Operating Costing

OPERATING
COSTING-TOURS AND TRAVELS
INTRODUCTION
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.
MCOM SEM2 COST ACCOUNTING

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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; 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.

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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.

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THE FEATURES OF COST ACCOUNTING:

1. It is a process of accounting for costs.
2. It records income and expenditure relating to goods and services
3. It provides statistical data on the basis of which future estimates are prepared
and quotations are submitted.
4. It is concerned with cost ascertainment, cost control and cost reduction.
5. Finally it involves the preparation of right information to the right person at
the right time so that it may be helpful to management for planning,
evaluation of performance, control and decision-making.
ADVANTAGES OF COST ACCOUNTANCY

1. It enables a concern to measure the efficiency and then to maintain and improve it.
This can be done with the help of comparison of data made available of the previous
periods and current period.
2. It provides information upon which estimates and tenders are based.
3.
It guides for future production polices. It explains the cost incurred and there by
provides data on the basis of which production can be appropriately planned.
4. The extract cause of decrease or increase in profit/loss can be detected. A concern

may suffer not because of the cost of production is high or prices are low but also
because the output is much below the capacity of the concern.
5. Efficiency of public enterprises. Costing has a more important role to play in public
enterprises than in private enterprises. The primary objective of the public enterprises
is not to raise profits but it is to serve the society by providing quality good at
cheaper rates.
OPERATING COSTING: A BRIEF REVIEW

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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, Janitorial Supplies, Office Products, Payroll Services, Telecom,
Uniforms, Utilities, or Waste Disposal etc.

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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 nonmonetary 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
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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

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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)
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

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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 litre in water supply, cost per meal in canteen
etc. Similarlycost 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

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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
Illustration of Operating cost sheet:Particulars

A
Total cost
Standing charges :License fees

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

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Cost per km
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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
Total charges [ (A) + (B) ]
MAIN AREAS OF OPERATING COSTING

Operating costing is further divided in and used in 3 main areas namely
Hotel industry
Hospital industry &
Transport industry
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

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the interplay of market forces occurring within and between modes, will result in greater
efficiency and service.
Many factors have led to a reexamination 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.

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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
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

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production of a specific trip, so it is not possible to fully allocate all costs nor 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 separatemarginal cost for a
to 1 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
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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.
5. INFORMATION YOU NEED TO PRICE YOUR TOURISM

BUSINESS
To successfully complete this step by step guide and the online pricing tool you need to have
the following information readily available:- 1. TOUR OR ACCOMMODATION DETAILS
You will need to provide information about your business, such as the different tour types you
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offer and the number of passengers or how many different room types you have. 2. DAILY
COSTS (FIXED) You need to determine the fixed costs associated with operating your
business, such as fuel, labour etc... 3. DAILY COSTS (VARIABLE) You need to determine
the costs associated with taking passengers on tour or letting out rooms, such as meals, third
party activities, linen and room cleaning 4. ANNUAL BUSINESS COSTS (FIXED) You
need to calculate the total costs associated with operating your business. These costs occur
whether you have tours operating or not, this is why they are called fixed. For example costs
that are fixed include insurance, marketing, lease payments, bank fees, accounting fees,
salaries etc... 5. AVERAGE CAPACITY If you have been trading for a number of years you
should know your average capacity. If you are new to the industry you will have to estimate
your future capacity based on factors such as visitation to the region, competitor analysis and
customer feedback.
NOTES _______________________
STEP 1 CAPACITY
To be able to effectively price your tourism product you need to identify some basic factors
about your business, such as how often you run a tour or how many rooms you have. Fill in
your answers to the questions below about the MAXIMUM CAPCITY for your business.
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TOUR OPERATOR
-how many types of tours are available?
NAME OF DIFFERENT
MAXIMUM NUMBER OF
MAXIMUM NUMBER OF
TOURS
PASSENGERS PER TOUR
TIMES TOUR OPERATES

PER YEAR
ACCOMODATION PROVIDER
How many different types of room you have available?
NAME OF DIFFERENT ROOMS
TOTAL NUMBER OF ROOMS PER TYPE

OF ROOM
STEP 2 ACTUAL CAPACITY AND OCCUPANCY

Now that we know your maximum capacity we need to work out realistically your actual
capacity. For example, you may be able to carry 20 passengers on tour 365 days of the year,
but chances are these are not your actual figures. You may only carry an average of 10
passengers and conduct the tour 300 days of the year.
TOUR OPERATOR
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If you have been trading for a number of years you should know your average capacity. If
you are new to the industry you will have to estimate your future capacity based on factors
such as visitation to the region, competitor analysis and customer feedback.
NAME OF DIFFERENT
AVERAGE NUMBER OF
AVERAGE NUMBER OF
TOURS
PASSENGERS PER TOUR
TIMES TOUR OPERATES

PER YEAR
ACCOMMODATION PROVIDER
If you have been trading for a number of years you should know your average occupancy
rate. If you are new to the industry it can be difficult to estimate your predicted occupancy.
Use the Tourism WA Quarterly Tourism Snapshots to get the average occupancy rates for
your region
NAME OF BUSINESS
AVERAGE OCCUPANCY RATE PER

ROOM TYPE
%
STEP 3 - FIXED AND VARIABLE COSTS

FIXED COSTS
DO NOT vary, they stay the same no matter how many rooms you let or tourists you carry. It
does not matter if you carry 1 or 20 passengers the costs will STAY THE SAME. It does not
matter if you let out 1 room or 10 the costs will STAY THE SAME.
VARIABLE COST?

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Variable costs CHANGE, they are dependent on how many rooms you let or tourists you
carry. If you carry 10 passengers the costs will be different to if you carry 20. Or, if you let
out 1 room, as opposed to all your available rooms, the costs will change.
ACTIVITY- FIXED V/S VARIABLE COSTS
Using the examples below tick () which costs are fixed and which are variable.
Example cost
Fixed
Variable
Fuel For A Bus Tour

WAGES FOR BUS TOUR
Meals Whilst On Tour
Room Cleaning
Activities Whilst On Tour
National Park Permits
Vehicle Registration
Amenities For Rooms
Cleaning Of Room Linen
You will now need to determine your own fixed and variable costs. If you have been in
business for a while you should know your figures, if your business is new you will need to
obtain quotes and give rough estimates.
Use the tables on the next page to enter all your fixed and variable costs for each tour or room
type and then when you are ready enter the details into the Tourism BOOST online pricing
tool to help you determine your final pricing results.
STEP 4 - ANNUAL BUSINESS COSTS

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The next step is to calculate the total costs associated with operating your business. These
costs occur whether you have passengers on your tour or not, this is why they are called
fixed. For example: insurance, marketing, lease payments, bank fees, accounting fees, etc...
If you have a profit/loss statement you can use the latest report from your accountant, if you
are new to the industry use the table below to help you estimate your ongoing annual
expenses
Operating Expenses Item
Amount
Notes
Accounting And Legal Fees

Business Loan Payments
Depreciation
Electricity And Gas
Insurance
Rent
Repairs, Maintenance And
Cleaning
Total Operating Expenses
HOW
MUCH
DO
YOUR
TOURS
OR
ACCOMMODATION
CONTRIBUTE TO YOUR OVERALL BUSINESS?

Some tourism businesses offer lots of different experiences for their visitors. For example,
you might offer luxury safari camping and also cultural tours.
So that you can price each element of your business accurately it is important to determine
how much each element contributes to your overall business. In terms of percentage how
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much does the product you are pricing contribute. For example, if all your business does is
offer tours then you would enter 100%. However, if you also offer activities or hire
equipment you might enter 80%.
Use the table below to help you determine the correct percentages. Tick which answer relates
best to you and then apply a percentage figure to it.
BUSINESS ACTIVITY
PERCENTAGE
OF BUSINESS
I only offer tours
100%
I only offer accommodation
100%
Accommodation is only my core business, but I also offer some
tours and activities. What percentage of your business are your

accommodation?
Tours are my core business, but I also offer some other activities.
What percentage of your business are your tours?
STEP 5 - MARK UP PERCENTAGE

As mentioned earlier, one of the main aims of any business is to make a profit.
The only way to do that is to correctly price your product, factoring in mark-up.
There is no set figure for mark up; however the mark up you set needs to make
you a profit on the one hand, yet be competitive on the other. You dont want
your price to be radically different to that of your competitors if it is too cheap
people may question your professionalism, if it is too expensive and doesnt offer
more value you may lose customers.
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Below are some average net profit percentages for various tourism business, this
information is based on the FMRC Business Benchmarks. The percentages below
are calculated before any salary has been paid to the owner/operator.
Type of business
Fmrc net profit

percentage
Bus/coach transport
Caravan parks and camping grounds
Gift shop
Guest house operation
Restaurant operation
Travel agency service
20%
22%
14%
23%
14%
25%
Mark-up or profit is the most dynamic element of your pricing; you can return to this step
later in the online guide and alter the mark up percentage to see how it affects your pricing.
Based on the percentages listed above you should be calculating your figures using a mark-up
of somewhere between 14% to 25%.
STEP 6 - COMMISSION
Some tourism operators believe they save money by not paying commission to third-party
sellers. But, here's another way to look at it - what do you lose by not paying commission?
CONSIDER THESE SIMPLE QUESTIONS...
1 Is your website ranking highly and are you generating great international bookings directly?
2. Are you consistently full and happy with the way your business is performing?
Answered YES to both these questions?
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Congratulations! Maybe you don't need to branch into the tourism distribution channels as
you seem to be doing very well on your own.
Answered NO?
Maybe another sales avenue could be beneficial to you. Retail Travel Agents, Tour
Wholesalers and Inbound Tour Operators can open up new markets for you in a very cost
effective way. But they also need to be paid.
Commission is usually the major source of revenue for retail travel agents, wholesalers,
inbound operators and visitor centres. Tourism operators need to understand how
commissions are divided between the different levels of sellers and allow for the payment of
commission in their prices.
Tourism operators do find it difficult to justify the commission required by some agents, yet
the costs in accessing these markets are generally beyond the reach of small operators. For
example, it can cost up to $10,000 to attend just one international tourism trade show.
You need to weigh it up - Do you want to open up new markets?
YES? Then the most cost effective way to do this is through the commission structure.
HOW MUCH COMMISSION SHOULD I PAY?

The level of commission varies depending who sells your product and which distribution
method is used. For example, working directly with a Visitor Centre you will pay less than
working with an International Tour Wholesaler. Here are the average commission levels
payable to third-party sellers.
Third party seller
Average commission
Travel agents/ visitor centres

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10%-20%
OPERATING
Tour wholesalers
25%-30%
Inbound tour operators
25%-30%
DIVERSIFYING YOUR INCOME STREAM

"Don't put all your eggs in one basket" is a common phrase for investing, but it also applies
to your business income. Diversifying your income stream is a great way to protect your
business against the unknowns such as a downturn in the market, or loss of a major thirdparty seller.
It is a good idea to spread your sales through avenues such as wholesalers, inbound tour
operators, direct bookings, retail agents and Visitor Centres.
Direct sales will give you instant money and help your cash flow. Tour wholesalers
sometimes take four to eight weeks to pay an invoice which may impact on your cash flow.
CALCULATING THE RIGHT COMMISSION FOR MY PRICING
To ensure you price your business consistently you need to calculate the AVERAGE
commission level you will be paying to third party sellers such as Inbound Tour Operators,
Tour Wholesalers and Visitor Centres. Also factor in direct sales that do not incur any
commission. You can then input this percentage into the Tourism BOOST online pricing tool.
For example, if 80% of your sales come directly and only 20% through third party sellers you
need to calculate the commission percentage accordingly.
PRACTICAL EXAMPLE (TRANSPORT)

Mr.Sanjay owns a fleet of taxis and the following information is available from the records
maintained by him.
Number of taxis
Cost of each Taxi
Salary to Manager
Salary to Accountant
Salary to Cleaner
10
Rs. 54,600
Rs. 700 p.m
Rs. 500 p.m
Rs. 200 p.m

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Salary to Mechanic
Garage Rent
Annual Tax
Drivers Salary
Annual Repairs
Insurance Premium
Rs. 400 p.m

Rs. 600 p.m
Rs. 900 per taxi
Rs. 350 per taxi
Rs. 1,000 per taxi
5% p.a
Total life of a taxi is about 2,00,000kms. A taxi runs 3,000 kms in a month and 30% of this
distance is run without any passengers. Petrol consumption is one litre for every 10 kms @
Rs. 4.41 per litre. Oil and sundry expenses are Rs. 10.50 per 100 kms.
Calculate the cost of running a taxi per effective km.
Solution
Statement Showing Total Operating Cost
Cost Sheet
Step
A
Costs
FIXED CHARGES
Rs.
Garage Rent (600/10)
60.00
Insurance Premium (54,600*5 1/12 months)
227.50
Annual Tax (900/12 months)
75.00
Depreciation
(54,600*1/2,00,000kms.*3,000 kms.)
819.00
Salary of Manager (700/10)
70.00
Salary of Accountant (500/10)

RUNNING CHARGES
50.00
Drivers Salary
350.00

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Salary of Cleaner (200/10)
20.00
Salary of Mechanic (400/10)
40.00
Repairs (1,000*1/12 months)
83.33
Petrol (3,000 kms.*1/10 kms.*4.41 )
1,323.00
Oil and sundry expenses
315.00
(3,000 kms.*1/100 kms.*10.5 )

TOTAL OPERATING COSTS
(A + B)
3,432.83
Cost per Kilometre = Total Operating Cost / Effective Kilometres

= 3,432.83 / 2,100
= Rs. 1.63
Working Notes
1
2
Effective Kilometres = Total Running (p.m) Run without Passengers

= 3,000 kms. (30%*3,000)
= 2,100 kms.
The cost classification is as per CAS-5. Salary of operating staff (driver, cleaner and
mechanic) is treated as running expenses (CAS-5). Administrative salaries
(manager/accountant) are treated as fixed costs.

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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.

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OPERATING
Service costing is similar to output costing. All costs are suitably classified under fixed and
variable. These costs are then collected, analysed 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.
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

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OPERATING
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 as an addition to cost of raw material, and the haulage of
fabricated
goods
to
customers
becomes
part
of
distribution
overhead.
Generally, commercial ton-km, 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
Page 29
OPERATING
(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 PhilipsIndia and Colgate. The company is involved in delivery of goods all over the country.
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:

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OPERATING
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 from Rs. 2,000Rs. 10,000 depending upon the nature of the job they do.
Measurement of Materials is done in tons.
COSTS:
FIXED COSTS
Salaries
54,00,000
Insurance
8,00,000
Transport Permits (Every 5 yrs)
1,00,000
Administrative Overheads
2,11,00,000
Taxes
Depreciation
30,00,000
Interests
34,00,000
TOTAL
3,38,00,000
VARIABLE COSTS
Maintenance (Per Vehicle)

HCV
10,000
LCV
6,000
TRAILERS
15,000
Wages
Drivers
2,000
Cleaners
1,200
Transit Expenses
500-1,500
TOTAL
35,000 approx
Notes:
There are 2 drivers and 1 cleaner for every long journey.

In case of short journeys, there is only 1 driver and 1 cleaner.

Page 31
OPERATING
The maximum distance covered in a day is 300kms. The average distance covered
225-280kms.
THE CUSTOMERS ARE CHARGED:
Rs. 1.20 PER KM PER TON (For HVC)
Rs. 1.00 PER KM PER TON (For LVC)
The Profit-Margin is between 10%-20%.
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.

It is applied by transport companies, gas and water works, electricity supply
companies, canteens, hospitals, theatres school etc.

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
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 &

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OPERATING
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
BIBLIOGRAPHY
http://www.businessdictionary.com/definition/operating-cost.html#ixzz2uvBn7sy2
http://www.mbajunction.com/career/transport_service.htm
http://www.wonderwebs.com/Portals/46/Content/Documents/Secured/Bankable
%20Feasibility%20Study/17%20-%20Section%2015%20-%20Operating%20%20Cost.pdf
http://nexus.umn.edu/papers/truckoperatingcosts.pdf
http://costingclub.com/article-details/Operating-Costing-format-for-TransportCompany/132#sthash.WMlndW6e.dpuf

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OPERATING

COSTING-TOURS AND TRAVELS

MCOM SEM2 COST ACCOUNTING

MCOM SEM2 COST ACCOUNTING

ESSENTIAL FEATURES OF OPERATING COSTS ARE AS

MCOM SEM2 COST ACCOUNTING

THE FEATURES OF COST ACCOUNTING:

ADVANTAGES OF COST ACCOUNTANCY

4. The extract cause of decrease or increase in profit/loss can be detected. A concern