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Operating Costing

Chapter 1: Introduction to topic
It is a method of costing applied by undertakings which provide service rather than production of commodities. Like unit costing and process costing, operating costing is thus a form of operation costing. The emphasis under operating costing is on the ascertainment of cost of rendering services rather than on the cost of manufacturing a product. It is applied by transport companies, gas and water works, electricity supply companies, canteens, hospitals, theatres school etc. Within an organisation itself certain departments too are known as service departments which provide ancillary services to the production departments. E.g. Maintenance department, power house, boiler house, canteen, hospital, internal transport.

The information concerning the business enterprise is very helpful to the management to control it in an efficiently way. As the other branches like financial accountancy and management accountancy, the cost accountancy also serves the important information to the management regarding the operating efficiency of the business. It becomes very easy for management to lay down management policies, to guide management decisions or evaluate operating management performance with the information provided by cost accounting.

The term operation in business terminology refers to an activity of the business. It is very important to study the operations of the business in detail because depends on the operations, which it performs. The management should always concentrate on the efficiency of the operation and also the costs associated to the operations. It is very important to control the costs associated to the operations for the enterprises like manufacturing companies, companies engaged in the process of extraction of materials from earth like, coal mines etc.

Generally, the above mentioned business enterprises depend on the operation that it has to be performed in to produce in to produce the final output. The costs associated with such operations are generally higher. These costs are called as “operating costs”.

The costs, which are incurred to perform the operation of the enterprise, are called as operating costs. These costs are to be accounted for in order to arrive at the total costs of operation or process, which helps in determining the price of the final product.

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Operating Costing

“Cost accounting is the classifying, recording and appropriate allocation of expenditure for the determination of the costs of products or services, and to the presentation of suitably; arranged data for the purposes of control and guidance of management.”

It includes the ascertainment of the costs of every process, operation, services or contrast as may be appropriate. It deals with the cost of production, selling and distribution. It thus, the provision of such analysis and classification of expenditure as will enable the total cost of any particular unit of production to be ascertained with reasonable degree of accuracy and at the same time to disclose exactly how such total cost is constituted (i.e. the value of material used, the amount of labour and other expenses incurred) so as to control and reduce the cost.

Operating Costs are the costs incurred by undertakings which do not manufacture any product but provide a service. Such undertakings for example are — Transport concerns, Gas agencies; Electricity Undertakings; Hospitals; Theatres etc. Because of the varied nature of activities carried out by the service undertakings, the cost system used is obviously different from that followed in manufacturing concerns.

Essential features of operating costs are as follows:
(1) The operating costs can be classified under three categories. For example in the case of transport undertaking these three categories are as follows: (a) Operating and running charges. It includes expenses of variable nature. For example expenses on petrol, diesel, lubricating oil, and grease etc. (b) Maintenance charges. These expenses are of semi-variable nature and include the cost of tyres and tubes, repairs and maintenance, spares and accessories, overhaul, etc. (c) Fixed or standing charges. These includes garage rent, insurance, road licence, depreciation, interest on capital, salary of operating manager, etc. (2) The cost unit used is a double unit like passenger-mile; Kilowatt-hour, etc. It can be implemented in all firms of transport, airlines, bus-service, etc., and by all firms of Distribution Undertakings.

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4. It enables a concern to measure the efficiency and than to maintain and improve it.Operating Costing THE FEATURES OF COST ACCOUNTING: 1. A concern may suffer not because of the cost of production is high or prices are low but also because the output is much below the capacity of the concern. It is a process of accounting for costs. This can be done with the help of comparison of data made available of the previous periods and current period. 2. The extract cause of decrease or increase in profit/loss can be detected. 3|Page . Efficiency of public enterprises. It is concerned with cost ascertainment. 5. Finally it involves the preparation of right information to the right person at the right time so that it may be helpful to management for planning. It explains the cost incurred and there by provides data on the basis of which production can be appropriately planned. evaluation of performance. It provides information upon which estimates and tenders are based. control and decision-making ADVANTAGES OF COST ACCOUNTANCY 1. The primary objective of the public enterprises is not to raise profits but it is to serve the society by providing quality good at cheaper rates. It records income and expenditure relating to goods and services 3. 5. It guides for future production polices. Costing has a more important role to play in public enterprises than in private enterprises. 3. 2. cost control and cost reduction. It provides statistical data on the basis of which future estimates are prepared and quotations are submitted. 4.

): Which may increase depending on whether more production is done. Semi-variable costs or maintenance costs. Janitorial Supplies. and how it is done (producing 100 items of product might require 10 days of normal time or take 7 days if overtime is used.. Driver Wages. Payroll Services. Preparation of Cost Sheet under Operating Costing For preparing a cost sheet under operating cost. 2. a quarter. It may be more or less expensive to use overtime production depending on whether faster production means the product can be more profitable). Office Products.Operating Costing Chapter 2 Operating Costing: a Brief Review It is defined as the refinement of process costing. or Waste Disposal etc. the per unit cost of service may be calculated by dividing the total cost for the period by the total units of service in the period. Depreciation. Fixed costs or standing charges: Which are the same whether the operation is closed or running at 100% capacity. Uniforms. It is concerned with the determination of the cost of each operation rather than the process. (Fuel. (Supervision salary. These generally have to be paid regardless of what state the business is in. oil etc. Operation costing offers better scope for control. Fixed Costs include items such as the rent of the building. All of the accumulated costs should be classified under the following three heads: 1. The two costing methods included under this head are process costing and service costing. a month. costs are usually accumulated for a specified period viz. In those industries where a process consists of distinct operations. It facilitates the computation of unit operation cost at the end of each operation by dividing the total operation cost by total input units. Electrical use. Variable costs or running charges. Variable Costs include indirect overhead costs such as Cell Phone Services. Credit Card Processing. Utilities. or a year etc. Computer Supplies. Repairs and Maintenance) Under operating costing. 4|Page . the method of costing applied or used is called operation costing. 3. Telecom.

In some cases. salaries.Operating costs are incurred by all equipment — unless the equipment has no cost to operate. but nonmonetary overhead is possible in the form of time required to accomplish tasks. In the case of a device. such as the cost of raw materials used in the goods a business sells. usual and customary recurring costs of operating the equipment. insurance. furniture etc. 5|Page . it is the regular. salaries of salesmen. stationery. rent. per se). all of these items will be referred to in general as equipment). component. though not equipment. director’s fees etc.Operating Costing Overhead costs for a business are the cost of resources used by an organization just to maintain its existence.  Selling and distribution expenses like advertisement. requires no personnel or space and never wears out (any examples? perhaps intangibles. Overhead costs are usually measured in monetary terms. equipment may appear to have low or no operating cost because either the cost is not recognized or is being absorbed in whole or part by the cost of something else. Operating Expenses consist of:  Administrative and office expenses like rent. Operating Cost is calculated by Cost of goods sold + Operating Expenses. piece of equipment or facility (for the rest of this article. This does not include the capital cost of constructing or purchasing the equipment (depending on whether it is made by the owner or was purchased as a constructed system). It includes all operating cost such as salary. to staff. Examples of overhead costs include:    payment of rent on the office space a business occupies cost of electricity for the office lights some office personnel wages Non-overhead costs are incremental costs.

once it's running there are no personnel costs.Operating Costing Equipment operating costs may include:     Salaries or Wages of personnel Advertising Raw materials License or equivalent fees (such as Corporation yearly registration fees) imposed by a government  Real estate expenses. utility costs or depreciation and it uses no extra land (that wasn't already part of the place where it is located) so it has no real operating costs.  A solar panel placed on one's home for use in generating electric power generally has only capital costs. sabotage. Internet connectivity. negligence.   Taxes on production or operation (such as subsidence fees imposed on oil wells) Income taxes Some of these are not applicable in all instances. etc. such as fees assessed on transportation carriers for use of highways       Fuel costs such as power for operations. however there may need to be taken into account costs of replacement if damaged. accident. For example. 6|Page . if it is owned instead of rented or leased o o property taxes and equivalent assessments Operations taxes. fuel for production Public Utilities such as telephone service. Maintenance of equipment Office supplies and consumables Insurance premium Depreciation of equipment and eventual replacement costs (unless the facility has no moving parts it probably will wear out eventually)  Damage due to uninsured losses. including o o o o Rent or Lease payments Office space rent furniture and equipment investment value of the funds used to purchase the land. terrorism and routine wear and tear.

of weeks 7|Page .  An item which is leased may have some or all of these costs included as part of the purchase price. since the wages for these people are both overhead and incremental.Operating Costing  An automobile or any other item purchased for personal use has no salary cost because the owner does not charge themselves for operating the device. The staffs needed to keep the shop operational are mostly considered as overhead. It might be questionable to assert that the cost of ten extra people on the sales force are an incremental cost or an overhead cost.  formula for operating cost: total cost*no.

However.  Total cost is averaged over the total amount of service rendered. are used for the collection of cost data. cost per meal in canteen etc.  The expenses are divided into fixed and variable cost.  Documents like the daily log sheet.  Service costing can be used for service performed internally or externally. The examples of simple cost units are cost per unit in electricity supply. cost per liter in water supply.. Similarly cost per passenger kilometers in transport cost per patient-day in hospital. cost sheet etc. in the case of utilization of vehicles. These undertakings render unique services to their customers.  Costs are usually computed period-wise. are the examples of composite cost unit. the costs are computed order wise.  The cost unit may be simple or composite. 8|Page . Such a classification is necessary to ascertain the cost of service and the unit cost of service. use of road-rollers etc.Operating Costing The main features of operating costing are as following:  The undertaking which adopts service costing does not produce any tangible goods. costs per room-day in hotel etc.

tubes and other spare parts Depreciation Total C Total charges [ (A) + (B) ] 9|Page Total cost Cost per km . per operation. per visit Kilowatt-hours Bathers attended. grease and oil Cost of tires.) Lubricants. full time/part time student hours Patient bed days. Hours of opening Meals provided. Ingredients of Dishes Illustration of Operating cost sheet:Particulars A Standing charges :License fees Insurance Premium Road tax Garage rent Driver’s wages Attendant-cum-cleaner’s wages Salaries and wages of other staff Total B Running charges :Repairs and maintenance Cost of fuel (diesel. Passenger KM. occupied.nights available. meals Students hours. KM Travelled Bed. occupied.Kilometer. petrol etc.Operating Costing Examples of the cost units for services Transport Hotel College/Schools Hospitals Electricity Swimming pool Canteen Ton.

At this very stage a bracket would be opened to explain that there is a primordial difference between revenue generator departments. Telephone department…). Therefore. the more cost of Food Sales the Hotel incurs. insurance. Moreover. For example. For. expenses are divided into two main categories:  Direct Expenses: These are the expenses that vary with the level of production. or variable costs that cannot be feasibly distributed to various Financial Reporting Centers.Operating Costing Chapter 3: main areas of operating costing Operating costing is further divided in and used in 3 main areas namely    Hotel industry Hospital industry & Transport industry Hotel industry In the hotel industry. in the Telephone Department. and then sell the final product (Ex. the more cost of calls the hotel incurs. the Cost of Calls is a direct expense. the Cost of Food Sales is a direct expense. Fixed Charges: Examples might include rent. revenue generator departments are classified into two: Service Type departments versus merchandising departments. In the hotel industry. the more dishes we serve. On the other hand. in the Food and Beverage department. Rooms Division department). these very expenses are incurred for the benefit of the hotel as a whole not for the benefit of each single 10 | P a g e . divided into two different categories: 1. and interest expense. merchandising departments ensure revenue by getting use of certain raw material. indirect expenses are. hence. property taxes. Service type departments are revenue generators making money from solely providing services (Ex. the more we connect guests to whatever destination wanted. For.  Indirect Expenses: These are the expenses that do not vary with the level of production. processing it. In fact. For. only merchandising departments have a direct expense called Cost of Sales. F&B department.

most of the hotels decide not to allocate such expenses any more. To illustrate. departments of a typical hotel would be listed along with their various related direct expenses. Department Usage…). this practice proved to be misleading. which is Payroll and Related Expenses. hotels report such expenses in separate schedules. since it might under-allocate energy expenses for some departments and over-allocate it for others. For. At this stage. energy. In the old days. Support Centers. Nowadays. some hotels went for allocating this amount according to certain factors (ex. usually the hotel receives a total energy bill to be paid. from any department whatsoever. the insurance company will indemnify the hotel. 2. theft and burglary. For. Revenue Centers  Generate Revenue through sales of Products and/or Services to Guests        Rooms Food and Beverage Telephone Gift Shops Garage and Parking Other Operated Departments Rentals and other Income 11 | P a g e . a bracket would be opened to discuss one of the most important Direct Expenses in any hotel. Rather. Undistributed Expenses: Examples might include electricity. Surface. and Other Financial Reporting Centers 1. Later. and water expenses. examples of fixed charges and undistributed expenses would be discussed. Last. However. and one day some valuable equipment has been stolen. hotels being described as labor intensive companies devote a big percentage of their financial resources to such an expense. if a hotel insures itself against fire. Financial Reporting Centers: A Financial Reporting Center is an area of responsibility for which separate Cost Information must be collected Might be classified as Revenue Centers.Operating Costing department.

which. they do provide services to Revenue Centers. Insurance Expense. Depreciation and Amortization Expenses)  Each Financial Reporting Center should be assigned an Identification Number. Hotels commonly opt for either the Five-Digit (xx-xxx) or Eight-Digit Account Numbering Systems (xx-xxx-xxx) 12 | P a g e . consider the following Example: Financial Reporting Center Rooms Food and Beverage Telephone Administrative & General Marketing Property Operation and Maintenance Energy Costs Fixed Charges Identification Number 11 15 17 31 36 38 41 51  Furthermore. Property Taxes. Other Financial Reporting Centers  include Energy Costs and Fixed Charges (Rent Expense. To illustrate. in turn. Support Centers  those departments that have minimal Guest Contact and do not produce Sales.Operating Costing 2. provide Services to Guests      Administrative & General Marketing Property Operation and Maintenance Data Processing Human Resources 3. Interest Expense. each Account should be assigned an Identification Number. Yet.

the Expired Costs of Assets through Depreciation and Amortization.Operating Costing Responsibility Accounting: Aim  provides Financial Information useful in evaluating the effectiveness of Managers and Department Heads. and cannot be identified with any particular Department          Property Insurance Interest Expense Property Taxes Rent Expense Depreciation and Amortization | | |  FIXED CHARGES | | Marketing Expense Administrative & General Expenses Property Operations and Maintenance Energy Costs | | UNDISTRIBUTED EXPENSES | | 13 | P a g e . Expenses  include the day-to-day Costs of Operating the Business. Indirect Expenses (Fixed Charges and Undistributed Expenses) and Income Taxes a) Direct Expenses  they are Costs incurred solely for the benefit of a particular Department       Cost of Sales Payroll Expenses Payroll-related Expenses Operating Supplies China. Glassware. and Linen Laundry and Dry Cleaning b) Indirect Expenses  They are incurred for the benefit of the Hotel as a whole. Expenses are classified as Direct expenses (Cost of Sales and Operating Expenses). and the "write-off" of pre-paid items. That's why only Direct Expenses should be charged to Specific Departments 1. Silver.

Operating Costing c) Income Taxes  it is neither a Direct Expense. nor an Indirect Expense. Salaries and Wages (Payroll Expense)  Includes Salaries. Wages. Worker's Compensation Insurance  Includes the Expense of Worker's Compensation Insurance 6. and Other Forms of Employee Group-plan Fringe Benefits 14 | P a g e . Employee Benefits  Include Vacation and Holiday Pay 3. It should appear as a separate Line Item on a Hotel's Summary Income Statement 2-Departmental Expense Accounting: Separate Expenses versus one Lump-sum Amount of Expenses Payroll and Payroll-related Expenses: 1. Overtime Pay. and any Employee Bonuses and Commissions 2. Employee Meals  Includes the Cost of Food furnished to Employees as a Convenience to the Employer 5. Employee Group Plans  Includes Life and Health Insurance. Payroll Taxes  Includes Social Security Taxes (Employer's Portion) 4.

and policy makers overseeing the issues of the national health system. where to allocate the resources within or among hospitals. Cost information may also be used for the future: making cost projections. Cost data can be used for two primary purposes. Cost information is part of the basic information needed by managers and policy makers for making decisions about how to improve the performance of a hospital. It can be used to assess the current situation of a hospital. 15 | P a g e . determining the effectiveness of the hospital. and setting of prices. and scenario planning with “what if?” situations. Some of the basic reasons for wanting cost information are to improve efficiency. budgeting. regional coordinators of health services. The information can be used to assess the internal operations and performance of a single hospital—such as helping assess the utilization of health personnel in different departments of the hospital in providing services—and to make comparisons of the operations and efficiency of different hospitals. such as for assessing its efficiency. and improve quality. increase effectiveness. Information on the costs and outputs of hospitals can provide considerable information for managers of hospitals. or Analysis of the effect of changing the use of staff. enhance sustainability. and supplies in providing services in an existing program. Some of the specific potential uses of cost information for a health care administrator are:      Comparison across facilities to identify those that are efficient from those those are not. development of a cross-subsidization strategy. equipment. reviewing its priorities. or to compare the performance of different hospitals to one another.Operating Costing Hospital industry Hospital cost information is derived by relating the inputs of resources in monetary terms to the outputs of services provided by the hospital. comparison of costs with fees. evaluation of the financial requirements of a new program. relative to time: for the present and for the future. When the cost data (the financial cost of the resource inputs) can be related to information about the outputs (the type and quantity of services provided) assessments of efficiency of the input output relationship can be made.

within an area or country. Major Cost Areas for Hospital 1. wards or units within the hospital. etc. The managers or administrators of hospitals may also use the cost data on their individual hospital. patrols. and (3) The amount of detail needed from the Output of this exercise. Inpatient ¨ Medical ward ¨ Surgical ward ¨ Maternity ¨ Private ward 2. Outpatient clinic 3. (2) The Amount of detailed costing information available. examine composition of costs: staff.) 5. Ancillary services ¨ Pharmacy ¨ Laboratory ¨ Radiology (X-Ray) 4. They may also use such information to establish standards of performance and efficiency for hospitals. and provincial managers to compare the performance of similar types of hospitals.Operating Costing Cost data on a series of hospitals. and assess revenue generation to costs of various services The process of determining the costs of a hospital involves six steps: The steps in costing of the hospital services are provided in the six sections below. Training school 16 | P a g e . regional. Outreach services (services provided off-site: mobile MCH clinics. Step 1: Defining the major and relevant activity areas of the hospital Define the relevant areas of hospital operations which need to be costed. Factors to consider are (1) The importance of an activity relative to the hospital’s total output or level of activity. This information can be used to    measure performance of different departments. may be used by national. supplies.

education. The reason for two measures is that since these measures will serve as a denominator and determine the outputs of this model. or number of surveillance visits. This latter output of the model—total cost per admission—is especially helpful if attempting to determine the payments or premiums on a capitation basis. Their services should be costed as the equivalent of what a national would receive for doing that same job     Drugs Medical Supplies Transportation (petrol and maintenance for vehicles and ambulances) Maintenance (for all facilities and equipment other than vehicles) 17 | P a g e . it is often useful to have not only the unit cost per day of hospitalization (total costs/total patient days) but also to have the average cost per admission (total costs/total admissions). Training schools may be a major source of resource commitment. or prescriptions filled. Outreach services would use number of visits to the mobile clinic. Step 3: Determining the labour and other recurrent costs In this step you must identify the major cost components for the major activities identified in step The major components of expenditure are detailed below Recurrent costs:     Labour Salaries Allowances (uniforms. housing.Operating Costing Step 2: Gathering information on the services provided or the output of the hospital Information to be gathered for each of these areas will be based on a typical measure of workload. The number of students enrolled would be a useful measure of the workload of the institution. number of contacts. For inpatient services two outputs are sought: total inpatient days and total admissions. procedures. home leave. rural or hardship incentive pay.) “Free” labour (foreign or missionary health personnel who provide their services at no cost to the facility). etc. Ancillary services will use the number of examinations. For outpatient clinics it is typical to use total visits for a time period as a measure of workload.

outpatient. inpatient. To allocate these indirect costs of administration we must use what is termed “the step-down allocation method. The administrative costs are considered indirect in that they support the care and ancillary services delivered to patients and are part of the total costs of the facility.” Since the ancillary. The assumption is that the indirect costs follow the same proportional representation that the direct service costs use among these areas. For example.  Vehicles Step 5: Allocating the indirect costs The model includes a summary chart. which lists the total cost for each activity area. constructed from the labour and the other costs listed. and any other activities as defined in the first step. Because we also want the unit costs of those areas providing patient care services. waste cans have a useful life of greater than one year but because they cost much less than $200 their purchase is considered a recurrent rather than a capital cost. If it does not meet these requirements then it is a recurrent cost. and outpatient services cannot use a common workload measure we will use the other direct costs as a basis for allocating the indirect costs. Equipment is considered capital equipment if its cost is higher than some set amount (such as US$ 200) and it has an expected useful life of more than one year. other ancillary services. which is included in recurrent costs) Equipment (major equipment purchased for the facility). 18 | P a g e . the indirect or administrative costs must be allocated to the inpatient.Operating Costing     Food (total food costs incurred for both patients and staff) Telecommunications Office expenses Other Step 4: Ascertaining the capital costs of the hospital   Building (construction or modification but not routine maintenance.

2. 5. as mentioned in the introduction. include: 1. This can help in the planning of new services or expanding existing services 19 | P a g e . an assessment of their relative levels of efficiency may be made. equipment) or when the same output is produced with fewer resources. and that they have been used properly and efficiently. Cost Recovery: Establishing prices Knowing the cost of services allows the managers to set prices for all services “at cost” plus a small margin.Operating Costing Step 6: Reviewing and using the hospital cost summary The resulting information can be used by an individual institution or for comparing several institutions. So when cost profiles of several hospitals are available for the manager to review. Accountability Using the information to report to the hospital board or the ministry how financial resources have been used. or determine which services will receive cross subsidies. the comparison can result in setting a standard for what that type of hospital should be able to produce with a given set of resources. 4. Budgets may be generated using cost information. Cost Projections: Planning for the future What-if” scenarios may be generated with the service volume and costing information generated. Assessing efficiency Efficiency is achieved when more hospital services (outputs) are produced with the same amount of resources (staff. The uses. Establishing standards When cost information is available for a cross-section of similar type hospitals. finances. 3.

congestion. it is now generally agreed. is the general move to place traditional government activities in a market setting. and safety costs in prices paid by transportation system users. Finally. will result in greater efficiency and service. Second. trucking. in which the structure and conduct of the different modes are a result of the interplay of market forces occurring within and between modes. The privatization and corporatization of roadways and parts of the aviation systems are good examples of this phenomenon. This is certainly to be expected from a sector that has been subject to continued public intervention since the nineteenth century. and in which mode. Such a major investment decision ought not to be made without understanding the full cost implications of a technology or investment compared to alternatives. While arguments of market failure. have previously been used to justify the economic regulations which characterized the airline. there is an avid interest in the prospect of new modes like high speed rail (HSR) to relieve airport congestion and improve in environmental quality. there is now a continual and increasing fiscal pressure exerted on all parts of the economy as the nation reduces the proportion of the economy’s resources which are appropriated by government. bus. there is increasing pressure to fully reflect the environmental. Third. where the private sector would not provide the socially optimal amount of transportation service. First and perhaps most importantly. Many factors have led to a reexamination of where. that the move to a deregulated system. noise. transportation investments should take place. and rail industries. and supported by empirical evidence.Operating Costing Transportation industry Price. cost and investment issues in transportation garner intense interest. 20 | P a g e .

Indivisible costs are usually variable for larger but not for smaller changes in output  Escapable costs (or Avoidable costs): A cost which can be avoided by curtailing production. because they cannot be changed. For example. so it is not possible to fully allocate all costs nor to identify separate marginal costs for each of the joint products.Operating Costing There are many types of costs. joint costs arise. and thus.  Total costs: Total expenditures required to achieve a given level of output. Sunk costs are irrelevant for decisions.  Indivisible costs: Do not vary continuously with different levels of output or must expenditures. For example.   Private cost: The cost a producer incurs in getting the resources used in production Sunk costs: These are costs that were incurred in the past. must be used in all cases. consider a rail line running only from point A to point B. it is not possible to identify a marginal cost for an i to j trip and a separate 21 | P a g e . Some of the costs are not traceable to the production of a specific trip. Key terms and brief definitions are below. Since the trip from A to B inevitably results in the costs of the return trip. The escapability of costs depends on the time horizon and indivisibility of the costs. The movement of a train from A to B will result in a return movement from B to A. o Total costs = fixed costs + variable costs.   Fixed costs: The costs which do not vary with output.  Opportunity costs: The actual opportunities forgone as a consequence of doing one thing as opposed to another. and on the opportunity costs of assets in question The production of transport services in most modes involves joint and common costs. Opportunity cost represents true economics costs. but be made in discrete "lumps". There are both escapable fixed costs and escapable variable costs. Marginal (or incremental) cost: The derivative (difference) of Total Cost with respect to a change in output.  Social cost: The cost the society incurs when its resources are used to produce a given commodity. Variable costs: The costs which change as output levels are changed. taking into accounts the external costs and benefits. The classification of costs as variable or fixed is a function of both the length of the time horizon and the extent of indivisibility over the range of output considered. A joint cost occurs when the production of one good inevitably results in the production of another good in some fixed proportion.   Average costs: The total cost divided by the level of output.

common or non-allocable costs will not preclude economically efficient pricing. however. The production of a unit of freight transportation does not. The question arises whether or not the presence of joint and common costs will prevent the market mechanism from generating efficient prices. the use of transport facilities to produce one good does not inevitably lead to the production of some other transport service since output proportions can be varied. Substantial literature in transport economics has clearly shown that conditions of joint. Thus. automatically lead to the production of passenger services. Common costs arise when the facilities used to produce one transport service are also used to produce other transport services (e. 22 | P a g e . Only the marginal cost of the round trip. unlike joint costs. what is produced.g. is identifiable. when track or terminals used to produce freight services is also used for passenger services).Operating Costing marginal cost for a j to i trip.

Service costing is similar to output costing. canteen.These include repairs and overhauling of vehicles. etc. The classification of costs into fixed and variable is very important. gas or electricity. boiler house. license. output costing and service costing are the sub-divisions of unit costing method. It also indicates the change in the cost structure due to change in the operating level. The principle of service or operating costing is to accumulate costs under suitable headings and to express them in terms of the unit of service rendered. wages of assistants and drivers. garage charges. hospitals. b) Maintenance charges: . the method of costing is different from that used in connection with production. Service costs are particularly suitable for the costing of road and rail transport services and they are also utilized by electricity undertaking. etc. Service or operating cost is the cost of providing services. It may be noted that process costs. All costs are suitably classified under fixed and variable. In transport undertakings most of the statistical data required for cost finding and cost control purposes are obtained from Daily Log Report.These fixed expenses include insurance. etc. 23 | P a g e . These costs are then collected. Identical cost units should have identical costs and this concept of equality of costs is the basic feature of unit costing. etc. oil. analyzed and expressed in terms of an appropriate cost unit. grease.Operating Costing Chapter 4 Transport costing case study Unit costing is the method of costing used when the cost units are identical. In order to prepare a Transport Cost Sheet for a transport undertaking the costs may be subdivided as under:a) Wages and running costs: .These include cost of petrol. c) Fixed charges: . tyres. depreciation. and the difference lies chiefly in the manner of assembling the cost data and finally in its allocation to cost units. All repairing and maintenance work are recorded on repair tickets and are then costed. as it draws management’s attention to the fixed costs to which they are committed regardless of the units of service ultimately given. Service costing is the term applied to describe the system used to find the cost of performing a service such as transport.

24 | P a g e . Costs per unit thus obtained are compared with the past result. is obtained by multiplying the total tonnage carried by the kilometres travelled and dividing the product by two. This is done where the vehicles return empty as is found in most cases. etc. securing the optimum use of vehicles. regular maintenance as a planned operation.. viz. Where transport department is treated as service department all costs are collected and apportioned to other departments on the basis of commercial ton-kms. In order to compare the operating efficiency for each period. the total costs thus arrived at are divided by the bases such as number of hours or days. Cost control is always possible by means of comparison of actual performance with the budgeted performance. A monthly Vehicle Cost Sheet and Performance Statement are generally used in many transport undertakings. The haulage of incoming material might be charged as an addition to cost of raw material. number of kilometres run.. may be instituted. maintenance and performance are helpful in preparing a performance in respect of each vehicle. number of commercial ton-kilometres.Operating Costing The statistical data regarding costs. etc. planned replacement of vehicles. and the haulage of fabricated goods to customers becomes a part of distribution overhead. commercial ton-km. Various control measures. Generally. avoidance of loading and unloading delays prevention of overlapping and duplicated journeys.

The driver charges and maintenance charges are borne by Adhunik Transport. Other expenses are borne by Elbee. In 1991. The company has its 17 branches all over the country. The company is involved in delivery of goods all over the country. operated under the name of another company for which they give a minimum amount of business and certain running costs are borne by that company.  Owned Vehicles 8 HCVs.Heavy Commercial Vehicles 4 Trailers  Dedicated Vehicles 25 LCVs.Operating Costing Adhunik Transport Organization Limited Introduction: Adhunik Transport Organization Limited was established in the year 1988 as an organization. along with 3 agencies in certain remote areas. The company currently has a turnover of approximately Rs. The company also provides warehousing facilities to companies like PhilipsIndia and Colgate. BGTA checks all business malpractices and IBA is needed for regulating payments within different states. The advantage to Elbee is that its capital is not blocked. They are used for delivering goods given by ELBEE. 25 | P a g e . it got the status of a limited company after reaching the minimum turnover level.Light Commercial Vehicles Dedicated Vehicles are delivery trucks. which are made according to certain specifications. The advantage to the company is that it does not have to look for customers and keeps getting a minimum amount of business. The company is a member of Bombay Goods Transport Association (BGTA) AND Indian Bank Association (IBA). which is very essential for the smooth conduct of their business activities. 10 Crores. Number of vehicles: The company has owned as well as dedicated trucks and trailers. The company has its LCVs dedicated to ELBEE Delivery Services.

000 26 | P a g e . of Employees: The Company has on an average 8 office staff members per branch.00.000 8.11.000 2.000 6.000 15.200 500-1. 2.00.000 54.000Rs.00.000 3.000 1.000 approx 10.00.00. Measurement of Materials is done in tons.000 30. 10.000 1.00. COSTS: FIXED COSTS Salaries Insurance Transport Permits (Every 5 yrs) Administrative Overheads Taxes Depreciation Interests TOTAL VARIABLE COSTS Maintenance (Per Vehicle) HCV LCV TRAILERS Wages Drivers Cleaners Transit Expenses TOTAL 2.500 35.000 34.38. There are 30 staff members in the head office in Mumbai. The salaries of these employees vary from Rs.000 depending upon the nature of the job they do.00.Operating Costing No.

Operating Costing Notes:     There are 2 drivers and 1 cleaner for every long journey. The average distance covered 225-280kms. 27 | P a g e . 1. In case of short journeys. THE CUSTOMERS ARE CHARGED: Rs.20 PER KM PER TON (For HVC) Rs.00 PER KM PER TON (For LVC) The Profit-Margin is between 10%-20%. there is only 1 driver and 1 cleaner. The maximum distance covered in a day is 300kms. 1.

hospitals. canteens. operating costing is thus a form of operation costing. the cost details of adhunik transport organisation limited are provided herewith which will help us to know more about operating costing 28 | P a g e .Operating Costing Chapter 5 Findings After studying the topic in depth and data collection from a firm following are the findings from the project   As the subject. gas and water works. which are incurred to perform the operation of the enterprise. These costs are to be accounted for in order to arrive at the total costs of operation    Operating Costs are the costs incurred by undertakings which do not manufacture any product but provide a service. important features and advantages of cost accounting are studied and the project throws light on operating costing It is a method of costing applied by undertakings which provide service rather than production of commodities.   It is applied by transport companies. theatres school etc. are called as operating costs. Like unit costing and process costing. The various steps and items of the operating cost sheet is explained in depth along with illustrative example and cost units for various services The three main area namely o Hotel industry o Hospital industry & o Transport industry In which massive use of this method of costing is used are explained with illustrations  Finally . The costs. electricity supply companies.