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Service costing
Process costing
In a food industry, the food is prepared on a continuous basis so the costs are based on the raw
materials bought, produced and served. It takes into consideration only the major costs that are
incurred by the restaurant. Using this method of costing, the industry can control the spending on
the inventory and leads to uniform productivity.
In the case of raw materials to be bought, the company uses FIRST IN FIRST OUT (FIFO)
method. Most of the raw materials used in the manufacturing process are single use producer
goods. So the stock has to be purchased every now and then. Some of the materials that has to be
purchased frequently are:
1.
2.
3.
4.
5.
6.
Eggs
Cheese
Chicken
Vegetables
Spices
Wheat flour etc.
Service costing method is commonly used in all service industries. The Egg Factory uses this
method for determining the fixed costs, variable costs and the maintenance cost. This also helps
them to price their products adequately and plan for the future to face any contingencies.
The egg factory uses absorption costing technique as it covers both the variable and fixed costs
that are incurred. In most of the service industry we find absorption costing, the egg factory is
one among them. Some of the fixed and variable and fixed costs are:
Variable costs:
1. Eggs
2. chicken
3. Veggies etc.
Fixed costs:
1. rent for using the land
2. salary to employees
3. Managers salary etc.
This technique of costing lets you know where the cost is high and where the cost is low. So it is
useful to reduce the costs and use the materials optimally.
Classification of costs:
The cost in any industry can be classified into 4 categories:
Prime cost
Work cost
Cost of production
Cost of sales
In the egg factory the costs can be categorized as follows:
Prime cost
Works cost
Cost of production
Cost of sales
Pamphlets
Advertising
Decorating the restaurant premises
Food cost
Beverage cost
Part time or casual labors
Electricity
Telephone charges
Maintenance expenses
Rent etc.
These are some of the costs that the egg factory can control and other factors cannot influence
over such costs.
Uncontrollable costs:
Cost of Eggs
Cost of Chicken
Vegetables cost
Cheese and butter
These are some of the costs which keeps fluctuating depending on various factors like season,
weather, demand, supply etc. Taking into consideration the costs that are controllable the egg
factory tries to reduce the cost.