How Does a Catering Company Allocate Costs?
It's important for catering companies to understand their profit margin on various engagements. However, it's not always easy to understand where to allocate seemingly unrelated business costs. Rather than just calculating food and labor expense, catering companies should develop a cost allocation plan that allows catering events to fully absorb all costs of doing business. Understanding fully absorbed costs allows the catering company to better price their products and services.
Food costs are usually the most straightforward to assign. Allocate the cost of any food and drink to event it was used for. However, it can be difficult to allocate monthly food spoilage costs. The catering company may choose to allocate spoilage costs based on the value of food used at each event. For example, say a catering company loses food to spoilage and wants to know how much of the cost to assign to Event X. If Event X incurred $1,000 of food cost and the company incurred $10,000 of event food costs that month, the accountant should allocate 10 percent of the spoilage cost to Event X.
Wage expense for chefs, catering managers and catering staff are usually allocated based on how many hours they spend on each event. Catering companies usually bill for labor on an hourly rate and have a strong understanding of these numbers. However, sometimes they don't have as clear of an understanding on how to bill administrative wage expense. Owners and sales representatives should estimate what percentage of their time they spent on different events to allocate their payroll cost. Support staff expenses that are not involved in catering events, like legal, accounting and human resources, should be absorbed by each event based on a predetermined rate. Examples of appropriate predetermined rates include percentage of total costs or percentage of total revenue.
All catering events utilize some type of equipment and should absorb the cost of new equipment purchases. When allocating equipment cost, catering companies should consider the cost driver behind the purchase. For example, the driver for the amount of tables, linens, china and glasswear at an event is typically the number of meals served. It's best to allocate new equipment purchases of this sort by the number of meals served at each event. Catering companies often bill based on the number of guests, so they usually already have this information on hand. On the other hand, it may make more sense to allocate the purchase of cooking equipment based on the total food cost of the event.
Catering companies have to pay utilities, rent and property taxes to keep their business afloat. However, these overhead costs usually don't have a clear correlation with specific catering events. The driver for gas, electricity and water costs is often the amount of time spent prepping the food. For this reason, preparation time can be an accurate allocation base for utilities. Rent and property tax could be allocated based on preparation time, total revenue or total cost depending on what management feels is most accurate.