OPERATING COSTING

INTRODUCTION
Operating Costing method is normally used in service sector. When the service is not completely standardized, it is the cost of producing and monitoring a service. It is a method of costing applied to undertakings which provide service rather than production of commodities. Service may be performed internally and externally. Services are termed as internal when they have to be performed on inter-departmental basis in factory itself e.g. Power house services, canteen service etc. Services are termed as external when they are to be rendered to outside parties. Public utility services like transport, water supply, electricity supply, hospitals are the best example for the service costing. Thus operating costing is a method of cost accumulation which is designed to determine the cost of services.

MEANING OF OPERATING COSTING Operating costing is a method of ascertaining the cost of providing or operating a service. It is also known as service costing CIMA London, defines Operating Costing as that form of operation costing which applies where standardized services are rendered either by an undertaking or by a service cost renter with in an undertaking.

Steps involved in Operating costing Selection of cost unit Collection of Costing Data

Cost Unit: Determining the suitable cost unit to be used for cost ascertainment is a major problem in service costing. Selection of a proper cost unit is a difficult task. A proper unit of cost must be related with reference to nature of world and the cost objectives. The cost unit related must be simple i.e. per bed in a hospital, per cup of tea sold in a canteen and per child in a school. In a certain cases a composite unit is used i.e. Passenger Kilometer in a transport company. The following are some of example of cost units used in different organizations Enterprises Cost per unit Passenger transport Passenger Kilometer Goods transport Ton Kilometer Hotel Per room per day Hospital Per patient per day Canteen Per item, per meal Water supply Per 1000 liters Electricity Per kilowatt

Collection of costing data:

After determining the cost unit, the cost relating to the service is collected. The collected cost is a presented under the heads suitable for control purpose i.e. fixed expenditure and variable expenditure. The presentation of cost data under difficult categories helps to improve managerial control over cost.

TRANSPORT COSTING Transport costing is method of ascertaining the cost of providing service by a transport undertaking. This includes air, water, road and railways; motor transport includes private cars, carriers for owners, buses, taxies, carrier Lorries etc. The objective of motor transport costing may be summarized as follows: To ascertain the operation cost of running a vehicle To provide and accurate basis for quotation and fixing of rates To provide cost companion between own transport and alternative e.g. hiring To compare the cost of monitoring one group of vehicle with another group To determine the cost to be charged against departments using the service To ensure the cost of maintenance and repairs is not excessive

Particulars

Rs. XX XX XX XX XX XX XX XX

Total Rs.

Per Km Rs. XX XX XX XX XX XX XX XX

A. Fixed Cost (or Standing charges)

1. Road Tax 2. Insurance 3. Drivers Salary 4. Conductors Salary 5. Depreciation 6. Interest on Capital 7. Garage Rent 8. Office & Administration Overheads B. Variable (Running) costs 1.Depreciation 2. Petrol Diesel 3. Oil & Grease 4. Repairs and maintenance 5. Tyres and tubes Total operating cost XX XX XX XX XX XX XXXX XX XX XX XX XX XX XXXX

XX

XX

Note: Maintenance expenses can be shown separately also depends on cases.

1. From the following information calculate fare for passenger KM.

The cost of the Bus Insurance charges Annual tax Garage rent Annual repairs Expected life of the bus Value of scrap at the end of 5 years Route distance Drivers salary Conductors Salary Commission to Driver & conductor (shared equally) Stationary Manager-cum-accountants Salary Diesel and Oil (for 100 kms)

Rs. 450000 3 % p.a. Rs. 4500 Rs. 500 p.m. Rs. 4800 5 yrs Rs. 30000 20 km long Rs. 550 p.m. Rs. 500 p.m. 10 % of the takings Rs. 250 p.m. Rs. 1750 p.m. 125

The bus will make 3 rounds trips for carrying on the average 40 passengers in each trip. Assume 15 % profit on takings. The bus will work on the average 25 days in a month

HOSPITAL COSTING Hospitals comes under service sector, big companies also maintain hospitals. For costing purpose the hospital service can be divided in two following categories (1) Outpatient department (2) Wards (3) Medical service departments such as radio therapy X ray etc. (4) General Services such as heating, lighting, catering laundry etc. (5) Other services such as transport, dispensary, cleaning etc.

Format of a cost Sheet of a Hospital

Particulars
A) Fixed standing charges 1. Rent , Repairs and maintenance 2. General administrative expenses 3. Depreciation 4. Salaries to staff 5. Cost of Oxygen, X ray etc B) Running or maintenance costs 1. Doctors fees 2. Food 3. Medicines 4. Laundry 5. Hire charges

Rs.
XX XX XX XX XX

Rs.

XXXX

XX XX XX XX XX XXXX XXXX

Total operating cost

Cost per patient day = Total Operating cost/No of Patient Days

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 be comfortably accommodated when the occasion demands. The permanent staff attached to the unit is as follows: 2 supervisors, each at a salary of Rs. 2,500 p.m. 4 nurses, each at a salary of Rs. 1,500 p.m. 2 ward boys, each at 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 average 20 beds occupied per day. But there were 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 extra beds 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 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:

Repairs & maintenance food supplied to patients Janitor & other services Laundry charges

7,200 88,000 25,000 28,000

Medicines supplied Cost of oxygen, X-rays General administration charges

64,000 1,08,000 99,000

Required: 1. If the unit recovered an over-all average amount of Rs. 150 per patient per day, what is the profit made by unit. 2. The unit wants to work on a budget for the next year, but the number of patients requiring intensive medical care is a very uncertain factor. Assuming that the same revenue and expenses will prevail next year also, work out no. of patient-days required by the of break-even.

HOTEL COSTING Hotel industry is a service industry and covers various activities such as provision for food and accommodation. It also provides other comforts like recreations, business facilities, shopping areas etc. The expenses incurred in a hotel are fixed or variable. Fixed expenses comprises of staff salaries, repairs, interior decoration, laundry contract cost and depreciation on fixed assets. The variable expenses incurred are lighting, attendants salaries, power etc. To find out room rent to be charged from customers a notional profit is added with the cost and divided by the number of rooms available. The number of rooms available is calculated after for considering availability of suits and occupancy. Rooms rent may be different from season to season. Sometime besides accommodation they also provide food. Then the cost of meals, other direct and indirect costs are considered to work out the costs to be charged from customers.

Operating cost sheet of a Hotel

Particulars A) Fixed Charge 1. Salaries to Staff 2. Repairs and Renovation 3. Depreciation 4. Interior decoration 5. Lighting, heating & power 6. Laundry contract cost 7. License fee B) Running charges (Variable cost) 1. Cost of free tea, coffee, meal, breakfast 2. Laundry cost of bed sheets & towel
Total Operating Cost

Rs. XX XX XX XX XX XX XX

Rs.

XXXX XX XX

XXXX
XXXX

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 a. Salaries of staff: Rs. 1,02,200 p.a. b. Wages of the room attendant : Rs. 4 per day c. There is a room attendant for each room. He is paid wages only when the room is occupied. d. Lighting, Heating and power The normal lighting expenses for each room for the whole month is Rs. 100 when occupied. Power is used only in winter and the charges are Rs. 40 p.m. for a room, when occupied. e. Repairs to buildings: Rs. 10,000 p.a. f. License etc : Rs. 4,800 p.a. g. Sundries: Rs. 6,600 p.a. h. Interior decoration and furnishing: Rs. 10,000 p.a. i. Depreciation @ 5% is to be charged on buildings costing Rs. 4,00,000 and 10% on equipments. j. Interest to be charged @ 20% on investment in buildings and equipments amounting to Rs. 5,00,000. k. There are 100 rooms in hotel 80% of the rooms are generally occupied in summer and 30% in winter. The period of summer winter may be considered to be of 6 month in each case: a month can be assumed of 30 days.

Canteen Costing Canteen costing is a method of ascertaining the cost of providing meals or dishes of different types. The objectives of canteen costing is to ascertain the cost of producing meals and to fix the rates of meals.

Format of Canteen Operating Cost Sheet

Particulars (A) Provisions: 1. Wheat flour 2. Bread 3. Vegetable & Milk 4. Cold drinks, Tea & coffee Wages & Salaries of Staff (B) Services: 1. Gas & Water 2. Power & Lighting Total (Rs) XX XX XX XX XX XX XX XX XX XX XX XX XX Per Unit (Rs) XX XX XX XX XX XX XX XX XX XX XX XX XX

(C) Consumable stores: 1. Crockery and Glassware 2. Cleaning materials

(D) Miscellaneous: 1. Rent & Insurance 2. Depreciation (E) Total (F) Profit

(G) Sales

XX

XX

From the following data for the month of April 2011, calculate cost per meal for the canteen Run by joint councils of workers and management of Ratex Ltd: 1. Purchases for the month of April Meat 50 kgs @ Rs. 15 per kg Eggs 36 dozens @ Rs. 5 per dozen Vegetables Rs. 300 Bread etc Rs. 400 Rice Rs. 600 2. Wages and Salaries 2 Cooks @ Rs. 400 p.m. each 1 Manager who is paid Rs. 50 p.m. as allowance ( because he is already an employee) 3. Consumable stores Rs. 5,000 p.a. 4. Gas & Electricity Rs. 200 p.m. 5. Overheads allocated to the canteen Rs. 1,200 p.a. 6. Company subsidy Rs. 2,000 p.a. 7. No. of meals served in the month of April: 2000

Electricity Generation Costing

Power houses engaged in electricity generation or steam generation use Power House Costing. Operating cost statement can be prepared by identifying the costs associated with the power generation or steam generation. Cost unit is different for electricity generation and steam generation. For electricity generation, cost unit is cost per kilowatthour while for steam it is lb.

Specimen of electricity generation costing Power House Cost Sheet XYZ Ltd. October 2007 Total Steam Produced: Total Steam Produced: Electricity Generated: Particulars A] Fixed Charges Rent, Rates, Taxes Insurance Depreciation Salaries Amount Cost per unit [lbs] Rs. XX XX XX XX Total Cost Rs. XX XX XX XX

B] Fuel Charges
C] Maintenance Charges Meters Furnaces Service materials Tools etc. D] Water Charges E] Wages/Labour Charges G] Total Charges

XX
XX XX XX XX XX XX XX

XX
XX XX XX XX XX XX XX

You are requested to prepare a Cost Sheet showing the cost of generation of power per kilo Watt-Hours (kWH). Total Units Generated Operating Labour Plant Supervision Lubricant and Supplies Repairs & Maintenance Administrative overheads Capital Cost 15,00,000 kWH p.a. Rs. 16,500 p.a. 5,250 p.a 10,500 p.a. 21,000p.a. 9,000 p.a. 1,50,000

Coal consumed per kWH is 1.5 lbs and cost of coal delivered to the power station is Rs. 33.06 per metric ton. Depreciation rate chargeable is 4% p.a. and interest on capital is to be taken @7%. Take 1 metric ton = 2205 lbs.