OPERATING COSTING

Meaning: 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. Businesses have to keep track of both operating costs and costs associated with nonoperating activities, such as interest expenses on a loan. Both costs are accounted for differently in a company's books, allowing analysts to see how costs are associated with revenue-generating activities and whether or not the business can be run more efficiently. Definition Cost per unit of a product or service, or the annual cost incurred on a continuous

process. Operating costs do not include capital outlays or the costs incurred in design and implementation phases of a new process.

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, cost per room-day in hotel etc. are the examples of composite cost unit. Total costs are 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.

COST UNITS FOR VARIOUS ENTERPRISES: No. Enterprise- Cost per unit 1. Railways or bus companies Per passenger-kilometer 2. Hospital Per patient/day, per bed/day 3. Canteen Meals served , cups of tea 4. Water supply service Per 1000 gallons 5. Boiler House 1000 kg of steam 6. Goods Transport Per tonne km, quintal km 7. Electricity Boards Per kilowatt hours 8. Road maintenance department Per mile or road maintenance 9. Bricks One thousand 10. Hotel Per room/day

 TRANSPORT COSTING Service costing method is used to ascertain the cost of services provided by an organization (transport firm) which uses its vehicles for transporting goods or passengers. In motor transport costing, the cost unit is tonne-km or passenger-km. Objectives of Motor Transport Costing 1. Analysis of operating costs, namely, wages, full cost, insurance, repairs and maintenance. 2. Control of operating and running costs and avoidance of waste of fuel and other consumable material. 3. Comparison of cost of running and maintenance of different vehicles. 4. Assignment of costs to services provided by each vehicle. 5. To quote hiring rates. 6. To compute cost of idle vehicle and lost running time. 7. Collection and analysis of cost for cost control.

 HOSPITAL COSTING Service costing system is used in ascertaining the cost of operations of a hospital. The activities of a hospital are divided into a number of cost centres, which are: Out-patient department Pathology centre Wards Operation theatre Laundry Kitchen Cost is collected for each such cost centres, and the cost per unit of output is ascertained with respect to each cost centre. Costs are classified into fixed and variable for preparing operating cost sheet Cost unit: Different cost centres have different cost units to measure the output. Costoutput relationship and all other relevant factors will have to be considered to select a cost unit. The following cost units are used generally: i. Bed-days for in-patients department (Ward)

Operation costing is an accounting method used to allocate costs of similar products that are manufactured in batches. It combines two other popular costing methods to get a more accurate picture of how a particular company's manufacturing process works. It simplifies the accounting process by only differentiating activities that cause a variation in cost between products. Similar items are allocated in batches that reflect the actual cost involved in creating that group. Here is a basic guide to the operation costing accounting method. Operation costing: How it works Operation costing is a combination of process costing and job-order costing. Process costing is an accounting method used for the creation of identical products. The costs are allocated to all products in a batch equally because they are all identical. Job-order costing is better suited for products that are different from each other. The products are separated into batches. The costs of each batch tracked separately and allocated only to the products contained in that batch. Operation costing: What products are suitable Operation costing works for products that have some similarities, but can still be separated out into batches. Some common products that use operation costing are electronic equipment or cosmetics. The manufacturing process is similar for all of the individual products, but there may be different costs involved. Using computer monitors as an example, each size of monitor may use the same manufacturing process, but will incur different levels of materials cost. The labor costs could then be allocated using a process costing system while the materials costs are allocated with a job-order costing system to account for the different sizes.

Operation costing: Procedures vary by company Each company has its own specific operation costing procedures, but most of them will resemble both process costing and job-order costing. Direct materials costs are usually booked into work-in-process accounts in batches the way they would be under a job-order system. Most operation costing systems require the use of several work-in-process accounts to keep the batches separate. Conversion and labor costs are tracked in a lump sum that is later spread to all units produced during the accounting period. Operation costing: How to determine the batches The variation between products can be large or small, as long as it can be differentiated from another group of products. When deciding how to group products for operation costing, the difference in cost is the most important consideration. One product may have more features than another, but that only matters if it costs significantly more to produce that item. Each company must tailor its operating costing system to their specific products.

Example: Fast roadways run 10 buses between two suburban centres which are 25 km apart seating capacity at each bus in 30 passengers. The expenses for the month of November 1994 were as under: Rs Salaries of drivers and conductors Salaries of mechanical staff Diesel oil and lubricants Taxes, insurance etc. Repairs and maintenance Depreciation Seating capacity utilized was 60%. All the buses ran 25 days at the month. Each bus made four round trips daily. 30,000 3,000 20,000 2,600 4,000 16,000

Transport & Service costing Service Costing

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 Costing Nature and Problem:

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 an 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 In Different Undertakings:

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. Transport Costing:

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.
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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 kilometers run, number of commercial ton-kilometers, 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 as an addition to cost of raw material, and the haulage of fabricated goods to customers becomes a part of distribution overhead.

Generally, commercial ton-km, is obtained by multiplying the total tonnage carried by the kilometers traveled and dividing the product by two. This is done where the vehicles return empty as is found in most cases.

Industrial Visit to Adhunik Transport Organization Limited

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Introduction:

The visit was made to Adhunik Transport Organization Limited. The company 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.

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 from Rs. 2,000Rs. 10,000 depending upon the nature of the job they do.

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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

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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. The maximum distance covered in a day is 300kms. The average distance covered 225280kms.

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 THE CUSTOMERS ARE CHARGED:

Rs. 1.20 PER KM PER TON (For HVC) Rs. 1.00 PER KM PER TON (For LVC) The method of costing used in service rendering undertakings is known as operating costing.

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

COST SHEET

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, 2. Variable costs or running charges,( Fuel, Driver Wages, Depreciation, oil etc.) 3. Semi-variable costs or maintenance costs. (Supervision salary, Repairs and Maintenance)
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Note : In the absence of information about semi -variable costs, the costs may be shown under two heads only, i.e., fixed and variable. Under operating costing, the per unit cost of service may be calculated by dividing the total cost for the period by the total units of service in the period.

1. Absolute (weighted average) tonnes-kms: Absolute tonnes-kms., are the sum total of tonnes-kms., arrived at by multiplying various distances by respective load quantities carried.

Absolute Tonne Km =Dist1 x Qty1 + Dist2 x Qty2

2. Commercial (simple average) tonnes-kms : Commercial tonnes-kms., are arrived at by multiplying total distance kms., by average load quantity.

Commercial Tonne Km = Total Dist x Average Qty

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The nature of service and operation costing

Service costing Used when an organization or department provides a service. There are four main differences between the output of service industries and the products of manufacturing industries.

Simultaneous production and consumption - cannot be inspected in advance of receiving it

Heterogeneity - nature and standard of the service will be variable due to the high human input

Intangibility - "performance" vs. "touchable" Perish ability - services required cannot be stored

Example 1: E.g. of service industries include the following:

hotel college hairdressers restaurant

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Suitable unit cost measures for service/operation costing Unit cost measures for service costing In a lot of situations, it may be necessary to calculate a composite cost unit. It is necessary if a service is a function of two variables. Haulage companies Hospitals Public transport companies Hotel services Tonne-miles Patient-days Passenger-miles Guest-days

The following cost units might be used by a hotel: Restaurant Function facilities Meals served Hours

Cost per service unit The total cost of providing a service will include: $ Direct materials Direct labor Direct expenses Overheads absorbed Total cost X X X X XX

The cost per service unit is calculated by establishing the total costs involved in providing the service and dividing this by the number of service units used in providing the service. The cost per service unit is as follows: Total costs for providing the service Cost per service unit = Number of service units used to provide the service

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Key point summary

Service costing is used by companies operating in a service industry or by companies wishing to establish the cost of services carried out by some of their departments. Service organizations do not make or sell tangible goods. Specific characteristics of services: Simultaneity Heterogeneity Intangibility Perishability

The main problem with service costing is the difficulty in defining a realistic cost unit that represents a suitable measure of the service provided. Frequently, a composite cost unit may be deemed more appropriate. Hotels for e.g. 'occupied bed-night' as an appropriate cost unit for ascertainment and control. Calculated using: Cost per service unit =

Total costs for period Number of service units in the period

Service department costing is also used to establish a specific cost for an internal service which is a service provided by one department for another, rather than sold externally to customers, e.g. canteen maintenance.

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Cost Sheet format for Transport organization: Costing Club Transport limited Cost Sheet for the month of January 2013 Vehicle No. Registration No. Days operated:

Particulars A) Standing Charges/Fixed charges Insurance License Salaries of Drivers, cleaner etc Depreciation Interest Total B) Running Charges/Variable Expenses Petrol/Diesel Oil Grease Total C) Maintenance Charge/Semi- Variable Repairs Tyres Spares Garage Charges Total D) E) F) Total Cost Total ton kilometer/passenger kilometer Cost per ton kilometer/passenger kilometer

Amount (Rs.)

Amount (Rs.)

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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%20F easibility%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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