OPERATING COSTING

INTRODUCTION

The method of costing used in service rendering undertakings is

known as operating costing.
This method of costing is generally made use of by transport
companies, gas and water works departments, electricity supply
companies, canteens, hospitals, theatres, schools etc.

OPERATING
COST SHEET

Preparation of Cost Sheet under Operating Costing: For preparing a cost

sheet under operating cost, costs are usually accumulated for a spe cified
period viz., a month, a quarter, or a year etc.
All of the accumulated costs should be classified under the following three
heads:
1. Fixed costs or standing charges,
2. Variable costs or running charges,( Fuel, Driver Wages, Depreciation, oil
etc.)
3. Semi-variable costs or maintenance costs. (Supervision salary, Repairs
and Maintenance)
Note : In the absence of information about semi-variable costs, the costs
may be shown under two heads only, i.e., fixed and variable.
Under operating costing, the per unit cost of service may be calculated by
dividing the total cost for the period by the total units of service in the
period.
Particulars

A Standing charges :License fees

Insurance Premium
Road tax
Garage rent
Drivers wages
Attendant-cum-cleaners wages
Salaries and wages of other staff

Total
cost

Cost
km

per

Total
B Running charges :Repairs and maintenance
Cost of fuel (diesel, petrol etc.)
Lubricants, grease and oil
Cost of tires, tubes and other spare
parts
Depreciation
Total
C
COST UNITS
FOR VARIOUS
ENTERPRISES

BASIC
FORMULAS

Total charges [ (A) + (B) ]

CHART SHOWING COST UNITS FOR VARIOUS ENTERPRISES :

No. Enterprise
Cost per unit
1.

Railways or bus companies

Per passenger-kilometer

2.

Hospital

Per patient/day, per bed/day

3.

Canteen

Meals served , cups of tea

4.

Water supply service

Per 1000 gallons

5.

Boiler House

1000 kg of steam

6.

Goods Transport

Per tonne km, quintal km

7.

Electricity Boards

Per kilowatt hours

8.

Road maintenance department

Per mile or road maintenance

9.

Bricks

One thousand

10.

Hotel

Per room/day

1. Absolute (weighted average) tonnes-kms:

Absolute tonnes-kms., are the sum total of tonnes-kms., arrived at by
multiplying various distances by respective load quantities carried.

Absolute Tonne Km =

Dist1 x Qty1 + Dist2 x Qty2

2. Commercial (simple average) tonnes-kms :

Commercial tonnes-kms., are arrived at by multiplying total distance kms.,
by average load quantity.
Commercial Tonne Km =

Total Dist x Average Qty

EXAMPLE
A lorry starts with a load of 20 tonnes of goods from station A. It unloads 8
tonnes at station B and rest of goods at station C. It reaches back directly to
station A after getting reloaded with 16 tonnes of goods at station C. The
distance between A to B, B to C and then from C to A are 80 kms., 120
kms., and 160 kms., respectively. Compute Absolute tonnes-kms., and
Commercial tonnes-kms.
Solution
Absolute tonnes-kms. = 20 tonnes 80 kms + 12 tonnes 120 kms + 16
tonnes 160 kms. = 5,600 tonnes-kms.

IMPORTANT
QUESTIONS
FOR THEORY

Commercial tonnes-kms. = Average load total kilometres travelled

16 tonnes( i.e. (20+12+16)/3 ) 360 kms. = 5,760 tonnes-kms.
Question 1:
The more the kilometre you travel with your own vehicle the cheaper it
becomes. Comment briefly on the statement.
Solution:
The given statement is based on the fact that when we travel more, the
costs which are fixed in nature or do not vary with output remain same. As
we all are aware of the fact that all the costs can be classified as fixed and
variable in nature. In the above case, the costs relating to cost of vehicle(
i.e. depreciation), wages of driver etc. are fixed costs and on the other
hand, fuel expenses, repairs and maintenance etc. are variable. As we
travel more and more, there is a proportionate rise in variable costs and
fixed costs remain the same. Thus, when we compute the cost per
kilometre, it keeps on declining for more kilometres and Hence, the
travelling becomes cheaper.
Question 2:
Write a short note on operating costing?
Solution:
Operating Costing - The method of costing used in service rendering
undertakings is known as operating costing.
This method of costing is generally made use of by transport
companies, gas and water works departments, electricity supply
companies, canteens, hospitals, theatres, schools etc.

TREATMENT OF
SOME SPECIAL
ITEMS

Depreciation - Depreciation if related to effluxion of time, may be

treated as fixed. If it is related to the activity level, it may be treated
as variable.

REVSION
ILLUSTRATION

Interest - If information about interest is explicitly given, it may be

treated as fixed cost.
The Union Transport Company has been given a twenty kilometer long
route to ply a bus. The bus costs the company ` 1,00,000. It has been
insured at 3% per annum. The annual road tax amounts to ` 2,000. Garage
rent is ` 400 per month. Annual repair is estimated to
cost ` 2,360 and the bus is likely to last for five yea` The salaries of the
driver and the conductor are ` 600 and ` 200 per month respectively in
addition to 10% of the takings as commission to be shared equally by them.
The managers salary is ` 1,400 per month and stationery will cost ` 100
per month. Petrol and oil will cost ` 50 per 100 kilometres. 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.
Solution
Union Transport Company Statement showing operating cost of the bus
per annum:
A Standing Charges:
Managers salary (` 1,400 * 12) = 16,800
Drivers salary (` 600 * 12) = 7,200
Conductors salary (` 200 * 12) = 2,400
Road tax = 2,000
Insurance (3% of ` 1,00,000) = 3,000
Garage rent (` 400 * 12) = 4,800
Stationery (` 100 * 12) = 1,200
Depreciation (` 1,00,000/5 years) = `20,000
B Maintenance Costs Repairs `2,360
C Running charges:
Petrol and oil (36,000 km. * ` 50)/100= `18,000
Total costs (A+B+C)
Add: 10% of takings for commission of
driver and conductor
15% Profit desired on takings
25% on total takings = 33-1/3 of cost

77,760

25,920
` 1,03,680

Calculation of total distance covered: (20 km. * 2 * 3 * 25 * 12) = 36,000

km. per annum.

Calculation of bus fare to be charged:

Effective passenger kilometers:
(2 * 20 km * 3 trips * 40 passengers * 25 days * 12 months) = 14,40,000.
Rate to be charged per km. from each passenger:
= ` 1,03,680 /14,40,000 = ` 0.072.