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INTRODUCTION TO OPERATING COSTING

Operating costing 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 organization itself certain
departments too are known as service departments which provide ancillary services
to the production departments. For example: maintenance department; power
house; boiler house; canteen; hospital; internal transport.
Operation costing offers better scope for control. It facilitates the
computation of unit operation cost at the end of each operation by dividing the
total operation cost by total input units. It is the category of the basic costing
method, applicable, where standardized goods or services result from a sequence of
repetitive and more or less continuous operations, or processes to which costs are
charged before being averaged over the units produced during the period. The two
costing methods included under this head are process costing and service costing.
CIMA has defined Operating Costing As that form of operation costing
which applies when standardized services are provided either y an undertaking or
by a service cost center within an undertaking.

Cost Accounting Standard 1 by ICWA defines Operating Cost As the


cost incurred in conducting a business activity. Operating costs refer to the cost of
undertakings, which do not manufacture any product but which provide services.
Because of the varied nature of activities carried out by the service
undertaking, the cost system used is obviously different from that followed in
manufacturing concerns.
The 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:
Operating and running charges: It includes expenses of variable nature.
For example expenses on petrol, diesel, lubricating oil, and grease etc.
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.
Fixed or standing charges: These includes garage rent, insurance, road
license, 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.

APPLICATION OF OPERATING COSTING


Transport Service: Under this method of costing, the operating cost of each
vehicle is determined. The common unit of service is tonne kilometer in case of
goods transport, and passenger kilometer in case of passenger transport. Examples
of transport service are Truck operators, road transport, Railways, Airlines, etc.

1. Supply service: It includes services like electricity, steam, gas, water, etc.
where steam is used for the purpose of generating electricity, it is possible to
compute the cost of electricity generated by aggregating the steam
production costs with other related cost of electricity generation. A cost unit
is generally in terms of kilograms.
2. Welfare Services: It includes services like canteen, hospital, library, etc.
Hotels, restaurants employ operating costing. The total operation of a hotel
can be divided into number of cost centers like Restaurant, Housekeeping,
Laundry, etc. The cost unit is generally in terms of per meal/ dish.

COST UNIT:
For ascertaining costs, it is necessary to decide suitable cost units for each type of
service industry. Basically, Operating Costing is a type of Process Costing. Thus it
uses the methods of Process Costing when ascertaining the cost of supply of
electricity, steam etc. However, sometimes Operating Costing may adopt a
particular Job as a unit of costs as for example when costing a particular trip by a
bus so as to quote the charges. In such cases Operating Costing uses the methods of
Job Costing by treating a specific trip as a separate job. A cost unit under operating
costing may be of two types
a. Simple cost unit; or
b. Composite cost unit.
Following is the list of different cost units used in different types of service
enterprises

Service Industries

Simple Cost Unit

Passenger Transport

Per Kilometer
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Goods Transport

Per Kilometer

Road Maintenance

Per K.M. of Road maintained

Water Supply

Per Kilo Liter of Water Supplied

Canteen

Per Meal / Dish

Service Industries

Composite Cost Unit

Passenger Transport

Per Passenger - K.M.

Goods Transport

Per Ton - K.M.

Electricity

Per Kilowatt Hour

Steam, Gas

Per K.G. / Cubic Ft.

Hospital

Per Patient Day

Library

Per Member Book

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Thus, it can be seen that in Operating Costing, in most cases the cost unit is a
compound unit. It refers to both the Quantum of Service and Period of Service.
Thus a transporter charges for carrying so much weight (tons) for so much distance
(Km); an electricity company charges one for use of both the Quantum (Kilowatt)
and the Period (Hours); and so on.

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TRANSPORT COSTING:
Transport operating costs refer to costs that vary with vehicle usage, including fuel,
tires, maintenance, repairs, and mileage-dependent depreciation costs (Booz Allen
& Hamilton, 1999). Projects that alter vehicle miles traveled, traffic speed and
delay, roadway surfaces, or roadway geometry may affect travelers' vehicle
operating costs, which should be considered in a benefit-cost analysis.
Vehicle ownership costs refer to fixed costs that are not directly affected by vehicle
mileage, including time-dependent depreciation, insurance and registration
fees, financing, and residential parking.
Projects that change per capita vehicle ownership rates, such as significant changes
in the quality of alternative modes and land use accessibility, may affect vehicle
ownership costs, which should be considered in benefit-cost analysis.
Estimate changes in total vehicle miles traveled along a corridor.
Estimate changes in vehicle travel speeds and delay due to road and traffic
conditions.
Estimate fuel consumption rates, fuel prices, and non-fuel-related operating
costs.
Calculate total changes in vehicle operating costs.
For improvements to ride quality, such as pothole repairs and curve or grade
reductions, estimate effects on vehicle wear.
Estimate changes in per capita vehicle ownership in an area.
Estimate average vehicle ownership costs.
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Calculate total changes in vehicle ownership costs.

COST SHEET for (Month/Year)


STE
P

COSTS

Rs Rs.
.

A.

FIXED COST
Insurance
License

xx

.
fee,

Permit

fee

and

..... xx

Taxes

Depreciation

Other Fixed costs (specify)

X
xx X
xx

xx

VARIABLE COST

C.

xx
Salaries and Wages of Drivers, Cleaners & other Operating
Staff

xx X
X
Fuel and Lubricants
..

D.

Consumables

E.

Amortization

Cost

of

Tyre

,Tube

&

Battery

X
xx X
xx X
X
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Laundry
Spares

...

Repairs & Maintainable


Other Variable Cost (specify)

xx X
X
xx

...

TOTAL OPERATING COST[A+B]


PROFIT/LOSS
REVENUE [TAKINGS]

VEHICAL NO

XXX

CARRAIGE CAPACITY [Seats or Tonnes]

XXX

DAYS OPERATED

XXX

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Illustrations 1:
1. From the following information calculate total kms and total passengers
Kms
No. of Buses=6
Days Operated in the month=25
Trips mage by each bus = 4
Distance of route 20 Kms (one way)
Capacity of Bus = 40 passengers
Normal passenger travelling 90% of capacity.
SOLUTION:
Total Kms covered = Run
Distance * Two ways * No. of trips * No. of days * No. of buses
20 Kms * 2 * 4 *25 * 6 = 24000 Kms
Total passenger-Kms. Covered = Run * Load
Load = Maximum capacity* Used capacity
= 40 * 90% = 36
Total Passenger Kms Covered = 24000*36

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= 864000

Illustrations 2:
A mineral is transported from two mines A and B and uploaded at plots in a
Railway station. Mine A is at a distance of 10kms, and B is at a distance of 15kms.
From railhead plots. A fleet of lorries of 5 tonne carrying capacity is used for the
transport of mineral from the mines. Records reveal that the lorries average a speed
of 30kms per hour , when running and regularly take 10 minutes to unload at the
railhead. At mine A loading time averages 30 minutes per load while at mine
B loading time averages 20 minutes per load.
Drivers wages, depreciation, insurance and taxes are found to coat Rs9 per hour
operated. Fuel, oil, tyres, repairs and maintainance cost Rs 1.20 per Km.
Draw up a statement, showing the cost per tone- kilometer of carrying mineral
from each mine.
Assuming the quality and other aspects pertaining to material is same in both the
mines, where should the material be purchased?

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Solution
1.

Operating analysis

Particulars

I.

Total kms operated

20km

30km

II.

Total operating time

20mins

30mins

C. Time from mine to plot

30mins

20mins

(10*60/30) , (15*60/30)

20mins

30mins

10mins

10mins

80mins

90mins

A. Time from plot to mine


(10*60/30) , (15*60/30)
B. Loading time

D. Unloading time

III.

Effective tone kilometer


(5*10km) , (5*15km)

50tonn-km

75tonn-km

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2. Statement showing the cost per ton kilometer of carrying Mineral


from each mine

Costs

Mine A

Mine B

(Drivers wages , depreciation , insurance & taxes)


A: 1hour 20minutes @ Rs9 per hour

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13.50

B: 1hour 30minutes @ Rs9 per hour


(refer to working note 1)
(Fuel, oil , tyres , repairs and maintainance)
A: 20kms @ Rs1.20 per km

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36.00

B: 30kms @ Rs1.20 per km


49.50
Total cost per trip
36

Cost per ton-km


= Total cost / Total ton-km
A = 36/50 = Rs 0.72
B = 49.5/ 75 = Rs 0.66
cost per tone
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= Total cost \ Total tones


A= 36/5 = Rs 7.2
B = 49.5/5 = Rs 9.9

Since the cost per tone is the lowest in case material is procure from mine A it will
be considered.

CONCLUSION
Operating costs are expenses that relate to a business operations. It can also refer
to the costs of operating a specific device or branch of a corporation. These costs
usually fall into two categories, called fixed costs and variable costs, and a
business may have more of one type than the other.

Fixed operating costs are expenses that tend to remain the same whether the
business or device is inactive or operating at full capacity. Examples of such
expenses include employee salaries and machinery leasing fees. Salaries must be
differentiated from hourly wages in this regard.

Flexible expenditures are known as variable operating costs. These expenses


fluctuate based on a variety of factors. Money dispensed on hourly wages, for
example, can be adjusted by varying the amount of time recipients are engaged in
labor.
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Operating costs are not unique to any country, although actual expenses may vary
from one country to another or even from one location to another. Within an
industry, it is very possible for expenses to vary. It is, however, difficult to find a
business that does not have any of these costs. Even Internet businesses, in which
the costs of operations can often be reduced, it is almost impossible to completely
eliminate them.
Process costing method is applicable where goods or services result from a
sequence of continuous or repetitive operations or processes and products are
identical and cannot be segregated. Costs are charged to processes and averaged
over the units produced during the period.
Single or output costing is used when the production is uniform and identical and a
single article is produced. The total production cost is divided by the number of
units produced to get unit or output cost. Examples are mining, breweries, brick
making, etc.
Operation costing refers to the methods where each operation in each stage of
production or process is separately costed. Thereafter, the cost of finished unit is
determined. This is suitable to industries dealing with mass production of repetitive
nature for example, motor cars, cycles, toys, etc.
Expenses associated with administering a business on a day to day basis. Operating
costs include both fixed costs and variable costs. Fixed costs, such as overhead,
remain the same regardless of the number of products produced; variable costs,
such as materials, can vary according to how much product is produced.

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Businesses have to keep track of both operating costs and costs associated with
non-operating activities, such as interest expenses on a loan. Both costs are
accounted for differently in a company's books, allowing analysts to see how costs
are associated with revenue-generating activities and whether or not the business
can be run more efficiently.

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