Professional Documents
Culture Documents
Definition
The process of identifying the costs of the business and of breaking them down and relating
them to the various activities of the organization.
OR
An activity that involves calculating how much it costs to make and sell a product or a
service.
Advantages to Employees
1. Enables employees to earn better wages through overtime wages and incentive
systems of wage payment.
2. It ensures job security.
3. Employees benefit by merit rating techniques which is conducted by scientific
process.
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Advantages to Creditors
1. It increases the confidence of creditors in the capital employed in the business.
2. The frequent preparation of reports and statements help in knowledge solvency
position of the business.
Advantages to Government
1. It helps the government in formulating policies regarding export, import etc.
2. It helps in assessing excise duty, sales tax and income tax of the business.
3. It helps in preparing national plans.
Advantages to society
1. It offers employment opportunities in the cost accounting department in the capacity
of cost accountants and cost clerks.
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Costing Methods:
Operation costing
1. Single to output costing
2. Process costing
3. Service or operating costing
4. Departmental costing
5. Composite costing
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OPERATING OR SERVICE COSTING
Definition:
The ICMA terminology defines operating cost as “the cost of providing a service” and
operating costing as “that form of operation costing which applies where standardized
services are provided either by an undertaking or by a service cost-centre within an
undertaking. The method may be used where the service is not completely standardized but it
is convenient to regard it as such, and to calculate average costs per period in relation to the
standardized unit of measurement. From these definitions it is clear that the cost of providing
a service is known as operating cost and the method employed to ascertain cost of such
service is known as operating costing.
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5. Costs are usually computed period-wise. However, under special circumstances costs
are computed order-wise as in the case of utilization of vehicles, use of road-roller,
etc.
6. The demand for the services of industries adopting this method of costing fluctuates.
Hence, it is difficult to estimated the cost accurately.
7. There is no difficulty faced in respect of valuation of work-in-progress or closing
stock when compared to other industries.
8. Only medium and large sized undertakings deal in manufacturing and rendering
services. Such industries assume the portion of monopolistic undertakings or public
utility undertakings.
Applications:
Operating costing is applied to those organizations which render service externally (i.e., to
public at large) or internally (i.e., to various departments of the same organization). Some
examples of services rendered to outsiders are electricity supply, water supply, gas supply,
boarding and lodging and so on. While services such as repairs and maintenance, purchasing
and storage, internal transport, etc. constitute services rendered internally. There is a point of
difference in respect of accounting of services rendered. Whereas the objective of accounting
external service is to know the total cost of manufacturing and profit on provision of such
service , the object of internal service to facilitate apportionment of service department cost to
various other departments.
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10. Distribution of gas, air compressor, air-conditioning.
11. Sports and recreational clubs.
12. Services such as supply cranes, road roller, water pumping, fire extinguishers, etc.
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Transportation Costing
The Transport Costing System provides a means to calculate the current operating
costs for road transport operations. The relevant "input costs" that are currently applicable in
the transport industry (for example license fees, fuel costs, capital costs, tire costs, etc) are
updated in the system on a regular basis. Therefore the results from the Transport Costing
System are not 3, 6 or 12 months behind. They are current!
The main objects of transport costing are (a) to ascertain the cost of operating a vehicle and
(b) to fix up a fair for carrying passengers or goods for a certain distance.
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d. Wages of drivers, conductors, and cleaners
e. Depreciation of vehicles
2. Running charges or variable cost: these include:
a. Petrol
b. Diesel, oil
c. Lubricant
3. Maintenance cost:
a. Repeirs and maintenance charges
b. Tyres, tubes, batteries, etc
In this report also enables to apportion expenses to other vehicle. The proforma of this
document is shown below:
Daily report sheet or log sheet
Particulars of Trip
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Out Enroute
Monthly charges
A- Operating Cost B- Maintenance Charges C- Fixed Charges
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1. Petrol 1. Tires 1. Insurance
2. Oil 2. Repairs 2. Interest
3. Grease 3. Overhead 3. Depreciation
4. Driver 4. Garage 4. Tax, License
5. Assistant 5. Others
6. Mechanics
_________ __________ _____________
Total _________ __________ _____________
Performance record
2. Days operated
3. Days idle
4. Days maintained
5. Total hours operated
6. Total kilometers covered
7. Total trip made
Performance Averages
8. Averages kilometers per day maintained 6/4
9. Averages kilometers per day operated 6/2
10. Average kilometers per trip 6/7
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Units of Costs in Transport Costing
There are various different cost units, which are used to measure the efficiency of running
vehicles. Important among them are as follows.
The tone-kilometer:
This can be divided in to two types:
1. The absolute tone-kilometer:
It refers to unit cost of carrying one tone of goods over a distance of 1 kilometer.
Absolute tone-kilometer = Weight carried x Kilometer run (for each section of the trip)
2. Commercial tone-kilometer:
This unit is used to overcome the limitation of calculating the unloaded capacity at
various distance covered. This method is based on the assumption of an average, wherein
it is assumed that the vehicle runs with half load throughout the distance covered (after
having unloaded part of the goods at different places).
Commercial tone-kilometer = Average load x Total kms travelled
Problem:
A truck starts with a load of 10 tones of goods from station P. It unloads 4 tones at station
Q and rest of the goods at station R. It reaches back directly to station after getting
reloaded with 8 tones of goods at station R. The distance between-
P to Q = 40 kms, Q to R = 60 kms & R to P = 80 kms.
Calculate Absolute tone-kilometer & Commercial tone-kilometer.
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Solution:
Absolute tone-km = (10 x 40)+ (6x60)+ (8 x 80)
= 1400 tone-kms
Problem:
A 40 seater tourist bus operates in a month as follows:
Capacity From To Distance
First 10 days 100% Hyderabad Khammam 160 kms
Next 15 days 75% Hyderabad Khazipet 250 kms
Next 5 days 60% Hyderabad Koppidi 100 kms
The total expenses are Rs. 3,77,000. Ascertain cost of one passenger km.
Solution:
No. of Passenger km = No. of Days x Capacity x Capacity used x Distance x To & From
First 10 days = 10 x 40 x 100/100 x 160 x 2 = 1,28,000
Next 15 days = 15 x 40 x 75/100 x 250 x 2 = 2,25,000
Next 5 days = 5 x 40 x 60/100 x 100 x 2 = 24,000
Total Passenger kms 3,77,000
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= __3,77,000__
3,77,000
= Re. 1 per passenger km
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(A) Variable Charges:
Cost of steam used
Coal
Lubricants and Suppliers
Wages of operators
Total
(B) Maintenance Charges:
Repairs and Maintenance
Total
(C) Fixed Charges:
Depreciation
Supervision
Administrative overheads
Interest on capital
Total
Total A+B+C
Problem:
You are requested to prepare a cost sheet showing the cost of generation of power per kilo
watt-hours (kWH).
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Rs.
Operating Labour 16,500 per annum
Plant Supervision 5,250 per annum
Lubricant and Supplies 10,500 per annum
Repairs and Maintenance 21,000 per annum
Adm. Overheads 9,000 per annum
Capital cost 1,50,000
Coal consumed per kWH is 1.5 lbs and cost of coal delivered to the power station is Rs.33.06
per metric ton. Depreciation rate chargeable is 4% per annum and interest on capital is to be
taken @ 7%. Take one metric ton = 2,205 lbs.
Solution:
Rs.
(A) Variable charges:
Operating Labour 16,500
Lubricant and Supplies 10,500
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Coal (15,00,000*1.5*33.06)/2,205 33,735
Total 60,735
(B) Maintenance charges:
Repairs and Maintenance 21,000
Total 21,000
1,12,485
Total A+B+C
(D)Cost per kWH = 1,12,485/15,00,000 0.075
= 0.07499
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1. Stock register which is maintained by canteen store keeper. As when issues are made
they are recorded to ascertain the cost of materials consumed in the canteen.
2. Wage analysis sheet is maintained by the personal department to record labour cost
and supervision of canteen.
3. Overhead analysis sheet, to calculate proportionate overhead charge.
Purpose
The purpose of canteen costing is to determine a price at which menu is to be sold. For this
purpose it involves classifying the expenses according to the following types:
(a) Provisions: such as rice, wheat flour, oil, sugar, vegetables, fruits, milk, coffee and tea
powder.
(b) Labour: cook’s wage, salary of supervisor, wages of kitchen assistants, porter’s
wages.
(c) Service: such as water, gas, electricity, steam, light
(d) Consumable stores: such as table cloths, crockery, glassware materials, dustbins,
brushes etc.
(e) Overheads: such as rent and rates, insurance, depreciation etc
(f) Sales: this includes revenue from meals, tea and coffee, sale of snacks etc.
Format
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Coffee
Tea
Vegetables and fruits
Soft drinks
Miscellaneous cost
Table cloths
Consumable stores
Rent
Gas
Profit
Hospital Costing
Hospital costing may relate to ascertaining the cost of medical service rendering by a
dispensary belonging to a factory or a hospital or a nursing home owned by government or
private doctors. The main object of hospital costing is to ascertain the cost of rendering
service per patient per day. For this purpose a cost sheet is prepared to record the various
expenses incurred in the hospital. Such costs are classified under the following headings:
(1) Medicines
(2) Cost of operation theater
(3) Cost of out-patient department
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(4) Cost of in-patient wards
(5) Salary of physicians, surgeons and nurses
(6) Cost of equipments and instruments
(7) Cost of blood bank
(8) Cost of X-ray and pathological services
Problem:
A public health care center runs an intensive care unit. For this purpose it has hired a building
at a rent of Rs.5000 per month with the understanding that it would bear the repairs and
maintenance charges also.
The unit consists of 25 beds and 5 more beds can be accommodated when the
occasion demands. The permanent staff attached to the unit are as follows:
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2 Supervisors, each at a salary of Rs.500 p.m.
4 Nurses, each at a salary of Rs.300 p.m
2 Wardways, each at a salary of Rs.150 p.m
Though the unit is open for patients all the 365 days in a year. Scrutiny of accounts in
1990 reveals that only for 120 days in the year the unit had the full capacity of 25 patients per
day and for another 80 days it had on an average 20 beds occupied per day. But there were
occasions when the beds were full, extra beds were hired at a charge of Rs.5 per bed per day
and this did not come to more than 5 beds extra above the normal capacity on any one day.
The total hire charges for extra beds incurred for the whole year amounted to Rs.2000.
The unit engaged doctors from outside to attend on the patients and the fee were paid
as basis of the number of patients attended and time spent by them which on an average
worked out to Rs.10000 p.m in 1990.
The other expenses for the year were as under:
Repairs and maintenance 3600
Food supplied to patients 44000
Janitor services 12500
Laundry charges for bed linen 28000
Medicines supplied 35000
Cost of oxygen, X-ray, etc 54000
General administration charges allocated to the unit 49550
If the unit recovered an overall amount of Rs.100 per day on an average from each patient,
what is the profit per patient made by the unit in 1990?
Solution:
Rs.
A. Variable cost:
Food 44,000
Janitor Services 12,500
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Laundry 28,000
Medicines 35,000
Doctor fee 10,000 x 12 1,20,000
Hire charges for extra beds 2,000
Total 2,41,500
B. Fixed cost:
30,000
Salaries (2 x 500 + 4 x 300 + 2 x 150) 12
60,000
Rent 5,000 x 12
3,600
Repairs & maintenance
49,550
General administration
54,000
Cost of oxygen
Total 1,97,150
___________
Total Cost (A+B) 4,38,650
Profit 61,350____
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