. The discussion extended to the importance of pricing, emphasizing its role in covering costs, generating profit, and maintaining competitiveness. Breakeven analysis was introduced as a critical tool to determine the sales volume required to cover all costs before profit is realized. Finally, the chapter addressed pricing adjustments, explaining how modifications respond to market changes, customer demand, and cost fluctuations. Together, these topics provide a comprehensive framework for effective financial management in the hospitality industry.
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