9

Operating Costing
Question 1
Distinguish between Operating Costing and Operation Costing.
Answer
Operating Costing: It 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. It is applied by transport
companies, gas and water works, electricity supply companies, canteens, hospitals, theatres,
school etc. Within an organisation itself certain departments too are known as service
departments which provide ancillary services to the production departments. For example,
maintenance department; power house; boiler house; canteen; hospital; internal transport.
Operation Costing: It represent a refinement of process costing. In this each operation
instead of each process of stage of production is separately costed. This may offer better
scope for control. At the end of each operation, the unit operation cost may be computed by
dividing the total operation cost by total output.
Question 2
(a) What do you understand by Operating Costs? Describe its essential features and state
where it can be usefully implemented.
(b) A chemical factory runs its boiler on furnace oil obtained from Indian Oil and Bharat
Petroleum, whose depots are situated at a distance of 12 and 8 miles from the factory
site. Transportation of Furnace Oil is made by the Company's own tank lorries of 5 tons
capacity each. Onward trips are made only on full load and the lorries return empty. The
filling-in time takes an average 40 minutes for Indian Oil and 30 minutes for Bharat
Petroleum. But the emptying time in the factory is only 40 minutes for all. From the
record available it is seen that the average speed of the company's lorries works out to
24 miles per hour. The varying operating charges average 60 paise per mile covered and
fixed charges give an incidence of Rs. 7.50 per hour of operation. Calculate the cost per
ton mile for each source.
Cost Accounting
9.2
Answer
Operating Costs are the costs incurred by undertakings which do not manufacture any
product but provide a service. Such undertakings for example are Transport concerns,
Gas agencies; Electricity Undertakings; Hospitals; Theatres etc. Because of the varied
nature of activities carried out by the service undertakings, the cost system used is
obviously different from that followed in manufacturing concerns.
The essential features of operating costs are as follows:
(1) The operating costs can be classified under three categories. For example in the
case of transport undertaking these three categories are as follows:
(a) Operating and running charges. It includes expenses of variable nature. For
example expenses on petrol, diesel, lubricating oil, and grease etc.
(b) Maintenance charges. These expenses are of semi-variable nature and
includes the cost of tyres and tubes, repairs and maintenance, spares and
accessories, overhaul, etc.
(c) Fixed or standing charges. These includes garage rent, insurance, road
licence, depreciation, interest on capital, salary of operating manager, etc.
(2) The cost unit used is a double unit like passenger-mile; Kilowatt-hour, etc.
It can be implemented in all firms of transport, airlines, bus-service, etc., and by all firms
of Distribution Undertakings.
Statement showing the cost per ton mile of carrying furnace oil from Indian Oil
and Bharat Petroleum Depots to Chemical Factory
Indian Oil Bharat Petroleum
Rs. Rs.
Variable Cost of Operating
(See working note l)
14.40 9.60
Fixed Charges
(See working note 2)
17.50 9.60
Total Cost 31.90 23.35
Cost per ton-mile 53 paise (Approx.) 58.00 paise (Approx)
Working Notes
Indian Oil Bharat Petroleum
1. Distance of Oil Depots
from Chemical Factory:
Mileage covered under one trip by a lorry
Variable cost of operating @ 60 paise
per mile
12 miles
24 miles
Rs. 14.40
8 miles
16 miles
Rs. 9.60
Operating Costing
9.3
2. Running time of lorries at a speed of 24
m.p.h.
60 minutes 40 minutes
Filling in time 40 minutes 30 minutes
Emptying time 40 minutes 30 minutes
Total time 140 minutes 140 minutes
Fixed charges @ Rs. 7.50 per hour Rs. 17.50 Rs. 13.75
3. Load carried by tank lorries 5 tones 5 tones
Total effective tons-mile 60 40
(12 miles 5 tons) (8 miles 5 tons)
Cost per ton mile =
miles tons effective Total
Cost Total
In the case of Indian Oil
Cost per ton mile = Paise 17 . 53
60
90 . 31 . Rs
=
Similarly, in the case of the Bharat Petroleum
Cost per ton-mile = Paise 38 . 58
40
35 . 23 . Rs
=
Question 3
Write short note on operation costing. (May, 1996, 4 marks)
Answer
Operation Costing: It is defined as the refinement of process costing. It is concerned
with the determination of the cost of each operation rather than the process. In those
industries where a process consists of distinct operations, the method of costing applied or
used is called operation costing. Operation costing offers better scope for control. It facilitate
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.
Question 4
SMC is a public school having five buses each plying in different directions for the
transport of its school students. In view of a large number of students availing of the bus
service, the buses work two shifts daily both in the morning and in the afternoon. The buses
are garaged in the school. The work-load of the students has been so arranged that in the
morning the first trip picks up the senior students and the second trip plying an hour later picks
Cost Accounting
9.4
up the junior students. Similarly in the afternoon the first trip drops the junior students and an
hour later the second trip takes the senior students home.
The distance travelled by each bus one way in 8 kms. The school works 25 days in a
month and remains closed for vacation in May, June and December. Bus fee, however, is
payable by the students for all the 12 months of the year.
The details of expenses for a year are as under:
Driver's salary Rs. 450 per month per driver
Cleaner's salary Rs. 350 per month
(Salary payable for 12 months)
(One cleaner employed for all the five buses)
License fee, taxes etc. Rs. 860 per bus per annum
Insurance Rs. 1,000 per bus per annum
Repairs & Maintenance Rs. 3,500 per bus per annum
Purchase price of bus
(Life 12 years)
Rs. 1,50,000 each
Scrap value Rs. 30,000
Diesel cost Rs. 2.00 per litre.
Each bus gives an average mileage of 4 kms per litre of diesel.
Seating capacity of each bus is 50 students.
The seating capacity is fully occupied during the whole year.
Students picked up and dropped within a range upto 4 kms. of distance from the school
are charged half fare and fifty percent of the students travelling in each trip are in this
category. Ignore interest. Since the charges are to be based on average cost, you are required
to:
(i) Prepare a statement showing the expenses of operating a single bus and the fleet of five
buses for a year.
(ii) Work out the average cost per student per month in respect of
(A) Students coming from a distance of upto 4 kms. from the school and
(B) Students coming from a distance beyond 4 kms. from the school
Answer
SMC Public School
Operating Cost Statement
Per Bus Per Annum Fleet of 5 buses p.a. Particulars Rate
No. Rs. No. Rs.
Driver's salary
Cleaner's salary
450 p.m.
350 p.m.
1
1/5
5,400
840
5
1
27,000
4,200
Operating Costing
9.5
Licence fee, taxes etc.
Insurance
Repairs & Maintenance
Depreciation
Diesel (See Note 1)
Total
Cost per month
No. of students on half fee
basis (see Note 2)
Cost per student (half fee)
Cost per student (full fee)
860 p.a.
1,000 p.a.
3,500 p.a.
10,000 p.a.
860
1,000
3,500
10,000
7,200
28,800
2,400
150
Rs. 16.00
Rs. 32.00
4,300
5,000
17,500
50,000
36,000
1,44,000
12,000
750
Rs. 16.00
Rs. 32.00
Working Notes
1. Calculation of Diesel Cost per bus.
Number of trips of 8 kms. each day 8.
Distance travelled per day by a bus: 8 8km / trip = 64 km.
Distance travelled during a month : 64 25 = 1,600 km.
Distance travelled p.a. 1,600 9 = 14,400 km.
(May, June and December being vacation)
Mileage 4 km./litre
Diesel required 14,400/4 = 3,600 litres.
Cost of diesel @ Rs. 2 per litre = Rs. 7,200 p.a. per bus.
2. Calculation of number of students per bus
Bus capacity 50 students.
Half fare 50% i.e. 25 students.
Full fare 50% i.e. 25 students.
Full fare students as equivalent to half fare students i.e. 50 students.
Total number of half fare students. 75 students. per trip
Total number of half fare students in two trips 150 students.
On full fare basis, number of students in two trips 75 students.
Question 5
SHANKAR has been promised a contract to run a tourist car on a 20 km. long route for
the chief executive of a multinational firm. He buys a car costing Rs. 1,50,000. The annual
cost of insurance and taxes are Rs. 4,500 and Rs. 900 respectively. He has to pay Rs. 500
per month for a garage where he keeps the car when it is not in use. The annual repair costs
Cost Accounting
9.6
are estimated at Rs. 4,000. The car is estimated to have a life of 10 years at the end of which
the scrap value is likely to be Rs. 50,000.
He hires a driver who is to be paid Rs. 300 per month plus 10% of the takings as
commission. Other incidental expenses are estimated at Rs. 200 per month.
Petrol and oil will cost Rs. 100 per 100 kms. The car will make 4 round trips each day.
Assuming that a profit of 15% on takings is desired and that the car will be on the road for 25
days on an average per month, what should he charge per round-trip?
Answer
Statement of Operating cost.
Standing charges Per Annum Per Month
Rs. Rs.
Depreciation
Insurance
Taxes
Garage (Rs. 500 12)
Annual repairs
Driver's Salary (Rs. 300 12)
Incidental expenses (Rs. 200 12)
10,000
4,500
900
6,000
4,000
3,600
2,400
31,400 2,616.67
Variable expenses
Petrol and Oil : 4,000.00
(4,000*kms 100
100
1
. Rs . kms )
Total Cost (without commission) 6,616.67
Let X be the total takings per month
Driver's Commission = 10% of X =
10 100
10 X
=
Profit = 15% of X =
20
3
100
15 X
X =
Total takings per month = Total cost + Driver's Commission + Profit
or X = Rs. 6,616.67 +
20
3
100
X X
+
or X 3X/20 X/10 = Rs. 6,616.67
or 67 616 6
20
2 3 20
. , . Rs
X X X
=
Operating Costing
9.7
or 67 616 6
20
15
. , . Rs
X
=
or X =
3
4 67 616 6 . , . Rs
= Rs. 8,822.22
Total number of round trips per month : 25 days 4 round trips per day = 100
Hence the charge per round trip =
100
22 . 822 , 8 . Rs
= Rs. 88.22
* 20 kms. x 2 x 4 x round trips x 25 days = 4,000 kms.
Question 6
The Union Transport Company has been given a twenty kilometer long route to play a
bus. The bus costs the company Rs. 1,00,000. It has been insured at 3% per annum. The
annual road tax amounts to Rs. 2,000. Garage rent is Rs. 400 per month. Annual repair is
estimated to cost Rs. 2,360 and the bus is likely to last for five years.
The salary of the driver and the conductor is Rs.600 and Rs. 200 per month respectively
in addition to 10% of takings as commission to be shared equally by them. The manager's
salary is Rs.1,400 per month and stationery will cost Rs. 100 per month. Petrol and oil cost
Rs. 50 per 100 kilometers. The bus will make three round trips per day carrying on an average
40 passengers in each trip. Assuming 15% profit on takings and that the bus will ply on an
average 25 days in a month, prepare operating cost statement on a full year basis and also
calculate the bus fare to be charged from each passenger per kilometer.
Answer
Union Transport Company
Statement showing Operating Cost of the bus per annum
A. Fixed Charges
Rs.
Manager's Salary 16,800
(Rs. 1,400 12)
Driver's Salary 7,200
(Rs. 600 12)
Conductor's Salary 2,400
(Rs.200 12)
Road Tax 2,000
Cost Accounting
9.8
Insurance 3,000
(3% of Rs. 1,00,000)
Garage rent 4,800
(Rs. 400 x 12)
Stationery 1,200
(Rs. 100 12)
Depreciation 20,000
(Rs. 1,00,000/5 years)
57,400
B. Maintenance Costs
Repairs 2,360
C: Running Charges
Petrol and Oil (36,000 Km* Rs. 50)/100 18,000
Total Cost (A + B + C): 77,760
Add: 10 percent of takings for commission of Driver and
Conductor and 15 percent for desired profit i.e.
25 percent of takings or
3
1
33 percent on Total Cost 25,920
1,03,680
*Calculation of distance covered
(20 Km 2 3 25 12 ) = 36,000 Km per annum
Calculation of bus fare to be charged
Effective Passenger Kilometers: = 14,40,000
(2 20 Km 3 trips 40 passengers
25 days 12 months)
Rate to be charged per kilometer from 7.2 Paise
each passenger (Rs. 1,03,680/14,40,000)
Question 7
A company is considering three alternative proposals for conveyance facilities for its
sales personnel who have to do considerable travelling, approximately 20,000 kilometers
every year. The proposals are as follows:
(i) Purchase and maintain of its own fleet of cars. The average cost of a car is Rs. 1,00,000.
(ii) Allow the executive to use his own car and reimburse expenses at the rate of Rs. 1.60
paise per kilometre and also bear insurance costs.
(iii) Hire cars from an agency at Rs. 20,000 per year per car. The Company will have to bear
costs of petrol, taxes and tyres.
Operating Costing
9.9
The following further details are available:
Petrol Rs. 0.60 per km.
Repairs and maintenance Rs. 0.20 P per km.
Tyre rs. 0.12 P per km.
Insurance Rs. 1,200 per car per annum.
Taxes Rs. 800 per car per annum.
Life of the car: 5 years with annual mileage of 20,000 kms.
Resale value : Rs. 20,000 at the end of the fifth year.
Work out the relative costs of three proposals and rank them.
Answer
Alternative Proposals
I II III
Use of Concern's
Car
Use of own
Car
Use of hire Car
Rs. Rs, Rs.
Re-imbursement
of hire charges (A)
1.60
1
( 20,000/20,000Km)
Fixed Costs: (B)
(Per Car Per Km.)
Taxes (P.a.) 800 0.04
800/20,000 Km.
Depreciation 16,000
5
) 000 , 20 . Rs 000 , 00 , 1 . Rs (
Insurance 1,2000 0.06
_____ ___ (1200/20,000 Km) ___
Total 18,000 0.90 1.06 1.04
(Rs. 18,000/20,000 Km.)
Running & Maintenance Cost
per car per km. (C)
Petrol 0.60 0.60
Repairs and maintenance 0.20
Tyre 0.12 0.12
Cost Accounting
9.10
Total cost: per km. (A + B + C) 1.82 1.66 1.76
Cost for 2,000 Kms. Rs.36,400 Rs. 33,200 Rs. 35,200
(20,000Rs.1.82) (20,000Rs.1.66) (20,000Rs.1.76)
Ranking of alternative
proposals
III I II
Decision: Use of own car by Sales Executives will be the most economical proposal from the
Concern's point of view. Hiring of car, for the use of Sales Executives will be the
IInd best choice and maintaining a fleet of cars for its executives will be the costliest
alternative.
Question 8
Prakash Automobiles distributes its goods to a regional dealer using a single Lorry. The
dealer's premises are 40 kilometres away by road. The lorry has a capacity of 10 tonnes and
makes the journey twice a day fully loaded on the outward journeys and empty on return
journeys. The following information is available for a Four Weekly period during the year
1990:
Petrol consumption 8 kilometers per litre
Petrol cost Rs. 13 per litre
Oil Rs. 100 per week
Driver's wages Rs. 400 per week
Repairs Rs. 100 per week
Garage rent Rs. 150 per week
Cost of Lorry (Excluding Tyres) Rs. 4,50,000
Life of Lorry 80,000 kilometres
Insurance Rs. 6,500 per annum
Cost of Tyres Rs. 6,250
Life of Tyres Rs. 25,000 kilometres
Estimated sale value of Lorry at the end of its life Rs.50,000
Vehicle Licence Cost Rs. 1,300 per annum
Other overhead cost Rs. 41,600 per annum
The Lorry operates on a five day week.
Required:
(a) A statement to show the total cost of operating the vehicle for the four weekly period
analysed into running costs and fixed costs.
(b) Calculate the vehicle cost per kilometer and per tonne kilometer.
Operating Costing
9.11
Answer
(a) Prakash Automobiles' Statement of Operating Cost of the Vehicle
(For the four weekly period)
Running Costs Rs.
Petrol Cost 5,200
(Refer to Note 1)
Oil expenses 400
Driver's wages 1,600
Repairs 400
Tyre Cost 800
(Refer to Note 2)
Depreciation 16,000
(Refer to Note 3)
Total running cost (A) 24,400
Fixed Costs
Garage rent 600
Insurance 500
(Refer to Note 4)
Licence Cost 100
(Refer to Note 5)
Other Overhead 3,200
(Refer to Note 6)
Total Fixed Cost (B) 4,400
Total Cost (A + B 28,800
(b) Cost per Kilometre 9 . Rs
200 , 3
800 , 28 . Rs
=
Cost per tonne Kilometre = 80 . 1 . Rs
tonne 10 . km 600 , 1
800 , 28 . Rs
=

Working Note
1. Total distance travelled = 80 km. (distance traveled in 1 trip)
by lorry in 4 weeks 2 trips 20 days.
= 3,200 km.
Total consumption of petrol
in 4 weeks = litre
km
km ,
400
8
200 3
=
Petrol cost (for 4 weeks) = 400 litres Rs. 13.
Cost Accounting
9.12
= Rs. 5,200
2. Total distance travelled in
4 weeks = 3,200 km.
Tyre Cost (for 4 weeks) =
. km 000 , 25
km 200 , 3 250 , 6 . Rs
= Rs. 800
3. Cost of Lorry = Rs. 4,50,000
Estimated sales value of lorry
at the end of its life = Rs. 50,000
Life of lorry = 80,000 km
Depreciation (for 4 weeks) = km ,
,
, . Rs , , . Rs
200 3
000 80
000 50 000 50 4

= Rs. 16,000
4. Insurance (for 4 weeks) = weeks 4
weeks 52
500 , 6 . Rs

= Rs. 500
5. Licence Cost (for 4 weeks) = weeks 4
weeks 52
300 , 1 . Rs

= Rs.100
6. Other overheads (for 4 weeks) = weeks 4
weeks 52
600 , 41 . Rs

= Rs. 3,200
Question 9
Mr. X owns a bus which runs according to the following schedule:
(i) Delhi to Chandigarh and back, the same day.
Distance covered: 150 kms, one way
Number of days run each month: 8
Seating capacity occupied 90%
(ii) Delhi to Agra and back, the same day.
Distance covered : 120 kms. One way
Number of days run each month: 10
Seating capacity occupied 85%
(iii) Delhi to Jaipur and back, the same day
Distance covered: 270 kms. one way.
Operating Costing
9.13
Number of days run each month: 6
Seating capacity occupied 100%
(iv) Following are the other details:
Cost of the bus Rs. 6,00,000
Salary of the driver Rs. 2,800 p.m.
Salary of the Conductor Rs. 2,200 p.m.
Salary of the part-time Accountant Rs. 200 p.m.
Insurance of the bus Rs. 4,800 p.a.
Diesel consumption 4 kms per litre Rs. 6 per litre
Road tax Rs. 1,500 p.a.
Lubricant oil Rs. 10 per 100 kms.
Permit fee Rs. 315 p.m.
Repairs and maintenance Rs. 1,000 p.m.
Depreciation of the bus @ 20% p.a.
Seating capacity of the bus 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 total takings. The fares are to be indicated per passenger
for the journeys:
(i) Delhi to Chandigarh
(ii) Delhi to Agra
(iii) Delhi to Jaipur
Answer
Working Notes
(1) Total running Kms per month:
Km. per
trip
Trips per
day
Days per
month
Km. per
month
Delhi to Chandigarh
Delhi to Agra
Delhi to Jaipur
150
120
270
2
2
2
8
10
6
2,400
2,400
3,240
8,040
Cost Accounting
9.14
(2) Passenger Kms. per month:
Total seats
available
per month
Capacity
utilized
% Seats
Km.per
trip
Passenger
Kms. per
month
Delhi to Chandigarh & Back
(50 seats 2 trips 8 days)
800 90 720 150 1,08,000
Delhi to Agra & Back
(50 seats 2 trips 10 days)
1,000 85 850 120 1,02,000
Delhi to Jaipur & Back
(50 seats 2 trips 6 days)
600 100 600 270 1,62,000
Total 3,72,000
Operating Cost Statement (per month)
Fixed Costs: Rs. Rs.
Salary of Driver
Salary of Conductor
Salary of the part-time accountant
2,800
2,200
200
Depreciation (Rs.6,00,000
12
1
100
20
) 10,000
Insurance (Rs.4,800 1/12) 400
Road Tax (Rs. 1,500 1/12) 125
Repairs and maintenance 1,000
Permit Fee 315 _____
Total fixed expenses 17,040
Variable Costs
Diesel (
. Kms
. Kms ,
4
040 8
Rs. 6)
12,060
(Refer to working note 1)
Lubricant Oil ( 10 . Rs
. Kms 100
. Kms 040 , 8
)
804
(Refer to working note 1)
Total Cost per month 29,904
Profit and passenger tax together accounts
for 50% of total taking p.m. or 100% of cost
29,904
______
Total takings 59,808
Passenger tax (20% of takings) 11,961.60
Profit (30% of takings) 17,942.60
Operating Costing
9.15
Rate per passenger Km. = 1607741 . 0
000 , 72 , 3 . Rs
808 , 59 . Rs
= passenger Km.
(Refer to working note 2) or (Re. 0.16 say)
Fare to be charged
Delhi to Chandigarh, per passenger = 150 Kms. 0.16 = Rs. 24
Delhi to Agra, per passenger = 120 Kms. 0.16 = Rs. 19.20
Delhi to Jaipur, per passenger = 270 Kms. 0.16 = Rs. 43.20
Question 10
A Mineral is transported from two mines 'A' and 'B' and unloaded at plots in a Railway
Station. Mine A is at a distance of 10 kms, and B is at a distance of 15 kms. from railhead
plots. A fleet of lorries of 5 tonne carrying capacity is used for the transport of mineral from the
mines. Records reveal that the lorries average a speed of 30 kms. per hour, when running and
regularly take 10 minutes to unload at the railhead. At mine 'A' loading time averages 30
minutes per load while at mine 'B' loading time averages 20 minutes per load.
Drivers' wages, depreciation, insurance and taxes are found to cost Rs. 9 per hour
operated. Fuel, oil, tyres, repairs and maintenance cost Rs. 1.20 per km.
Draw up a statement, showing the cost per tonne-kilometer of carrying mineral from each
mine. (Nov. 2000, 8 marks)
Answer
Statement showing the cost per tonne-kilometer of
carrying mineral from each mine
Mine A
Rs.
Mine B
Rs.
Fixed cost per trip
(Driver's wages, depreciation, insurance
and taxes)
A: 1 hour 20 minutes @ Rs. 9 per hour 12
B: 1 hour 30 minutes @ Rs. 9 per hour 13.50
(Refer to working note 1)
Running and maintenance cost:
(Fuel, oil, tyres, repairs and
maintenance)
A: 20 kms Rs. 1.20 per km. 24
B: 30 kms. Rs. 1.20 per km. ___ 36.00
Cost Accounting
9.16
Total cost per trip 36 49.50
Cost per tonne km 0.72 0.66
(Refer to working note 2) (Rs.36/50 tonnes kms) (Rs.49.50/75 tonnes kms)
Working notes
Mine A Mine B
1. Total operated time taken per trip
Running time to & fro 40 minutes 60 minutes
|
|
.
|

\
|

kms 30
utes min 60
. kms 20
|
|
.
|

\
|

kms 30
utes min 60
. kms 30
Unloading time 10 minutes 10 minutes
Loading time 30 minutes 20 minutes
Total operated time 80 minutes or 90 minutes or
1 hour 20 minutes 1 hour 30 minutes
2. Effective tones kms 50 75
(5 tonnes 10 kms) (5 tonnes 15 kms.)
Question 11
An article passes through five hand operations as follows:
Operation No. Time per article Grade of worker Wage rate per hour
1
2
3
4
5
15 minutes
25 minutes
10 minutes
30 minutes
20 minutes
A
B
C
D
E
Re. 0.65
Re. 0.50
Re. 0.40
Re. 0.35
Re. 0.30
The factory works 40 hours a week and the production target is 600 dozens per week.
Prepare a statement showing for each operation and in total the number of operators required,
the labour cost per dozen and the total labour cost per week to produce the total targeted
output. (May 1996, 7 marks)
Answer
Statement showing total number of operators required; the labour cost per dozen
and the total labour cost per week to produce targeted output under each operation.
Operation No. No. of operators
required *
Labour cost of 600 dozens
per week
Rs.
Labour cost per
dozen
Rs.
1 45 1,170
(45 40 0.65P)
1.95
(Rs. 1,170/600)
Operating Costing
9.17
2 75 1,500
(7540 0.50p)
2.50
(Rs. 1,500/600)
3 30 480
(30 40 0.40p)
0.80
(Rs.480/600)
4 90 1,260
(90 40 0.35p)
2.10
(Rs. 1,260/600)
5 60 720
(60 40 0.30 p)
1.20
(Rs. 720/600)
300 5,130 8.55
* Working Note
Operation No. No. of operators required
1
60
15
40
12 dozens 600

= 45
2
60
25
40
12 dozens 600

= 75
3
60
10
40
12 dozens 600

= 30
4
60
30
40
12 dozens 600

= 90
5
60
20
40
12 dozens 600

= 60
Question 12
A truck starts with a load of 10 tonnes of goods from station P. It unloads 4 tonnes at
station Q and rest of the goods at station R. It reaches back directly to station P after getting
reloaded with 8 tonnes of goods at station R. The distances between P to Q, Q to R and then
from R to P are 40 kms, 60 kms, and 80 kms, respectively. Compute 'Absolute tonne-km' and
'Commercial tonne-km'. (May, 1995, 4 marks)
Answer
Absolute tonnes-kms = 10 tonnes 40 kms + 6 tonnes 60 kms.
+ 8 tonnes 80 kms.
= 1,400 tonnes kms.
Commercial tonnes-kms = Average load Total kilometers travelled
= kms 180 tonnes
3
) 8 6 10 (

+ +
Cost Accounting
9.18
= 8 tonnes 180 kms
= 1,440 tonnes-kms
Note: It may be noted that while calculating the absolute tonnes kms, the travel between
any two stations is considered individually, while in the case of commercial tonne-
kms, the trip is considered as a whole.
Question 13
EPS is a Public School having 25 buses each plying in different directions for the
transport of its school students. In view of large number of students availing of the bus
service, the buses work two shifts daily both in the morning and in the afternoon. The buses
are garaged in the school. The workload of the students has been so arranged that in the
morning, the first trip picks up senior students and the second trip plying an hour later picks up
junior students. Similarly, in the afternoon, the first trip takes the junior students and an hour
later the second trip takes the senior students home.
The distance travelled by each bus, one way is 16 kms. The school works 24 days in a
month and remains closed for vacation in May and June. The bus fee, however, is payable by
the students for all the 12 months in a year.
The details of expenses for the year 2003-2004 are as under:
Driver's salary payable for all the 12 in month. Rs. 5,000 per month per drive.
Cleaner's salary payable for all the 12 months Rs.3,000 per month per cleaner
(one cleaner has been employed for every five buses).
Licence Fees, Taxes etc. Rs. 2,300 per bus per annum
Insurance Premium Rs. 15,600 per bus per annum
Repairs and Maintenance Rs. 16,400 per bus per annum
Purchase price of the bus Rs. 16,50,000 each
Life of the bus 16 years
Scrap value Rs. 1,50,000
Diesel Cost Rs. 18.50 per litre
Each bus gives an average of 10 kms per litre of diesel. The seating capacity of each bus
is 60 students. The seating capacity is fully occupied during the whole year.
The school follows differential bus fees based on distance traveled as under:
Operating Costing
9.19
Students picked up and
dropped within the range of
distance from the school
Bus fee Percentage of students
availing this facility
4 kms
8 kms
16 kms
25% of Full
50% of Full
Full
15%
30%
55%
Ignore interest. Since the bus fees has to be based on average cost, you are required to
(i) Prepare a statement showing the expenses of operating a single bus and the fleet of 25
buses for a year.
(ii) Work out average cost per student per month in respect of:
(a) Students coming from a distance of upto 4 kms from the school.
(b) Students coming from a distance of upto 8 kms from the school; and
(c) Students coming from a distance of upto 16 kms from the school
(May, 2004, 10 marks)
Answer
(i) EPS Public School
Statement showing the expenses of operating a single bus and the fleet of 25
buses for a year
Particulars Per bus
per annum
(Rs.)
Fleet of 25 buses
per annum
(Rs.)
Running costs : (a)
Diesel
(Refer to working note 1)
Repairs & maintenance costs: (B)
Fixed charges:
Driver's salary
Cleaners salary
Licence fee, taxes etc.
Insurance
Depreciation
Total fixed charges: (C)
Total expenses: (A+B+C)
56,832
16,400
60,000
7,200
2,300
15,600
93,750
1,78,850
2,52,082
14,20,800
4,10,000
15,00,000
1,80,000
57,500
3,90,000
23,43,750
44,71,250
63,02,050
Cost Accounting
9.20
(ii) Average cost per student per month in respect of students coming from a distance
of:
a) 4 kms. from the school
(Rs. 2,52,082 / 354 students 12 months)
(Refer to working note 2)
Rs. 59.34
b) 8 kms from the school
(Rs. 59.34 2)
Rs. 118.68
c) 16 kms from the school
(Rs. 59.34 4)
Rs. 237.36
Working notes:
1. Calculation of diesel cost per bus:
No. of trips made by a bus each day 4
Distance travelled in one trip both ways 32 kms
(16 kms 2 trips)
Distance traveled per day by a bus 128 kms
(32 kms 4 shifts)
Distance traveled during a month 3,072 kms
(128 kms 24 days)
Distance traveled per year 30,720 kms
(3,072 kms 10 months)
No. of litres of diesel required per bus per year 3,072 litres
(30,720 kms / 10 kms)
Cost of diesel per bus per year Rs. 56,832
(3,072 litres Rs. 18.50)
2. Calculation of number of students per bus:
Bus capacity of 2 trips 120 students
1/4
th
fare students 18 students
(15% 120 students)
fare 30% students (equivalent to 1/4
th
fare students) 72 students
Full fare 55% students (equivalent to 1/4
th
fare students) 264 students
Total 1/4
th
fare students 354 students
Operating Costing
9.21
Question 14
A transport company has a fleet of three trucks of 10 tonnes capacity each plying in
different directions for transport of customer's goods. The trucks run loaded with goods and
return empty. The distance travelled, number of trips made and the load carried per day by
each truck are as under:
Truck No. One way
Distance Km
No. of trips
per day
Load carried
per trip / day
tonnes
1
2
3
16
40
30
4
2
3
6
9
8
The analysis of maintenance cost and the total distance travelled during the last two years is
as under
Year Total distance
travelled
Maintenance Cost
Rs.
1
2
1,60,200
1,56,700
46,050
45,175
The following are the details of expenses for the year under review:
Diesel : Rs. 10 per litre. Each litre gives 4 km per litre of
diesel on an average.
Driver's salary : Rs. 2,000 per month
Licence and taxes : Rs. 5,000 per annum per truck
Insurance : Rs. 5,000 per annum for all the three vehicles.
Purchase Price per truck : Rs. 3,00,000 Life 10 years. Scrap value at the
end of life is Rs. 10,000.
Oil and sundries : Rs. 25 per 100 km run.
General Overhead : Rs. 11,084 per annum
The vehicles operate 24 days per month on an average.
Required
(i) Prepare an Annual Cost Statement covering the fleet of three vehicles.
(ii) Calculate the cost per km. run.
(iii) Determine the freight rate per tonne km. to yield a profit of 10% on freight
(Nov., 2001, 10 marks)
Cost Accounting
9.22
Answer
(i) Annual Cost Statement of three vehicles
Rs.
Diesel 3,36,960
(Refer to working note I)
(1,34,784 kms / 4 km) Rs. 10)
Oil & sundries 33,696
(1,34,784 kms/100 kms) Rs. 25
Maintenance 39,696
(Refer to working note 2)
{(1,34,784 kms 0.25P) + Rs. 6,000}
Drivers' salary 72,000
(Rs. 2,000 12 months) 3 trucks
Licence and taxes 15,000
Insurance 5,000
Depreciation 87,000
(Rs. 2,90,000/10 years) 3 trucks
General overhead 11,084
Total annual cost 6,00,436
(ii) Cost per km. run
Cost per kilometer run =
annually travelled kilometre Total
vehicles of t cos annual Total
(Refer to working note 1)
= 4548 . 4 . Rs
Kms 784 , 34 , 1
436 , 00 , 6 . Rs
=
(iii) Freight rate per tonne km (to yield a profit of 10% on freight)
Cost per tonne km. =
annum per . kms tonnes effective Total
vehicles three of t cos annual Total
(Refer to working note 1) = 143 . 1 . Rs
kms 312 , 25 , 5
436 , 00 , 6 . Rs
=
Freight rate per tonne km. = Rs. 1.27
10
9
143 . 1 . Rs
|
.
|

\
|
Operating Costing
9.23
Working notes:
1. Total kilometre travelled and tonnes kilometre (load carried) by three trucks in one
year
Truck
number
One way
distance in
kms
No. of trips Total
distance
covered in
km per day
Load carried
per trip / day
in tonnes
Total
effective
tonnes km
1
2
3
Total
16
40
30
4
2
3
128
160
180
468
6
9
8
384
720
720
1824
Total kilometre travelled by three trucks in one year 1,34,784
(468 kms 24 days 12 months)
Total effective tonnes kilometre of load carried by three trucks during one year 5,25,312
(1,824 tonnes km 24 days 12 months)
2. Fixed and variable component of maintenance cost:
Variable maintenance cost per km =
travelled distance in Difference
cost e maintenanc in Difference
=
kms 700 , 56 , 1 kms 200 , 60 , 1
175 , 45 . Rs 050 , 46 . Rs
= Rs. 0.25
Fixed maintenance cost = Total maintenance costVariable maintenance cost
= Rs. 46,050 1,60,200 kms 0.25
= Rs. 6,000
Question 15
Global Transport Ltd. charges Rs. 90 per ton for its 6 tons truck lorry load from city 'A' to
city 'B'. The charges for the return journey are Rs.84 per ton. No concession or reduction in
these rates is made for any delivery of goods at intermediate station 'C'. In January 1997 the
truck made 12 outward journeys for city 'B' with full load out of which 2 tones were unloaded
twice in the way of city 'C'. The truck carried a load of 8 tons in its return journey for 5 times
but once caught by police and Rs.1,200 was paid as fine. For the remaining trips the truck
carried full load out of which all the goods on load were unloaded once at city 'C'. The distance
from city 'A' to city 'C' and city 'B' are 140 kms and 300 kms respectively. Annual fixed costs
and maintenance charges are Rs. 60,000 and Rs. 12,000 respectively Running charges spent
during January, 1997 are Rs. 2,944.
Cost Accounting
9.24
You are required to find out the cost per absolute ton-kilometre and the profit for January,
1997 (May, 1997, 12 marks)
Answer
Operating Cost and Profit Statement
M/s Global Transport Ltd.
(during January, 1977)
Rs.
Fixed Costs 5,000
(Rs. 60,000/12)
Maintenance charges 1,000
(Rs. 12,000/12)
Running charges 2,944
Total operating cost 8,944
Cost per absolute ton km 0.20
(Rs. 8,944/44,720 absolute tons kms)
(Refer to working note 3)
Net revenue received 12,168
(Refer to working note 4)
Less: Total operating cost 8,944
Profit 3,224
Working Notes
1. Outward journeys:
(i) From city A to city B:
10 journey 300 kms 6 tons = 18,000 tons kms
(ii) From city A to city C:
2 journeys 140 kms 6 tons = 1,680 tons kms.
(iii) From city C to city B:
2 journeys 160 kms 4 tons = 1,280 tons kms
Total: = 20,960 tons kms
2. Return journeys:
(i) From city B to city A:
5 journeys 300 kms 8 tons. = 12,000 tons kms
6 journeys 300 kms 6 tons = 10,800 tons kms
Operating Costing
9.25
(ii) From city B to city C:
1 journey 160 kms. 6 tons = 660 tons kms.
Total = 23,760 tons kms
3. Total absolute tonnes kms of outward and return journeys:
(Refer to working notes 1 and 2) = 20,960 tons kms + 23,760 tons km
= 44,720 tons, - kms.
4. Net revenue received during January, 1997:
12 trucks + 6 tons Rs. 90 6,480
(from city A to city B)
5 trucks 8 tons Rs. 84 3,360
(from city B to city A)
6 trucks 6 tons Rs. 84 3,024
(from city B to city A)
1 truck 6 tons Rs. 84 504
(from city B to city C)
Total revenue 13,368
Less: Fine paid 1,200
Net revenue received 12,168
Question 16
A transport service company is running five buses between two towns which are 50 kms
apart. Seating capacity of each bus is 50 passengers. The following particulars were obtained
from their books for April, 1998:
Rs.
Wages of drivers, conductors and cleaners 24,000
Salaries of office staff 10,000
Diesel oil and other oil 35,000
Repairs and Maintenance 8,000
Taxation, Insurance etc. 16,000
Depreciation 26,000
Interest and other expenses 20,000
1,39,000
Cost Accounting
9.26
Actually, passengers carried were 75 percent of seating capacity. All buses ran on all days of
the month. Each bus has made one round trip per day.
Find out the cost per passenger km. (Nov., 1998, 10 marks)
Answer
Operating cost statement for the month of April, 1998
Amount
Particulars
Rs. Rs.
A. Standing charges
Wages of drivers, conductors and cleaners
Salaries of office staff
Taxation, insurance etc.
Interest and other expenses
24,000
10,000
16,000
20,000 70,000
B. Running & maintenance cost
Repairs and maintenance
Diesel oil and other oil
Depreciation
8,000
35,000
26,000 69,000
Total cost : (A+B) 1,39,000
Cost per passenger Km. 0.2471
(Rs. 1,39,000/5,62,500 passenger kms)
(Refer to working note)
Working note
Passenger Kms.: No. of Buses Distance in Seating Percentage No. of days
one round capacity seating in a month
trip per day available capacity
in each actually
bus used in
each bus
= 5 Buses 50 Kms. 2 50 passengers 75% 30 days = 5,62,500 Kms.
Question 17
In order to develop tourism, ABCL airline has been given permit to operate three flights in
a week between X and Y cities (both side). The airline operates a single aircraft of 160 seats
capacity. The normal occupancy is estimated at 60% through out the year of 52 weeks. The
one-way fare is Rs. 7,200. The cost of operation of flights are:
Operating Costing
9.27
Fuel cost (variable) Rs. 96,000 per flight
Food served on board on non-chargeable basis Rs. 125 per passenger
Commission 5% of fare applicable for all booking
Fixed cost:
Aircraft lease Rs. 3,50,000 per flight
Landing Charges Rs. 72,000 per flight
Required:
(i) Calculate the net operating income per flight.
(ii) The airline expects that its occupancy will increase to 108 passengers per flight if
the fare is reduced to Rs. 6,720. Advise whether this proposal should be
implemented or not. (3+2=5 marks)
Answer
No. of passengers 16060/100 = 96 Rs Rs.
(i) Fare collection 967,200 6,91,200
Variable costs:
Fuel 96,000
Food 96125 12,000
Commission 5% 34,560
Total variable Costs 1,42,560
Contribution per flight 5,48,640
Fixed costs: Lease 3,50,000
Crew 72,000 4,22,000
Net income per flight 1,26,640
(ii) Fare collection 1086,720 7,25,760
Variable costs:
Fuel 96,000
Food 108125 13,500
Commission @ 5% 36,288
Contribution 5,79,972
There is an increase in
contribution by Rs. 31,332.
Hence the proposal is
acceptable
Cost Accounting
9.28
Question 18
A Club runs a library for its members. As part of club policy, an annual subsidy of upto
Rs. 5 per member including cost of books may be given from the general funds of the
club. The management of the club has provided the following figures for its library
department.
Number of Club members 5,000
Number of Library members 1,000
Library fee per member per month Rs. 100
Fine for late return of books Re. 1 per book per day
Average No. of books returned late per month 500
Average No. of days each book is returned late 5 days
Number of available old books 50,000 books
Cost of new books Rs. 300 per book
Number of books purchased per year 1,200 books
Cost of maintenance per old book per year Rs. 10
Staff details No. Per Employee
Salary per month (Rs.)
Librarian 01 10,000
Assistant Librarian 03 7,000
Clerk 01 4,000
You are required to calculate:
(i) the cost of maintaining the library per year excluding the cost of new books;
(ii) the cost incurred per member per month on the library excluding cost of new books;
and
(iii) the net income from the library per year.
If the club follows a policy that all new books must be purchased out of library
revenue (a) What is the maximum number of books that can be purchased per year
and (b) How many excess books are being purchased by the library per year?
Also, comment on the subsidy policy of the club. (May 2007, 10 Marks)
Operating Costing
9.29
Answer
Computation of total revenue
No. of library members No 1,000
Library fees per month Rs. 1,00,000
Late fees per month (500 5 1) Rs. 2,500
Total Revenue per month Rs. 1,02,500
Total Revenue per annum (1,02,500 12) Rs. 12,30,000
Computation of total cost
Staff details No. Salary per
month
Total cost
Rs. Rs.
Librarian 1 10,000 10,000
Assistant Librarian 3 7,000 21,000
Clerk 1 4,000 4,000
Total Staff cost per month 35,000
Total Staff cost per year (35,000 12) 4,20,000
No. Cost per book
Books maintenance cost 50,000 Rs. 10 5,00,000
Total maintenance cost per annum
excluding cost of new books (4,20,000 +
5,00,000)
9,20,000
Cost incurred per library member per annum
(Rs. 9,20,000/1,000) Rs. 920
Cost incurred per member per month on the library
excluding cost of new books (920/12) Rs. 76.67
Cost incurred per club member per annum
(9,20,000/5,000) Rs. 184
Cost incurred per club member per month (184/12) Rs. 15.33
Net income from the library per annum
(12,30,000 9,20,000) Rs. 3,10,000
Cost per new book Rs. 300
Maximum number of new books per annum
(3,10,000/300) No. 1033.333
Cost Accounting
9.30
Present number of books purchased No. 1200
Excess books purchased (1200 1033.333) No. 166.6667
Subsidy being given per annum Rs. 50,000
Subsidy per library member per annum (50,000/1,000) Rs. 50
Subsidy per club member per annum (50,000/5,000) Rs. 10
Comment:
The club is exceeding its subsidy target to members by Rs. 45 (Rs. 50 5) per library
member and Rs. 5 (Rs. 10 5) per club member.
Question 19
A company runs a holiday home. For this purpose, it has hired a building at a rent of Rs.
10,000 per month alongwith 5% of total taking. It has three types of suites for its
customers, viz., single room, double rooms and triple rooms.
Following information is given:
Type of suite Number Occupancy percentage
Single room 100 100%
Double rooms 50 80%
Triple rooms 30 60%
The rent of double rooms suite is to be fixed at 2.5 times of the single room suite and that
of triple rooms suite as twice of the double rooms suite.
The other expenses for the year 2006 are as follows:
Rs.
Staff salaries 14,25,000
Room attendants wages 4,50,000
Lighting, heating and power 2,15,000
Repairs and renovation 1,23,500
Laundry charges 80,500
Interior decoration 74,000
Sundries 1,53,000
Provide profit @ 20% on total taking and assume 360 days in a year.
You are required to calculate the rent to be charged for each type of suite.
(May 2007, 10 Marks)
Operating Costing
9.31
Answer
(i) Total equivalent single room suites
Nature of suite Occupancy Equivalent single
room suites
Single room suites 100 360 100% = 36,000 36,000 1 = 36,000
Double rooms suites 50 360 80% = 14,400 14,400 2.5 = 36,000
Triple rooms suites 30 360 60% = 6,480 6,480 5 = 32,400
Total 1,04,400
(ii) Statement of total cost:
Rs.
Staff salaries 14,25,000
Room attendants wages 4,50,000
Lighting, heating and power 2,15,000
Repairs and renovation 1,23,500
Laundry charges 80,500
Interior decoration 74,000
Sundries 1,53,000
25,21,000
Building rent 10,000 12 + 5% on total taking 1,20,000
+ 5% on takings
Total cost 26,41,000 + 5% on
total takings
Profit is 20% of total takings
Total takings = Rs. 26,41,000 + 25% of total takings
Let x be rent for single room suite
Then 1,04,400 x = 26,41,000 + 25% of (1,04,400 x)
or 1,04,400 x = 26,41,000 + 26,100 x
or 78,300 x = 26,41,000
or x = 33.73
Cost Accounting
9.32
(iii) Rent to be charged for single room suite = Rs. 33.73
Rent for double rooms suites Rs. 33.73 2.5 = Rs. 84.325
Rent for triple rooms suites Rs. 33.73 5 = Rs. 168.65
Question 20
A transport company has 20 vehicles, which capacities are as follows:
No. of Vehicles Capacity per vehicle
5 9 tonne
6 12 tonne
7 15 tonne
2 20 tonne
The company provides the goods transport service between stations A to station B.
Distance between these stations is 200 kilometres. Each vehicle makes one round trip
per day an average. Vehicles are loaded with an average of 90 per cent of capacity at
the time of departure from station A to station B and at the time of return back loaded
with 70 per cent of capacity. 10 per cent of vehicles are laid up for repairs every day.
The following informations are related to the month of October, 2008:
Salary of Transport Manager Rs. 30,000
Salary of 30 drivers Rs. 4,000 each driver
Wages of 25 Helpers Rs. 2,000 each helper
Wages of 20 Labourers Rs. 1,500 each labourer
Consumable stores Rs. 45,000
Insurance (Annual) Rs. 24,000
Road Licence (Annual) Rs. 60,000
Cost of Diesel per litre Rs. 35
Kilometres run per litre each vehicle 5 Km.
Lubricant, Oil etc. Rs. 23,500
Cost of replacement of Tyres, Tubes, other parts etc. Rs. 1,25,000
Garage rent (Annual) Rs. 90,000
Transport Technical Service Charges Rs. 10,000
Electricity and Gas charges Rs. 5,000
Depreciation of vehicles Rs. 2,00,000
Operating Costing
9.33
There is a workshop attached to transport department which repairs these vehicles and
other vehicles also. 40 per cent of transport managers salary is debited to the workshop.
The transport department is charged Rs. 28,000 for the service rendered by the
workshop during October, 2008. During the month of October, 2008 operation was 25
days.
You are required:
(i) Calculate per ton-km operating cost.
(ii) Find out the freight to be charged per ton-km, if the company earned a profit of 25
per cent on freight. (November 2008 8 marks)
Answer
(i) Operating Cost Sheet
for the month of October, 2008
Particulars Amount
(Rs.)
A. Fixed Charges:
Managers salary:
100
60
30,000 Rs.
18,000
Drivers Salary : Rs. 4,000 30 1,20,000
Helpers wages : Rs. 2,000 25 50,000
Labourer wages : Rs. 1,500 20 30,000
Insurance :
12
24,000 Rs. 2,000
Road licence :
12
60,000 Rs. 5,000
Garage rent:
12
90,000 Rs. 7,500
Transport Technical Service Charges 10,000
Share in workshop expenses 28,000
Total (A) 2,70,500
B. Variable Charges:
Cost of diesel 12,60,000
Lubricant, Oil etc. 23,500
Cost Accounting
9.34
Depreciation 2,00,000
Replacement of Tyres, Tubes & other parts 1,25,000
Consumable Stores 45,000
Electricity and Gas charges 5,000
Total (B) 16,58,500
C. Total Cost (A + B) 19,29,000
D. Total Ton-Kms. 18,86,400
E. Cost per ton-km. (C/D) 1.022
(ii) Calculation of Chargeable Freight
Cost per ton-km. Rs. 1.022
Add: Profit @ 25% on freight or 33% on cost Re. 0.341
Chargeable freight per ton-km. Rs. 1.363 or Rs. 1.36
Workings:
1. Cost of Diesel:
Distance covered by each vehicle during October, 2008 = 200 2 25 90/100 = 9,000 km.
Consumption of diesel = litres. 36,000
5
20 9,000
=

Cost of diesel = 36,000 Rs. 35 = Rs. 12,60,000.

2. Calculation of total ton-km:
Total Ton-Km. = Total Capacity Distance covered by each vehicle Average Capacity Utilisation
ratio.
= ( ) ( ) ( ) ( ) | |
( )
2
70% 90%
9,000 20 2 15 7 12 6 9 5
+
+ + +
= ( ) 80% 9,000 40 105 72 45 + + +
= 262 9,000 80%.
= 18,86,400 ton-km.