Mcom Part 1 Sem 2 Cost Acc Operating Costing

INTRODUCTION The role of service sector in the national economy has become significant nowadays. The term “service” is being used extensively under different context contexts. s. It means means servic services es render rendered ed by various departments within the organization or organizations providing services to outside firms, viz. personnel, maintenance, canteen, hospitals, boiler house, captive power units, hotels, road maintenance, water supply, transport (goods and passengers, electricity companies, computer  services department, etc. !uch service organizations render a variety of services. "ach is uni#ue in its inherent characteristic features. $perating costing is a method of costing applied by underta%ings which provide service rather  than production of commodities. &i%e unit costing and process costing, operating costing is thus a form of operation costing. The emphasis under op erating costing is on the ascertainment of cost of rendering services rather than on the cost of manufacturing a product. $per $perat atio ion n cost costin ing g is not not a new new metho method d but it is the techn techni# i#ue ue to use use the the meth method od of 'ob of 'ob costing,, batch costing and process costing for calculating the cost of those business products costing whose whose produc productio tions ns are operati operating ng day and night. night. !o, all expenses expenses in operati operation on costin costing g are recurring in nature. $peration costing is also useful useful where units of products are are same and one or  two type products are producing. $peration 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 se#uence 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. 1 DEFINITION & MEANING $perating costing is used by concern running diverse nature of activities, the cost system is obviously obviously different different from that for manufacturing manufacturing concerns. In this system a suitable suitable costunit is adopted, which is not a 'ob or process but is related to service rendered e.g. ton%ilometer,  passenger%ilometer of transport services, unit of electricity or %ilowatt hour, cubic meter of gas etc. )cco )ccord rdin ing g to *I+) *I+),, oper operat atin ing g cost costin ing g is defi defined ned as “ope “operat ratin ing g cost costin ing g appl applies ies where where standardized services are provided by an underta%ing. !uch underta%ings are- transport concern (shipping, air, railways and motor transport etc., catering establishments (hotels, hostel, canteen etc. and public utility underta%ings li%e gas, electricity, steam generating, hospitals, theatres, schools, laundries etc. In many factories utility services li%e motor transport, power house, hospital and canteen are departmentally run divisions which provide services to the producing departments of the factory. usine usiness ss /ictio /ictionary nary define definess operat operating ing costin costing g as cost cost per   per unit unit of a product a  product or service service,,   or the annual cost incurred incurred on  on a conti continuous nuous proces processs. $perating costs costs do  do not include capital outlays or  outlays or  the costs incurred in design and implementation phases implementation phases of  of a new process new process.. *ost )ccounting !tandard 0 1 by I*2) defines 3$perating *ost “)s the cost incurred in conducting a business activity. $perating costs refer to the cost of underta%ings, which do not manufacture any product but which provide services”. !ervic !ervicee costi costing ng is in use where where servic services es are render rendered ed but articl articles4 es4goo goods ds are not produce produced. d. 5sually, it refers to the cost procedure used for determining the cost per unit of service rendered. $perating costing is a variant of unit or output ou tput costing. The terminology of *I+) defines service costing as “the cost of specific services and functions, e.g., maintenance, personnel, canteen etc. These may be referred as service centers, departments or functions.” 2 !ervice costing involves the method of determination of the cost of services. The cost of   providing a service is computed at ease. )t the end of specified periods, the expenses (costs of  operating a service are grouped under suitable headings. The aggregate of these costs is to be divided by the #uantity of services provided during the specified period to arrive at the cost per  unit of service. 3 FEATURES $perating costs are the expenses which are related to the operation of a business, or to the operation of a device, component, piece of e#uipment or facility. They are the cost of resources used by an organization 'ust to maintain its existence. The following are the features of operating costs. Cost Classification *osts are classified into variable and fixed. In case additional service is provided, variable cost will be affected. Periodical Ascertainment of Costs 5nder this system, the costs are ascertained periodically, generally at the end of specific periods. Many Staes and Processes The conversion of basic materials into services involves many stages and processes. !al"ation !al"ation of #or$%In%Proress In this system, the valuation of wor%inprogress is comparatively easy in relation to other types. 4 Intanile Prod"cts !ervice organizations do not produce tangible goods. $n the other hand, they are engaged in  providing services to the public. Cost Unit Differs )s service organizations provide a wide variety of services, it is difficult to provide a common cost unit. It differs from organization to organization. 5 APP'ICATION $perating costing is related to the service sector. The following are the areas where operating costing is applicable- Trans(ort Tr ans(ort Ser)ice S er)ice 5nder this method of costing, the operating cost of each vehicle is determined. The common unit of service is tonne %ilometer in case of goods transport, and passenger %ilometer in case of   passenger transport. "xamples of transport service are Truc% operators, road transport, 6ailways, )irlines, etc. S"((ly Ser)ice It includes services li%e electricity, steam, gas, water, etc. where steam is used for the purpose of  generating generating electricity, electricity, it is possible to compute compute the cost of electricity electricity generated by aggregating aggregating the steam production costs with other related cost of electricity generation. ) cost unit is generally in terms of %ilograms. #elfare Ser)ices It includes services li%e canteen, hospital, library, etc. 7otels, restaurants employ operating costing. The total operation of a hotel can be divided into number of cost centers li%e 6estaurant, 7ouse%eeping, &aundry, etc. The cost unit is generally in terms of per meal4 dish. 6 C'ASSIFICATION OF COSTS $perating costs are classified and accumulated under the following three heads i.e. fixed, semi variable and variable costs, as follows- FI*ED OR STANDING STANDING COSTS ) fixed cost is a cost that does not change with an increase or decrease in the amount of goods or  services produced. 8ixed costs are expenses that have to be paid by a company, independent of  any business activity. 8ixed costs are defined as expenses that do not change as a function of the activity activity of a business, within within the relevant period. period. These are expenses which are more or less fixed in nature. 8or example in case transport service garage costs, insurance, taxes, license and depreciation are standing cost. In case of 7ospital the depreciation pertaining to the cost of   building, e#uipment, beds, beds insurance etc. are fixed costs. These expenses e xpenses are constant and are incurred irrespective of the extent of service. SEMI%!ARIA+'E COSTS !emivariable cost is a cost composed of a mixture of fixed and variable components. *osts are fixed for a set level of production or consumption, becoming variable after the level is exceeded. It is also %nown as a 9semifixed cost.9 Semi-variable costs remain fixed up to a particular   production volume. eyond this volume volume,,   semivariable costs increase in direct proportion to output output.. 2ages, ges, for instan instance, ce, are semiv semivari ariabl ablee costs. costs. Semi-varia Semi-variable ble costs are an import important ant consideration for companies when planning output levels, because semivariable costs may limit  profitability at higher production levels and erode a company:s bottom company:s bottom line. line. 7 !ARIA+'E COST These These are also also %nown %nown as runnin running g or operati operating ng costs. costs. ;ariable riable costs costs are those those costs costs that that vary depending on a company:s production volume< they rise as production increases and fall as  production decreases. 5nli%e fixed costs, costs, which remain constant regardless of output, variable costs are a direct function of production volume volume,, rising whenever production expands and falling whenever it contracts. "xamples of common variable costs include raw materials, materials, pac%aging, and labor directly directly involved in a company:s company:s manufacturing manufacturing process. 8or example example in case of hospital, the cost of medicine, diet, laundry etc. will represent the running costs. In case of transport service petrol or diesel, lubricating oil, wages of driver or clean er are operating or running costs. 8 UNIT OF COST ) unit cost is the cost incurred by a company to produce, store and sell one unit of a particular   product. 5nit costs include all fixed costs (i.e. plant and e#uipment and all variable costs (labor, costs (labor, materials, etc. involved in production. 5nit cost is the expenditure incurred incurred in  in producing  producing one  one unit of a good or service service,,   computed usually as average cost. cost. 8or ascertaining costs, it is necessary to decide suitable cost units for each type of service industry. asically, $perating *osting is a type of =rocess *osting. Thus it uses the methods of  =roces =rocesss *osti *osting ng when ascert ascertaini aining ng the cost cost of supply supply of electr electrici icity ty,, steam steam etc. etc. 7owever 7owever,, sometimes $perating *osting may adopt a particular >ob as a unit of costs as for example when costing a particular trip by a bus so as to #uote the charges. In such cases $perating *osting uses the methods of >ob *osting by treating a specific trip as a separate 'ob. ) cost unit under  operating costing may be of two types !imple cost unit< or   *omposite cost unit. 8ollowing is the list of different cost units used in different types of service enterprises- Ser)ice Ind"stries Sim(le Cost Unit =assenger Transport =er ?ilometer   9 @oods Transport =er ?ilometer   6oad +aintenance =er ?.+. of 6oad maintained 2ater !upply =er ?ilo &iter of 2ater !upplied Ser)ice Ind"stries Com(osite Cost Unit =assenger Transport =er =assenger  ?.+. @oods Transport =er Ton  ?.+. "lectricity =er ?ilowatt 0 7our   !team, @as =er [email protected] 4 *ubic 8t. 7ospital =er =atient 0 /ay &ibrary =er +ember 0 oo%   Thus, it can be seen that in $perating *osting, in most cases the cost unit is a compound unit. It refers to both the Auantum of !ervice and =eriod of !ervice. Thus a transporter charges for  carrying so much weight (tons for so much distance (?m< an electricity company charges one for use of both the Auantum (?ilowatt and the =eriod (7ours< and so on. 10 11 TRANSPORT  Transport  Transport operating costs refer to costs that vary with vehicle usage, incluing fuel, tires, !aintenance, repairs, an !ileage"epenent epreciation costs# $ro%ects that alter vehicle !iles travele, tra&c spee an elay, roaway surfaces, or roaway geo!etry !ay a'ect travelers( vehicle operating costs, which shoul )e consiere in a )ene*t"cost analysis# +ehicle ownership costs refer to *e costs that are not irectly a'ecte )y vehicle !ile !ileag age e incl inclu uin ing g ti!e ti!e" "ep epen ene ent nt epr eprec ecia iati tion on,, insu insura ranc nce e an an regis egistr trat atio ion n fees, *nancing, an resiential resiential par-ing# COST SHEET for (Month/Year) PARTICULARS A Rs. Fie! "ost .nsurance /icense fee, $er!it fee an Taes epreciation ther ie costs specify Tota# Fie! Costs $A% ' Rs. aria#e "ost alaries  ages of rivers, leaners  ther perating ta'  uel  /u)ricants onsu!a)les !orti:ation ost of Tyres ,Tu)e  ;attery pares aipur B B B B B B FHEE x DE x MEN passenger %ms 1EGEEE passenger %ms FHEE x DE x GDN passenger %ms 1EFEEE passenger %ms KFHE x DE x 1EEN passenger %ms 1JFEEE passenger %ms 15  Total  Total passenger passenger -!s H B B are per passenger -! are for the %ourney @aA I @)A I @cA passenger -!s 1EGEEE L 1EFEEE L 1JFEEE passenger %m %ms KFEEE passenger %ms H Total ta-ingsJTotal passenger -!s H 59809J372000 H
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INTRODUCTION

The role of service sector in the national economy has become significant nowadays. The term
“service” is being used extensively under different contexts. It means services rendered by
various departments within the organization or organizations providing services to outside firms,
viz. personnel, maintenance, canteen, hospitals, boiler house, captive power units, hotels, road
maintenance, water supply, transport (goods and passengers), electricity companies, computer
services department, etc. Such service organizations render a variety of services. Each is unique
in its inherent characteristic features.
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.
Operation costing is not a new method but it is the technique to use the method of job
costing, batch costing and process costing for calculating the cost of those business products
whose productions are operating day and night. So, all expenses in operation costing are
recurring in nature. Operation costing is also useful where units of products are same and one or
two type products are producing.
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.

1

DEFINITION & MEANING
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. ton-kilometer,
passenger-kilometer of transport services, unit of electricity or kilowatt hour, cubic meter of gas
etc.
According to CIMA, operating costing is defined as “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.
Business Dictionary defines operating costing as 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.
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”.
Service costing is in use where services are rendered but articles/goods are not produced.
Usually, it refers to the cost procedure used for determining the cost per unit of service rendered.
Operating costing is a variant of unit or output costing.
The terminology of CIMA defines service costing as “the cost of specific services and functions,
e.g., maintenance, personnel, canteen etc. These may be referred as service centers, departments
or functions.”

2

Service costing involves the method of determination of the cost of services. The cost of
providing a service is computed at ease. At the end of specified periods, the expenses (costs) of
operating a service are grouped under suitable headings. The aggregate of these costs is to be
divided by the quantity of services provided during the specified period to arrive at the cost per
unit of service.

3

FEATURES

Operating costs are the expenses which are related to the operation of a business, or to the
operation of a device, component, piece of equipment or facility. They are the cost of resources
used by an organization just to maintain its existence. The following are the features of operating
costs.

Cost Classification
Costs are classified into variable and fixed. In case additional service is provided, variable cost
will be affected.

Periodical Ascertainment of Costs
Under this system, the costs are ascertained periodically, generally at the end of specific periods.

Many Stages and Processes
The conversion of basic materials into services involves many stages and processes.

Valuation of Work-In-Progress
In this system, the valuation of work-in-progress is comparatively easy in relation to other types.

4

Intangible Products
Service organizations do not produce tangible goods. On the other hand, they are engaged in
providing services to the public.

Cost Unit Differs
As service organizations provide a wide variety of services, it is difficult to provide a common
cost unit. It differs from organization to organization.

5

APPLICATION

Operating costing is related to the service sector. The following are the areas where operating
costing is applicable:

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.

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.

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.

6

CLASSIFICATION OF COSTS

Operating costs are classified and accumulated under the following three heads i.e. fixed, semivariable and variable costs, as follows:

FIXED OR STANDING COSTS
A fixed cost is a cost that does not change with an increase or decrease in the amount of goods or
services produced. Fixed costs are expenses that have to be paid by a company, independent of
any business activity. Fixed costs are defined as expenses that do not change as a function of the
activity of a business, within the relevant period. These are expenses which are more or less
fixed in nature. For example in case transport service garage costs, 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 costs. These expenses are constant and
are incurred irrespective of the extent of service.

SEMI-VARIABLE COSTS
Semi-variable cost is a cost composed of a mixture of fixed and variable components. Costs are
fixed for a set level of production or consumption, becoming variable after the level is exceeded.
It is also known as a "semi-fixed cost." Semi-variable costs remain fixed up to a particular
production volume. Beyond this volume, semi-variable costs increase in direct proportion to
output. Wages, for instance, are semi-variable costs. Semi-variable costs are an important
consideration for companies when planning output levels, because semi-variable costs may limit
profitability at higher production levels and erode a company's bottom line.

7

VARIABLE COST
These are also known as running or operating costs. Variable costs are those costs that vary
depending on a company's production volume; they rise as production increases and fall as
production decreases. Unlike fixed costs, which remain constant regardless of output, variable
costs are a direct function of production volume, rising whenever production expands and falling
whenever it contracts. Examples of common variable costs include raw materials, packaging, and
labor directly involved in a company's manufacturing process. For example in case of hospital,
the cost of medicine, diet, laundry etc. will represent the running costs. In case of transport
service petrol or diesel, lubricating oil, wages of driver or cleaner are operating or running costs.

8

UNIT OF COST

A unit cost is the cost incurred by a company to produce, store and sell one unit of a particular
product. Unit costs include all fixed costs (i.e. plant and equipment) and all variable costs (labor,
materials, etc.) involved in production.
Unit cost is the expenditure incurred in producing one unit of a good or service, computed
usually as average cost.
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:

Simple cost unit; or

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

9

Goods Transport

Per Kilometer

Road Maintenance

Per K.M. of Road maintained

Water Supply

Per Kilo Liter of Water Supplied

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

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.

10

11

TRANSPORT

Transport operating costs refer to costs that vary with vehicle usage, including fuel,
tires, maintenance, repairs, and mileage-dependent depreciation costs. 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.

COST SHEET for (Month/Year)

PARTICULARS
A

Rs.

Fixed cost
Insurance
License fee, Permit fee and Taxes
Depreciation
Other Fixed costs [specify]
Total Fixed Costs [A]

B

Rs.

Variable cost
Salaries & Wages of Drivers, Cleaners & Other Operating
Staff
Fuel & Lubricants
Consumables
Amortization Cost of Tyres ,Tube & Battery
Spares
Repairs & Maintenance
Other Variable Cost [specify]
Total Variable Costs [B]

xx
xx
xx
xx
XX

xx
xx
xx
xx
xx
xx
xx
XX

12

C
D
E

TOTAL OPERATING COST [A+B]

XX
XX

PROFIT/LOSS
REVENUE [TAKINGS]

XX

Number of Vehicles
XXX
Carriage Capacity [Seats or Tons]
XXX
Days Operated
XXX

ILLUSTRATION:
Mr. X owns a bus which runs according to the following schedule:

(i)

Delhi to Chandigarh and back, the same day.
Distance covered

:

Number of days run each month :
Seating capacity occupied

(ii)

150 kms. One way.
8
:

90 %

Delhi to Agra and back, the same day.
Distance covered

:

120 kms. One way.

13

(iii)

Number of days run each month :

10

Seating capacity occupied

:

Delhi to Jaipur and back, the same day.
Distance covered

(iv)

85%

:

270 kms. One way.

Number of days run each month :

6

Seating capacity occupied

:

100%

Following are the other details:

Cost of the bus
Salary of the driver
Salary of the conductor
Salary of the part-time accountant
Insurance of the bus
Diesel consumption 4 Kms. Per litre at
Road tax
Lubricant oil

Rs.
Rs.
Rs.
Rs.
Rs.
Rs.
Rs.
Rs.

6,00,000
2,800 p. m.
2,200 p. m.
200 p. m.
4,800 p. a.
6 per litre
1,500 p. a.
10 per 100

Permit fee
Repair and maintenance
Depreciation of the bus
Seating capacity of the bus

kms
Rs. 315 p. m.
Rs. 1000 p. m.
@ 20% p. a.
50 persons

Passenger tax is 20% of the total takings. Calculate the bus fare to be charged from
each passenger to earn a profit of 30% on taking. The fares are to be indicated per
passenger for the journeys:

Delhi to Chandighar;
Delhi to Agra;
Delhi to Jaipur.

14

SOLUTION:

Total kms
a) Delhi to Chandigarh
b) Delhi to Agra
c) Delhi to Jaipur
Total kms

=
=
=
=
=
=
=

(Distance covered x No. of trips x No. of days) kms
(150 x 2 x 8) kms
2400 kms
(120 x 2 x 10) kms
2400 kms
(270 x 2 x 6) kms
3240 kms

=
=
=

(a) + (b) + (c) kms
2400 + 2400 + 3240 kms
8040 kms

Calculation of total cost for a month

PARTICULARS
Salary of the driver
Salary of the conductor
Salary of the part-time accountant
Insurance (W. N. - 1)
Diesel (W. N. - 2)
Road tax (W. N. - 3)
Lubricant oil (W. N. - 4)
Permit fee
Repair & maintenance
Depreciation (W. N. - 5)
Total cost excluding tax
Profit
Total cost
Passenger tax
TAKINGS

RS.
2800
2200
200
400
12060
125
804
315
1000
10000
29904
17943
41866
11962
59809

Passenger kms = Total kms of journey x Seating capacity of the bus x Seating capacity occupied
a) Delhi to Chandigarh
b) Delhi to Agra
c) Delhi to Jaipur

=
=
=
=
=
=

2400 x 50 x 90% passenger kms
108000 passenger kms
2400 x 50 x 85% passenger kms
102000 passenger kms
3240 x 50 x 100% passenger kms
162000 passenger kms
15

Total passenger kms

=

=
=
Fare per passenger km

Fare for the journey

(a) + (b) + (c) passenger kms

108000 + 102000 + 162000 passenger kms
372000 passenger kms
=

Total takings/Total passenger kms

=

59809/372000

=

Rs. 0.16 per passenger km

=

Fare per passenger km x Distance covered

Fare for Delhi to Chandigarh

=
=

Fare for Delhi to Agra

Rs. 24
=

=
Fare for Delhi to Jaipur

Rs. 0.16 x 150 kms

Rs. 0.16 x 120 kms

Rs. 24
=

Rs. 0.16 x 270 kms

=

Rs. 24

=

Insurance of the bus (p. a.) x 1/12

=

Rs. 4800 x 1/12

=

Rs. 400 p. m.

=

Total kms x Rs. 6 per 4 litres

WORKING NOTES:

1) Insurance (p. m.)

2) Diesel

16

3) Road tax (p. m.)

4) Lubricant oil

5) Depreciation

=

Rs. 8040 x Rs. 6 per litre/4kms per litre

=

Rs. 48240 x 4kms per litre

=

Rs. 12060

=

Road tax (p. a.) x 1/12

=

Rs. 1500 x 1/12

=

Rs. 125

=

Total kms x Rs. 10 per 100 kms

=

8040 kms x Rs. 10/100 kms

=

80400 kms/100 kms

=

Rs. 804

=
=
=
=

Rs. Cost of the bus x Rate of depreciation x 1 month
Rs. 600000 x 20% x 1/12
Rs.120000 x 1/12
Rs. 10000

17

HOTEL

Hotel and lodges, providing daily accommodation facility to general public, have mushroomed
all over the country due to the impetus provide by modern civilization to ‘travel’ both on
personal and commercial work. The Operating Costing is applied in lodging houses in order to
find out the cost of accommodation provided.
The convenient form of 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.
Hence, the distinctions between fixed and operating charges are rarely observed. In case the
customers are provided food and drinks along with accommodation facility, a separate charge
may be levied from them. The cost per room day is arrived at by dividing the total cost with the
number of room day. Some amount of profit is added to the cost per room per day to determine
charge per room day. Once the charge per room day is determined, the same is to be multiplied
with the assigned weights to arrive at the rate to be charged for different classes of room per day.

18

Hotels, restaurants employ operating costing. The total operation of a hotel is divided into
number of cost centers as follows:

Restaurant-cost unit is number of meals served

Housekeeping-cost unit is no. of rooms cleaned

Laundry-cost unit is number of clothes washed.

COST SHEET FOR (the month/year)

PARTICULARS

R

Rs

s.

.

Salaries to staff

XX

Room attendant wages

XX

Repairs & renovation

XX

Lighting & Heating

XX

Power

XX

Linen

XX

Variable cost

XX

Interior Decoration

XX

Sundries

XX

Depreciation
- Buildings

xx
xx
19

- Furniture & fixtures

xx

XX

- Air-conditioners
Premises rent

XX

Other administration expenses

XX

Interest on investment

XX

TOTAL OPERATING COST [A]

X
X

NO. OF ROOM DAYS [B]

X
X

COST PER ROOM DAY [A + B]

X
X

ILLUSTRATION:
A hotel has three types of suites for its customers viz.

Single suite,

Double suite, Three room suite. You are requested to suggest what rent
should be charged for such type of suite on the basis of the following
information.

1) The rent of double-room suite is to be fixed as 1½ times the single suite and that of three
room suite as twice the single suite.
2) There are 20 three room suites, 30 double room and 100 single room suites in the hotel.

20

3) Normally, 90% of single room, 80% of double room and 60% of three room suites are
occupied in summer. In winter 50% of single room, 20% of double room and 20% of three
room suites are occupied.
4) Annual expenses are follows:
5) Staff salaries

Rs. 2,20,000

Room Attendant’s Salary
Rs. 2 daily per single room occupied in summer. Rs. 3 per double room. Rs. 4 per
three room.
Rs. 3 daily per room occupied in winter Rs. 4.50 per day double room, Rs. 6 per
three room.

Lighting, Heating and Power
Lighting
Rs. 40 for single- room suite per month for month for both summer and winter.

Rs. 60 for double- room suite per month of occupied for full month for both summer
and winter.
Rs.80 for three- room suite per month if occupied for full month for both summer
and winter.

Power
Rs. 20 for single-room suite per month if occupied for full month for both summer
and winter.

21

Rs.30 for double-room suite per month if occupied for full month for both summer
and winter
Rs. 40 for three-room suite per month if occupied for full month for both summer
and winter

Rs.
Repairs and Renovation

42000

Linen, etc.

45000

Interior decoration

50000

Sundries

31550

Depreciation:
Building @ 5% on

1400000

Furniture and Fixture @ 10%

100000

Air conditioner @ 10% on

200000

6) Summer may be assured for 7 months and winter for 5 months in a year. Normal days in a
month may be taken as 30.
7) Profit on cost 25%, so that interest on investments may also be covered in such profits.

SOLUTION:
Calculation of total cost for the year

PARTICULARS
Staff salary

RS.
220000

22

Repairs & renovation

42000

Linen, etc.

45000

Interior decoration

50000

Sundries

31550

Depreciation (W. N. – 1)
-

70000

Building
Furniture &fixtures
Air-conditioner

10000
20000

Room attendant’s salary (W. N. – 2)

93150

Lighting (W. N. – 3)

55400

Power (W. N. – 4)

27700

Total cost

664800

Profit

166200

Sales

831000

No. of room days

=

No. of rooms x 1 month x No. of months x Occupancy

=

100 single-room suites x 30 days x 7 months x 90% room

=

18900 single room days

percentage

a) Single-room suites:
Summer
days

Winter

=

100 single-room suites x 30 days x 5 months x 90%

room days

23

=

7500 single room days

Total no. of single room days = Summer + Winter
=

18900 + 7500 single room days

=

26400 single room days

b) Double-room suites:
Summer

=

30 double-room suites x 30 days x 7 months x 80% room

=

5040 double room days

days

Winter

=

30 double-room suites x 30 days x 5 months x 80%

room days
=

900 double room days

Total no. of double room days = Summer + Winter
=

5040 + 900 double room days

=

5940 double room days

c) Triple-room suites:
Summer

=

20 triple-room suites x 30 days x 7 months x 60% room

=

2520 triple room days

days

Winter

=

20 triple-room suites x 30 days x 5 months x 60%

room days
=

600 triple room days

24

Total no. of triple room days = Summer + Winter
=
=

2520 + 600 double room days
3120 double room days

Let the rent of the single-room suite be Rs. ‘x’
Thus, rent of double-room suite = Rs. 1.50x
Rent of triple-room suite = Rs. 2x

Total Rent = Total no. of room days x Rent per room suite
Single-room suite

Double-room suite

Triple-room suite

=

26400 single room days x Rs.x

=

Rs. 26400x.

=

5940 double room days x Rs.1.50x

=

Rs. 8910x

=

3120 triple room days x Rs.2x

=

Rs. 6240x

Total Rent = Total Sales
Rs. (26400x + 8910x + 6240x) =

Rs. 831000

Rs.41550x

Rs.831000

=

25

x

=

Rs. 831000/41550

x

=

Rs. 20

Rent to be charged:
Single-room suites

=

Rs. x

=

Rs. 20

Double-room suites

Triple-room suites

=

Rs. 1.50x

=

Rs. 1.50 x Rs. 20

=

Rs. 30

=

Rs. 2x

=

Rs. 2 x Rs. 20

=

Rs. 40

WORKING NOTES:

1) Depreciation:
Building

Furniture & fixtures

Air-conditioner

=

Rs. 1400000 x 5%

=

Rs. 70000

=

Rs.100000 x 10%

=

Rs. 10000

=

Rs. 200000 x 10%

=

Rs. 20000

26

2) Room attendants’ salary = No. of room days x Rate per day
Summer
Single-room

=
=

Double- room

Triple-room

Total

18900 single room days x Rs.2
Rs. 37800
=

5040 double room days x Rs.3

=

Rs. 15120

=

2520 tiple room days x Rs.4

=

Rs. 10080

=

Rs. (37800 + 15120 + 10080)

=

Rs. 63000

=

7500 single room days x Rs.3

=

Rs. 22500

Winter
Single-room

Double- room

Triple-room

Total

=

900 double room days x Rs.4.50

=

Rs. 4050

=

600 tiple room days x Rs.6

=

Rs. 3600

=

Rs. (22500 + 4050 + 3600)

=

Rs. 30150

Total room attendant’s salary = Rs. (63000+ 30150)

27

=

Rs. 93150

3) Lighting:
Single-room

Double-room

Single-room

=

Total single room days / 1 month x Rate

=

26400 single room days / 30days x Rs. 40

=

Rs. 35200

=

Total double room days / 1 month x Rate

=

5940 double room days / 30days x Rs. 60

=

Rs. 11880

=

Total triple room days / 1 month x Rate

=

3120 triple room days / 30days x Rs. 80

=

Rs. 8320

Total lighting

=

Rs. (35200 + 11880 + 8320)

=

Rs. 55400

=

Total single room days / 1 month x Rate

=

26400 single room days / 30days x Rs. 20

=

Rs. 17600

=

Total double room days / 1 month x Rate

=

5940 double room days / 30days x Rs. 30

4) Power:
Single-room

Double-room

28

Triple-room

Total power

=

Rs. 5940

=

Total triple room days / 1 month x Rate

=

3120 triple room days / 30days x Rs. 40

=

Rs. 4160

=

Rs. (17600 + 5940 + 4160)

=

Rs. 27700

HOSPITAL

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.
A hospital is engaged in providing various types of medical services to the patients. Hospital
costing is applied to decide the cost of these services.

Why are hospital costs important?
Hospital cost information is derived by relating the inputs of resources in monetary terms to the
outputs of services provided by the hospital. 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, where to allocate the resources within or among hospitals, or to
compare the performance of different hospitals to one another. Some of the

29

Basic reasons for wanting cost information are to improve efficiency, increase effectiveness,
enhance sustainability, and improve quality.

How does one do a hospital costing exercise?
The process of determining the costs of a hospital involves six steps:

Defining the major and relevant activity areas of the hospital.

Gathering information on the services provided or the output of the hospital.

Determining the labor and other recurrent costs.

Ascertaining the capital costs of the hospital.

Allocating indirect costs.

Reviewing and using the hospital cost summary.

UNIT OF COST
The common units of costs of various departments in a hospital are as follows:

30

DEPARTMENT

UNIT OF COST

Outdoor patient department

Per out-patient

Indoor patient department

Per room-day

X – ray department

Per 100 units

Scanning centre

Per case

Pathology laboratory

Per 100 requests

Laundry department

Per 100 items laundered

Catering department

Per patient per week

The cost of hospital is divided into fixed and variable costs. Fixed costs include staff salaries,
depreciations of building, rent of building whereas variable cost include light and power, water,
laundry charges, food supplied to patients etc.

COST SHEET for (month/year)

PARTICULARS

A

R

Rs

s.

.

FIXED STANDING COSTS

31

.

B

Salaries to staff

xx

Premises rent

xx

Repairs & maintenance

xx

General administration expenses

xx

Cost of oxygen, x-rays, etc.

xx

Depreciation

xx

XX

RUNNING OR VARIABLE COSTS

.

C

Doctor’s fees

xx

Food

xx

Medicines

xx

Diagnostic Services

xx

Laundry

xx

Hire charges for extra beds

xx

TOTAL OPERATING COST [C]

.
D

X
X

NO. OF PATIENT DAYS [D]

.
E

XX

X
X

COST PER PATIENT DAY [C + D]

.

X
X

ILLUSTRATION:

32

A public health centre runs an intensive medical care unit. For this
purpose, it has hired a building at a rent of Rs. 5,250 p.m. with the
understanding that it would bear the repairs and maintenance charges
also.
The unit consists of 25 beds but 5 more beds can comfortably be accommodated
when the occasion demands. The permanent staff attached to the unit as follows:
2 supervisors, each with a salary of Rs. 2500 p. m.
4 nurses, each with a salary of Rs. 1500 p. m.
2 ward boys, each with a salary of Rs. 750 p. m.
Though the unit remains open for the patients all the 365 days in a year, it has full
capacity of 25 patients per day only for 120 days.

For 245 days it has on an

average 20 beds occupied per day. But, there are occasions when the beds are full
and extra beds are hired from outside at a charge of Rs.10 per bed per day.
However, this does not come to more than 5 beds extra above the normal capacity
on any one day. The total hire charges for the extra beds incurred

for

the

whole year amount to Rs. 5,000.
The unit has engaged expert doctors from outside to attend on the patients. The
fees are paid on the basis of the number of patients attended and time spent by
them. On an average it works out to Rs. 22,500 p. m.

The other expenses for the year are as under:

Particulars

Rs.

Repairs and maintenance

7200

Food supplied to patients

88000

Janitor and other services for them

25000

Laundry charges for their bed linen

28000
33

Medicine supplied

64000

Cost of oxygen, x-rays etc., other than those directly borne by

10800

patients
General administration charges allocated to the unit
Total

0
99000
4190
00

Required;
If the unit recovered an overall average amount of Rs. 150 per patient per day, what
is the profit per patient made by the unit (in nearest rupee)?

SOLUTION:

No. of patient days:
25 beds x 120 days

300
0

20 beds x 245 days

490
0

Extra bed-days (W. N. – 6)

500

34

Total no. of patient days

840
0

Calculation of total cost for the year

PARTICULARS

Rs.

Rent of the building (W. N. – 1)

63000

Salary of Supervisors (W. N. – 2)

60000

Salary of Nurses (W. N. – 3)

72000

Salary of Ward boys (W. N. – 4)

18000

Doctors’ fees (W. N. – 5)

27000
0

Hire Charges

5000

Other Expenses:
-

Repairs & maintenance
Food supplied to patients
Janitor & other services for them
Laundry charges for their bed linen
Medicines supplied
Cost of oxygen, X-rays, etc. other than those directly borne

7200
88000

-

by patients
General administration charges allocated to the unit

28000

25000

64000
10800
0
99000
Total Cost

90720

35

0

Cost per patient day

=
=

Rs. 907200/8400 patient days

=

Rs. 108

Income from patients

Profit per patient

Total cost/Total no. of patient days

=

Total no. of patient days x Rate per patient

=

8400 patient days x Rs. 150

=

Rs. 1260000

=

(Income from patients – Total cost) / No. of patient

=

(Rs. 1260000 – Rs. 907200) / 8400 patient days

=

Rs. 352800/8400 patient days

days

=

Rs. 42

WORKING NOTES:
1) Rent of the building

=

Rent (p. m.) x 12 months

=

Rs. 5250 x 12 months

=

Rs. 63000

2) Salary of Supervisors =

Salary (p. m.) x 12 months x No. of supervisors

36

=

Rs. 2500 x 12 months x 2

=

Rs. 60000

3) Salary of Nurses

4) Salary of Ward Boys

=

Salary (p. m.) x 12 months x No. of nurses

=

Rs. 1500 x 12 months x 4

=

Rs. 72000

=

Salary (p. m.) x 12 months x No. of ward boys

=

Rs. 1500 x 12 months x 2
=

Rs. 18000

=

Fees (p. m.) x 12 months

=

Rs. 22500 x 12 months

=

Rs. 270000

Hire charges incurred

=

Rs. 5000

Rate per bed

=

Rs. 10

5) Doctors’ Fees

6) Extra Bed Days:

No. of beds

=

Hire charges incurred/Rate per bed

=

Rs. 5000/Rs. 10

=

500 beds

37

38

CONCLUSION

Operating costs are expenses that relate to 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.
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.

39

Operation costing refers to the methods where the cost of each operation in each stage of
production or process is separately computed. 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.

40

REFERENCE

http://www.yourarticlelibrary.com/cost-accounting/operating-costing/operating-costing-




definition-unit-and-classification/58318/
http://www.businessdictionary.com/definition/operating-cost.html
https://www.safaribooksonline.com/library/view/cost-accounting/
https://en.wikipedia.org/wiki/Operating_cost
http://www.investinganswers.com/financial-dictionary/

41