Hospitality Finance: Cost Elements, Profit Margins, Stock Control

This report delves into the financial aspects of the hospitality industry, providing a comprehensive analysis of cost elements, gross profit percentages, and selling prices for products and services. It explores various components of cost, including material, labor, and overhead costs, and explains how these factors influence the selling price. The report further examines the calculation of gross profit margins and the significance of variable and fixed costs. Additionally, it evaluates methods for controlling stock and cash within a business and services environment, including LIFO, FIFO, EOQ, reorder point, and anticipatory stock control methods. The report also includes a detailed discussion of each method and its implications for effective inventory management and financial stability in the hospitality sector, supported by relevant references. This assignment is contributed by a student to be published on the website Desklib, a platform which provides all the necessary AI based study tools for students.

FINANCE IN THE HOSPITALITY INDUSTRY

Contents
AC2.1- Discuss elements of cost, gross profit percentages and selling prices for products and
services............................................................................................................................................3
AC2.2- Evaluate methods of controlling stock and cash in a business and services environment. 6
References........................................................................................................................................8

AC2.1- Discuss elements of cost, gross profit percentages and selling prices for
products and services
Components of cost
Cost = Material cost + Labour cost + Overhead
Material cost: Material cost can be defined as the cost which is incurred on the procurement of
material for the purpose of manufacturing product or providing services. In the hospitality
industry, the material is used to provide services to customers. The material can be direct
material and indirect material (Drury, 2012). Those materials which can be identified in the end
product or end service are direct material and vice-versa.
Labour cost: Labour cost or wages is that cost which is incurred on a human resource that is
being used in the production of any product or in providing services. Labour cost varies on the
basis of the type of labour i.e. skilled labour, semi-skilled and unskilled labour. Labour cost can
be related to production, supervisor, transportation, maintenance, etc. Direct labour cost is that
cost which is directly related to the production of product or provision of services.
Overheads: Indirect expenses or overheads are those expenses that are incurred in support of
direct expenses or those expenses which are incurred on supporting activities. Overheads are
divided into many categories but the following are common overheads:
Production or manufacturing overhead: This includes indirect expenses or overheads incurred in
the production process.
Administrative overhead: This includes indirect expenses incurred in administrative activities of
the business organisation.
Selling overhead- These expenses are incurred on selling the product or providing services to end
consumers during the reporting period.
Distribution overhead- Distribution expenses are related to distribution activities of the business
organisation.

Research and Development overhead- These are expenses which are related research and
development activities of the business organisation.
(Dyson, 2010)
Components of Gross profit margin
Gross profit margin = Selling price – Variable cost
Selling price: Selling price of the product or services is that element or consideration which is
charged from the buyer of product or receiver of service. The selling price of product or service
is the end consideration charged and therefore it includes all types of the cost incurred and profit
margin. Selling price is the base for gross profit margin.
Variable cost: Variable cost is the cost which is incurred in the production of products or in
providing services on a parallel basis. That means the variable cost is that cost which increases as
the level of activity increase and vice-versa. Variable cost is directly related to product or service
and has a major part in product or services. Variable cost remains constant on per unit basis but
varies overall basis (Wood and Sangster, 2011).
Components of selling price
Selling price = Variable cost per unit + Fixed cost per unit + Profit margin per unit
Variable cost: As discussed earlier.
Fixed cost: Fixed cost is that cost which remains fixed for the given period of time for the
reporting period. Fixed expenses are those expenses which are will remain constant and are
incurred on a constant basis. Fixed cost does not change when there is a change in production or
provision services (Scorte and Briciu, 2010). Fixed cost in the hospitality industry has a major
role to play. Fixed cost is incurred on regular basis and is fixed for certain period of time. Fixed
cost is fixed for the pre-decided level of activity.
Profit margin: Profit can be defined as the money or consideration earned in the process of
trading or buying and selling product or in the process of providing services. There are many

ways of deciding profit margin on product or services and this becomes an important component
of selling price (Scorte and Briciu, 2010). When total cost and profit margin added together, then
this becomes selling price of product or services.

AC2.2- Evaluate methods of controlling stock and cash in a business and
services environment
Methods of controlling stock and cash in a business and services environment
Controlling stock or inventories and cash is the most vital of every business organisation. As
stock and cash is directly related to liquidity and incurs expenses of the business organisation.
Therefore there is need to control stock and cash in a business. Following are some methods for
the same:
LIFO: Last in First out is the stock control method, under this method stock or inventory
purchased last will be issued first. In other words, latest inventory or stock will be cleared or
issued to the production department. In this method, the stock will be controlled by preparing
stock control statement having a material name, opening inventory, inventory received, inventory
issues and balance inventory (closing inventory) sections (Pompilio, 2010). Closing stock or
balanced stock will be of initial inventory or stock that was purchased earlier i.e. older inventory.
FIFO: First in First out is another stock and cash control method under which stock purchased
first will be cleared first. In other words, inventory purchased will be cleared or issues first to the
production department (Pompilio, 2010). In this method also, stock control statement will be
prepared and the stock is controlled using the same headings as of LIFO method. Closing
inventory or balance section will contain the latest inventory of stocks with their purchase price.
EOQ: Economic order quantity is one of the best stock control methods that are employed by
most of the business organisation. Under this method, that level of inventory or level of order
quantity will be calculated, that should be ordered at a time. At the level of economic order
quantity, both carrying cost and ordering cost will be minimum level (Taleizadeh and Dehkordi,
2017). With the help of this method, no of orders that should be placed in a year can also be
calculated. Carrying cost, ordering cost and annual consumption of stock are three components
or determinate of EOQ.
ROP: Re-order point is the safety stock that shall be maintained by every business organisation.
Re-order point is the point calculated by the business organisation by considering costs and

orders (Chen, 2011). With the help of economic order quantity, the manager can analyse what
quantity of items shall be ordered, but the help of re-order point, when order shall be placed is
measured. Usage, lead time and safety stock are three determination or component of re-order
point.
Anticipatory Stock: Under this method of stock control, inventory is maintained by the business
organisation for uncertain future demand or need. Anticipatory inventory or stock control
method is best suited for those business organisations whose demand in near future is uncertain
or cannot be determined effectively (Watson et al., 2014). This method is used because of
uncertain nature of the business, unexpected increase in demand, safety stock required to meet
current demand and other anticipatory reasons of the business organisation.

References
Chen, S.-P., 2011. A membership function approach to lot size re-order point inventory problems
in fuzzy environments. International Journal of Production Research, 49(13), pp.3855–3871.
Drury, C. (2012). Cost and Management Accounting: An Introduction. 8th edition. London:
Thomson Learning ISBN-13: 978-1408048566
Dyson J R – Accounting for Non-Accounting Students (Financial Times/Prentice Hall, 2010)
ISBN-13: 978-0273722977
Pompilio, David, 2010. The choice between LIFO, FIFO and mark-to-market accounting in the
estimation of securities damages.(last in, first out and first in, first out inventory methods)
(Australia). Company and Securities Law Journal, 28(4), pp.243–258.
Scorte Carmen & Briciu Sorin, 2010. Cost Volume Profit Model, The Break -Even Point and
The Decision Making Process in the Hospitality Industry. Annals of the University of Oradea:
Economic Science, 1(2), pp.839–845.
Taleizadeh, A. & Dehkordi, A., 2017. Economic order quantity with partial back ordering and
sampling inspection. Journal of Industrial Engineering International, 13(3), pp.331–345.
Watson, J.W., Moliver, N. & Gossett, K., 2014. Inventory Control Methods in a Long-Term Care
Pharmacy. Political Science, 30(5), pp.151–158.
Wood, F. and Sangster, A. (2011). Business Accounting 1. 12th edition. Harlow: Pearson
Education Ltd