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. Fore computing operating cost, it is necessary to decide first, about the unit of which the cost is to be computed, this may often require the study of some technical and operating data, for finding out the factors which have a bearing on cost. For preparing a cost sheet under operating cost, costs are usually accumulated for a specific period viz. a month, a quarter or a year etc.

Accumulated cost have three types:

Fixed cost : also known as standing charges. Variable cost : also known as running charges. Semi variable cost : also known as maintenance charges.

Some important terms related to operating costing :

UNIT COST. ABSOLUTE/COMMERCIAL. STANDERD LOAD.

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, services are rendered either by an undertaking or by a service cost renter with in an undertaking.

Importance
Management of business concerns expects from cost accounting detailed cost information in respect of its operations to equip their executives with relevant information require for planning, Scheduling, controlling and decision making. To be more specific, management expect from cost.

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 order wise. (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.

Objective
Ascertainment of cost. Determination of selling price. Cost control and cost reduction Ascertainment the profit of each activity Assisting management on decision making

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 Passenger transport Goods transport Ton Hotel Hospital Canteen Water supply Electricity -

Cost per unit Kilometer Kilometer Per room per day Per bed per day Per item, per meal Per 1000 liters 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. Total Rs. A. Fixed Cost (or Standing charges) 1. Road Tax XX XX XX 2. Insurance XX XX 3. Drivers Salary XX XX 4. Conductors Salary XX XX 5. Depreciation XX XX 6. Interest on Capital XX XX 7. Garage Rent XX XX 8. Office & XX XX Administration Overheads B. Variable (Running) costs 1.Depreciation XX XX XX 2. Petrol Diesel XX XX 3. Oil & Grease XX XX 4. Repairs and XX XX maintenance XX XX 5. Tires and tubes Total operating cost XXXX Note: Maintenance expenses can be shown separately also depends on cases. Lets have a sum related to it : Tulsian passenger transport Per Km Rs. XX

XX

XXXX

company provides you the following information: No. of buses Cost of each bus Estimated life Repairs & maintenance Driver's Salary Conductor's salary Garage rent Insurance Taxes Road licence

5 Rs.3,00,000 5 years Rs.7,285 p.m. per bus Rs.800 p.m.per bus Rs.600 p.m.per bus Rs. 6,000 p.a. 2% p.a. Rs. 6,000 p.a. Rs. 600 p.a.per bus

Interest 8% p.a. Km per litre of fuel 20 km Cost of fuel Rs. 300 per 10 litres Total Capacity 40 passengers Average capacity which is used

Normal % of vehicles laid up 5% for repair no. of round trips per day 3 Distance of route working days in a month 25 Manager's salary Rs. 1,000 p.m. Accountant's salary Rs. 500 p.m. Peon's salary Rs. 250 p.m. Cleaner's salary 100 p.m. Mechanic's salary Rs. 300 p.m. Cost of tickets Rs. 10 per 1000 passenger km Office Rent Rs. 250 p.m. Office routine expenses Rs. 500 p.m. Cost of each tyre Rs. 3,000 Tyres to be replaced per bus 1 p.m. 90%

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 Rs. XX XX XX XX XX Rs.

5.Cost of Oxygen, X ray etc

XX XXXX

B) Running or maintenance costs 1.Doctors fees 2.Food 3.Medicines 4.Laundry 5.Hire charges

XX XX XX XX XX

XXXX Total operating cost Cost per patient day = Total Operating cost/No of Patient Days Lets have a sum related to it : 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. 33,500 p.m. XXXX

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 Medicines supplied Cost of oxygen, X-rays General administration charges 28,000 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 Rs. Rs.

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

XX XX XX XX XX XX XX

XXXX B) Running charges (Variable cost) 1.Cost of free tea, coffee, meal, breakfast 2.Laundry cost of bed sheets & towel XXXX Total Operating Cost Lets have a sum related to it : 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. XXXX XX XX

i. Depreciation @ 5% is to be charged @ 20% on investment in 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 Total (Rs) XX XX XX XX Per Unit (Rs) XX XX XX XX

Wages & Salaries of Staff (B) Services: 1.Gas & Water 2.Power & Lighting

XX XX XX

XX XX XX

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

XX XX

XX XX

(D) Miscellaneous: 1.Rent & Insurance 2.Depreciation

XX XX

XX XX

(E) Total (F) Profit (G) Sales

XX XX XX

XX XX XX

Lets have a sum related to it : 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 kilowatt-hour 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: Particulars Amount Cost per unit [lbs] Rs. A] Fixed Charges Rent, Rates, Taxes Insurance Depreciation Salaries 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 Electricity Generated: Total Cost Rs. XX XX XX XX XX XX XX XX XX XX

Lets have a sum related to it : You are requested to prepare a Cost Sheet showing the cost of generation of power per kilo Watt-Hours (kWH). Total Units Generated 15,00,000 kWH p.a. Rs. Operating Labour 16,500 p.a.

Plant Supervision Lubricant and Supplies Repairs & Maintenance Administrative overheads Capital Cost

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.

CONCLUSION