Service Costing

Introduction
In order to determine the total cost and per unit cost of
services rendered by organizations providing or
operating services on the basis of expenditure incurred
for the services and determining the per selling price of
service, the method which is applied is known as
operating costing.
 Definition

According to the ICMS England, “Operating

Cost applies where standardized services are
provided by a service cost centre within an
undertaking. ”
 Scope
The undertakings to which this method is applicable are
as follows:
 Transport Services: Bus, Railway, Trans, Truck, Air &
Marine Transport
 Supply Services: Gas, Water, Electricity, etc
 Welfare Services: Hospital, Library, Hostel, Canteen,
Hotel, etc.
 Entertainment Services: Cinema, Circus, etc.
 Municipal Services: Road Maintenance, Street Lights,
etc.
 Characteristics:

 Undertakings.
 Capital Expenditure.
 Fixed and Variable Cost.
 Working Capital.
 Computation of Operating Cost of
Specific Services:
 Transport Operating Costing.
 Power House Operating Costing.
 Hotel Operating Costing.
 Canteen Operating Costing.
 Hospital Operating Costing.
 Cinema Operating Costing.
 HOTEL OPERATING COSTING
Such hotels as provided the lodging facilities are to be
considered here for costing purposes. The hotel costing
helps to determine the room rent charges per day,
which may cover all the expenses and allow the desired
profit to be earned.
It depends upon factors like
 Room accommodation available
 Numbers of persons lodging
 City, its significance, or importance of place
 Seasons
 Facilities
 CANTEEN OPERATING COSTING
The canteen operating costing are shown under the
following headings
 Provisions- tea, coffee, cold drinks, biscuits, cakes,
milk etc.
 Labour- salaries and wages of cook, assistant, cooks
supervisor, etc.
 Fuel and power- steam, gas, power, coal, firewood, etc.
 Miscellaneous expenses- rent, depreciation, insurance,
etc.
There are some food provisions for canteen operating
costing like:

 Daily sales requirement

 Preserve the food ingredients and quality
 Demand according to the season
 Neatness and quality
 Consumers preference
HOSPITAL OPERATING COSTING
Under this method cost of providing facilities and
services in hospitals, nursing homes, clinic, etc. is
calculated. Keeping in view the capacity of hospital,
number of patients, class or category of admit ward,
etc.
Costs per patients per day, per bed per day, per room
per day, are calculated .
Transport Operating Costing
Transport operating costing is applied in those
organisation where services are provided for carriage
of passengers or carriage of goods from one place to
another. In these organisations, cost related to services
provided as regard to transportation are collected and
classified in such a manner so that cost per unit of
transportation service may be ascertained. Though,
transport services can be related to air, water and land,
but here the study deals with the cost of transport
service specifically provided by means of land,
especially by bus or truck.
 Question
A transport service company is running 4 buses between two towns which are 50 km
apart, seating capacity of each bus is 40 passengers. The following particulars were
obtained from their books for April 2018.
Wages of drivers and 1,400
Wages of conductors 1,000
Salaries of office staff 1,200
Diesel oil and other oils 3,800
Repairs and maintenance 900
Taxation and insurance 1,500
Depreciation 2,600
Road licence fee per year 500
Interest and other charges 1,500
Actual passengers loaded were 75% of the seating capacity. All the four business
run on all days of the month. Each bus made one round trip per day. Find out the
cost per passengers km.
 Working note

Total passenger km in April 2008

= 4 buses ×50 km ×2 ×40 passengers ×75% capacity
used ×30 days in April
= 4 ×50 ×2 ×40 ×75/100 ×30
= 3,60,000 passengers km per month
 Operating Cost Sheet
Particulars Per month Total
A. Standing charges :
Wages of drivers and cleaners 1,400
Wages of conductors 1,000
Salaries of other staff 1,200
Taxation and insurance 1,500
Depreciation 2,600
Road License fee ( 500/12) 42
Interest and other charges 1,500 9,242
B. Running charges :
Diesel oil and other oils 3,800
Repairs and Maintenance 900 4,700

Total operating charges (A+B ) 13,942

Operating cost per passenger km

13,942/3,60,000 passenger km 0.0387
 Power House Operating Costing
The Power-House Cost Statement indicates two functions of the Power-
House:
a) Steam Production
b) Electricity Generation
 Generally, steam production is the function of Boiler-house, but
where Boiler-House Cost Statement is not desired to be prepared
separately, it forms part of Power-House costing for the reason that
steam is used for the generation of electricity.
 Where Power-House is treated as a service department in a big
undertaking, the power-house cost statement indicates the efficiency
of the department. The cost of generation of electricity and its
distribution is compared to the costs of the previous periods and
control is exercised on costs.
 Question
From the following data find out in an appropriate cost sheet from the
generating cost of electricity per unit in an iron and steel works
during the month of April 2010 .
1) Fuel : Coal at the beginning of the month 500 ton
Supply during the month 1100 ton
Balance at the end of the month 400 ton
Annual contract for supply of coal F.O.R. colliery at Rs. 10 per ton Add 10% to
cover freight and handling charges.
2) Oil- 10 per ton at Rs. 250 per ton.
3) Water- 50,000 gallon, pumping charges at 25 paisa per 100 gallon
4) Depreciation of steam boiler: Capital value Rs.24000 Rate of
depreciation 12% per annum
5) Salaries & Wages of the boiler house:
10 men at Rs. 100 per month each.
40 coolies at Rs. 20 per month each.
6) Recovery on account of sale of ashes: 100 ton at Rs. 1 per ton .
7) Salaries and Wages of the generating station.
50 men at Rs. 100 per month each.
20 coolies at Rs. Per month each.
8) Depreciation on generating equipment :
Capital value Rs. 1,20,000
Rate of depreciation 12.5 % p.a.
9) Repair and maintenance of the generating equipment : Rs. 2600.
10) Share of administrative charges- Rs. 1750.
11) No. Of units generated :- 1,46,000.
12) Loss in the process: 2000 units generated.
 Solution
Particulars Amount ( Rs.)
Amount ( per ton )
A) Fixed charges.
Depreciation
Steam boiler [ 24000 * 240
12/100 *1/12]
Generating equipment 1250
[1,20,000*12.5/100 *1/12]
Salary and wages of boiler house
1000
Men [ 10 *100]
Coolie [40 *20] 800
Salary and wages of generating station :- Men
[ 50 * 100] 5000
Coolie [20*20] 400
Administrative charges 1750
Total (A) 10440
B) Variable charges
Fuel
Oil [ 10 * 250] 13200
Water [ 50,000 * 0.25/100] 2500
Repair 125
2600
T 18425
o
t
 Total cost ( A+B) 28,865
Less :
Recovery by sale of ashes 100
Cost per unit
28,765 0.199 or 0.20

Working notes :-
Fuel = Opening balance of month + Supply during the year – Closing
balance of the month.
500 + 1100 – 400 = 1200 ton
[ 1200 * 10 * 110/100]
=13,200.
Water :- 100 gallon = 0.25 Rs.
1 gallon = 0.25/100
50,000 gallon = 0.25/100 * 50,000
= 125 Rs.
 Cinema Operating Costing
 Its objective is to determine operating cost of running a
cinema house and the unit of cost in this costing is ‘per
man-per show’. However, difference is made and due
weight is given on the basis of facilities in various
classes such as Balcony, Gold, Premium,etc.
 Question
The following data related to Star Talkies for the year ending 31 st
Dec.,2010:
Salaries:
1 Manager Rs 800 p.m
10 Gate Keepers Rs 200 p.m each
2 Operators Rs 400 p.m each
4 Clerks Rs 250 p.m each

Other Expenses:
Electricity Rs 11,655
Carbon Rs 7,235
Misc. Expenditure Rs 5,425
Advertisement Rs 34,710
Administrative Exp. Rs 18,000
Hire Charges for print Rs 1,40,700

The premises is valued at Rs6,00,000 and it’s estimated life is 15 years.

Projector and other equipments cost Rs 3,20,000 on which 10%
depreciation is to be charged.
Daily 3 shows are run throughout the year. Total seating capacity is 625.
Seats are divided into three classes as follows:

I Class 250 Seats

II Class 250 Seats

Balcony 125 Seats

Ascertain the cost per man show, assuming that:
 20% of the total seats remain vacant, and
 Weightage to be given to the three classes in the ratio 1:2:3
Determine the rates for each class if the management expects 30%
return on gross proceeds. Ignore taxes.
 Solution
Salaries:
Manager (800x1x12) 9,600
Gate Keepers (200x10x12) 24,000
Operators (400x2x12) 9,600
Clerks (250x4x12) 12,000 55,200

Electricity 11,655
Carbon 7,235
Misc. Expenditure 5,425
Advertisement 34,710
Administrative Expenses 18,000
Hire Charges for Print 1,40,700
Depreciation on Building 40,000
Depreciation on projector & other equipments 32,000
TOTAL COST
Profit (3,44,925x30/70)

TOTAL REVENUE

3,44,925
1,47,825
Total Ticket of Each Class:
II Class
I Class
Balcony

After Weight,

Cost per Class= = Rs 0.50

II Class= Rs 0.50 (0.50x1)

I Class = Rs 1 (0.50x2)
Balcony= Rs 1.50 (0.50x3)
THANK YOU