OPERATING COSTING

By:Akrit Kashyap-25

Shreyansh Kejriwal-26 Ambarish Kulkarni-27

Devashree Kumar-28Snehil Kumar-29

Pallawi Kumari-30

What is operating costing?• Operating costing method is one designed to ascertain

and control the costs of the undertakings which do not produce products but which render services

• Also known as service costing• Operation costing is the cost of rendering services• It is the cost of producing and maintaining a service• Industries using operating costing do not produce

tangible poducts ; but useful service is rendered; for eg-transport services, utility services like hospitals, canteens etc, distribution services like supply of electricity, gas etc.

Service CostingService or operating cost is the cost of providing service. The

term service costing is applied to describe the system used to find the cost of performing a service such as transport, gas or electricity.

• Services rendered to customers are of unique and standardised type

• Distinction between fixed cost and variable cost is of special importance as the scale of operations considerably affects the cost per unit of service rendered

• A large chunk of total capital invested in fixed assets and relatively less working capital is required

• The method of costing is different from that used in connection with production and difference lies mainly in the manner of accumulating the cost data and finally in its allocation to cost units

Cost Unit-Selection of cost unit is different in operating costing

SNONAME OF THE UNDERTAKING

COST UNIT

1 Passenger transport Passenger km/mile2 Goods transport Ton mile/km3 Hotel lodging Per bed, per person, per day4

HospitalsPer bed, per day, per operations, per patient, per test, per x-ray etc.

5 Electricity Kilowatt-hour6 Boiler house Kilograms of streams supplied7 Cinema theatre Man-show8 Canteens Meals served, cups of tea sold9 Gas works Per 100 cubic ft produced10 Water supply Per 1000 gallons

Classification of Costs1.Fixed costs or standing charges2.Semi-variable costs or manufacturing charges3.Variable costs or operating-running charges

CharacteristicsThese undertakings render unique services to their

customersThey invest large proportion of their capital in fixed

assetsThe requirement of working capital comparatively is lessThe operating cost is divided into fixed and variable and

they are of utmost importance

TRANSPORT COSTINGObjective of Transport CostingAscertaining the rates of carriage of good/passengers on the basis of operating costsAscertaining the price at which the vehicle should be hired outComparing the cost of using own motor vehicles and that of using alternative forms

of transportAscertaining what should be charged against the departments , or others, using the

service

Cost Unit

1. Absolute (Weighted Average) tonnes-kms: The sum total of tonnes-kms., arrived at by multiplying various distances by respective load quantities carried

Absolute Tonne Km = Dist1 x Qty1 + Dist2 x Qty2

2. Commercial (Simple Average) tonnes-kms : Arrived at by multiplying total distance kms., by average load quantity

Commercial Tonne Km = Total Dist x Average Qty

EXAMPLE Question:

A lorry starts with a load of 20 tonnes of goods from station A. It unloads 8 tonnes at station B and rest of goods at station C. It reaches back directly to station A after getting reloaded with 16 tonnes of goods at station C. The distance between A to B, B to C and then from C to A are 80 kms., 120 kms., and 160 kms., respectively. Compute ‘Absolute tonnes-kms.,’ and ‘Commercial tonnes-kms.

Solution:

Absolute tonnes-kms. = 20 tonnes × 80 kms + 12 tonnes × 120 kms + 16 tonnes × 160 kms. = 5,600 tonnes-kms

Commercial tonnes-kms. = Average load × total kilometres travelled 16 tonnes( i.e. (20+12+16)/3 ) × 360 kms. = 5,760 tonnes-kms

PREPARATION OF COST SHEET UNDER TRANSPORT COSTING Costs are usually accumulated for a specified period viz., a month, a quarter, or a year.

All of the accumulated costs should be classified under the following thread

1. Fixed Costs or Standing Charges(license Fee And Insurance,, Administrative Expenses, Depreciation and Tax ,Wages Of drivers, conductors and cleaners)

2. Variable Costs or Running Charges( Fuel, Oil, grease/Lubricants Etc.)

3. Semi-variable Costs or Maintenance Costs.(Supervision Salary, Repairs and Maintenance, Garage Costs, Tubes and Tyres)

Note : In the absence of information about semi-variable costs, the costs may be shown

under two heads only, i.e., fixed and variableDepreciation - Depreciation if related to effluxion of time, may be treated as

fixed. If it is related to the activity level, it may be treated as variable Interest - If information about interest is explicitly given, it may be treated as

fixed cost

EXAMPLEQuestion:- The Union Transport Company has been given a twenty kilometer

long route to ply a bus. The bus costs the company 1,00,000. It has been insured at 3% per annum. The annual road tax amounts to 2,000. Garage rent is 400 per month. Annual repair is estimated to cost 2,360 and the bus is likely to last for five year. The salaries of the driver and the conductor are 600 and 200 per month respectively in addition to 10% of the takings as commission to be shared equally by them. The manager’s salary is `1,400 per month and stationery will cost 100 per month. Petrol and oil will cost 50 per 100 kilometres. The bus will make three round trips per day carrying on an average 40 passengers in each trip. Assuming 15% profit on takings and that the bus will ply on an average 25 days in a month, prepare operating cost statement on a full year basis and also calculate the bus fare to be charged from each passenger per kilometre.

SOLUTION Union Transport Company Statement showing

operating cost of the bus per annum: A – Standing Charges: • Manager’s salary (1,400 * 12) = 16,800 • Driver’s salary (600 * 12) = 7,200 • Conductor’s salary (200 * 12) = 2,400 • Road tax = 2,000 • Insurance (3% of 1,00,000) = 3,000 • Garage rent (400 * 12) = 4,800 • Stationery (100 * 12) = 1,200 • Depreciation (1,00,000/5 years) = 20,000

CONTINUED…

B – Maintenance Costs – Repairs 2,360 C – Running charges: • Petrol and oil (36,000 km. * 50)/100= 18,000 • Total costs (A+B+C) 77,760 • Add: 10% of takings for commission of • driver and conductor • 15% Profit – desired on takings • 25% on total takings = 25,920(77760*25/75)• Total Revenue = 1,03,680(77760*100/75)

CONTINUED…

Calculation of total distance covered:

(20 km. * 2 * 3 * 25 * 12) = 36,000 km per annum

Calculation of bus fare to be charged:

Effective passenger – kilometers: (2 * 20 km * 3 trips * 40 passengers * 25 days * 12 months) = 14,40,000

Rate to be charged per km from each passenger: = 1,03,680 /14,40,000 = 0.072

POWER HOUSE/BOILER HOUSECOSTING

The costs may be considered under the following headings:

• SUPERVISION-Wages of foremen, and salary of work engineers.

• LABOUR-Wages of coal handlers, stokers and ash removers.

• MAINTENANCE-furnace repairs, renewal of the fire bars, replacement of

fire irons etc.

• INDIRECT MATERIALS-service materials and small tools.

• FUEL-coal or oil and its carriage, handling and storage.

• WATER-cost of supply , purification and softening.

• FIXED OVERHEAD-Rent ,rates , depreciation, insurance and interest on

capital.

BOILER HOUSE• Prepare a cost sheet showing the cost of generation the cost of steam per

unit.• Total units of steam generated: 1,00,000 units.

• Normal consumption of coal for generation of steam is 2 Kg for every unit of steam generated @Rs.200 per quintal.

• Interest on capital to be included in costs @ 10% per year.

RS.

Coal consumed 4,20,000

Labour cost 72,000

Water and softening charges 24,000

Electricity 12,000

Works and admin overheads 40,000

Miscellaneous overheads 20,000

Capital invested 4,00,000

SOLUTION:Operating cost sheet of a boiler house

Variable Total costRs

Per unit costRs.

Coal(1,00,000*2*Rs.200/100kg)

4,00,000 4.00

Labour 72,000 0.72

Water and softening charges

24,000 0.24

Electricity 12,000 0.12

Total variable

costs(A)

5,08,000 5.08

CONTINUED…

Fixed costs

Works and admin

overheads

40,000

Misc.overheads 20,000

Interest on

capital(Rs.4,00,000*10

%/12)

3,333

Total fixed costs(B) 63,333 0.63

Total cost(A+B) 5,71,333 5.71

POWER HOUSE• The following cost data pertaining to the year 1998-99 were

collected from the books of A B C power co. ltd• Prepare a cost sheet showing the cost of generation of power

per unit of Kwh:

Total units generated 15,00,000 units

RS.

Operation labour 16,500

Plant supervision 5,250

Lubricants and supplies 10,500

Repairs and maintenance 21,000

Adminstrative overheads 9,000

Capital cost 1,50,000

QUESTION

• Coal consumed per Kwh for the year was 1.5 lbs and cost of coal delivered to the power station in Rs. 33.06 per metric tonne.Depreciation rate chargeable was 4% per annum and interest on capital was to be taken at 1% higher than the reserve bank rate at 6% per annum.

SOLUTION:ABC POWER CO.LTD

Variable Expenses Total Rs. Per Kwh Rs.

Coal 33,734 2.25

Operation labour 16,500 11

Lubricants& supplies 10,500 7

Repairs and maintenance

21,000 14

depreciation 6,000 4

Fixed Expenses

Plant supervision 5,250

Admin overheads 9,000

Interest(7% on Rs.1,50,000)

10,500

24,750 16.5

1,12,484 75.0

CONTINUED…

• Cost of 1 metric tonne i.e 2204.62 lbs of coal =

Rs.33.06

• Therefore cost of 1.5 lbs=33.06/2,205 *1.5 =

Rs.2.25(approax)

• Cost of coal for generating 15,00,000 units of power

=(33.06*1.5*15,00,000)/2,205 = Rs.33,734(Approax)

OPERATION COST OF A MOVIE THEATRESalaries1 Manager Rs800 P.M

10 Gate Keepers Rs200 P.M

2 Operators Rs 400 P.M

4 Clerks Rs 250 P.M

Electricity and Oil Rs 11,655

Carbon Rs 7,235

Miscellaneous Expense Rs 5,425

Advertisement Rs 34,710

Admin. Expense Rs18,000

Hire of Print Rs 1,40,700

Premise value is Rs.6,00,000 and that of Projector is Rs.3,20,000 and it suffers a depreciation of 10% .

Seating capacity :- 1) Class 1 –250 Seats

2) Class 2 – 250 Seats

3) Class 3– 125 Seats

Finding cost per man assuming 20% of seats remain vacant

Finding rates of each class for 30% returns on gross proceeds and weightage ratio of classes is take as 1:2:3

COSTING OF EDUCATIONAL INSTITUTIONS• It’s a type of costing that involves determining the per

student cost that is to be charged.• Due to varying students, lot of factors have to kept

dynamic and based on which total cost is to be determined.

PROBLEM

Prepare statement showing the expenses of operating a single bus and the fleet of 25 buses for a year.

Work out average cost per students per month in respect of:Students coming from a distance of up to 4 kms.Students coming from a distance of up to 8 kms.Students coming from a distance of up to 16 kms.

HOSPITAL Costing

Key Points•Relating costs to services billed to patients.

•Typical system divides cost accumulation centres into 2 parts –

• Revenue producing cost centres• Supporting service cost centres

ProblemSupervisor Salary p.m. 2,500

Nurse Salary p.m. 1,500

Ward Boy Salary p.m. 750

Repairs and maintenance 7,200

Food supplies 88,000

Janitor and other supplies 25,000

Laundry Charges for the linen 28,000

Medicines 64,000

Cost of Oxygen, X-Rays, etc. 1,08,000

General Admin. Charges allocated to the unit 99,000

Total 4,19,000

Additional points• Hospital accommodates 25 beds + 5 additional• Building rent Rs 5,250 p.m.• 120 days – 25 beds occupied, rest 245 – 20• Extra bed hire charges – Rs 5,000 max.• Avg. Fees paid to external doctors – Rs 22,500 p.m.• Find profit made by unit if Rs 150 is charged per day

SolutionNo. of patient days (120*25 + 245*20)

7,900

Extra Beds (Rs 5,000/10) 500

Total Patient Days 8,400

Fixed Costs:

Rent (Rs 5,250 * 12) 63,000

Salaries:

Supervisors (2*2,500*12) 60,000

Nurses 72,000

Ward Boys 18,000

Repairs and Maintenance 7,200

General Admin Charges 99,000

Total fixed costs 3,19,200

Variable Costs

Fees paid to Expert Doctors 2,70,000

Hire charges for extra beds 5,000

Food Supplies to patients 88,000

Janitor and other services 25,000

Laundry Charges 28,000

Medicines Supplied 64,000

Cost of X-Rays 1,08,000

Total Variable Costs 5,88,000

Total Costs 9,07,200

Average charges per patient per day 150

Less: Cost patient per day 108

Profit per patient day 42

CANTEEN Costing

• Key Points

• Meals, snacks and refreshments at subsidized rates.• Objective is to acertain total cost of running the canteen

and deriving cost per unit of service. ex. Cup of tea• Headings in Cost sheet

• Provisions (all grocery items, soft drinks, cigg, etc)• Labour (cooks, waitresses, porters, assistants etc.)• Services (steam, gas, electricity, power, light)• Consumable Stores (linen, cutlery, crockery, mops, etc)• Miscellaneous Overheads (rents, depri., insurance)• Credit (charges for meals, tea, other sales)

Problem• Profit needed -25% excluding interest• Staff Salary – Rs 80,000 p.a.• Wages of room attendant : Rs 2 p.d. 1 attendant per

room, paid only when room occupied• Lighting expense Rs 50 p.m. when occupied• Power expense Rs 20 p.m. in winters when occupied• Repairs, Linen, Sundries and Decoration/Furnishings – Rs

10,000 4,800, 6,600, 10,000 p.a. respectively• Depreciation @5% on Rs 4,00,000• Interest rate @5% on investments in Buildings and

equipment amounting to Rs 5,00,000• No. of rooms – 100. Occupancy – 80% in summers and

30% in winters. Each period of 6 month each and each month having 30 days

SolutionRooms Days (80*30*6 + 30*30*6) 19,800

1 Total Cost Rs

A Staff Salaries 80,000

B Room attendant wages (Room days * Rs 2) 39,600

C Lighting (Rs 50*6*100*80% + Rs 50*6*100*30%) Power ( 20*6*100*30% )

33,0003,600

D Repairs 10,000

E Linen etc. 4,800

F Sundries 6,600

G Interior Decoration/Furnishings 10,000

H Depreciation: Building @5% Equipment @10% 30,000

I Interest on Investment @5% 25,000

Total Cost 2,42,000

Continued…

2 Profit @25% on cost excluding interest (on Rs 2,17,600)

54,400

Total Rent to be charged for all rooms 2,97,000

3 Room Days 19,800

4 Room Rent per Day (Total Rent/Room Days) 15