Read the case Costing and Cost Sheet - Analyzing the Costs at Gopal Catering Services

Costing and Cost Sheet - Analyzing the Costs at Gopal Catering Services Gopal ran a catering services business in Hyderabad city in the southern Indian state of Telangana. In 2018-19, more than 3 years after launching the business, Gopal wanted to start food outlets at different locations in the city. His aim was to cater to the daily food needs of the students, bachelors, families, and office goers in different areas across Hyderabad. Gopal believed the costs of running and maintaining each outlet would be the same, and estimated an average profit of Rs.50,000 (During the fourth quarter of the financial year, for a period of three months) from the food outlet business with an average revenue of Rs.12,000 per day from each outlet. The costs of managing each outlet included the cost of the food, operating expenses like the electricity and telephone expenses, supporting staff salaries, etc. A total of three outlets were opened during the fourth quarter of the financial year 2018-19. All the operations of Gopal Catering Services (GCS) were run through a single administrative office located at the center of the city. The administrative office was responsible for the maintenance of all the accounting records of GCS. At the end of the financial year, Gopal wanted to know how much profit each food outlet had made and about the various expenses he had incurred in running the business. Upon his request, the staff in the administrative office provided him with excerpts of various costs and the total revenues drawn from the financial records (Refer to Exhibit I for the List of Revenues and Expenses of GCS during the year 2018-19). However, Gopal was unable to understand the different costs incurred while running different stages of the business. Why is the information provided by the administrative office not sufficient for Gopal to understand the profitability of each food outlet? What can be done to help Gopal understand the cost structure and profitability of his business?

BACKGROUND Gopal came to Hyderabad in the year 2015. He sold his properties in his native town and shifted to the city to start a business. After talking things over with his friends and relatives, he decided to start a catering services business in the city. He believed that if he could deliver quality food at a reasonable price and on time, there would a continuous market for the catering services business. Gopal had some experience in running a catering service and this gave him the confidence to start the catering services business in Hyderabad. The business was started in the year 2015, and he invested around Rs. 1 million from his own sources. The business was named Gopal Catering Services (GCS). Initially, he hired the necessary kitchen equipment and started the business from a small hired location in the city. He started off supplying lunch to 10 to 15 people working in different offices. With the help of existing customers and friends, he got in touch with more people who needed a regular supply of food. He was also able to gain more food supply contracts from colleges, offices, schools, and private hostels. With his area of operations increasing, Gopal invested an additional of Rs. 0.50 million and borrowed another one million to expand the business. To meet the requirements of the customers spread out in the city, Gopal purchased kitchen equipment for around Rs. 0.80 million and started a kitchen with all the necessary facilities in the year 2017. In addition to the regular orders, GCS also accepted large orders for parties and other events. Educational material supplied by The Case Centre Copyright encoded A76HM-JUJ9K-PJMN9I Purchased for use on the Cost Accounting, at Abu Dhabi School of Management. Taught by Prasanna Raj, from 1-Nov-2021 to 1-May-2022. Order ref F428615. Usage permitted only within these parameters otherwise contact info@thecasecentre.org 121-0037-1 3 MAKING AND DELIVERING FOOD SERVICES GCS was the sole Proprietary business, solely owned and managed by Gopal. Apart from incurring expenditure on the purchase of kitchen equipment, Gopal incurred regular expenses on the purchase of raw materials, labor, and other miscellaneous expenses for managing the business operations. The raw materials included vegetables, non-vegetarian items, and provisions. The cost of raw materials kept changing based on the market conditions and hence they were not always steady or fixed. Major expenses were incurred on the cooking staff, who was mainly involved in the cooking activities. The other expenses were related to the supporting staff in the kitchen and in the stores. The cooking staff costs could be considered to be fixed and amounted at Rs. 20,000 per month for each chef and to around Rs. 10,000 per month each to other supporting cooking staff. The supporting staff for managing the kitchen and store activities was also paid a fixed salary of Rs. 8,000 per month each. The store manager was paid a salary of Rs. 15,000 per month. By the year 2018-19, two kitchens were operational and each kitchen was staffed with one chef and two supporting chefs, three kitchen supporting staff, and one store manager. A new kitchen was opened during the year 2018-19 due to large orders from schools and colleges. In addition to the costs just mentioned, Gopal incurred other expenses on managing the kitchen on electricity, gas cylinders, rent, telephone, and other miscellaneous items. For the timely delivery of orders, GCS hired a fleet of vehicles. The delivery charges were based on the time at which the delivery was made, and the distance. On an average, the delivery charges amounted to Rs. 150 per trip for orders to be delivered across different locations in the city. On an average, there were around 10 trips every day. During the year 2018-19, GCS was supplying food to 3 college canteens1 , 2 school canteens2 , 10 office canteens3 , and 2 private hostels4 . In addition to the standard orders, GCS also accepted orders for marriages, birthday parties, and other family and office events. The minimum number of orders was for 50 people and the maximum was for 1500 people. Due to the increase in the number of orders received, and in order to make coordinating of operations more efficient, GCS opened an administrative office in the city during the year 2018-19. The office was responsible for accepting and processing orders to the kitchens, and to ensure the timely delivery of orders. The city office coordinated all the activities of GCS and served as a single point for all the customers. It had two operating staff, with each being paid a monthly salary of Rs. 15,000, and one supporting staff, who was paid a salary of Rs. 8,000 per month. Besides, the city office incurred additional expenses in the form of telephone and electricity charges, rent, and other maintenance expenses. Gopal was very happy with the growth of his business operations. Over a span of four years, he had managed to gain the confidence of his customers and had expanded his business profitably by servicing different customers. The total sales came from among other things, food supplied to regular customers, food supplied for functions and events, and also from the newly opened food outlets. Costs were incurred on salaries, raw materials, and other expenses related to the operations and maintenance of the kitchens and food outlets and for running the city office and also the salaries paid to employees. The revenue breakup of GCS from different sources is shown in Table-I.

1. Examine the impact of cost attribution and cost dynamics on the companys leadership to address the cost unit. (CLO 2 15 Marks)

2. Choose three theoretical models/frameworksthat addresses the reduction of food waste costs that can help companys leadership in taking decisions in the future. (CLO 2 10 Marks)

3. The company plans to produce new standardized therapeutic diet meals in addition to their current menu. By applying the incremental analysis, produce two scenarios where you can demonstrate when the new diet meal can be produced and when it can be dropped.