CHAPTER-I

Introduction of 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. E.g. Maintenance department, power
house, boiler house, canteen, hospital, internal transport.
The information concerning the business enterprise is very helpful to
the management to control it in an efficiently way. As the other branches like
financial accountancy and management accountancy, the cost accountancy also
serves the important information to the management regarding the operating
efficiency of the business. It becomes very easy for management to lay down
management policies, to guide management decisions or evaluate operating
management performance with the information provided by cost accounting.
The term operation in business terminology refers to an activity of the
business. It is very important to study the operations of the business in detail
because depends on the operations, which it performs. The management should
always concentrate on the efficiency of the operation and also the costs associated
to the operations. It is very important to control the costs associated to the

operations for the enterprises like manufacturing companies, companies engaged

in the process of extraction of materials from earth like, coal mines etc.
Generally, the above mentioned business enterprises depend on the operation that
it has to be performed in to produce in to produce the final output. The costs
associated with such operations are generally higher. These costs are called as
operating costs.
The costs, which are incurred to perform the operation of the
enterprise, are called as operating costs. These costs are to be accounted for in
order to arrive at the total costs of operation or process, which helps in
determining the price of the final product.
Cost accounting is the classifying, recording and appropriate allocation of
expenditure for the determination of the costs of products or services, and to the
presentation of suitably; arranged data for the purposes of control and guidance
of management.
It includes the ascertainment of the costs of every process, operation,
services or contrast as may be appropriate. It deals with the cost of production,
selling and distribution. It thus, the provision of such analysis and classification of
expenditure as will enable the total cost of any particular unit of production to be
ascertained with reasonable degree of accuracy and at the same time to disclose
exactly how such total cost is constituted (i.e. the value of material used, the
amount of labour and other expenses incurred) so as to control and reduce the
cost.
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;
2

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.
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
include 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.

CHAPTER -II
A BRIEF REVIEW of Operating 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 facilitates the computation of unit operation cost at the end of each
operation by dividing the total operation cost by total input units. The two costing
methods included under this head are process costing and service costing.
Preparation of Cost Sheet under Operating Costing
For preparing a cost sheet under operating cost, costs are usually accumulated for
a specified 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:
Which are the same whether the operation is closed or running at 100% capacity.
Fixed Costs include items such as the rent of the building. These generally have to
be paid regardless of what state the business is in.
2. Variable costs or running charges, (Fuel, Driver Wages, Depreciation, oil
etc.):
Which may increase depending on whether more production is done, and how it is
done (producing 100 items of product might require 10 days of normal time or
take 7 days if overtime is used. It may be more or less expensive to use overtime
production depending on whether faster production means the product can be
more profitable). Variable Costs include indirect overhead costs such as Cell
Phone Services, Computer Supplies, Credit Card Processing, Electrical use,
4

Janitorial Supplies, Office Products, Payroll Services, Telecom, Uniforms,

Utilities, or Waste Disposal etc.
3. Semi-variable costs or maintenance costs. (Supervision salary, Repairs and
Maintenance)
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.
Overhead costs for a business are the cost of resources used by
an organization just to maintain its existence. Overhead costs are
usually

measured

in

monetary

terms,

but

non-monetary

overhead is possible in the form of time required to accomplish

tasks.
Examples of overhead costs include:
payment of rent on the office space a business occupies
cost of electricity for the office lights
some office personnel wages
Non-overhead costs are incremental costs, such as the cost of raw materials used
in the goods a business sells.
Operating Cost is calculated by Cost of goods sold + Operating Expenses.
Operating Expenses consist of:
Administrative and office expenses like rent, salaries, to staff, insurance,
directors fees etc.

 Selling and distribution expenses like advertisement, salaries of salesmen.

It includes all operating cost such as salary, rent, stationery, furniture etc.
In the case of a device, component, piece of equipment or facility (for the rest of
this article, all of these items will be referred to in general as equipment), it is the
regular, usual and customary recurring costs of operating the equipment. This
does not include the capital cost of constructing or purchasing the equipment
(depending on whether it is made by the owner or was purchased as a constructed
system).Operating costs are incurred by all equipment unless the equipment
has no cost to operate, requires no personnel or space and never wears out (any
examples? perhaps intangibles, though not equipment, per se). In some cases,
equipment may appear to have low or no operating cost because either the cost is
not recognized or is being absorbed in whole or part by the cost of something else.
Equipment operating costs may include:
Salaries or Wages of personnel
Advertising
Raw materials
License or equivalent fees (such as Corporation yearly registration fees)
imposed by a government
Real estate expenses, including
o Rent or Lease payments

o Office space rent

o furniture and equipment
o investment value of the funds used to purchase the land, if it is
owned instead of rented or leased
o property taxes and equivalent assessments
o Operations taxes, such as fees assessed on transportation carriers for
use of highways
Fuel costs such as power for operations, fuel for production
Public Utilities such as telephone service, Internet connectivity, etc.
Maintenance of equipment
Office supplies and consumables
Insurance premium
Depreciation of equipment and eventual replacement costs (unless the
facility has no moving parts it probably will wear out eventually)
Damage due to uninsured losses, accident, sabotage, negligence, terrorism
and routine wear and tear.
Taxes on production or operation (such as subsidence fees imposed on oil
wells)
7

 Income taxes
Some of these are not applicable in all instances. For example,
A solar panel placed on one's home for use in generating electric power
generally has only capital costs; once it's running there are no personnel
costs, utility costs or depreciation and it uses no extra land (that wasn't
already part of the place where it is located) so it has no real operating
costs; however there may need to be taken into account costs of
replacement if damaged.
An automobile or any other item purchased for personal use has no salary
cost because the owner does not charge themselves for operating the
device.
An item which is leased may have some or all of these costs included as
part of the purchase price.
It might be questionable to assert that the cost of ten extra people on the sales
force are an incremental cost or an overhead cost, since the wages for these
people are both overhead and incremental. The staffs needed to keep the shop
operational are mostly considered as overhead.
formula for operating cost: total cost*no. of weeks
The main features of operating costing are as following:

The undertaking which adopts service costing does not produce any
tangible goods. These undertakings render unique services to their
customers.

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.

The cost unit may be simple or composite. The examples of simple cost
units are cost per unit in electricity supply, cost per liter in water supply,
cost per meal in canteen etc. Similarly cost per passenger kilometers in
transport cost per patient-day in hospital, costs per room-day in hotel etc.
are the examples of composite cost unit.

Total cost is averaged over the total amount of service rendered.

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.

Service costing can be used for service performed internally or externally.

Documents like the daily log sheet, cost sheet etc. are used for the
collection of cost data.

Examples of the cost units for services

9

Transport

Ton- Kilometer, Passenger KM, KM Travelled

Hotel

Bed- nights available, occupied, meals

College/Schools

Students hours, full time/part time student hours

Hospitals

Patient bed days, occupied, per operation, per visit

Electricity

Kilowatt-hours

Swimming pool

Bathers attended, Hours of opening

Canteen

Meals provided, Ingredients of Dishes

10

Illustration of Operating cost sheet:-

Particulars
Standing charges :-

Total cost

Cost per km

License fees
Insurance Premium
Road tax
Garage rent
Drivers wages
Attendant-cum-cleaners wages

Salaries and wages of other staff

Total
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
Total charges [ (A) + (B) ]

11

CHAPTER-III
MAIN AREAS OF OPERATING COSTING
Operating costing is further divided in and used in 3 main areas namely
Hotel
Hospital &
Transport industry

HOTEL COST
In the hotel industry, expenses are divided into two main categories:
Direct Expenses:
These are the expenses that vary with the level of production. For example, in
the Food and Beverage department, the Cost of Food Sales is a direct expense.
For, the more dishes we serve, the more cost of Food Sales the Hotel incurs.
Moreover, in the Telephone Department, the Cost of Calls is a direct expense. For,
the more we connect guests to whatever destination wanted, the more cost of calls
the hotel incurs. At this very stage a bracket would be opened to explain that there
is a primordial difference between revenue generator departments. In fact,
revenue generator departments are classified into two:
Service Type departments versus Merchandising departments.
Service type departments are revenue generators making money from
solely providing services (Ex. Rooms Division department). On the
other hand.
Merchandising departments ensure revenue by getting use of certain raw
material, processing it, and then sell the final product (Ex. F&B

12

department, Telephone department). Therefore, only merchandising

departments have a direct expense called Cost of Sales.
Indirect Expenses:
These are the expenses that do not vary with the level of production, or
variable costs that cannot be feasibly distributed to various Financial Reporting
Centers. In the hotel industry, indirect expenses are, hence, divided into two
different categories:
1. Fixed Charges:
Examples might include rent, insurance, property taxes, and interest expense.
For, these very expenses are incurred for the benefit of the hotel as a whole not for
the benefit of each single department. To illustrate, if a hotel insures itself against
fire, theft and burglary, and one day some valuable equipment has been stolen,
from any department whatsoever, the insurance company will indemnify the
hotel.
2. Undistributed Expenses:
Examples might include electricity, energy, and water expenses. For, usually
the hotel receives a total energy bill to be paid. In the old days, some hotels went
for allocating this amount according to certain factors (ex. Surface, Department
Usage). However, this practice proved to be misleading, since it might underallocate energy expenses for some departments and over-allocate it for others.
Nowadays, most of the hotels decide not to allocate such expenses any more.
Rather, hotels report such expenses in separate schedules.
At this stage, departments of a typical hotel would be listed along with their
various related direct expenses. Later, examples of fixed charges and
undistributed expenses would be discussed. Last, a bracket would be opened to
discuss one of the most important Direct Expenses in any hotel, which is Payroll
13

and Related Expenses. For, hotels being described as labor intensive companies
devote a big percentage of their financial resources to such an expense.

Financial Reporting Centers:

A Financial Reporting Center is an area of responsibility for which separate Cost
Information must be collected might be classified as Revenue Centers, Support
Centers, and Other Financial Reporting Centers
1. Revenue Centers Generate Revenue through sales of Products and/or
Services to Guests
Rooms
Food and Beverage
Telephone
Gift Shops
Garage and Parking
Other Operated Departments
Rentals and other Income
2. Support Centers those departments that have minimal Guest Contact and do
not produce Sales. Yet, they do provide services to Revenue Centers, which, in
turn, provide Services to Guests
Administrative & General
Marketing
Property Operation and Maintenance
Data Processing
Human Resources
14

3. Other Financial Reporting Centers include Energy Costs and Fixed

Charges (Rent Expense, Property Taxes, Insurance Expense, Interest Expense,
Depreciation and Amortization Expenses)
Each Financial Reporting Center should be assigned an Identification Number.
To illustrate, consider the following Example:
Financial Reporting Center
Rooms
Food and Beverage
Telephone
Administrative & General
Marketing
Property Operation and Maintenance
Energy Costs
Fixed Charges

Identification Number
11
15
17
31
36
38
41
51

Furthermore, each Account should be assigned an Identification Number.

Hotels commonly opt for either the Five-Digit (xx-xxx) or Eight-Digit Account
Numbering Systems (xx-xxx-xxx)
(1)Responsibility Accounting:
Aim provides Financial Information useful in evaluating the effectiveness of
Managers and Department Heads. That's why only Direct Expenses should be
charged to Specific Departments
1. Expenses include the day-to-day Costs of Operating the Business, the
Expired Costs of Assets through Depreciation and Amortization, and the "writeoff" of pre-paid items. Expenses are classified as Direct expenses (Cost of Sales
and Operating Expenses), Indirect Expenses (Fixed Charges and Undistributed
Expenses) and Income Taxes

15

a) Direct Expenses they are Costs incurred solely for the benefit of a particular
Department
Cost of Sales
Payroll Expenses
Payroll-related Expenses
Operating Supplies
China, Glassware, Silver, and Linen
Laundry and Dry Cleaning
b) Indirect Expenses They are incurred for the benefit of the Hotel as a whole,
and cannot be identified with any particular Department
Property Insurance

Interest Expense

Property Taxes

| FIXED CHARGES

Rent Expense

Depreciation and Amortization

Marketing Expense

|
|

Administrative & General Expenses

UNDISTRIBUTED

EXPENSES
Property Operations and Maintenance
Energy Costs

c) Income Taxes it is neither a Direct Expense, nor an Indirect Expense. It

should appear as a separate Line Item on a Hotel's Summary Income Statement
2-Departmental Expense Accounting:
16

Separate Expenses versus one Lump-sum Amount of Expenses

Payroll and Payroll-related Expenses:
1. Salaries and Wages (Payroll Expense) Includes Salaries, Wages, Overtime
Pay, and any Employee Bonuses and Commissions
2. Employee Benefits Include Vacation and Holiday Pay
3. Payroll Taxes Includes Social Security Taxes (Employer's Portion)
4. Employee Meals Includes the Cost of Food furnished to Employees as a
Convenience to the Employer
5. Worker's Compensation Insurance Includes the Expense of Worker's
Compensation Insurance
6. Employee Group Plans Includes Life and Health Insurance, and Other
Forms of Employee Group-plan Fringe Benefits

HOSPITAL COST
Hospital cost information is derived by relating the inputs of resources in
monetary terms to the outputs of services provided by the hospital. Cost
information is part of the basic information needed by managers and policy
makers for making decisions about how to improve the performance of a hospital,
where to allocate the resources within or among hospitals, or to compare the
performance of different hospitals to one another. Some of the basic reasons for
wanting cost information are to improve efficiency, increase effectiveness,
enhance sustainability, and improve quality.
Cost data can be used for two primary purposes, relative to time: for the
present and for the future. It can be used to assess the current situation of a
hospital, such as for assessing its efficiency, determining the effectiveness of the
17

hospital, reviewing its priorities, and setting of prices. Cost information may also
be used for the future: making cost projections, budgeting, and scenario planning
with what if? situations.
Information on the costs and outputs of hospitals can provide considerable
information for managers of hospitals, regional coordinators of health services,
and policy makers overseeing the issues of the national health system. The
information can be used to assess the internal operations and performance of a
single hospitalsuch as helping assess the utilization of health personnel in
different departments of the hospital in providing servicesand to make
comparisons of the operations and efficiency of different hospitals. Some of the
specific potential uses of cost information for a health care administrator are:
Comparison across facilities to identify those that are efficient from those

are not,
comparison of costs with fees,
development of a cross-subsidization strategy,
evaluation of the financial requirements of a new program, or
Analysis of the effect of changing the use of staff, equipment, and supplies
in providing services in an existing program.

When the cost data (the financial cost of the resource inputs) can be related to
information about the outputs (the type and quantity of services provided)
assessments of efficiency of the input output relationship can be made.
Cost data on a series of hospitals, within an area or country, may be used by
national, regional, and provincial managers to compare the performance of similar
types of hospitals. They may also use such information to establish standards of
performance and efficiency for hospitals.
The managers or administrators of hospitals may also use the cost data on
their individual hospital. This information can be used to
18

 measure performance of different departments, wards or units within the

hospital;
examine composition of costs: staff, supplies; and
assess revenue generation to costs of various services
The process of determining the costs of a hospital involves six steps:
The steps in costing of the hospital services are provided in the six sections below.
Step 1: Defining the major and relevant activity areas of the hospital
Define the relevant areas of hospital operations which need to be costed. Factors
to consider are
(1) The importance of an activity relative to the hospitals total output or level of
activity,
(2) The Amount of detailed costing information available, and
(3) The amount of detail needed from the Output of this exercise.
Major Cost Areas for Hospital
1. Inpatient

Medical ward
Surgical ward
Maternity
Private ward

2. Outpatient clinic
3. Ancillary services
Pharmacy
Laboratory
Radiology (X-Ray)
4. Outreach services (services provided off-site: mobile MCH clinics, patrols,
etc.)
5. Training school

19

Step 2: Gathering information on the services provided or the output of the

hospital
Information to be gathered for each of these areas will be based on a typical
measure of workload. For inpatient services two outputs are sought: total inpatient
days and total admissions. The reason for two measures is that since these
measures will serve as a denominator and determine the outputs of this model, it
is often useful to have not only the unit cost per day of hospitalization (total
costs/total patient days) but also to have the average cost per admission (total
costs/total admissions). This latter output of the modeltotal cost per admission
is especially helpful if attempting to determine the payments or premiums on a
capitation basis.
For outpatient clinics it is typical to use total visits for a time period as a measure
of workload.
Ancillary services will use the number of examinations, procedures, or
prescriptions filled.
Outreach services would use number of visits to the mobile clinic, number of
contacts, or number of surveillance visits. Training schools may be a major source
of resource commitment.
The number of students enrolled would be a useful measure of the workload of
the institution.
Step 3: Determining the labour and other recurrent costs
In this step you must identify the major cost components for the major activities
identified in step
The major components of expenditure are detailed below
Recurrent costs:
20

 Labour
Salaries
Allowances (uniforms, housing, education, home leave, rural or hardship
incentive pay, etc.)
Free labour (foreign or missionary health personnel who provide their
services at no cost to the facility). Their services should be costed as the

equivalent of what a national would receive for doing that same job
Drugs
Medical Supplies
Transportation (petrol and maintenance for vehicles and ambulances)
Maintenance (for all facilities and equipment other than vehicles)
Food (total food costs incurred for both patients and staff)
Telecommunications
Office expenses
Other

Step 4: Ascertaining the capital costs of the hospital

Building (construction or modification but not routine maintenance, which
is included in recurrent costs)
Equipment (major equipment purchased for the facility). Equipment is
considered capital equipment if its cost is higher than some set amount
(such as US$ 200) and it has an expected useful life of more than one year.
If it does not meet these requirements then it is a recurrent cost. For
example, waste cans have a useful life of greater than one year but because
they cost much less than $200 their purchase is considered a recurrent
rather than a capital cost.
Vehicles
Step 5: Allocating the indirect costs
21

The model includes a summary chart, constructed from the labour and the other
costs listed, which lists the total cost for each activity area. Because we also want
the unit costs of those areas providing patient care services, the indirect or
administrative costs must be allocated to the inpatient, outpatient, other ancillary
services, and any other activities as defined in the first step.
The administrative costs are considered indirect in that they support the care and
ancillary services delivered to patients and are part of the total costs of the facility.
To allocate these indirect costs of administration we must use what is termed the
step-down allocation method.
Since the ancillary, inpatient, and outpatient services cannot use a common
workload measure we will use the other direct costs as a basis for allocating the
indirect costs. The assumption is that the indirect costs follow the same
proportional representation that the direct service costs use among these areas.
Step 6: Reviewing and using the hospital cost summary
The resulting information can be used by an individual institution or for
comparing several institutions. The uses, as mentioned in the introduction,
include:
1. Accountability: Using the information to report to the hospital board or the
ministry how financial resources have been used, and that they have been used
properly and efficiently. Budgets may be generated using cost information.
2. Assessing efficiency: Efficiency is achieved when more hospital services
(outputs) are produced with the same amount of resources (staff, finances,
equipment) or when the same output is produced with fewer resources. So when
cost profiles of several hospitals are available for the manager to review, an
assessment of their relative levels of efficiency may be made.
22

3. Establishing standards: When cost information is available for a cross-section

of similar type hospitals, the comparison can result in setting a standard for what
that type of hospital should be able to produce with a given set of resources.
4. Cost Recovery: Establishing prices knowing the cost of services allows the
managers to set prices for all services at cost plus a small margin, or determine
which services will receive cross subsidies.
5. Cost Projections: Planning for the future What-if scenarios may be generated
with the service volume and costing information generated.
This can help in the planning of new services or expanding existing services

Transportation industry
Price, cost and investment issues in transportation garner intense interest. This is
certainly to be expected from a sector that has been subject to continued public
intervention since the nineteenth century. While arguments of market failure,
where the private sector would not provide the socially optimal amount of
transportation service, have previously been used to justify the economic
regulations which characterized the airline, bus, trucking, and rail industries, it is
now generally agreed, and supported by empirical evidence, that the move to a
deregulated system, in which the structure and conduct of the different modes are
a result of the interplay of market forces occurring within and between modes,
will result in greater efficiency and service.

23

Many factors have led to a re-examination of where, and in which mode,

transportation investments should take place. First and perhaps most importantly,
is the general move to place traditional government activities in a market setting.
The privatization and corporatization of roadways and parts of the aviation
systems are good examples of this phenomenon. Second, there is now a continual
and increasing fiscal pressure exerted on all parts of the economy as the nation
reduces the proportion of the economys resources which are appropriated by
government. Third, there is increasing pressure to fully reflect the environmental,
noise, congestion, and safety costs in prices paid by transportation system users.
Finally, there is an avid interest in the prospect of new modes like high speed rail
(HSR) to relieve airport congestion and improve in environmental quality. Such a
major investment decision ought not to be made without understanding the full
cost implications of a technology or investment compared to alternatives. There
are many types of costs. Key terms and brief definitions are below.
Fixed costs: The costs which do not vary with output.
Variable costs: The costs which change as output levels are changed. The
classification of costs as variable or fixed is a function of both the length of
the time horizon and the extent of indivisibility over the range of output
considered.
Total costs: Total expenditures required to achieve a given level of output.
o Total costs = fixed costs + variable costs.
Average costs: The total cost divided by the level of output.

24

 Marginal (or incremental) cost: The derivative (difference) of Total Cost

with respect to a change in output.
Opportunity costs: The actual opportunities forgone as a consequence of
doing one thing as opposed to another. Opportunity cost represents true
economics costs, and thus, must be used in all cases.
Social cost: The cost the society incurs when its resources are used to
produce a given commodity, taking into accounts the external costs and
benefits.
Private cost: The cost a producer incurs in getting the resources used in
production
Sunk costs: These are costs that were incurred in the past. Sunk costs are
irrelevant for decisions, because they cannot be changed.
Indivisible costs: Do not vary continuously with different levels of output
or must expenditures, but be made in discrete "lumps". Indivisible costs are
usually variable for larger but not for smaller changes in output
Escapable costs (or Avoidable costs): A cost which can be avoided by
curtailing production. There are both escapable fixed costs and escapable
variable costs. The scalability of costs depends on the time horizon and
indivisibility of the costs, and on the opportunity costs of assets in question

25

The production of transport services in most modes involves joint and

common costs. A joint cost occurs when the production of one good inevitably
results in the production of another good in some fixed proportion. For example,
consider a rail line running only from point A to point B. The movement of a train
from A to B will result in a return movement from B to A. Since the trip from A to
B inevitably results in the costs of the return trip, joint costs arise. Some of the
costs are not traceable to the production of a specific trip, so it is not possible to
fully allocate all costs or to identify separate marginal costs for each of the joint
products. For example, it is not possible to identify a marginal cost for an I to J
trip and a separate marginal cost for a J to I trip. Only the marginal cost of the
round trip, what is produced, is identifiable. Common costs arise when the
facilities used to produce one transport service are also used to produce other
transport services (e.g. when track or terminals used to produce freight services is
also used for passenger services). The production of a unit of freight
transportation does not, however, automatically lead to the production of
passenger services. Thus, unlike joint costs, the use of transport facilities to
produce one good does not inevitably lead to the production of some other
transport service since output proportions can be varied. The question arises
whether or not the presence of joint and common costs will prevent the market
mechanism from generating efficient prices. Substantial literature in transport
economics has clearly shown that conditions of joint, common or non-allocable
costs will not preclude economically efficient pricing.

26

CHAPTER-IV

TRANSPORT COSTING CASE STUDY

Unit costing is the method of costing used when the cost units are identical.
Identical cost units should have identical costs and this concept of equality of
costs is the basic feature of unit costing. It may be noted that process costs, output
costing and service costing are the sub-divisions of unit costing method.
Service or operating cost is the cost of providing services. Service costing is the
term applied to describe the system used to find the cost of performing a service
such as transport, gas or electricity. Service costs are particularly suitable for the
costing of road and rail transport services and they are also utilized by electricity
undertaking, hospitals, canteen, boiler house, etc. the method of costing is
different from that used in connection with production, and the difference lies
chiefly in the manner of assembling the cost data and finally in its allocation to
cost units. The principle of service or operating costing is to accumulate costs
under suitable headings and to express them in terms of the unit of service
rendered.
Service costing is similar to output costing. All costs are suitably classified under
fixed and variable. These costs are then collected, analyzed and expressed in
terms of an appropriate cost unit. The classification of costs into fixed and
variable is very important, as it draws managements attention to the fixed costs to
which they are committed regardless of the units of service ultimately given. It
also indicates the change in the cost structure due to change in the operating level.

27

In transport undertakings most of the statistical data required for cost finding and
cost control purposes are obtained from Daily Log Report. All repairing and
maintenance work are recorded on repair tickets and are then costed. In order to
prepare a Transport Cost Sheet for a transport undertaking the costs may be
subdivided as under:a) Wages and running costs: - These include cost of petrol, oil, grease, wages of
assistants and drivers, etc.
b) Maintenance charges: - These include repairs and overhauling of vehicles,
garage charges, tyres, etc.
c) Fixed charges: - These fixed expenses include insurance, license, depreciation,
etc.
The statistical data regarding costs, maintenance and performance are helpful in
preparing a performance in respect of each vehicle. In order to compare the
operating efficiency for each period, the total costs thus arrived at are divided by
the bases such as number of hours or days, number of kilometres run, number of
commercial ton-kilometres, etc. Costs per unit thus obtained are compared with
the past result. A monthly Vehicle Cost Sheet and Performance Statement are
generally used in many transport undertakings. Cost control is always possible by
means of comparison of actual performance with the budgeted performance.
Various control measures, viz., securing the optimum use of vehicles, regular
maintenance as a planned operation, avoidance of loading and unloading delays
prevention of overlapping and duplicated journeys, planned replacement of
vehicles, etc., may be instituted. Where transport department is treated as service
department all costs are collected and apportioned to other departments on the
basis of commercial ton-kms. The haulage of incoming material might be charged
28

as an addition to cost of raw material, and the haulage of fabricated goods to

customers becomes a part of distribution overhead. Generally, commercial tonkm, is obtained by multiplying the total tonnage carried by the kilometres
travelled and dividing the product by two. This is done where the vehicles return
empty as is found in most cases.
Adhunik Transport Organization Limited

Introduction:
Adhunik Transport Organization Limited was established in the year 1988 as an
organization. In 1991, it got the status of a limited company after reaching the
minimum turnover level. The company currently has a turnover of approximately
Rs. 10 Crores. The company is a member of Bombay Goods Transport
Association (BGTA) AND Indian Bank Association (IBA), which is very essential
for the smooth conduct of their business activities. BGTA checks all business
malpractices and IBA is needed for regulating payments within different states.
The company has its 17 branches all over the country, along with 3 agencies in
certain remote areas. The company also provides warehousing facilities to
companies like Philips-India and Colgate. The company is involved in delivery of
goods all over the country.

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Number of vehicles:
The company has owned as well as dedicated trucks and trailers.
Owned Vehicles
8 HCVs- Heavy Commercial Vehicles
4 Trailers
Dedicated Vehicles
25 LCVs- Light Commercial Vehicles
Dedicated Vehicles are delivery trucks, which are made according to certain
specifications, operated under the name of another company for which they give a
minimum amount of business and certain running costs are borne by that
company. The company has its LCVs dedicated to ELBEE Delivery Services.
They are used for delivering goods given by ELBEE. The driver charges and
maintenance charges are borne by Adhunik Transport. Other expenses are borne
by Elbee. The advantage to Elbee is that its capital is not blocked. The advantage
to the company is that it does not have to look for customers and keeps getting a
minimum amount of business.
No. of Employees:
The Company has on an average 8 office staff members per branch. There are 30
staff members in the head office in Mumbai. The salaries of these employees vary
30

from Rs. 2,000- Rs. 10,000 depending upon the nature of the job they do.
Measurement of Materials is done in tons.

Illustration
Adhunik Automobiles distributes its goods to a regional dealer using a single
lorry. The dealers premises are 40 kilometers away by road. The lorry has a
capacity of 10 tons and makes the journey twice a day fully loaded on the outward
journeys and empty on return journey. The following information is available for
a four weekly period during the year 1990.
Petrol consumption

8 km per liter

Petrol Cost

Rs 13 per liter

Oil

Rs 100 per week

Drivers wages

Rs 400 per week

Repairs

Rs 100 per week

Garage Rent

Rs 150 per week

Cost of Lorry (excluding tyres)

Rs

Life of Lorry

4,50,000
80,000 Kilometers

Insurance

Rs

6,500 per annum

Cost of tyres

Rs 6,250

Life of tyres

Rs

25,000 kilometers

Estimated sale value of lorry at end of its life

Rs

50,000

Vehicle license cost

Rs

1,300 per annum

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The lorry operates on five day week

Rs 41,600 per annum

Required:
(a) A statement to show the total cost of operating the vehicle for four-weekly
period analyzed into running costs and fixed costs.
(b) Calculate the vehicle cost per kilometer and per ton kilometer
Solution:
(a) Before computing the total cost, it is necessary to find out the basic data as
under :
1)Distance travelled in 4 week period; 40 km one way x 2 (return) x 2 trips x 5
day x 4 weeks = 3200 km.
2) For tone km working = empty on return and as such for tone km = 3200 2 =
1600
3) Total consumption in weeks = 3,200 km 8 km = 400 lt
4) Tyre cost = (Rs. 6,250 25,000 km) x 3,200 km = Rs. 800
5) Depreciation of lorry in 4 weeks
= (Rs. 4, 50,000 Rs. 50,000 km) 80,000 x 3,200 = Rs. 16,000
Operating cost statement f a lorry of M/s. Adhunik Automobiles
(for the 4 week period)

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PARTICULARS

Rs

Running costs
Cost of petrol (400 liters x Rs. 13)
Oil (Rs. 100 per week x 4)
Drivers wages (Rs. 400 per week x 4)
Repairs (Rs. 100 x 4)
Cost of tyers (as at 4 above)
Depreciation (as at 5 above)
Total running costs (i)
Fixed costs
Garage ret (Rs. 150 x 4)
Insurance (Rs. 6,500 52) x 4
License cost (Rs. 1,300 52) x 4
Other overheads (Rs. 41,600 52) x 4

5,200
400
1,600
400
800
16,000
24,400
600
500
100
3,200

Total fixed cost - (ii)

4,400

Total (i) + (ii)

28,000

CHAPTER-V
FINDINGS
After studying the topic in depth and data collection from a firm following are the
findings from the project
As the subject, important features and advantages of cost accounting are
studied and the project throws light on 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.

33

 It is applied by transport companies, gas and water works, electricity supply

companies, canteens, hospitals, theatres school etc.
Operating Costs are the costs incurred by undertakings which do not
manufacture any product but provide a service.
The various steps and items of the operating cost sheet is explained in depth
along with illustrative example and cost units for various services
The three main area namely
o Hotel industry
o Hospital industry &
o Transport industry
In which massive use of this method of costing is used are explained with
illustrations
Finally , the cost details of adhunik transport organisation limited are
provided herewith which will help us to know more about operating costing

CONCLUSION
Operating costs are expenses that relate to a business operations. It can also
refer to the costs of operating a specific device or branch of a corporation. These
costs usually fall into two categories, called fixed costs and variable costs, and a
business may have more of one type than the other. Fixed operating costs are
expenses that tend to remain the same whether the business or device is inactive
or operating at full capacity.

Examples of such expenses include employee

salaries and machinery leasing fees. Salaries must be differentiated from hourly
wages in this regard.
Flexible expenditure are known variable operating costs. These expenses
fluctuate based on a variety of factors. Money dispensed on hourly wages, for
examples, can be adjusted by varying the amount of time recipients are engaged
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in labor. Operating costs are not unique to any country although actual expenses
may vary from one country to another or even from one location to another.
Within an industry, it is very possible for expenses to vary. It is, however, difficult
to find a business that does not have any of these costs. Even Internet business, in
which the costs of operation can often be reduced, it is almost impossible to
completely eliminate them.
Process costing is applicable where goods or services result from a
sequences of continuous or repetitive operation or processes and products are
identical and cannot be segregated. Costs are charged to process and averaged
over the units produced during the period. Single or output costing is used when
the production is uniform and identical and a single article is produced. The total
production cost is divided by the number of units produced to get unit or output
cost. Examples are mining, breweries, brick making etc.
Operating costing refers to the methods where each operation in each stage
of production or process is separately costed. Thereafter, the cost of finished unit
is determined. This is suitable to industries dealing with mass production of
repetitive nature for examples, motor cars, cycles, toys, etc. Expenses associated
with administering a business on a day to day basis. Operating costs include both
fixed costs and variable costs. Fixed costs, such as overhead remain the same
regardless of the number of products produced, variable costs, such as materials,
can vary according to how much product is produced. Business have to keep
track of both operating costs and costs associated with non-operating activities,
such as interest expenses on a loan. Both costs are accounted for differently in a
companys books, allowing analysis to see how costs are associated with revenuegenerating activities and whether or not the business can be run more efficiently.

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BIBLIOGRAPHY
http://www.businessdictionary.com/definition/operatingcost.html#ixzz2uvBn7sy2
http://www.mbajunction.com/career/transport_service.htm
http://www.wonderwebs.com/Portals/46/Content/Documents/Secured/Bank
able%20Feasibility%20Study/17%20-%20Section%2015%20%20Operating%20-%20Cost.pdf
http://nexus.umn.edu/papers/truckoperatingcosts.pdf

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 http://costingclub.com/article-details/Operating-Costing-format-forTransport-Company/132#sthash.WMlndW6e.dpuf

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