The concept of operating costs refers to everyday costs of sustaining and controlling a product.

It
also covers business and overhead expenses and costs for sales made, and is also known as
operational expenses. All the observable costs, whether fixed or contingent, which are related to
any organizations day to day operations are known as operating costs (Colthirst, Berg, DeNicolo,
& Simecek, 2013). Rent, equipment, accounting systems, supplies, coveralls and the
procurement of offices are typical sources of running costs. The expense to produce and
purchase a company's goods and services often represents operating costs. This can involve
direct inventory expenditures or machinery maintenance costs, also defined as the costs of goods
sold (COGS). As per many organizations, there are two types of operational Costs, namely Fixed
costs and Variable Costs.

Fixed Costs

Fixed costs are known as cost, which stay unchanged at the various levels of output services
offered by the business. The transitory variations in the organisation's activity levels are not
affected. The fixed cost doesn't mean that it won't change in the future, but is usually fixed in the
short term. The fixed cost doesn't mean that it won't change in the future, but is usually fixed in
the short term.

For illustration, a building's rent is a flat rate agreed between a small business owner and the
landlord, which is dependent on the square films needed for its function. If the owner leases Rs
200 for 10 years 10,000 square feet, so Rs 200,000 will be paid every month for the following 10
years, irrespective of profit or loss.

Variable Cost

The costs that shift when the input volume varies are called contingent costs. The shifts in the
market environment of the company directly impact them. The costs differ with the output
fluctuations, i.e. if demand rises, then the costs will always grow proportionately in the same rate
because if no manufacturing is generated no variable costs will exist. The expense of the element
is proportionate directly to that of the product.

The administrative expenditures that can rise or decrease depending on company operations are a
typical illustration of variable costs. A increasing company may incur increased running
expenses, such as part-time employees employed for assignments or an rise in services – for
example, power, gas or water.

Predetermined Overhead Rate

A predetermined overhead rate is often used to allocate overhead for goods or workers and is
generally performed by dividing projected overhead manufacturing costs into an allocation base
at the time of the transaction. By splitting the master forecast fixed overhead development costs
by calculation of projected performance (productive divisor) over the forecast year, a
predetermined Overhead Rate will be set (Foster & Baxendale, 2013). Direct hours of work,
direct working cash, hours, and raw materials are commonly used weighting factors.

For Example

Assume X uses direct working hours to assign overhead production costs for job costing. The X
Company's budget indicates an average growing production cost of Rs80, 000 for the succeeding
F/Y. In the coming year, the analysts estimate 800 direct hours at work.

As per the above information, the predetermined overhead rate can be calculated as follows:

Predetermined overhead rate = Estimated manufacturing overhead cost/Estimated total units in

the allocation base

Predetermined overhead rate = Rs80, 000 / 800 hours

= Rs100 per direct labor hour

References

Colthirst, P. M.,D.C.U.S.A., Berg, R. G., B.Sc, DeNicolo, P.,D.C.U.S.A., & Simecek, John
W,D.D.S., M.P.H. (2013). Operational cost analysis of dental emergencies for deployed U.S.
army personnel during operation iraqi freedom. Military Medicine, 178(4), 427-31.

Foster, B. P., & Baxendale, S. J. (2013). Accounting for the cost of unused capacity in an
economic downturn: Certified public accountant. The CPA Journal, 83(5), 20-26.