II - PROCESS & SERVICE COSTING

Processes are the stages of production. In those industries where the production involves several
operations, they are divided into distinct stages or processes of production. Raw materials pass through
different processes before it becomes a finished product. Detailed records (or accounts) are maintained for
each process to record the processing costs.
Process costing is a method of costing. It ascertains costs for a process (or a department) for a period of
time, called ‘cost period’. This method of costing is ideal for those industries which produce one or limited
(and similar) goods, in large scale, with continuous flow of production, process costing is suitable for
industries such as oil refinery, chemicals, textiles, soap, paper, milk-diary, rubber, sugar, mining, food
processing, fertilizers, petroleum products, electronics, paints and varnish, packing, breweries, bottling,
public utility industries like electricity and gas manufacturing etc.
Normally different processes are arranged in a logical order. The input of the first process has to travel
through all the subsequent process and come out of the last process as the finished product. The output of
each process becomes the input of the next (subsequent) process. Along with the transfer of products, the
cost incurred in each process is also transferred to the next process. Finally, completed units are transferred
to finished goods stores.
The total cost of the output is the aggregate of all costs incurred by different processes. Each unit of
output is processed in the same manner. Therefore, cost of production during a particular period is divided
by number of units produced during that period to find out the cost per unit.
Definition and features of process costing:
Process costing is a method of costing used in industries, where units are continuously mass-
produced through one or more processes. The important features of process costing are as follows:
1. The factory is divided into number of departments or cost centers or process. Each department or
process performs specific work or operation.
2. Outputs are identical and homogeneous. Products are indistinguishable in processes.
3. Both the products and processes are standardized.
4. Production is continuous and the output of one process becomes the input of the next process. The
output of the last process is transferred to finished stock.
5. Cost of production is ascertained at each process. Records are maintained to show the quantity and
cost of output of each process. The cost per unit of output calculated by dividing the total cost by
the number of units produced.
6. The cost incurred in each process is transferred to the next process along with the output. Thus, the
last process shows the total cost of the final output.
7. The cost of normal loss in the process is to be absorbed by the output of that process. However
abnormal loss or abnormal gain is transferred to costing profit and loss account.
8. Production is continuous and on large scale basis.
Process costing method is useful for industries with the following features:
1. Continuous and mass production.
2. Homogeneous products.
3. Production involving different process.
4. Output of one process becomes the input of the next process.
5. Products and production functions are standardized.

Notes Compiled by: Asst. Professor Sahana Shetty

 Chapter 2: Process & Service Costing

Difference between job costing and process costing:

Job costing and process costing are the two basic methods of costing. The main differences between these
two methods are given below:
Job costing Process costing
1 Production is undertaken as per specific Production is in anticipation of demand
order from customer
2 Products may be dissimilar Products are identical
3 Each job is separate and independent of Products lose their individual entity as they are
others manufactured in continuous form
4 Product diversification is possible easily It is not possible unless basic changes in
machineries and layout are made
5 Cost is charged to the specific job Cost is ascertained and charged to concerned
process.
6 There is no work-in-progress after the There may be work-in-progress at various stages
completion of the job of production or at the end of the costing period
7 Costs are ascertained only when the jobs are The costs are ascertained at the end of a particular
complete period
8 The diverse nature of jobs may make cost Homogeneous products and continuous
control difficult production make cost control easier.
9 Machines, production facilities and Specialized machines, functions and workers are
employees are more of general performances employed
10 Capital investment is less Capital investment is more.
11 Generally there is no transfer of output from Output of one process is transferred to next
one job to other process.
12 More supervision, production planning, Standardization reduces the need for supervision
control are necessary because of differences and control.
in jobs.

Preparation of process cost accounts:

For each process an individual process account is prepared. All elements of cost Such as material, labour,
overheads etc. relating to a process are debited to this account. The value of normal scrap or spoilage, if
any, is credited to the process account. Excess of expenses over the revenue represents the cost of the
process. This cost is transferred to next process along with the transfer of output.
Process loss: During the course of production some portion of material (or input) is normally lost due to
reasons like processing, chemical change in moisture content etc. The difference between the input
quantity and the output quantity is called process loss.
Normal loss: The loss which is inherent (unavoidable) and uncontrollable in the process of production is
known as normal loss. It arises from the natural course of production. The causes for normal loss are
evaporation, chemical reactions, shrinkage, spoil material etc. Because it is unavoidable, it is estimated and
provided for in advance of production. The estimation can be based on past experience, nature of process
of production and the nature of raw materials. Normal loss is usually expressed as a percentage of input
quantity.
Normal loss may be in the form of (a) normal waste or (b) normal scrap or (c) normal spoilage. Waste,
generally has no recovery value. It is, often, invisible. Scrap is visible. Usually it has some monetary
value, recoverable without further processing. Spoilage refers to those units which are damaged in the
course of manufacturing processes. They cannot be rectified.
2|Page Notes Compiled By: Asst. Prof. Sahana Shetty
 Chapter 2: Process & Service Costing

Normal loss is regarded as the part of the costs of production. It is absorbed by good units produced.
Thus, the cost of good units is inflated (increased) to the extent of normal loss. Normally, no separate
account is opened for normal loss. However, if normal loss units have some realizable value, such a value
is credited to the concerned process account.
Abnormal loss: The process loss which is in excess of normal loss is known as abnormal loss. It is
avoidable and controllable. It is callused by abnormal or unexpected conditions such as poor quality
materials, machine break-downs, negligence, carelessness, accidents, bad plant designs, bad workmanship
etc. Abnormal loss does not arise on account of nature of the production process. It can be controlled by
taking corrective steps.
The treatment of abnormal loss differs from that of treatment of normal loss. Abnormal loss is not
charged to good units manufactured. Abnormal loss is valued just like good units. This value is
transferred to a separate account called abnormal loss account.
Value of abnormal loss = Cost of normal production X Abnormal loss units
Normal production (units)
If abnormal loss units have any realizable value, it is to be credited to abnormal loss account. The balance
in abnormal loss account is to be transferred to costing profit and loss account.
Abnormal gain: It is also known as abnormal effectiveness or abnormal efficiency. Normal loss is
generally expected and allowed in advance of actual production. If the actual loss is less than the normal
loss (expected loss) provided for the difference is known as abnormal gain. Abnormal gain is the excess
of units produced over the expected units of production.
The abnormal gain is valued just like good units. The value of abnormal gain is credited to a separate
account called abnormal gain account. Abnormal gain is the result of the normal loss being less than the
pre-determined quantity of production. The value of scrap realized shown against the normal loss in the
process accounts gets reduced by the scrap value of units treated as abnormal gain units. Thus, the value of
scrap realized is less due to abnormal gain. Therefore, the value of units expected and shown as normal
loss units but resulted in abnormal gain, is debited to abnormal gain account. The balance of abnormal
gain account is transferred to costing profit and loss account.

Value of abnormal gain = Cost of normal production X Abnormal gain units

Normal production (units)

ILLUSTRATIONS
1. A product passes through 3 processes A, B and C. The normal wastage of each process is as follows:
Process A - 3%, Process B - 5%, Process C - 8%.
Wastage of Process A sold at 25 paise per unit, that of Process B at 50 paise per unit and that of C at
Re. 1 per unit. 10,000 units were issued to Process A at a cost of Re. 1 per unit.
Other expenses were as follows:
A (₹) B (₹) C (₹)
Sundry Materials 1000 1500 500
Labour 5000 8000 6500
Expenses 1050 1188 2009
Output in units 9500 9100 8100
Prepare the Process accounts. There was no opening or closing stocks.

3|Page Notes Compiled By: Asst. Prof. Sahana Shetty

 Chapter 2: Process & Service Costing

2. A product is obtained after it passes through three distinct processes. You are required to prepare
process accounts from the following information.
Particulars Total Process
₹ A (₹) B (₹) C (₹)
Materials 21260 7300 6060 7900
Direct wages 26250 6750 8750 10750
Production overheads 26250
1000 units at ₹ 8/- per unit were introduced in Process ‘A’. Production overheads are to be distributed
at 100% on direct wages.
Actual output Normal loss Value of scrap Per unit (₹)
Process A 950 units 5% 6.00
Process B 840 units 10% 8.00
Process C 750 units 15% 10.00
Also prepare abnormal loss or gain account if it arises in any process.
3. The product of a company passes through three distinct processes to completion. From past
experience, it is ascertained that wastage is incurred in each process as under:
Process A = 2%, Process B = 5%, Process C = 10%
The wastage of Process ‘A’ and Process ‘B’ is sold at ₹ 20 per 100 units and that of Process C at ₹ 160
per 100 units.
Following is the information regarding the production in March 2020.
Process A (₹) Process B (₹) Process C (₹)
Materials 24000 16000 8000
Direct labour 32000 24000 12000
Machine expenses 4000 4000 6000
Other factory expenses 7000 7600 8400
20000 units have been issued to Process A at a cost of ₹ 40000. The output of each process has been
as under:
Process A 19500 units
Process B 18800 units
Process C 16600 units
There was no stock in any process in the beginning and at the end of March. Prepare Process cost
accounts, Abnormal loss a/c and Abnormal gain a/c if it arises in any process.
4. An article has to undergo three different processes before it becomes ready for sale. From the
following information find out cost of production per unit of that article, if 200 units of the article
were manufactured up-to 31st December 2019.
Manufacturing Refining Finishing
Process (₹) Process (₹) Process (₹)
Material 2000 1000 750
Labour 1500 2500 1000
Direct expenses 400 200 300
The indirect expenses for the period amount to ₹ 6000 in the factory out of which ₹ 2000 is
attributable to this product. There was no stock at the end in any process. The indirect expenses

4|Page Notes Compiled By: Asst. Prof. Sahana Shetty

 Chapter 2: Process & Service Costing

should be allocated to each process on the basis of labour. If an order for 500 units of an article is
received, prepare production order for the same.
5. A particular brand of phenyl passed through three processes. During the week ended 15 th Jan 2020,
600 gross bottles were produced. The cost book shows the following information.
Process I (₹) Process II (₹) Process III (₹)
Material 4000 2000 1500
Labour 3000 2500 2500
Direct expenses 600 200 500
Cost of bottles - 2030 -

Crushing (₹) Refining (₹) Finishing (₹)

Raw materials 225000 -- --
(500 tons of Copra)
Wages 8000 5900 5875
Power 1200 1000 1500
Sundry Materials 500 1900 --
Factory Expenses 600 1000 950
Cost of drums for storing finished oil was ₹ 21,025. 200 tons of oil cake were sold for ₹ 15000 and 275
tons of crude oil were obtained. Sundry by-products of crushing process fetched ₹ 900. By-products
after refining the oil was sold for ₹ 900 (20 tons) and 250 tons of refined oil were obtained. 240 tons
of finished oil were stored in drums and 10 tons were sold for ₹ 1200.
The establishment expenses for the period amounted to ₹ 3500 which are to be charged to the three
processes in proportion of 3:2:2.
Prepare the process accounts.
6. The following details are taken from the books of an oil mill for one month ended 31st March 2020.
Purchase of 100 tons of oil seeds at ₹ 1000 per ton.
Crushing (₹) Refining (₹) Finishing (₹)
Wages 1000 700 900
Sundry Stores 200 600 100
Electricity 700 600 400
Factory expenses 500 400 300
Containers -- -- 2350

60 tons of crude oil were produced. 51 tons of oil were produced in the refining process. 50 tons of
refined oil were finished for delivery. Hundred empty bags of oil seeds were sold for ₹ 100. 35 tons of
oil cake were sold at ₹ 60 per ton. Loss in weight in crushing was 5 tons. 8.5 tons of by-product from
refining process were valued at ₹ 2550.
Make out accounts in respect of each process and calculate the cost of the product per ton at the end
of each process.
6. The following details are extracted from the costing records of an oil mill for the month of March
2020. Purchase of 500 tons of copra costing ₹ 200000.

5|Page Notes Compiled By: Asst. Prof. Sahana Shetty

 Chapter 2: Process & Service Costing

Crushing Refining Finishing

(₹) (₹) (₹)
Labour 2500 1000 1500
Power 600 360 240
Other materials 100 2000 --
Repairs 280 330 140
Steam 600 450 450
Expenses 1320 660 220
Cost of drums -- -- 7500
Sacks sold 400 -- --
Production (tons) 300 250 248

175 tons of copra residue sold for ₹ 11000. Loss in weight in crushing process 25 tons. 45 tons of by-
products got in refining process valued at ₹ 6750. Prepare the process accounts.
7. The product of a company passes through three distinguished processes to completion. In each
process 2 % of the total weight is lost. 10 % of the total weight is scrap which realises ₹ 100 per ton in
process I and ₹ 30 a ton in process II and III. The expenses incurred are as follows:
Process I Process II Process III
Input Tons 1000 Tons 160 Tons 654
Raw Materials 120000 28000 95000
Wages 20500 10500 15350
Overheads 10300 7200 8655
50 % of the output of Process I is passed to Process II and the rest transferred to warehouse. 75 % of
the output of Process II is transferred to Process III. You are asked to prepare Process Accounts.
8. Process D passes through three processes namely P1, P2 and P3. The details of expenses and other
particulars of the 3 processes for the year 2019 are as follows:
P1 (₹) P2 (₹) P3 (₹)
Materials 10000 15000 5000
Process Wages 30000 80000 65000
Chargeable expenses 6000 18150 27200
Selling price per unit of output 120 165 250
Sales value of scrap per unit 2 5 10
Normal Loss 5% 15% 20%
Actual output (units) 9300 5400 2100

10000 units at ₹ 100 each were issued to P1 process. 2/3 of the output of P1 and 1/2 of the output of
P2 process was transferred to next process and the balance was sold. The entire output of P3 was
sold. Management expenses during the year were ₹ 80000 and selling expenses were ₹ 50000 which
were not allotted to the process accounts.
You are required to prepare:
1) Process Accounts
2) Abnormal Loss/Gain A/c if any and
3) Finished stock A/c
4) Statement of profit

6|Page Notes Compiled By: Asst. Prof. Sahana Shetty

 Chapter 2: Process & Service Costing

9. X Ltd. Processes a patent material used in building. The material is produced in three consecutive
grades - Soft, Medium and Hard.
Soft I Medium II Hard III
Raw Material used 1000 tons -- --
Cost per ton ₹ 200 -- --
Manufacturing wages and expenses ₹ 87500 ₹ 39500 ₹ 10710
Weight lost 5% 10% 20%
(% of the input of the process)
Scrap (sale price ₹ 50 per ton) 50 tons 30 tons 51 tons
Sales price per ton ₹ 350 ₹ 500 ₹ 800

Management expenses were ₹ 17500 and selling expenses were 10000. Two third of the output of
Process I and one-half of Process II are passed on to the next process and the balances are sold. The
entire output of Process III is sold. Prepare the three Process Accounts and a statement of profit.
10. The finished product of a factory has to pass through three processes (A, B and C). The normal
wastage of each process is 2% in process A, 5% in process B and 10% in process C. The percentage of
wastage is computed on the number of units entering each process.
The scrap value of wastage of process A, B and C are ₹ 10, ₹ 40 and ₹ 20 per 100 units respectively.
The output of each process is transferred to the next process and the finished products are
transferred from process C into stock. The following further information is obtained.
Process A (₹) Process B (₹) Process C (₹)
Materials used 24000 12000 12000
Direct wages 16000 10000 8000
Manufacturing expenses 5000 7000 5000

Establishment expenses amounted to ₹ 8500 which has to be apportioned in the proportion of Direct
wages amongst the three processes. 20000 units have been put into process A at a cost of ₹ 60000.
The output of each process has been A - 19600, B - 18400, C - 16700.
Prepare:
A) Process Accounts
B) Normal Loss Account
C) Abnormal Loss Account
D) Abnormal Gain Account
11. Product X required three distinct processes P1, P2, P3 and after the third process product is
transferred to finished stock. Prepare variou process accounts from the following:
Total (₹) Process A (₹) Process B (₹) Process C (₹)
Direct materials 5000 4000 600 400
Direct labour 4000 1500 1600 900
Direct expenses 800 500 300 --

Production overhead ₹ 6000 (to be allocated on the basis of direct wages). Production was 200 units.
There was no opening or closing stock.

7|Page Notes Compiled By: Asst. Prof. Sahana Shetty

 Chapter 2: Process & Service Costing

FIVE MARKS QUESTIONS

12. In process “A”, 100 units of raw materials were introduced at a cost of ₹ 1000. The other expenditure
incurred by the process is ₹ 600. Of the units introduced 10% are normally scraped in the course of
manufacture and they possess a scrap value of ₹ 7 per unit. The output of process “A” was only 75
units. Prepare Process “A” Account.
13. The output of process A is 5000 units. 400 units are considered as abnormal loss. Normal loss allowed
is 10%. From the following information, prepare process account. Materials @ ₹ 20 per unit of input,
wages ₹ 16000, overhead ₹ 13400, wastage realised ₹ 10 per unit.
14. The output of process ‘A’ totalled 5000 units. It was considered that 400 units were an abnormal loss.
Normal loss allowed was 10%. Additional information obtained was as under:
Material @ ₹ 10 per unit, labour ₹ 16000, overhead ₹ 13400, wastage realised ₹ 5 per unit.
Prepare process ‘A’ account and Abnormal Loss account.

SERVICE or OPERATING COSTING

Service/Operating costing: It is a method of costing applied to undertakings which provide service to find
out the cost of service rendered. In other words, it is the cost of providing a service. It is also known as
service costing.
ICMA, London defines operating costing or service 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.
Undertakings to which this method of costing is applied are (Undertakings & Cost unit):
1. Transport company - passenger-kilometer, ton-kilometer.
2. Hospitals - per bed or patient per day
3. Electricity supply - kilowatt-hour
4. Cinema theatre - per person per show
5. Hotels - per meal or cup of coffee etc.
6. Street lighting - per point or per lamp etc.
Features:
1. This method of costing is used by undertakings rendering services.
2. Cost unit may be simple (i.e., per student in a school) or composite (i.e., passenger kilometer or ton
kilometer in transport companies).
3. Costs are classified as fixed and variable costs.
4. Costs are usually collected for a given period of time i.e., per month, year, etc.
5. Total costs are averaged over the total amount of service rendered.
6. Service costing is used by organisations which provide services externally (i.e., public at large) or
internally (i.e., providing services to other departments of the same organization like repairs and
maintenance, canteen, internal transport etc.
Differences between Service costing & Process costing:
It differs in the following ways due to some basic and peculiar nature.
(i) Unlike products, services are intangible and cannot be stored, hence, there is no inventory for the
services.
(ii) Use of Composite cost units for cost measurement and to express the volume of outputs.
8|Page Notes Compiled By: Asst. Prof. Sahana Shetty
 Chapter 2: Process & Service Costing

(iii) Unlike a product manufacturing, employee (labour) cost constitutes a major cost element than
material cost.
(iv) Indirect costs like administration overheads are generally have a significant proportion in total cost
of a service as unlike manufacturing sector.
Transport costing: It is a method of ascertaining the cost of carrying passengers or goods for a certain
distance. The cost unit is generally passenger-kilometer or ton-kilometer. The total operating cost is
divided by corresponding passenger/ton-kilometer to find out the cost of carrying one passenger/ton for
one kilometer.
Operating cost statement: It is prepared periodically usually monthly or yearly. It shows both the total
costs and cost per passenger/ton per kilometer.
Cost Classification: Under service costing, the total cost is generally divided into two:
1. Fixed cost (standing charges): The fixed costs are put together and the total fixed cost is divided
by the units of service rendered.
2. Variable cost (running and maintenance charges): The variable costs are individually divided by
the number of units of service rendered.
However, it may be noted that there is no hard and fast rules for classification of costs as fixed and
variable. An item of cost may be considered as variable in one circumstance and may be considered as
fixed in other circumstances.
A proforma of operating cost statement of a transport company is as follows:
XYZ Company
Operating cost statement
Base period: Month or year Total Passenger/ton-kilometer: xxxxxx
Particulars Total cost Cost per
Passenger/ton km.
Fixed cost:
Wages of drivers, conductors, cleaners etc. X
Salary of manager, supervisor accountant, clerk etc. X
Insurance X
License fees X
Road tax X
Garage rent X
Permit fees X
Supervision charges X
Office and administration overhead X
Workshop expenses X
Stationery X
Cost of tyre, tube etc. X
Total fixed cost XXX
Fixed cost per passenger/ton kilometer X
Variable cost:
Depreciation X X
Repairs and maintenance X X
Diesel/petrol X X
Operating cost XXX XX
Profit X
Net takings (rate per passenger/ton per km) XXX
9|Page Notes Compiled By: Asst. Prof. Sahana Shetty
 Chapter 2: Process & Service Costing

Formulae:
Total kms = Distance x No of working days x No of trips x No of vehicles
Total passkm/tonkm = (Distance x capacity x capacity utilized) x No of working days x No of trips x No of
vehicles

ILLUSTRATIONS

1. From the following information, calculate total kilometers and total passenger-kilometers.
Number of buses :5
Days operated in the month : 25
Trips made by each bus :4
Distance of route : 25 km (one side)
Capacity of bus : 50 passengers
Normal passenger travelling : 90% of capacity

2. From the following calculate the total passenger kms:

No. of buses – 10; No. of days operated in a month – 28; No. of trips by each bus per day – 2 trips;
distance of route – 25 kms (one side); capacity of the bus – 50 passengers; normal capacity – 80%.
3. Vivek travels has four buses, operating between two cities Mangalore and Kollur which are 140 kms
apart. Each bus makes two trips a day. The seating capacity is 50 seats. On an average 80% seats are
occupied. Calculate passenger kms. for the month of July 2010 in which each bus was laid down for
six days for repairs.
4. Suraksha Transport Company has 4 mini trucks, each with a capacity of 5 tons. Each truck makes 6
trips a day between two places, 30 kms apart. In the onward journey full load of trucks and in the
return journey on an average 20% of capacity filled with provisions. Trucks are laid down for repairs
and rest for 5 days in a month of 30 days. Calculate the effective Ton kms.
5. SRS Travels, operates a 40 seats capacity Volvo bus in a month as follows:
Capacity From To Distance
First 10 days Full Kundapur Hasan 160 km
Next 15 days 75% Kundapur Hubli 250 km
Next 5 days 60% Kundapur Mangalore 100 km

6. Prepare an operating cost statement from the following information:

Rs. Rs.
Cost of vehicle 450000 Road license p.a. 7500
Supervisor’s salary p.a. 26500 Drivers wage per hour 40
Repairs, maintenance per km 2 Cost of fuel, oil etc., per litre 6
Tyre cost per km 1.5 Garage rent p.a. 6000
Insurance p.a. 5000 Km. running per litre 5
Kilometer run during the year 6000
Estimated life of the vehicle is 450000 km.
Tons per km. (average) was 5. The vehicle runs 20 km. per hour on an average.

10 | P a g e Notes Compiled By: Asst. Prof. Sahana Shetty

 Chapter 2: Process & Service Costing

7. Mr. Avtar Singh has been given a permit to run a bus in between two towns which are 25 kms
apart. From the following information, assuming 10% profit on takings for Mr. Avtar Singh work out
the bus fare to be charged in between those two towns for each passenger.
Rs.
Cost of the bus 120000
Annual tax 2400
Diesel – for 100 kms. 72
Oil and stores per month 200
Garage rent per month 200
Repairs estimated per month 450
Insurance per annum 3600
Replacement of tyres and tubes per
month 300
Depreciation at 25% per annum
Salary of conductor per month 300
Salary of Driver per month 450
Salary of accountant per month 500
Permit fee per month 100
Miscellaneous expenses per month 800
Commission to driver and conductor at
10% of the takings.
The bus will make 3 round trips every day and it carries 30 passengers on an average in each trip.
Further the bus will operate for 25 days during the month.
8. Sugama Transport Ltd owns a bus which runs between Delhi and Chandigarh and back for 10 days in
a month. The distance from Delhi to Chandigarh is 240 kms. The bus completes the trip from Delhi
to Chandigarh and back on the same day.
The bus goes another 10 days in a month towards Agra and the distance between Delhi and Agra is
190 km. This is also completed in the same day. For the rest of 4 days of its operations in a month, it
runs in the local city covering a distance of 70 kms. per day. Calculate the rate per passenger km.
when a profit of 33.33% on takings is maintained.
Other information is as follows:
Salary of conductor Rs 10,500 per month.
Token tax Rs 18,000 per month.
Cost of the bus Rs 20,00,000.
Repairs, maintenance Rs 15,000 per month.
Drivers salary per month Rs 10,500.
The life of the bus is 10 years.
Insurance Rs 5,400 per annum.
Scrap value of the bus after 10 years Rs 2,00,000.
Lubricant oil Rs 200 per 100 kms.
Accountants salary Rs 4,800 per month.
Permit fee Rs 5,000 per month.
Normal capacity of the bus - 50 passengers.

11 | P a g e Notes Compiled By: Asst. Prof. Sahana Shetty

 Chapter 2: Process & Service Costing

Diesel consumption 9 kms per litre at Rs 45 per litre.

The bus generally is occupied 90% of the capacity between Delhi & Chandigarh, 80% between Delhi
& Agra and it is always full when it runs within the city.
9. Coastal carrier company has a truck of 8 tons capacity. The truck carries goods between two cities
covering a distance of 100 km. each way. It makes one round trip each day. On onward trip freight
is available to the extent of full capacity and on return journey it is 25% of the capacity.
The cost of the truck is Rs 7,56,000 and its life is estimated to be 20 years Rs after which it may fetch
a scrap value of Rs. 36,000. Annual tax and insurance are estimated to be Rs 38,400 and Rs 57,600
respectively.
The following information are supplied to you for the month of January 2013:
Diesel, oil per trip, each way Rs 120. Repairs Rs 3,750. Driver’s wages Rs 4,000. Conductors wage Rs
3,000. The truck was laid off on account of repairs for 6 days during the month of January.
You are required to ascertain:
i) Operating cost per ton - km. &
ii) Rate per round trip that the company should charge if a profit of 50% on the freightage is to
be earned.
10. Sugama Tourist runs a bus between Kundapura and Mangalore via Udupi. The distance between
Kundapura and Udupi is 35 kms and between Udupi and Mangalore 60 kms. During the onward
journey, the bus is full of its capacity up to Udupi but only 80% full between Udupi and Mangalore. On
the other hand on the return journey, it is full from Mangalore to Udupi but 75% of the capacity
between Udupi and Kundapura. The following information is provided.
Rs.
Cost of the bus 30,00,000
Estimated scrap value Rs. 20,000
Estimated life 10 years
Annual road tax Rs. 5000
Insurance charges per year Rs. 10,000
Garage rent per year Rs. 24,000
Driver’s salary per year Rs. 15,000
Conductor’s salary per month Rs. 8000
Cleaner’s salary per month Rs. 3000
Cost of diesel per litre Rs. 50
Kms run per litre of diesel 4 kms
Proportionate charges for tyre per km. Rs. 0.50

Capacity of the bus is 50 passengers and the bus makes a round trip from Kundapura to Mangalore on
an average 25 days in the month.
You are required:
a) To compute the cost per passenger km of operating the bus.
b) Assuming 10% profit on takings for the Company, work out the bus fare to be charged in between
Kundapura and Udupi and Udupi and Mangalore for each passenger.
11. A person owns a bus, which runs between Delhi to Chandigarh and back, for 10 days in a month. The
distance from Delhi to Chandigarh is 150 miles. The bus completes the trip from Delhi to Chandigarh
and back in the same day. The bus goes another 10 days in a month towards Agra. The distance from

12 | P a g e Notes Compiled By: Asst. Prof. Sahana Shetty

 Chapter 2: Process & Service Costing

Delhi to Agra is 120 miles. This trip is also completed in the same day. For the rest 4 days of its
operation in a month it runs in the local city. Daily distance covered in local city is 40 miles. Calculate
the rate the person should charge from passenger when he wants to earn the profit of 33 1/3% in his
takings. The other information is given below:
Cost of the bus Rs. 6,00,000
Salary of the driver Rs. 3500 per month
Salary of the conductor Rs. 3500 per month
Salary of part-time accountant Rs. 1600 per month
Insurance Rs. 16800 per month
Token tax Rs. 6000 per annum
Lubricant oil Rs. 100 per 100 miles
Repairs and Maintenance Rs. 5000 per month
Permit fee Rs. 2840 per month
Diesel consumption 4 miles per litre costing Rs. 10 per litre
Depreciation 20% per annum
Normal capacity 50 passengers

The bus is generally occupied 90% of the capacity when it goes to Chandigarh and 80% when it goes to
Agra. It is always full when it runs within the city. Passenger Tax is 20% of his net takings.
12. Mr. Athul Pinto has been given a permit to run a bus between two towns which are 25 kms apart.
From the following information, assuming 15% profit on takings for Mr. Athul Pinto, workout the
busfare to be charged to each passenger.
Rs.
Cost of the bus 20,00,000
Annual tax 72,000
Diesel- for 100 kms 1000
Other expenses per month 8000
Garage rent per month 2000
Repair charges per month 4000
Insurance per annum 24000
Tyre and tubes per month 3000
Depreciation @ 12% per annum
Salary of the driver per month 10000
Salary of the conductor per month 8000
Salary of the accountant per month 5400
Permit fees per month 3600

Commission to driver and conductor @ 5% of the takings to be shared equally by them. The bus will
make 2 round trips every day.
The seating capacity of the bus is 40 passengers. On outward journey 80% of the seats are occupied
and on return journey 75% of the seats are occupied. The bus will operate for 30 days during the
month.
13. A bus with capacity of 50 passengers makes a round trip from Delhi to Gazipur via Nawalbad per day.
The distance between Delhi to Nawalbad is 75 kms and between Nawalbad and Gazipur is 25 kms.
During the onward journey the bus is full of its capacity upto Nawalbad but only 60% full between

13 | P a g e Notes Compiled By: Asst. Prof. Sahana Shetty

 Chapter 2: Process & Service Costing

Nawalbad and Gazipur. On the other hand, on the return trip it is full of its capacity from Gazipur to
Nawalbad but 80% of the capacity between Nawalbad and Delhi. The following information is
provided. The bus runs on an average 25 days a month.
Cost of the bus is Rs. 25,00,000. Estimated scrap value after 10 years 2,50,000. Annual road tax Rs.
25,000. Insurance charges per year Rs. 24,000; Garage rent per year Rs. 12,000; Drivers salary per
month Rs. 15,000; Cleaners wages per month Rs. 10,000. Accountants salary Rs. 12,000 per month.
Supervisor’s salary per month Rs. 10,000.
Cost of Diesel per litre Rs. 60.00, Kilometers run per litre of diesel 4 kms, proportionate charges for
tyres per km. Rs. 2.00, repairs and maintenance per km Rs. 5.00. Interest on capital @ 5%.
You are required to compute the cost per passenger km. of operating the bus.
14. A company having a fleet of trucks undertakes to carry waste material. They have the following
capacity vehicles.
No. of vehicles Capacity
40 5 tons
20 4 tons
50 3 tons

On an average each lorry makes five trips a day and, in each trip, covers an average distance of five km
each. The truck carries only 75% of its capacity. 20% of the lorries are laid up for repairs every day.
Following charges are incurred during the month:
Salary of the Supervisor Rs. 2000
Salary of Foremen 3 Nos. Rs. 600 each
Wages of Drivers Rs. 200 each for 110 drivers
Wages of Cleaners Rs. 100 each for 220 cleaners
Consumable stores Rs. 16000
Petrol Rs. 60000
Lubricants Rs. 14000
Replacement of tyres Rs. 6000
Garage rent Rs. 3000
Electricity charges Rs. 1000
Other expenses Rs. 12000

During the month, old tubes and tyres were auctioned for Rs. 3000. Assuming that a month consists of
30 days, calculate the cost per ton-km for conveying waste.

****************************************************

14 | P a g e Notes Compiled By: Asst. Prof. Sahana Shetty