You are on page 1of 38

UNIVERSITY OF MUMBAI

PROJECT ON
OPERATING COSTING.
SUBMITTED BY
MADHURI JADHAV
ROLL NO.: 29
ADVANCED ACCOUNTANCY PART 1 (SEM 2)
ADVANCED COST ACCOUNTING
IN PARTIAL FULLFILLMENT OF THE DEGREE OF
MASTER OF COMMERCE
2015-16
UNDER THE GUIDENCE OF
PROF. VARSHA PENDSE
VIDYA PRASARAK MANDAL, THANE
K.G.JOSHI COLLEGE OF ARTS &
N.G. BEDEKAR COLLEGE OF COMMERECE
CHENDANI BUNDER ROAD, THANE-400601

1 | Page

Declaration
2 | Page

I, student of M.Com. (Part - I) Roll No. : 29 hereby declare that the


project title OPERATING COSTING for the subject ADVANCED COST

ACCOUNTING submitted by me for semester - II of the academic year 2015-16, is


based on actual work carried out by me under the guidance and supervision of PROF.
VARSHA PENDSE. I further state that this work is original and not submitted
anywhere else for any examination.

PLACE

MADHURI JADHAV
ROLL NO: 29

DATE

ACKNOWLEDGEMENT
It is indeed a great pleasure and proud privilege to present this project work.
3 | Page

I take this opportunity to express my gratitude and acknowledge to all the individuals
involved both directly and indirectly for their valuable help and guidance.

This project has been an attempt to give information about the OPERATING

COSTING.

I expressed my deep since of gratitude to founder and president of Vidya Prasarak


Mandal. I express my heartful thanks to our honorable Principal for her constant
support and motivation.

I express special thanks to my guide Prof. VARSHA PENDSE under whose guidence
the project conceived , planned and executed.

I would also like to thank the college library and its staff for patiently listening and
guiding me. I would like to thank my family also.

Thank You.

INDEX

4 | Page

Chapter

Sub

no

chapter

1.1

Introduction

1.2

Features of operating costing

1.3

Unit of cost

1.4

Classification of cost

1.5

Component of operating costing

10

1.6

Application of operating costing

12

1.7

Cost unit

13

2.1

Types of operating costing

14

2.2

Literature review

25

3.1

Company profile

26

4.1

Conclusion

29

4.2

Bibliography

31

Particulars

Page no

Chapter 1
5 | Page

1.1 Introduction
CIMA defines the method Operating costing applies where standardized services are
provided by an undertaking.
Such undertakings are: transport concern (shipping, air, railways and motor transport
etc.), catering establishments (hotels, hostel, canteen etc.) and public utility undertakings like
gas, electricity, steam generating, hospitals, theatres, schools, laundries etc. In many factories
utility services like motor transport, power house, hospital and canteen are departmentally run
divisions which provide services to the producing departments of the factory.
Operating costing is used by concern running diverse nature of activities, the cost
system is obviously different from that for manufacturing concerns. In this system a suitable
cost-unit is adopted, which is not a job or process but is related to service rendered e.g. tonkilometer, passenger-kilometer of transport services, unit of electricity or kilowatt hour, cubic
meter of gas etc.
It is a method of ascertaining costs of providing or operating a service. This method of
costing is applied by those undertakings which provide services rather than production of
commodities. The emphasis under operating costing is on the ascertainment of cost of
services rather than on the cost of manufacturing a product. This costing method is usually
made use of by transport companies, gas and water works departments, electricity
supply companies, canteens,hospitals, theatres, schools etc.
Cost per unit of a product or service, or the annual cost incurred on a continuous
process. Operating costs do not include capital outlays or the costs incurred in design and
implementation phases of a new process.
Operating costs are costs that are incurred on a day-to-day basis related to the
business operations. It can also be related to the operation of a device, component, and
piece of equipment or facility. Operating costs are also known as operating expenses. For
example sales and administration costs are operating costs. Operating costs are referred to
as cost per unit of a product or service, or the annual cost incurred on a continuous process.
The operating costs are those that do not include capital outlays or the costs incurred
in design and implementation phases of a new process.

6 | Page

Operating costs are divided into two categories. They are fixed costs and variable
costs. Fixed costs are those which are fixed and do not vary with the changes in the level of
output. They do not change whether the business is inactive or operating at full capacity.
Variable costs are those costs which vary with the changes in the level of output. Flexible
expenditures are also known as the variable operating costs. The expenses fluctuate on the
basis of a variety of factors.
Operating expenses differ in every country. The actual expenses vary in every
location. The calculation of operating costs is essential for sound business planning. These
costs should be properly budgeted; otherwise it will adversely affect the business. The lack
of planning in a business increases the risk that a business will not maintain adequate funds
to operate properly. When the operating costs are fixed, the likely business
interruptions or economic declines should be taken into consideration. The business
generally cannot be deferred until a business finds it convenient to pay them. Fixed
operating costs are set on a payment schedule and need to be paid accordingly for the
company to maintain good credit.

7 | Page

1.2 Features Of Operating Costing


The main features of operating costing are as following:

(1) The undertaking which adopts service costing does not produce any tangible goods.
These undertakings render unique services to their customers.

(2) The expenses are divided into fixed and variable cost . Such a classification is necessary
to ascertain the cost of service and the unit cost of service.

(3) The cost unit may be simple or composite. The examples of simple cost units are cost per
unit in electricity supply , cost per litre in water supply, cost per meal in canteen etc.
Similarly cost per passenger kilometers in transport cost per patient-day in hospital, cost per
room-day in hotel etc. are the examples of composite cost unit.

(4) Total cost are averaged over the total amount of service rendered.

(5) Costs are usually computed period-wise. However,in the case of utilization of vehicles,
use of road-rollers etc., the costs are computed orderwise.

(6) Service costing can be used for service performed internally or externally.

(7) documents like the daily log sheet, cost sheet etc. are used for the collection of cost data

8 | Page

1.3 Unit Of Cost


It is quite important to find out a proper unit of cost in case of operating cost so that
the cost per unit can be ascertained. In certain cases the unit is obvious. For example in case
of hospital it will be bed, in case of water works it will be 1000 litres, in case of electricity it
will be a unit or kwh and in case of a retail store it will be the sale per Rs. 100 In case of
transport concerns, however, the unit is likely to be composite. It may be a passenger-km. or
ton-km signifying the effort which is made in carrying a passenger one kilometre or a ton of
goods one km.
Following are composite units based on two or more factors.

9 | Page

1.4 Classification Of Cost


Operating costs are classified and accumulated under the following three heads:
(a) Fixed or Standing Charges:
These are expenses which are more or less fixed in nature. For example in case transport
service garage charges, insurance, taxes, license and depreciation are standing cost. In case of
Hospital the depreciation pertaining to the cost of building, equipment, beds, beds insurance
etc. are fixed charges. These expenses are constant and are incurred irrespective of the extent
of service.
(b) Maintenance Charges:
These are costs of semi-variable nature and include expenditure on repairs, maintenance,
tyres, tubes, accessories and spares.
(c) Running or Operating Charges:
These are variable cost. For example in case of hospital, the cost of medicine, diet, laundry
etc. will represent the running charges. In case of transport service petrol or diesel, lubricating
oil, wages of driver or cleaner are operating or running charges.

1.5Components Of Operating Costing


10 | P a g e

A businesss operating costs are comprised of two components, fixed


costs and variable costs, which differ in important ways.
A fixed cost is one that does not change with an increase or decrease in sales
or productivity and must be paid regardless of the companys activity or performance. For
example, a manufacturing company must pay rent for some sort of factory space regardless of
how much it is producing or earning. While it can downsize and reduce the cost of its rent
payments, it cannot entirely eliminate these costs, and so they are considered to be fixed.
Fixed costs generally include overhead costs, and other examples of fixed costs include
insurance, security and equipment.
Fixed Costs
Fixed costs can help in achieving economies of scale, as when many of a
companys costs are fixed the company can make more profit per unit as it produces more
units. In this system, fixed costs are spread out over the number of units produced, making
production more efficient as production increases by reducing the average per-unit cost of
production. Economies of scale can allow large companies to sell the same goods as smaller
companies for lower prices.
This principle can be limited in that fixed costs generally need to increase with
certain benchmarks in production growth. For example, a manufacturing company that
increases its rate of production over a certain period will eventually reach a point where it
needs to increase the size of its factory space as well in order to accommodate the amount of
the product it is making.

Variable Costs

Variable costs, like the name implies, are comprised of costs that may vary.
Unlike fixed costs, variable costs will increase as production increases and decrease as
production decreases. Examples of variable costs include raw material costs, payroll and the
cost of electricity and other utilities. For example, in order for a fast-food restaurant chain
that sells French fries to increase its French fry sales, it will need to increase the size of its
purchases from its potato supplier.

11 | P a g e

It is sometimes possible for a company to achieve a volume discount or "price


break" when purchasing supplies in bulk, wherein the seller agrees to slightly reduce the perunit cost in exchange for the buyers agreement to regularly buy the supplies in large
amounts, thereby diminishing the correlation somewhat between an increase or decrease in
production and an increase or decrease in the companys operating costs. For example, the
fast-food company may buy its potatoes at $0.50 per pound when it buys potatoes in amounts
of less than 200 pounds, but the potato supplier may offer the restaurant chain a price of
$0.45 per pound when it buys potatoes in bulk amounts of 200 to 500 pounds. Yet, volume
discounts generally have a small impact on the correlation between production and variable
costs and the trend otherwise remains the same.
Generally speaking, companies with a high proportion of variable costs
relative to fixed costs are considered to be less volatile, as their profits are more dependent on
the success of their sales. In the same way, the profitability and risk for the same companies
are also easier to gauge.
Semi-variable Costs

In addition to fixed and variable costs, it is also possible for a companys operating
costs to be considered semi-variable (or semi-fixed). These costs represent a mixture of
fixed and variable components and thus can be thought of as existing between fixed costs and
variable costs. Semi-variable costs vary in part with increases or decreases in production, like
variable costs, but still exist when production is zero, like fixed costs. This is what primarily
differentiates semi-variable costs from fixed costs and variable costs.
A relatively simple example of semi-variable costs is overtime labor. Regular
wages for workers are generally considered to be fixed costs, as while a companys
management can reduce the number of workers and paid work-hours, it will always need a
work force of some size in order to operate. Yet, overtime payments are often considered to
be variable costs, as the number of overtime hours that a company pays to its workers will
generally rise with increased production and drop with reduced production. Because wages
paid in conditions allowing for overtime have both fixed and variable components, they are
considered to be semi-variable.

12 | P a g e

1.6 Application Of Operating Costing

1 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.
2 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.
3 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.

13 | P a g e

1.7 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

Goods Transport

Per Kilometer

Road Maintenance

Per K.M. of Road maintained

14 | P a g e

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


Chapter 2
2.1 Types Of Operating Costing

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.
15 | P a g e

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.

Calculate total changes in vehicle ownership costs.

STE
P

COSTS

Rs Rs.
.

16 | P a g e

A.

FIXED COST
Insurance

xx

..... xx

License fee, Permit fee and Taxes

X
xx X

Depreciation

Other Fixed costs (specify)

xx

xx

VARIABLE COST

Salaries and Wages of Drivers, Cleaners & other xx


Operating Staff

Fuel and Lubricants

..

Consumables

C.
D.
Amortization

Cost

of

Tyre

,Tube

&

E.
Laundry
Spares

X
X
xx X
Battery
X
xx
X
xx X
xx X

...

Repairs & Maintainable

xx

17 | P a g e

Other Variable Cost (specify)

...

TOTAL OPERATING COST[A+B]


PROFIT/LOSS
REVENUE [TAKINGS]

Illustrations:

18 | P a g e

A truck starts with a load of 10 tonnes of goods from station P. It unloads 4 tonnes at station
Q and rest of the goods at station R. It reaches back directly to station P after getting reloaded
with 8 tonnes of goods at station R. The distance between P to Q to R and then R to P is 40
Kms, 60 Kms and 80 Kms respectively. Compute
1. Absolute Tonnes-Kilometers
2. Commercial Tonnes-Kilometers

Solution:
Absolute Tonnes- Kilometer

= (10 tonnes*40km) + (6 tonnes*60km)


+ (8 tonnes*80 kms)
= 1400
Commercial Tonnes Kilometer
= Average Load * Kilometers Travelled
= 10 + 6 + 8/3 Tonnes * 180 km
= 1440 Tonnes Kms

19 | P a g e

HOTEL COSTING
The Operating Costing is applied in lodging houses in order to find out the cost of
accommodation provided.
The convenient form measuring the accommodation facility is in terms of Room
day.
Cost per room day means the cost of maintaining one room in usable condition for
one day when occupied.
When different classes of rooms are provided, they can be expressed in term of a
single class with the help of weights based on appropriate width.
While determining the cost per room day, factors such as room accommodation
available, whether cubicles or dormitories, number of persons lodging, facilities provided to
the lodgers, etc. are to be taken into account.
Most of the costs in the lodging houses are fixed in nature like depreciation, staff
salaries, maintenance, etc.

20 | P a g e

21 | P a g e

Step

Costs

Rs

Rs

Salaries to staff

XX

Room attendant wages

XX

Repairs and renovation

XX

Lighting and heating

XX

Power

XX

Linen

XX

Interior decoration
Sundries
Depreciation

XX
XX

XX
XX

XX

-Buildings
-Furniture & fixtures
-Air-conditioners
Premises rent
Other Administration Expenses
Interest on investment
total operating cost (1)
no. of room days(2)
cost per room day (1+2)

XX
XX
XX
XX
XX
XX
XX

22 | P a g e

Illustration

From the following information relating to a hotel, calculate the room rent to be charged to
give a profit of 25% on cost excluding interest charged on loan for the year ended 31 st March,
2008:
1.

Salaries of office staff Rs 50,000 per month.

2.

Wages of the room attendant: Rs 20 per day per room when the room is occupied.

3.

Light, heating and power:


a. The normal lighting expenses for a room for the full month is Rs 500, when occupied.
b. Power is used only in winter and charges are Rs 200 for a room, when occupied.

4. Repair to bed and other furniture: Rs 30,000 per annum.


4. Repair to Hotel building: Rs 50,000 per annum.
4. License fees: Rs 12,400 per annum.
4. Sundries: Rs 10,000 per annum.
4. Interior decoration and furniture: Rs 1, 00,000 per annum.

23 | P a g e

4. Depreciation @ 5% p.a. is to be charged on building costing Rs 20,000 and @ 10% p.a.


on equipments.
4. There are 200 rooms in the Hotel, 80% of the rooms are generally occupied in
summer, 60% in winter, 30% in rainy season.
The period of summer, winter and rainy season may be considered to be of 4 months in each
case. A month may be assumed as 30 days of an average.

SOLUTION:

Operating Cost Statement

Particular

Rs p.a.

Rs p.a.

24 | P a g e

Office staff salaries (50,000 12)

6,00,000

Room attendant wages (WN 1)

8,16,000

Lighting and Heating (WN 2)

6,80,000

Power (WN 3)

96,000

Repair to bed and other furniture

30,000

Repair to building

50,000

License fee

12,400

Sundries (10,000 12)

1,20,000

Interior decoration and furnishing

1,00,000

Depreciation:
Building @ 5%
Equipment @10%
Total Cost

1,00,00
0
5,00,00

1,50,000

Add: Profit 25% of Cost (Excluding interest on


loan)

26,54,400

Total Earnings

6,63,600

33,18,000

25 | P a g e

HOSPITAL COSTING:

A concern of most countries is health sector resources: the sources of finance for health
services, the ability to maintain past funding levels, resource allocation patterns, and the
efficiency of health services delivery. The hospitals of these countries are an important
element of the concern about health resources because they are the largest and most costly
operational unit of these health systems and account for a large portion of the health sector's
financial, human, and capital resources. In aggregate terms,

hospitals utilize nearly half of the total national expenditure for the health sector;

hospitals commonly account for 50 to 80 percent of government recurrent health


sector expenditure:

hospitals use a large proportion of the most highly trained health personnel

26 | P a g e

A.

FIXED STANDING COSTS


Salaries to staff

xx

Premises Rent

xx

Repairs and maintenance

xx

General administration Expenses

xx

Cost of Oxygen, X-Ray, etc.

xx

Depreciation

...

XX

xx

RUNNING OR VARIABLE COSTS


xx
Doctors fees

xx

XX

27 | P a g e

Food

xx

Medicines

xx

XX

Diagnostic Services

xx

XX

Laundry

...

xx

XX

C.
D.
E.

Hire charges for Extra Beds

..

TOTAL OPERATING COST


NO. OF PATIENTS DAYS
COST PER PATIENT DAY (C)+(D)

Illustration
Care Hospital operates a fitness center to provide counseling on nutrition, exercise and health
care for major surgery patients after their release from the hospital. Average patient will make
three visits to the center. Each visit lasts 40 minutes.

The hospital has estimated the following costs of operating the center:
28 | P a g e

Particulars

Amt

Occupancy costs per month

18000

Clerical costs per month

12000

Other costs per month

4000

Medication charges per patient

44

Records charge per patient

16

Staffing cost per visit

Computer record update per visit

Hospital expects to have an average of 500 visits per month. What should be the amount
charged to each patient in order to cover the above costs?

29 | P a g e

Solution:

Particulars
Indirect cost per month

Amt

18000

Occupancy
12000
Clerical
4000
Other costs
3400

A. Indirect costs per visit ( 34000/500)

68

Staffing cost per visit

Computer record update per visit

3____

Total costs per visit

80

Visits per patient

3____

B. Total cost per patient

240

Records charge per patient

16

Medication change per patient

44____

C. Total average cost per patient

300

30 | P a g e

C. Or per patient (60+80) per visit

2.2 Literature Review


Keeler, et al (1975), The Full Costs of Urban Transport; Intermodal Comparisons,
Institute of Urban and Regional Development (Berkeley). This report compares commuting
costs of automobile, bus and rail in the San Francisco Bay area. It includes marginal
congestion costs, public services, noise, air pollution, facilities, accidents, parking, and user
costs. This is the oldest study of its type. The analysis is still highly regarded.
Mark Hanson (1992), Results of Literature Survey and Summary of Findings: The
Nature and Magnitude of Social Costs of Urban Roadway Use, U.S. Federal Highway
Administration. This report identifies external costs of urban roadway transport and describes
costing methods. It also includes recommendations for better calculating external costs,
incorporating costs into user prices, and applying least-cost planning to transportation.
James MacKenzie, Roger Dower, and Donald Chen (1992), The Going Rate, World
Resources Institute (Washington DC; www.wri.org); at http://pdf.wri.org/goingrate_bw.pdf
This is a comprehensive study of U.S. motor vehicle costs. Cost categories include roadway
facilities and services, parking, air pollution, oil import costs, congestion, traffic accidents,
noise, and land loss. Concludes that driving incurs $300 billion annually in external costs.
Per Kgeson (1993), Getting the Prices Right; A European Scheme for Making
Transport Pay its True Costs, European Federation for Transport and Environment
(www.transportenvironment.org) This study estimates pollution, crash and infrastructure
costs in European countries.

31 | P a g e

Works Consultancy (1993), Land Transport Externalities, Transit New Zealand


(Wellington). This comprehensive study is part of New Zealands efforts to rationalize
transport planning. It attempts to describe all external costs of road transport, and identify
costing methodologies.
Apogee Research (1994), The Costs of Transportation, Conservation Law Foundation
(www.clf.org). This study estimates user, accident, congestion, parking, road facilities and
services, air pollution, water pollution, energy, and noise costs. Urban sprawl and aesthetic
degradation are mentioned but not estimated.

Chapter 3
3.1 Company Profile
The National Center for Transit Research analyzed vehicle expenses in
Exploration of a Shift in Household Transportation Spending from Vehicles to Public
Transportation (Polzin, Chu and Raman 2008) . The accompanying spreadsheet model
calculates marginal savings that result from reductions in household vehicle ownership;
for example, due to transit oriented development or other travel option improvements.
They find the annual cost to households per additional vehicle averaged about $3,500 in
2006, but conclude that marginal annual savings per reduced vehicle are probably
somewhat less since households are likely to shed lower value vehicles. In the model
they use a marginal cost of $0.20 per mile,but suggest that this value be adjusted to
reflect specific situations. Average household vehicle expenditures and marginal savings
per reduced vehicle.
Hybrid and Electric Cars
Hybrid vehicles are more costly to purchase but more fuel efficient in urban conditions
than standard models.16 For example, the 2009 Camry Hybrid lists for about $6,600 more
than a non-hybrid version, a 9 per vehicle-mile premium if depreciated over 5 years at
8% interest and 15,000 annual miles.17 It is rated at 33 miles-per-gallon (MPG) in city
driving, 50% better than a standard Camrys 22 MPG, but only achieves a 10% gain (31
vs. 34 MPG) in highway driving. The Toyota Prius achieves 48 MPG in city driving and
32 | P a g e

45 MPG in highway driving. A 2008 GMC Yukon four wheel drive hybrid is rated at 20
MPG in both city and highway conditions, which is not very fuel efficient but
significantly more efficient than the standard models 15 MPG city driving rating.
The US DOE reports that electric cars require new battery sets every 20,000-30,000 miles
costing $2,000-$3,000 (averaging 6-15 per vehicle-mile), and consume 0.25 to 0.5 kWh

Vehicle Expenditures Including Rental Cars (Polzin, Chu and Raman 2008)
(2006 Dollars)
Vehicles per HH
0
1
2
3
4
5+

1
$355
$3,102
$9,972
$10,891
$10,862
$11,208

Adults per Household


3
$847
$743
$3,748
$3,832
$7,289
$7,723
$15,826
$11,084
$17,470
$19,057
$20,001
$25,726
2

5+
$680
$5,481
$7,198
$10,481
$14,307
$29,324

$764
$3,949
$7,411
$10,976
$15,078
$26,729

Spending varies depending on household composition and vehicle ownership. In


this study, vehicle travel expenses include car rentals, but excludes taxi and public
transit expenses. Note that vehicle costs do not decline to zero with zero vehicle
ownership

Household Savings by Vehicle Ownership (Polzin, Chu and Raman 2008)


Savings per Relinquished Vehicle (2006 Dollars)
Adults per Household
Vehicles per HH
1
2
3
4
1
$2,747
$2,901
$3,089
$3,185
2
$6,870
$3,540
$3,892
$3,462
3
$919
$8,537
$3,361
$3,565
4
-$29
$1,644
$7,973
$4,101
5+
$346
$2,531
$6,669
$11,651

5+
$4,801
$1,717
$3,283
$3,827
$15,016

Reduction in cost per vehicle relinquished varies considerably depending on


household composition and number of vehicles owned. Note that the data is from a
33 | P a g e

fairly small sample, the general trends indicated may be more reliable than specific
values.

The American Automobile Association publishes estimated costs of owning and

operating various vehicle types as summarized in Table 5.1.5-4. This reflects costs during the
first five years of a vehicles life and so has relatively high depreciation and insurance costs,
and almost no repair costs. Note that depreciation is now adjusted for mileage, unlike earlier
AAA data.
American Automobile Association 2008 Vehicle Cost Estimates
Small Sedan

Gas & oil


Maintenance
Tires
Operating costs/mile
Insurance
License & registration
Depreciation
Financing
Ownership costs/year
Total for 12,500 annual miles
Average cost per mile

8.21
4.26
0.61
13.08
$948
$419
$2,430
$553
$4,350
$5,985
$0.35

Medium Sedan

10.54
4.51
0.87
15.92
$957
$572
$3,401
$786
$5,716
$7,706
$0.46

Large Sedan

11.51
4.92
0.82
17.25
$1,022
$711
$4,551
$998
$7,282
$9,438
$0.58

SUV

Van

14.39
4.94
0.95
20.28
$948
$727
$4,619
$1,023
$7,317
$9,852
$0.59

12.16
4.87
0.74
17.77
$897
$602
$3,818
$832
$6,149
$8,370
$0.49

This table summarizes vehicle cost estimates published by the American Automobile
Association. It represents typical costs during the first six years of vehicle operation,
and so tends to overestimate depreciation and financing costs and underestimate repair
costs. It also ignores incidental costs, such as user parking fees and road tolls.

The Canadian Automobile Association also publishes a version of Driving Costs.


34 | P a g e

Annual Costs for 2.2 L Cobalt Sedan (2006 Canadian Dollars)


Kilometers
Driven
per Year
12,000 km
16,000 km
18,000 km
24,000 km
32,000 km

Annual
Operating
Costs (variable)
$1,500.00
$2,000.00
$2,250.00
$3,000.00
$4,000.00

Annual
Ownership
Costs (fixed)
$7,081.00
$7,081.00
$7,081.00
$7,261.00
$7,501.00

Total Cost

$8,581.00
$9,081.00
$9,331.00
$10,261.00
$11,501.00

Cost per
Kilometer
$0.715
$0.568
$0.518
$0.428
$0.359

Chapter 4
4.1 Conclusion
Operating costs are expenses that relate to a buisness 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.
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.

35 | P a g e

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.
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.

36 | P a g e

4.2 Bibliography

www.google.com
www.wikipedia.com
Advanced Cost Accounting Manan Prakashan
Advanced cost accounting- sheth prakashan

37 | P a g e

38 | P a g e