8

Operating Costing

Basic Concepts
Operating Costing It is a method of ascertaining costs of providing or operating
a service. This method of costing is applied by those
undertakings which provide services rather than production
of commodities.
Cost Units Transport service Passenger km., quintal km., or tone-
km.
Supply service Kw hr., Cubic metre, per kg., per litre.
Hospital Patient per day, room per day or per
bed, per operation etc.
Canteen Per item, per meal etc.
Cinema Per ticket.
Composite units i.e. tonnes km., quintal km. etc. may be
computed in two ways..
Composite Units Two different units are composed into a single unit.
Examples are Passenger-km., Kilowatt-hour, Tonne-km. etc.
Absolute Tonne-
km.
This is a weighted average of distance travelled and weight
carried.
Commercial
Tonne-km.
This is a simple average of weight carried multiplied by total
distance travelled.
Round-trip Travelling to a destination and return back to the starting
point.


The Institute of Chartered Accountants of India
Operating Costing 8.2
SECTION-A
Question-1
Explain briefly, what do you understand by Operating Costing. How are composite units
computed?
Solution:
Operating Costing: It is method of ascertaining costs of providing or operating a service. This
method of costing is applied by those undertakings which provide services rather than
production of commodities. This method of costing is used by transport companies, gas and
water works departments, electricity supply companies, canteens, hospitals, theatres, schools
etc.
Composite units may be computed in two ways:
(a) Absolute (weighted average) tones- km., quintal- km. etc.
(b) Commercial (simple average) tonnes- km., quintal-km. etc.
Absolute tonnes-km. are the sum total of tonnes-km. arrived at by multiplying various
distances by respective load quantities carried.
Commercial tonnes-km., are arrived at by multiplying total distance km., by average load
quantity.
Question-2
What do you understand by Operating Costs? Describe its essential features and state where
it can be usefully implemented?
Solution:
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.
The 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.
The Institute of Chartered Accountants of India
8.3 Cost Accounting
(b) Maintenance charges: These expenses are of semi-variable nature and includes 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 composite 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.
Question-3
Distinguish between Operating Costing and Operation Costing.
Solution:
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. For example maintenance
department; power house, boiler house, canteen, hospital, internal transport etc.
Operation Costing: It represents a refinement of process costing. In this each operation
instead of each process of stage of production is separately costed. This may offer better
scope for control. At the end of each operation, the unit operation cost may be computed by
dividing the total operation cost by total output.
SECTION B
Calculation of Absolute Tonne-Km and Commercial Tonne-Km.
Question 1
Calculate total passenger kilometres from the following information:
Number of buses 6, number of days operating in a month 25, trips made by each bus per day
8, distance covered 20 kilometres (one side), capacity of bus 40 passengers, normally 80% of
capacity utilization.

The Institute of Chartered Accountants of India
Operating Costing 8.4
Solution
Calculation of passenger kilometer:
= 6 buses 25 days 8 trips 2 sides 20 k.m. 40 passengers 80%
= 15,36,000 passenger km.
Question 2
A lorry starts with a load of 24 tonnes of goods from station A. It unloads 10 tonnes at station
B and rest of goods at station C. It reaches back directly to station A after getting reloaded
with 18 tonnes of goods at station C. The distance between A to B, B to C and then from C to
A are 270 kms, 150 kms and 325 kms respectively. Compute Absolute tonnes km. and
Commercial tones-km.
Solution
Absolute tonnes km.:
= Weight in tonnes Distance in km.
= From A to B + from B to C + from C to A
= (24 tonnes 270 km.) + (14 tons 150 km.) + (18 tonnes 325 km.)
= 6,480 tonnes-km. + 2,100 tonnes-km. + 5,850 tonnes-km.
= 14,430 tonnes-km.
Commercial Tonnes km.
= Average weight load Total distance (km.) travelled
=

+ +
3
18 14 24
Tonnes 745 km.
= 13,906.67 Tonnes km
Costing for Transport Agencies
Question 3
A Mineral is transported from two mines 'A' and 'B' and unloaded at plots in a Railway
Station. Mine A is at a distance of 10 km., and B is at a distance of 15 km. from railhead plots.
A fleet of lorries of 5 tonne carrying capacity is used for the transport of mineral from the
mines. Records reveal that the lorries average a speed of 30 km. per hour, when running and
regularly take 10 minutes to unload at the railhead. At mine 'A' loading time averages 30
minutes per load while at mine 'B' loading time averages 20 minutes per load.
Drivers' wages, depreciation, insurance and taxes are found to cost ` 9 per hour operated.
Fuel, oil, tyres, repairs and maintenance cost ` 1.20 per km.
The Institute of Chartered Accountants of India
8.5 Cost Accounting
Draw up a statement, showing the cost per tonne-kilometer of carrying mineral from each
mine.
Solution
Statement showing the cost per tonne-kilometre of carrying mineral from each mine
Mine A (`) Mine B (`)
Fixed cost per trip: (Refer to working note 1)
(Driver's wages, depreciation, insurance and taxes)
A: 1 hour 20 minutes @ ` 9 per hour 12.00
B: 1 hour 30 minutes @ ` 9 per hour 13.50
Running and maintenance cost:
(Fuel, oil, tyres, repairs and maintenance)
A: 20 km. ` 1.20 per km. 24.00
B: 30 km. ` 1.20 per km. 36.00
Total cost per trip 36.00 49.50
Cost per tonne km
(Refer to working note 2)
0.72
36
50tonne km



`

0.66
49.50
75tonne km



`

Working notes
Mine- A Mine- B
(1) Total operated time taken per trip
Running time to & fro 40 minutes 60 minutes

60minutes
20km.
30km.

60minutes
30km.
30km.

Un-loading time 10 minutes 10 minutes
Loading time 30 minutes 20 minutes
Total operated time 80 minutes or 90 minutes or
1 hour 20 minutes 1 hour 30 minutes
(2). Effective tones km. 50
(5 tonnes 10 km.)
75
(5 tonnes 15 km.)

Question 4
EPS is a Public School having 25 buses each plying in different directions for the transport of
its school students. In view of large number of students availing of the bus service, the buses
work two shifts daily both in the morning and in the afternoon. The buses are garaged in the
The Institute of Chartered Accountants of India
Operating Costing 8.6
school. The workload of the students has been so arranged that in the morning, the first trip
picks up senior students and the second trip plying an hour later picks up junior students.
Similarly, in the afternoon, the first trip takes the junior students and an hour later the second
trip takes the senior students home.
The distance travelled by each bus, one way is 16 km. The school works 24 days in a month
and remains closed for vacation in May and June. The bus fee, however, is payable by the
students for all the 12 months in a year.
The details of expenses for the year 2013-2014 are as under:
Driver's salary payable for all the 12 in months. ` 5,000 per month per driver.
Cleaner's salary payable for all the 12 months ` 3,000 per month per cleaner
(one cleaner has been employed for every five buses).
Licence Fees, Taxes etc. ` 2,300 per bus per annum
Insurance Premium ` 15,600 per bus per annum
Repairs and Maintenance ` 16,400 per bus per annum
Purchase price of the bus ` 16,50,000 each
Life of the bus 16 years
Scrap value ` 1,50,000
Diesel Cost ` 18.50 per litre
Each bus gives an average of 10 km. per litre of diesel. The seating capacity of each bus is 60
students. The seating capacity is fully occupied during the whole year.
The school follows differential bus fees based on distance traveled as under:
Students picked up and
dropped within the range of
distance fromthe school
Bus fee Percentage of students
availing this facility
4 km. 25% of Full 15%
8 km. 50% of Full 30%
16 km. Full 55%
Ignore interest. Since the bus fees has to be based on average cost, you are required to
(i) Prepare a statement showing the expenses of operating a single bus and the fleet of 25
buses for a year.
(ii) Work out average cost per student per month in respect of:
(a) Students coming from a distance of upto 4 km. from the school.
(b) Students coming from a distance of upto 8 km. from the school; and
(c) Students coming from a distance of upto 16 km. from the school.

The Institute of Chartered Accountants of India
8.7 Cost Accounting
Solution
(a) (i) EPS Public School
Statement showing the expenses of operating a single bus and
the fleet of 25 buses for a year
Particulars Per bus
per annum
(`)
Fleet of 25 buses
per annum
(`)
Running costs : (A)
Diesel (Refer to working note 1) 56,832 14,20,800
Repairs & maintenance costs: (B) 16,400 4,10,000
Fixed charges:
Driver's salary
(` 5,000 12 months)
60,000 15,00,000
Cleaners salary
(`3,000
1
/5
th
12 months)
7,200 1,80,000
Licence fee, taxes etc. 2,300 57,500
Insurance 15,600 3,90,000
Depreciation 93,750 23,43,750
Total fixed charges: (C) 1,78,850 44,71,250
Total expenses: (A+B+C) 2,52,082 63,02,050
(ii) Average cost per student per month in respect of students coming from a
distance of:
(a) 4 km. from the school
{` 2,52,082 / (354 students 12 months)}
(Refer to Working Note 2)
` 59.34
(b) 8 km. from the school (` 59.34 2) ` 118.68
(c) 16 km. from the school (` 59.34 4) ` 237.36
Working Notes:
1. Calculation of diesel cost per bus:
No. of trips made by a bus each day 4
Distance travelled in one trip both ways (16 km. 2 trips) 32 km.
Distance traveled per day by a bus (32 km. 4 shifts) 128 km.
Distance traveled during a month (128 km. 24 days) 3,072 km.
The Institute of Chartered Accountants of India
Operating Costing 8.8
Distance traveled per year (3,072 km. 10 months) 30,720 km.
No. of litres of diesel required per bus per year
(30,720 km. 10 km.)
3,072 litres
Cost of diesel per bus per year (3,072 litres ` 18.50) ` 56,832
2. Calculation of number of students per bus:
Bus capacity of 2 trips (60 students 2 trips) 120 students
1
/
4
th
fare students (15% 120 students) 18 students
fare 30% students (equivalent to
1
/
4
th
fare students) 72 students
Full fare 55% students (equivalent to
1
/
4
th
fare students) 264 students
Total
1
/
4
th
fare students 354 students

Question 5
A transport company has a fleet of three trucks of 10 tonnes capacity each plying in different
directions for transport of customer's goods. The trucks run loaded with goods and return
empty. The distance travelled, number of trips made and the load carried per day by each
truck are as under:
Truck No. One way
Distance Km
No. of trips
per day
Load carried
per trip / day tonnes
1 16 4 6
2 40 2 9
3 30 3 8
The analysis of maintenance cost and the total distance travelled during the last two years is
as under
Year Total distance travelled Maintenance Cost `
1 1,60,200 46,050
2 1,56,700 45,175
The following are the details of expenses for the year under review:
Diesel ` 10 per litre. Each litre gives 4 km per litre of diesel on an
average.
Driver's salary ` 2,000 per month
Licence and taxes ` 5,000 per annum per truck
Insurance
` 5,000 per annum for all the three vehicles
Purchase Price per ` 3,00,000, Life 10 years. Scrap value at the end of life is `
The Institute of Chartered Accountants of India
8.9 Cost Accounting
truck 10,000.
Oil and sundries ` 25 per 100 km run.
General Overhead ` 11,084 per annum
The vehicles operate 24 days per month on an average.
Required
(i) Prepare an Annual Cost Statement covering the fleet of three vehicles.
(ii) Calculate the cost per km. run.
(iii) Determine the freight rate per tonne km. to yield a profit of 10% on freight.
Solution
(i) Annual Cost Statement of three vehicles
(`)
Diesel {(1,34,784 km. 4 km) ` 10) (Refer to Working Note 1) 3,36,960
Oil & sundries {(1,34,784 km. 100 km.) ` 25} 33,696
Maintenance {(1,34,784 km. ` 0.25) + ` 6,000}
(Refer to Working Note 2)
39,696
Drivers' salary {(` 2,000 12 months) 3 trucks} 72,000
Licence and taxes (` 5,000 3 trucks) 15,000
Insurance 5,000
Depreciation {(` 2,90,000 10 years) 3 trucks} 87,000
General overhead 11,084
Total annual cost 6,00,436
(ii) Cost per km. run
Cost per kilometer run =
Totalannual cost of vehicles
Totalkilometre travelled annually
(Refer to Working Note 1)
=
6,00,436
4.4548
1,34,784Kms
=
`
`
(iii) Freight rate per tonne km (to yield a profit of 10% on freight)
Cost per tonne km. =
Total annual cost of three vehicles
Total effective tonnes kms. per annum
(Refer to Working Note 1)
The Institute of Chartered Accountants of India
Operating Costing 8.10
=
6,00,436
1.143
5,25,312kms
=
`
`
Freight rate per tonne km.
1.143
1
0.9




`
= ` 1.27
Working Notes:
1. Total kilometre travelled and tonnes kilometre (load carried) by three trucks in
one year
Truck
number
One way
distance in
kms
No. of
trips
(up &
down)
Total
distance
covered in
km per day
Load
carried per
trip / day
in tonnes
Total
effective
tonnes km
1 16 4 128 6 384
2 40 2 160 9 720
3 30 3 180 8 720
Total 468 1,824
Total kilometre travelled by three trucks in one year
(468 km. 24 days 12 months) = 1,34,784
Total effective tonnes kilometre of load carried by three trucks during one year
(1,824 tonnes km. 24 days 12 months) = 5,25,312
2. Fixed and variable component of maintenance cost:
Variable maintenance cost per km =
Difference inmaintenance cost
Difference indistance travelled

=
46,050 45,175
1,60,200kms 1,56,700kms
` `

= ` 0.25
Fixed maintenance cost = Total maintenance costVariable maintenance cost
= ` 46,050 1,60,200 kms ` 0.25
= ` 6,000
Question 6
(a) A transport company has 20 vehicles, which capacities are as follows:
No. of Vehicles Capacity per vehicle
5 9 tonne
6 12 tonne
The Institute of Chartered Accountants of India
8.11 Cost Accounting
7 15 tonne
2 20 tonne
The company provides the goods transport service between stations A to station B.
Distance between these stations is 200 kilometres. Each vehicle makes one round trip
per day an average. Vehicles are loaded with an average of 90 per cent of capacity at
the time of departure from station A to station B and at the time of return back loaded
with 70 per cent of capacity. 10 per cent of vehicles are laid up for repairs every day.
The following information are related to the month of October, 2013:
Salary of Transport Manager ` 30,000
Salary of 30 drivers ` 4,000 each driver
Wages of 25 Helpers ` 2,000 each helper
Wages of 20 Labourers ` 1,500 each labourer
Consumable stores ` 45,000
Insurance (Annual) ` 24,000
Road Licence (Annual) ` 60,000
Cost of Diesel per litre ` 35
Kilometres run per litre each vehicle 5 Km.
Lubricant, Oil etc. ` 23,500
Cost of replacement of Tyres, Tubes, other parts etc. ` 1,25,000
Garage rent (Annual) ` 90,000
Transport Technical Service Charges ` 10,000
Electricity and Gas charges ` 5,000
Depreciation of vehicles ` 2,00,000
There is a workshop attached to transport department which repairs these vehicles and
other vehicles also. 40 per cent of transport managers salary is debited to the workshop.
The transport department is charged ` 28,000 for the service rendered by the workshop
during October, 2013. During the month of October, 2013 operation was 25 days.
You are required:
(i) Calculate per ton-km operating cost.
(ii) Find out the freight to be charged per ton-km, if the company earned a profit of 25
per cent on freight.


The Institute of Chartered Accountants of India
Operating Costing 8.12
Solution
(a) (i) Operating Cost Sheet for the month of October, 2013
Particulars Amount (`)
A. Fixed Charges:
Managers salary (` 30,000 60%) 18,000
Drivers Salary (` 4,000 30 drivers) 1,20,000
Helpers wages (` 2,000 25 helpers) 50,000
Labourer wages (` 1,500 20 labourers) 30,000
Insurance (` 24,000 12 months) 2,000
Road licence (` 60,000 12 months) 5,000
Garage rent (` 90,000 12 months) 7,500
Transport Technical Service Charges 10,000
Share in workshop expenses 28,000
Total (A) 2,70,500
B. Variable Charges:
Cost of diesel (Working Note 1) 12,60,000
Lubricant, Oil etc. 23,500
Depreciation 2,00,000
Replacement of Tyres, Tubes & other parts 1,25,000
Consumable Stores 45,000
Electricity and Gas charges 5,000
Total (B) 16,58,500
C. Total Cost (A + B) 19,29,000
D. Total Ton-Kms. (Working Note 2) 18,86,400
E. Cost per ton-km. (C D) 1.022
(ii) Calculation of Chargeable Freight
Cost per ton-km. ` 1.022
Add: Profit @ 25% on freight or 33% on cost ` 0.341
Chargeable freight per ton-km. ` 1.363 or ` 1.36


The Institute of Chartered Accountants of India
8.13 Cost Accounting
Working Notes:
1. Cost of Diesel:
Distance covered by each vehicle during October, 2013
= 200 k.m. 2 25 days 90 % = 9,000 km.
Consumption of diesel =
9,000k.m. 20vehicles
36,000 litres.
5k.m.

=
Cost of diesel = 36,000 litres ` 35 = ` 12,60,000.
2. Calculation of total ton-km:
Total Ton-Km. = Total Capacity Distance covered by each vehicle Average
Capacity Utilisation ratio.
( ) ( ) ( ) ( )
( ) 90% 70%
= 5 9 ton 6 12ton 7 15 ton 2 20 ton 9,000k.m.
2
+
+ + +

=
( ) 45 72 105 40 9,000 k.m. 80% + + +

= 262 9,000 80%.
= 18,86,400 ton-km.
Question 7
A transport company has been given a 40 kilometre long route to run 5 buses. The cost of
each bus is ` 6,50,000. The buses will make 3 round trips per day carrying on an average 80
percent passengers of their seating capacity. The seating capacity of each bus is 40
passengers. The buses will run on an average 25 days in a month. The other information for
the year 2013-14 are given below:
Garage rent ` 4,000 per month
Annual repairs and maintenance ` 22,500each bus
Salaries of 5 drivers ` 3,000 each per month
Wages of 5 conductors ` 1,200 each per month
Managers salary ` 7,500 per month
Road tax, permit fee, etc. ` 5,000 for a quarter
Office expenses ` 2,000 per month
Cost of diesel per litre ` 33
Kilometre run per litre for each but 6 kilometres
Annual depreciation 15% of cost
Annual Insurance 3% of cost
The Institute of Chartered Accountants of India
Operating Costing 8.14
You are required to calculate the bus fare to be charged from each passenger per kilometre, if
the company wants to earn profits of 33
1
/
3
percent on taking (total receipts from passengers).
Solution
Operating Cost Sheet for the year 2013- 14
Particulars Total Cost (`)
A. Fixed Charges:
Garage rent (`4,000 12 months) 48,000
Salary of drivers (`3,000 5 drivers 12 months) 1,80,000
Wages of Conductors (`1,200 5 conductors 12 months) 72,000
Managers salary (` 7,500 12 months) 90,000
Road Tax, Permit fee, etc. (` 5,000 4 quarters) 20,000
Office expenses (` 2,000 12 months) 24,000
Insurance (` 6,50,000 5 buses 3%) 97,500
Total (A) 5,31,500
B. Variable Charges:
Repairs and Maintenance (` 22,500 5 buses) 1,12,500
Depreciation (` 6,50,000 5 buses 15%) 4,87,500
Diesel {(3,60,000 km. 6 km.) `33} 19,80,000
Total (B) 25,80,000
Total Cost (A+B) 31,11,500
Add: 33
1
/
3
% Profit on takings or 50% on cost 15,55,750
Total Takings (Total bus fare collection) 46,67,250
Total Passenger-km. (Working Note 2) 1,15,20,000
Bus fare to be charged from each passenger per km. 0.405
Working Notes:
1. Total Kilometres to be run during the year 2013-14
= 40 km. 2 sides 3 trips 25 days 12 months 5 buses = 3, 60,000 Kilometres
2. Total passenger Kilometres
= 3,60,000 km. 40 passengers 80% = 1,15,20,000 Passenger- km.
Question 8
The following information relates to a bus operator:
The Institute of Chartered Accountants of India
8.15 Cost Accounting
Cost of the bus ` 18,00,000
Insurance charges 3% p.a.
Manager-cum accountant's salary ` 8,000 p.m.
Annual Tax ` 50,000
Garage Rent ` 2,500 p.m.
Annual repair & maintenance ` 1,50,000
Expected life of the bus 15 years
Scrap value at the end of 15 years ` 1,20,000
Driver's salary ` 15,000 p.m.
Conductor's salary ` 12,000 p.m.
Stationery ` 500 p.m.
Engine oil, lubricants (for 1200 km.) ` 2,500
Diesel and oil (for 10 km.) ` 52
Commission to driver and conductor (shared equally) 10% of
collections
Route distance 20 km long
The bus will make 3 round trips for carrying on the average 40 passengers in each trip.
Assume 15% profit on collections. The bus will work on the average 25 days in a month.
Calculate fare for passenger-km
Solution
Working Notes:
(i) Calculation of Depreciation of Bus (Per month)

Cost of thebus Scrapvalueat theendof the15years
=
Expectedlifeof thebus

18,00,000 1,20,000
=
15years
` `

= ` 1,12,000 p.a.
Depreciation per month = =
1,12,000
9,333.33
12months
`
`
(ii) Calculation of total distance travelled and Passenger-km. per month
Total distance = 3 trips 2 20 k.m. 25 days = 3,000 k.m.
Total Passenger-km. = 3 trips 2 20 k.m. 25 days 40 passengers
The Institute of Chartered Accountants of India
Operating Costing 8.16
= 1,20,000 Passenger-k.m.
(iii) Cost of Engine oil, Lubricants and Diesel & oil (Per month)
Engine oil & lubricants
Totaldistancetravelled
= 2,500
1,200K.m.
`

3,000K.m.
= 2,500
1,200K.m.
`
= ` 6,250
Diesel and Oil
Totaldistancetravelled
= 52
10K.m.
`

3,000K.m.
= 52
10K.m.
` = `15,600
Statement showing the Operating Cost per Passenger-km.
(`) (`)
(i) Standing Charges:
Depreciation {Working Note- (i)} 9,333.33

Insurance Charge
18,00,000
3%
12



`

4,500
Manager-cum-accountants salary 8,000

Annual Tax (p.m.)
50,000
12



`

4,166.67
Garage Rent 2,500 28,500
(ii) Maintenance Charges:

Repair & Maintenance per month
1,50,000
12



`

12,500
(iii) Running Cost:
Drivers Salary 15,000
Conductors Salary 12,000
Stationery 500
Engine oil & Lubricants {Working Note- (iii)} 6,250
Diesel and oil {Working Note- (iii)} 15,600
Total running cost before deducting commission to
driver and conductor
49,350 49,350
Total cost excluding commission to driver and
conductor

90,350
The Institute of Chartered Accountants of India
8.17 Cost Accounting
Drivers commission on collection* 6,023.34
Conductors commission on collection* 6,023.33
Total Cost (i) +(ii) + (iii) 1,02,396.67
Add: Profit** 18,070
Total Collection 1,20,466.67
Working Note:
Total costs before commission on collection and net profit is ` 90,350.
Commission on collection to driver and conductor is 10% of collection and Profit is 15%
of collection means
100% - (10% + 15%) i.e. 75% = ` 90,350
So, Total collection =
90,350
100 = 1,20,466.67
75
`
`
*Total Commission on collection = 10% ` 1,20,466.67 = ` 12,046.67
Drivers share = 50% ` 12,046.67 = 6,023.34
Conductors share = 50% ` 12,046.67 = 6,023.33
** Profit on collection = ` 1,20,466.67 15% = ` 18,070
Fare per Passenger-km.
Total Collection
=
Total Passenger - km. {WorkingNote(ii)}


1,20,466.67
=
1,20,000
`

= ` 1.004 (appx.)
Costing for Airlines
Question 9
In order to develop tourism, ABCL airline has been given permit to operate three flights in a
week between X and Y cities (both side). The airline operates a single aircraft of 160 seats
capacity. The normal occupancy is estimated at 60% through out the year of 52 weeks. The
one-way fare is ` 7,200. The cost of operation of flights are:
Fuel cost (variable) ` 96,000 per flight
Food served on board on non-chargeable basis ` 125 per passenger
Commission 5% of fare applicable for all booking
Fixed cost:
The Institute of Chartered Accountants of India
Operating Costing 8.18
Aircraft lease ` 3,50,000 per flight
Landing Charges ` 72,000 per flight
Required:
(i) Calculate the net operating income per flight.
(ii) The airline expects that its occupancy will increase to 108 passengers per flight if the
fare is reduced to ` 6,720. Advise whether this proposal should be implemented or not.
Solution
(i) No. of passengers 160 seats 60% = 96
(`) (`)
Fare collection (96 passengers `7,200) 6,91,200
Variable costs:
Fuel 96,000
Food (96 passengers `125) 12,000
Commission (5% of `6,91,200) 34,560 1,42,560
Contribution per flight 5,48,640
Fixed costs:
Aircraft Lease 3,50,000
Landing charges 72,000 4,22,000
Net income per flight 1,26,640
(ii)
Fare collection (108 passengers ` 6,720) 7,25,760
Variable costs:
Fuel 96,000
Food (108 passengers `125) 13,500
Commission (5% of ` 7,25,760) 36,288 1,45,788
Contribution 5,79,972
There is an increase in contribution by ` 31,332. Hence the proposal is acceptable.




The Institute of Chartered Accountants of India
8.19 Cost Accounting
Costing for Clubs and Library
Question 10
A Club runs a library for its members. As part of club policy, an annual subsidy of upto ` 5 per
member including cost of books may be given from the general funds of the club. The
management of the club has provided the following figures for its library department.
Number of Club members 5,000
Number of Library members 1,000
Library fee per member per month ` 100
Fine for late return of books ` 1 per book per day
Average No. of books returned late per month 500
Average No. of days each book is returned late 5 days
Number of available old books 50,000 books
Cost of new books ` 300 per book
Number of books purchased per year 1,200 books
Cost of maintenance per old book per year ` 10

Staff details No. Per Employee Salary per month (`)
Librarian 01 10,000
Assistant Librarian 03 7,000
Clerk 01 4,000
You are required to calculate:
(i) the cost of maintaining the library per year excluding the cost of new books;
(ii) the cost incurred per member per month on the library excluding cost of new books; and
(iii) the net income from the library per year.
If the club follows a policy that all new books must be purchased out of library revenue
(a) What is the maximum number of books that can be purchased per year and
(b) How many excess books are being purchased by the library per year?
Also, comment on the subsidy policy of the club
Solution
(`) (`)
Total Revenue
Library fees per month (1,000 members `100) 1,00,000
The Institute of Chartered Accountants of India
Operating Costing 8.20
Late fees per month (500 times 5 books `1) 2,500
Total Revenue per month 1,02,500
Total Revenue per annum (` 1,02,500 12 months) 12,30,000
Total Cost
Staff Costs:
Librarian (`10,000 1 person 12 months) 1,20,000
Assistant Librarian (` 7,000 3 persons 12 months) 2,52,000
Clerk (` 4,000 1 person 12 months) 48,000 4,20,000
Books maintenance cost (50,000 books ` 10) 5,00,000
Total maintenance cost per annum excluding cost of new books 9,20,000
Cost incurred per library member per annum (` 9,20,000 1,000) 920
Cost incurred per library member per month on the library
excluding cost of new books (` 920 12 months)

76.67
Cost incurred per club member per annum (` 9,20,000 5,000) 184
Cost incurred per club member per month (`184 12 months) 15.33
Net income from the library per annum
(` 12,30,000 ` 9,20,000)

3,10,000
Cost per new book 300
Maximum number of new books per annum (` 3,10,000 `300) 1,033.33 nos.
Number of books purchased 1,200 nos.
Excess books purchased (1,200 nos. 1,033.33 nos.) 166.67 nos.
Subsidy being given per annum on excess purchase
(166.67 books ` 300)
50,000
Subsidy per library member per annum (` 50,000 1,000 members) 50
Subsidy per club member per annum (` 50,000 5,000 members) 10
Comment: The club is exceeding its subsidy target to members by ` 45 (` 50 `5) per library
member and ` 5 (` 10 5) per club member.
Costing for Hotels & Lodges
Question 11
A company runs a holiday home. For this purpose, it has hired a building at a rent of ` 10,000
per month alongwith 5% of total taking. It has three types of suites for its customers, viz.,
single room, double rooms and triple rooms.
The Institute of Chartered Accountants of India
8.21 Cost Accounting
Following information is given:
Type of suite Number Occupancy percentage
Single room 100 100%
Double rooms 50 80%
Triple rooms 30 60%
The rent of double rooms suite is to be fixed at 2.5 times of the single room suite and that of
triple rooms suite as twice of the double rooms suite.
The other expenses for the year 2013 are as follows:
(`)
Staff salaries 14,25,000
Room attendants wages 4,50,000
Lighting, heating and power 2,15,000
Repairs and renovation 1,23,500
Laundry charges 80,500
Interior decoration 74,000
Sundries 1,53,000
Provide profit @ 20% on total taking and assume 360 days in a year.
You are required to calculate the rent to be charged for each type of suite.
Solution
(i) Total equivalent single room suites
Nature of suite Occupancy (Room-days) Equivalent single room
suites (Room-days)
Single room suites 36,000
(100 rooms 360 days 100%)
36,000
(36,000 1)
Double rooms suites 14,400
(50 rooms 360 days 80%)
36,000
(14,400 2.5)
Triple rooms suites 6,480
(30 rooms 360 days 60%)
32,400
(6,480 5)
1,04,400
(ii) Statement of total cost:
(`)
Staff salaries 14,25,000
Room attendants wages 4,50,000
Lighting, heating and power 2,15,000
The Institute of Chartered Accountants of India
Operating Costing 8.22
Repairs and renovation 1,23,500
Laundry charges 80,500
Interior decoration 74,000
Sundries 1,53,000
25,21,000
Building rent {(`10,000 12 months) + 5% on total taking} 1,20,000+ 5% on total takings
Total cost 26,41,000 + 5% on total
takings

Profit is 20% of total takings
Total takings = ` 26,41,000 + 25% (5% +20%) of total takings
Let x be rent for single room suite
Then 1,04,400 x = 26,41,000 + 0.25 1,04,400 x
Or, 1,04,400 x = 26,41,000 + 26,100 x
Or, 78,300 x = 26,41,000
Or, x = 33.73
(iIi) Rent to be charged for single room suite = ` 33.73
Rent for double rooms suites ` 33.73 2.5 = ` 84.325
Rent for triple rooms suites ` 33.73 5 = ` 168.65

The Institute of Chartered Accountants of India