Operating Costing

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.
The main objective of operating costing is to compute the cost of the services offered by the organization.
For doing this, it is necessary to decide the unit of cost in such cases. The cost units vary from industry to
industry. For example, in goods transport industry, cost per ton kilometer is to be ascertained while in case
of passenger transport, cost per passenger kilometer is to be computed. Cost units used in different service
units are explained in detail later in chapter. The next step is to collect and identify various costs under
different headings.
The headings used are,
(a) Fixed or standing charges
(b) Semi-fixed or maintenance charges
(c) Variable or running charges.
One of the important features of operating costing is that mostly such costs are fixed in nature. For example,
in case of passenger transport organization, most of the costs are fixed while few costs like diesel and oil are
variable and dependent on the kilometers run.
Because of the diverse nature of activities carried out in service undertakings, the cost system used is
obviously different from that of manufacturing concern.
Cost Unit for Operating Costing
Industry Unit of cost
Hospital Per Bed per day or Per patient per day
Nursing Home Per Bed per week or per day
Goods transport Per Tonne Kilometre or per mile
Passenger Transport Per Passenger Km
Hotels Per Room Day or Per Bed Day
Electricity Per Kilo Watt Hour

Q.1
A truck starts with a load of 10 tonnes of goods from station P. It unloads 4 tonnes at station Q and rest of
the goods at station R. It reaches back directly to station P after getting reloaded with 8 tonnes of goods at
station R. The distances between P to Q, Q to R and then from R to P are 40 kms, 60 kms, and 80 kms,
respectively. Compute 'Absolute tonne-km' and 'Commercial tonne-km'.

Q.2
A transport company has 20 vehicles, which capacities are as follows:
No. of Vehicles Capacity per vehicle
5 9 tonne
6 12 tonne
7 15 tonne
2 20 tonne

1
 Operating Costing

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. Calculate ton-km.

Q.3
Prakash Automobiles distributes its goods to a regional dealer using a single Lorry. The dealer's premises are
40 kilometres away by road. The lorry has a capacity of 10 tonnes and makes the journey twice a day fully
loaded on the outward journeys and empty on return journeys. The following information is available for a
Four Weekly period during the year 1990:–
Petrol consumption 8 kilometers per litre
Petrol cost Rs. 13 per litre
Oil Rs. 100 per week
Driver's wages Rs. 400 per week
Repairs Rs. 100 per week
Garage rent Rs. 150 per week
Cost of Lorry (Excluding Tyres) Rs. 4,50,000
Life of Lorry 80,000 kilometres
Insurance Rs. 6,500 per annum
Cost of Tyres Rs. 6,250
Life of Tyres Rs. 25,000 kilometres
Estimated sale value of Lorry at the end of its life Rs.50,000
Vehicle Licence Cost Rs. 1,300 per annum
Other overhead cost Rs. 41,600 per annum
The Lorry operates on a five day week.
Required:
a) A statement to show the total cost of operating the vehicle for the four weekly period analysed
into running costs and fixed costs.
b) Calculate the vehicle cost per kilometer and per tonne kilometer.

Q.4
Drive Comfort Transport Co. has been given a route 20 km. long for running buses. The company has a fleet
of 10 buses each costing ₹ 50,000 and having a life of 5 years without any scrap value.
From the following estimated expenditure and other details calculate the bus fare to be charged from each
passenger.
(i) Insurance charges 3 % p.a.
(ii) Annual tax for each bus ₹ 1,000
(iii) Total garage charges ₹1,000
(iv) Drivers’ salary for each bus ₹150 p.m
(v) conductor’s salary for each bus ₹100 p.m
(Vi) Annual repairs to each bus ₹1,000
(vii) Commission to be shared by the driver and conductor equally: 10% of the takings
(viii) Cost of stationary ₹500 p.m.
(ix) Manager’s salary ₹2,000 p.m.
(x) Accountant’s salary ₹1,500 p.m.

2
 Operating Costing

(xii) Petrol and oil ₹25 per 100 km

Each bus will make 3 round trips carrying on an average 40 passengers on each trip. The bus will run on an
average for 25 days in a month. Assuming 15% profit on takings, calculate, the bus fare to be charged from
each passenger.

QUESTIONS FOR SELF PRACTICE BY STUDENTS

Q.5
Mr. Shenoy has started transport business with a fleet of 10 taxies. The various expenses incurred by him are
given below:
(i) Cost of each taxi ₹ 75,000
(ii) Salary of office Staff ₹ 1,500 p.m.
(iii) Salary of Garage’s Supervisor ₹ 2,000 p.m.
(iv) Rent of Garage ₹ 1,000 p.m
(v) Drivers Salary (per taxi) ₹ 400 pm.
(vi) Road Tax and Repairs per taxi ₹ 2,160 p.a.
(vii) Insurance premium @ 4% of cost p.a.
The life of a taxi is 3,00,000 km. and at the end of which it is estimated to be sold at ₹ 15,000. A taxi runs on
an average 4,000 Km. per month of which 20% it runs empty, petrol consumption 9 Km. per litre of petrol
costing ₹ 6.30 per litre. Oil and other sundry expenses amount to ₹ 10 per 100 Km.
Calculate the effective cost of running a taxi per kilometre. If the hire charge is ₹ 1.80 per Kilometre, find out
the profit that Mr. Shenoy may expect to make in the first year of operation.

Q.6
The Union Transport Company has been given a twenty kilometer long route to play a bus. The bus costs the
company Rs. 1,00,000. It has been insured at 3% per annum. The annual road tax amounts to Rs. 2,000.
Garage rent is Rs. 400 per month. Annual repair is estimated to cost Rs. 2,360 and the bus is likely to last for
five years.
The salary of the driver and the conductor is Rs.600 and Rs. 200 per month respectively in addition
to 10% of takings as commission to be shared equally by them. The manager's salary is Rs.1,400 per month
and stationery will cost Rs. 100 per month. Petrol and oil cost Rs. 50 per 100 kilometers. The bus will make
three round trips per day carrying on an average 40 passengers in each trip. Assuming 15% profit on takings
and that the bus will ply on an average 25 days in a month, prepare operating cost statement on a full year
basis and also calculate the bus fare to be charged from each passenger per kilometer.

Q.7
Union Transport Company supplies the following details in respect of a truck of 5 tonne capacity
Cost of truck ₹ 90,000
Estimated life 10 years
Diesel, oil, grease ₹ 15 per trip each way
Repairs and maintenance ₹500 p.m.
Driver’s wages ₹ 500 p.m.
Cleaner’s wages ₹ 250 p.m.
Insurance ₹ 4,800 per year
Tax ₹2,400 per year
General supervision charges ₹4,800 per year

3
 Operating Costing

The truck carries goods to and from the city covering a distance of 50 kms. each way.
On outward trip freight is available to the extent of full capacity and on return 20% of capacity.
Assuming that the truck runs on an average 25 days a month, work out:
(a) Operating cost tonne-km.
(b) Rate for tonne per trip that the company should charge if a profit of 50% on freight is to be earned.