A

STUDY OF OPERATING COSTING WITH SPECIAL

REFERENCE TO AS TOURS & TRAVELS (TRANSPORT
AGENCY ) .

A SYNOPSIS SUBMITTED TO
SAVITRIBAI PHULE PUNE UNIVERSITY ,
FOR THE PARTIAL COMPLITION OF PROJECT
METHODOLOGY .
BY
GANGURDE SOMNATH DASHRATH
B.Y.K. (SINNER ) COMMERCE COLLEGE ,
NASHIK 5 .
CLASS :- TYB.COM
ROLL NO: - 508 (E)
YEAR :- 2021-2022
GUIDED BY ,
Dr. Mrs. SUNEETA PIMPLE .
HEAD ,Dept. Of Costing.
B.Y.K.College Of Comm

2
 CONTENTS

Sr No TITLE PAGE NO

1 Introduction
4

2 Objectives
5

3 Project Methodology
6

4 Introduction to Operating Costing

Definition 7-9
Charactristics

5 Areas of operating costing 10-12

6 Service Industris simple Cost Unit 13-18

7 Transport Costing
Meaning 15-18
Objectives

8 Conclusion
19

9 References
20

3
 INTRODUCTION
(A) Cost and Works accountancy as a c- component subject
Cost accounting is a form of managerial accounting that aims to capture a
company's total cost of production by assessing the variable costs of each step of
production as well as fixed costs, such as a lease expense.

(B) CONCEPT

Operating costing method is one designed to ascertain and control the costs of
the undertakings which do not produce products but which render services.
Operating costing is also known as service costing. It is that form of operation
costing which applies where standardised services are provided either by an
undertaking or by a service cost center within an undertaking.

(C) Need and Importance :-

Costs are classified into a 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.

Operating expenses are important because they can help assess a

company’s cost and stock management efficiency. It highlights the level of
cost that a company needs to make to generate revenue, which is the main goal
of a company.

If a company incurs relatively higher opex as a percentage of sales

compared to its competitors, that may indicate they are less efficient at generating
those sales.

4
 OBJECTIVES

❖ To study the meaning , definition of operating costing .

❖ To study the features and aaplication of operating costing .
❖ To study the concept of cost units and composite cost units with
respect to transport agency.
❖ To study the specimen of operating cost sheet .
❖ To study the procedure of preparations of operating cost sheet .
❖

5
 Project Methodology
( Methods of Data Collection .)
One important aspect of analyzing cost data is the challenge of how to present the
finding in a manner that potential users may be be able to apply to their own .

1] We collected most of the data from Secondary data sourcses .

➢ Internet.

2] Some of the data are collected by Primary sources of data colletion.

❖ By visiting the AS TOURS & TRAVELS Transport Agency.

6
 Introduction to operating costing
Operating costing method is one designed to ascertain and control the costs of
the undertakings which do not produce products but which render services.
Operating costing is also known as service costing. It is that form of operation costing
which applies where standardised services are provided either by an undertaking or
by a service cost center within an undertaking.
Operation costing is the cost of rendering services. It is the cost of producing and
maintaining a service. Industries using operating costing do not produce tangible
products; but useful service is rendered; for example, transport services, utility
services like hospitals, canteens etc., distribution services like supply of electricity,
gas etc. There is internal as well as external service.
Service rendered in the same organisation is known as internal service, for
example, repairs and maintenance department or canteen in a factory. Services
rendered to consumers are known as external service; for example, hospitals,
transport companies, electricity companies etc. The operating cost per unit is
calculated by dividing the total cost by the number of service units produced or
rendered.

Meaning of Operating Costing

Operating costing is a method of ascertaining cost of providing or operating a service.
In this method, cost is determined in the same way as in the unit costing method or
output costing method by preparing a cost sheet. Operating costing method is
applied in undertakings which provide service or fall in the category of public
utilities. The method is also called service costing.

This method of costing is employed in those undertakings which are engaged in

providing or operating services rather than in manufacturing tangible products. This
method is applicable to road transport undertakings, railways, tramways, airways,
shipping companies, electricity companies, gas companies, hospitals, cinemas,
hotels, canteens, water works etc.

Operating costing is characterised by a form of unit costing. The product produced is

only one but it is some service. The service being provided is standardised, or is
regarded as such. These may be for sale to the general public, or within the
organisation itself. In fact, every manufacturing entity has some service centres, else
service departments which act as ancillaries to the production departments.

Definitions of Operating Costing

7
 According to Wheldon – “operating costing actually is unit costing as applied to
the cost of services.”

According to CIMA, London, “Operating Costing is that form of operation costing

which applies where standardized services are rendered either by an undertaking or
by a service cost centre within an undertaking.”

Both the definitions make it clear that operating costing is confined to costing of
services. However the method can also be used for non-standardised services in a
restricted way e.g., hiring a bus for a private trip.

Features of Operating Costing are listed

below:

1. Uniformity of service to all the customers.

2. Involves fixed and variable costs. The distinction is necessary to ascertain the cost
of service and the unit cost of service.

3. Service undertakings do not produce physical articles for stock and sale. But
services are sold to consumers.

4. It is not concerned with accounting for inventories, other than those for
miscellaneous supplies. There is nothing like finished services inventory similar to
finished goods inventory.

5. The cost unit may be simple in certain cases, and composite or compound in other
cases like transport undertakings.

6. Total costs are averaged over the total amount of service rendered.

8
 Characteristics of Operating Costing

The undertakings where operating costing is applied,

generally possess the following: -

(i) These undertakings are engaged in rendering services of unique nature to their
customers.

(ii) These undertakings are required to invest a large proportion of their total capital
in fixed assets e.g., trucks, buses, ships, aircrafts, railway engines, wagons, railway
lines, etc.

(iii) The amount of working capital required to meet out the day-to-day expenses, is
comparatively less.

(v) Unlike in other methods of costing, selection of cost unit is difficult in operating
costing.

(vi) Operating costs are mostly period costs.

(vii) This system requires a more detailed but simpler statistical data for proper
costing.

9
 Areas of Operating Costing

Operating costing is applied in those areas which provide services and not
producing consumable or industrial goods.

These organisations can be mainly:

1. Transport Services – Bus, car, trucks, railways, airways, ships, cargo, tramways,
steamer etc.

2. Entertainment Services – Cinema, club, circus, drama, etc.

3. Welfare Services – Hospitals, libraries, canteens, hotels, educational institutions,

creches, etc.

Operating Costing – Log Sheets

Log sheets are prepared for collection of costs. A log sheet is maintained for each
vehicle to record the details of trip, running time, and distance covered, running cost
i.e., petrol and diesel, loading or uploading time etc. These log sheets help the
management to ascertain the operating cost, to avoid idleness of vehicle and to
exercise control.

10
Operating Costing – Maintenance of Log Book in
Transport Services
For collection of expenses specially in transport service, a book known as log book is
maintained for each vehicle. In the log book all the expenses and activities of the
vehicle during that specified period are recorded for cost calculation purpose,
maintenance purpose and control on cost purpose.

The maintenance of the log book helps in the following

matters:
(i) Number of trips (run kilometer) by the vehicle during a day.

(ii) Number of passengers travelled during journey.

(iii) Weight carried during the journey by the vehicle.

(iv) Period and timing of no use of the vehicle and reasons thereof like repair, non-
availability of passengers or goods to be carried etc.

(v) Consumption of petrol, diesel, and average rate of consumption of fuel.

11
 Speciman of Log Sheeet

SERVICE INDUSTRIES SIMPLE COST UNIT

12
 Passenger transport Good transport Road Maintenance Water supply Canteen Per
kilometer Per kilometer Per K.M. of road maintained Per kilo liter of water supplied Per
meal/ dish SERVICE INDUSTRIES COMPOSITE COST UNIT Passenger transport Good
transport Electricity Steam, Gas Hospital Library Per Passenger K.M. Per Ton K.M Per
kilowatt Hour Per K.G. / Cubic Ft. Per Patient Day Per Member Book

Thus it can be seen that in operating costing in most cases the cost unit is a
compound unit. It refer to both the quantum of service and period of service. Thus a
transport charge for carrying so much weight (Ton) for so much distance (Km) an
electricity company charge one for use of both the quantum (Kilowatt) and the period
(Hour) and so on.

DETERMINE COST UNIT:

The first in operating costing is the determination of the cost unit. This is a complex
task as explained in para 1.3. 2) ASCERTAIN COST: The next point to be notes is that
operating cost are period cost. The cost of supplying the service for a period are
ascertained in the following manner(taking the example of a transport)  VEHICLE NO.:
Each vehicle is treated as accost centre and given a specific number. All the cost account
against this number. A separate account is opened to record the cost and income of each
vehicle.

(1) FIXED COSTS:

Fixed cost (fixed charge) included garages rent, insurance, road license fees etc.
the fixed charges are apportioned and absorbed by each vehicle no. on the basic of
overhead absorption rate which may be actual or pre determine. The fixed cost
attributable to the vehicle are debited to the relevant vehicle account.

(2)VARIABLE COST: .

This included expenses of variable nature e.g. petrol, diesel, lubricating oil, grease
etc. the material requisition note and time sheet (or Log) bears the vehicle no. the
relevant vehicle account is debited with it direct material and direct labour cost. Direct
expenses such as a fuel are debited to vehicle account on the basic of log book and the
cash / purchase / journal vouchers.

13
 REVENUE:
The revenue from the vehicle is credited to the vehicle account.

PROFIT OR LOSS:
The vehicle account at this stage will reveal the profit or loss made on operating
that vehicle. The profit or loss is then transfer to the costing profit and loss account the
total operating cost of a period is divided by the number of cost unit (KM/Passenger/
Ton)supplied during the period to arrive at the operating cost Per unit for that period.
.

ABNORMAL COST:
According to cost accounting standard 5 (transportation cost)abnormal and non
recurring cost shall be directly debited to p&l a/c and shall not form part of operating cost.
Example are penalty, detention charge demurrage and cost related to abnormal

LIMITATIONS OPERATING COST ACCOUNTING HAS CERTAIN

LIMITATIONS
a)Based on estimates: Indirect costs are not charged fully to a product or
process. It is charged to all the products and processes on the basis of estimates.
Actual cost varies from estimated cost. Due to these limitations, all cost accounting
results are taken as mere estimates.
b)Lack of uniformity: Procedures of cost accounting followed by different
organizations are different for different products. There is no uniformity. There is also
possibility of difference in pricing material issues for production. All these lead to
different cost results for the same operation.
c)Many conventions: There are many conventions for classification of costs, pricing
of material issues, apportionment of indirect costs, adoption of marginal or standard
cost, etc. These create difficulty in determining the exact cost, because no one type of
cost is suitable for all. Purposes and in all circumstances.
d)Expensive: Cost accounting is expensive. It involves lots of clerical won for
maintaining various costing records for different purposes. For medium and small size
concern, the benefit derived from costing system may not justify the cost involved .
e)Result requires reconciliation: Information and results provided b;financial
accounting and cost accounting may be different for the as activity. This requires
reconciliation to find out correctness of the two before taking any decision.
f)Dependent: It is not an independent system of accounting. It depends on other
accounting systems.

14
 Transport Costing

Meaning :
Transport Costing refers to the determination of the cost per unit of services
rendered by a vehicle. Its include Water, Air, Road and Railways. Motor transport
includes Buses, Taxies, Private Cars, Carriers and Lorries etc. E.g. The
cost/passenger/km or cost/ton/km.

Objects of Transport Costing

i. It helps in controlling, operating and maintenance costs.

ii. Cost of using own vehicle and hired vehicle can be compared.

iii. Operating costs of different vehicles can be compared and thus efficiency can be
improved.

iv. Comparison of oil consumption and time taken for a trip with other trips is
possible.

v. Proper apportionment of costs to different departments which use the service is

possible.

vi. It provides information for giving quotation and fixing the rates.

Objectives of Transport Costing

1. To find cost per unit of operating a vehicle and to fix the rate for the carriage of
passengers or goods.

2. The control of the cost of operating each vehicle.

3. To compare the cost per unit of one means of transport with that of another, and
to find out the profitable means of transport.

4. To compare the cost per unit of operating one vehicle, with another vehicle, and to
ascertain the efficiency of each vehicle.

5. To help to fix the hire charges of a vehicle where a vehicle is given on hire.

Cost Classification
The expenses incurred by a transport concern can be classified into three categories .

15
1. Fixed Charges or Standing Charges
It includes expenses, which remain fixed, whatever may be the distance covered, or
trips made. The vehicle may be idle, but these expenses have to be met. Therefore
they are called as fixed charges.

Example: Garage rent, insurance premium, road license fee, interest on capital,
vehicle tax, establishment expenses of the work shop, head office expenses,
depreciation of the vehicle (based on time), wages of drivers, conductors etc (based
on amount to be paid on a fixed rate, regardless of distance covered).

2. Maintenance Charges
These expenses are incurred on the repairs and maintenance of the vehicle, so as to
keep the vehicle in proper condition. They are semi-variable or semi-fixed in nature.

Example: Repairs and maintenance, spares and accessories, wear and tear of tyres
and tubes, supervision expenses, painting charges, overhaul expenses.

3. Operating Charges
These expenses are incurred on the actual running of the vehicle. They vary with the
distance covered or the trips made. They are variable in nature.

Example: Petrol or diesel expenses, lubricating oil and grease, salaries and wages of
drivers, conductors etc. (if it depends upon the distance covered, or by the number of
trips made), depreciation of vehicles (based on the mileage run) etc .

Advantages:
The usefulness of transport costs becomes apparent when we
consider the following advantages:
(a) Choosing between alternative means of transport. A transport company- owning
Lorries may compare the cost of using a lorry with the prevailing railway rates and
decide to make use of the alternative if that appears to be cheaper.

(b) Comparing the cost of maintaining one vehicle with the cost of another vehicle of
the same type.

(c) Determining the basis for charging to departments using the service.

(d) Determining the price at which a vehicle should be hired out.

16
(e) Comparison between owned transport and hired transport to decide whether it is
economical to go in for a hired one.

Operating Cost Sheet (With Specimen)

It is said that, “a well-designed cost sheet is the heart of transport costing”. For
collecting and controlling costs, costs are classified and accumulated under the three
heads, suitably analysed and presented periodically in the form of an operating cost
sheet.

A specimen of operating cost sheet is given as follows:

17
18
 CONCLUSION

On Detailed analysis of operating costing leads us to conclude that although

the Big Companies Offer similar services and operate in geographic area , each
of them has control over and manages their operating costs differently .
And this naturally has varying effects on their operating profits .Example OLA
,UBER and many more.

We further concludes that operating costing technique is one of the most

important factor of transport industry .

19
 REFERENCES

WWW.GOOGLE.COM
WWW.WIKIPEDIA.COM
WWW.ICAI.COM
WWW.OPERATINGCOSTINGOFTRANSPORTAGEN
CY.COM
.

20
21
22