Question

Classifications of Costs

Let's say you decide to open a restaurant. You begin by creating a menu and setting the prices for the menu items. Let's say one of your menu choices is a steak, with a baked potato and seasonal vegetables. How much should the menu item price be? Obviously, you must include the cost of the food itself (this is the DIRECT MATERIALS) - the cost of the steak ($5), the potato ($1) and the vegetables ($1). If the total cost of food is $7, should we set the price at $8?

Answer 1

No. While setting the price for the steak, along with the cost of direct materials, other costs also should be taken into consideration such as the direct labor costs (salaries and wages of chef and other kitchen staff), and the overheads such as indirect materials, indirect labor (salaries and wages of waiters, cleaning staff, etc.), other costs such as power, rent, depreciation on kitchen equipments, etc. After all direct material, direct labor, and overhead costs are computed, the desired mark-up should be added to the total cost to arrive at the price for the steak.