OPERATIONAL COSTING&OPERATING COST

COST ACCOUNTING

Cost accountingis a process of collecting, analyzing, summarizing and evaluating various alternative courses of action. Its goal is to advise the management on the most appropriate course of action based on the cost efficiency and capability. Cost accounting provides the detailed cost information that management needs to control current operations and plan for the future.

Since managers are making decisions only for their own organization, there is no need for the information to be comparable to similar information from other organizations. Instead, information must be relevant for a particular environment. Cost accounting information is commonly used infinancial accountinginformation, but first we are concentrating on its use by managers to make decisions.

Unlike the accounting systems that help in the preparation offinancial reportsperiodically, the cost accounting systems and reports are not subject to rules and standards like theGenerally Accepted Accounting Principles. As a result, there is wide variety in the cost accounting systems of the different companies and sometimes even in different parts of the same company or organization.

Origins

All types of businesses, whether service, manufacturing or trading, require cost accounting to track their activities.Cost accounting has long been used to help managers understand thecosts of running a business. Modern cost accounting originated during theindustrial revolution, when the complexities of running a large scale business led to the development of systems for recording and tracking costs to help business owners and managers make decisions.

In the early industrial age, most of the costs incurred by a business were what modern accountants call "variable costs" because they varied directly with the amount of production. Money was spent on labor, raw materials, power to run a factory, etc. in direct proportion to production. Managers could simply total the variable costs for a product and use this as a rough guide for decision-making processes.

Some costs tend to remain the same even during busy periods, unlike variable costs, which rise and fall with volume of work. Over time, these "fixed costs" have become more important to managers. Examples of fixed costs include the depreciation of plant and equipment, and the cost of departments such as maintenance, tooling, production control, purchasing, quality control, storage and handling, plant supervision and engineering.In the early nineteenth century, these costs were of little importance to most businesses. However, with the growth of railroads, steel and large scale manufacturing, by the late nineteenth century these costs were often more important than the variable cost of a product, and allocating them to a broad range of products lead to bad decision making. Managers must understand fixed costs in order to make decisions about products and pricing.

For example: A company produced railway coaches and had only one product. To make each coach, the company needed to purchase $60 of raw materials and components, and pay 6 laborers $40 each. Therefore, total variable cost for each coach was $300. Knowing that making a coach required spending $300, managers knew they couldn't sell below that price without losing money on each coach. Any price above $300 became a contribution to the fixed costs of the company. If the fixed costs were, say, $1000 per month for rent, insurance and owner's salary, the company could therefore sell 5 coaches per month for a total of $3000 (priced at $600 each), or 10 coaches for a total of $4500 (priced at $450 each), and make a profit of $500 in both cases.

Types of cost accounting:-

The Following are different Cost Accounting Approaches: Standardized or standard cost accounting Lean accounting Activity-based costing Resource consumption accounting Throughput accounting Life cycle costing Environmental accounting Target costing

Elements of costBasic cost elements are: Raw materials Labor Indirectexpenses/overhead

Material (Material is a very important part of business) Direct material/Indirect material

Labor Direct labor/Indirect labor

Overhead(Variable/Fixed) Production or works overheads Administration overheads Selling overheads Distribution overheads Maintenance & Repair Supplies Utilities Other Variable Expenses Salaries Occupancy (Rent) Depreciation Other Fixed Expenses

(In some companies, machine cost is segregated from overhead and reported as a separate element)

Classification of costsClassification of cost means, the grouping of costs according to their common characteristics. The important ways of classification of costs are:

1. By Element: There are three elements of costing i.e. material, labor and expenses.

2. By Nature or Traceability: Direct Costs andIndirect Costs. Direct Costs are directly attributable/traceable to Cost Object. Direct costs are assigned to Cost Object. Indirect Costs are not directly attributable / traceable to Cost Object. Indirect costs are allocated or apportioned to cost objects.

3. By Functions: production, administration, selling and distribution, R&D.

4. By Behavior: fixed, variable, semi-variable. Costs are classified according to their behavior in relation to change in relation to production volume within given period of time. Fixed Costs remain fixed irrespective of changes in the production volume in given period of time. Variable costs change according to volume of production. Semi-variable Costs costs are partly fixed and partly variable.

5. By control ability: controllable, uncontrollable costs. Controllable costs are those which can be controlled or influenced by a conscious management action. Uncontrollable costs cannot be controlled or influenced by a conscious management action.

6. By normality: normal costs and abnormal costs. Normal costs arise during routine day-to-day business operations. Abnormal costs arise because of any abnormal activity or event not part of routine business operations. E.g. costs arising of floods, riots, accidents etc.

7. By Time: Historical Costs and Predetermined costs. Historical costs re costs incurred in the past. Predetermined costs are computed in advance on basis of factors affecting cost elements. Example: Standard Costs.

8. By Decision making Costs: These costs are used for managerial decision making.

Marginal Costs: Marginal cost is the change in the aggregate costs due to change in the volume of output by one unit.

Differential Costs: This cost is the difference in total cost that will arise from the selection of one alternative to the other.

Opportunity Costs: It is the value of benefit sacrificed in favor of an alternative course of action.

Relevant Cost: The relevant cost is a cost which is relevant in various decisions of management.

Replacement Cost: This cost is the cost at which existing items of material or fixed assets can be replaced. Thus this is the cost of replacing existing assets at present or at a future date.

Shutdown Cost: These costs are the costs which are incurred if the operations are shut down and they will disappear if the operations are continued.

Capacity Cost: These costs are normally fixed costs. The cost incurred by a company for providing production, administration and selling and distribution capabilities in order to perform various functions.

Other Costs

Standard cost accounting

In modern cost account of recording historical costs was taken further, by allocating the company's fixed costs over a given period of time to the items produced during that period, and recording the result as the total cost of production. This allowed thefull costof products that were not sold in the period they were produced to be recorded in inventory using a variety of complex accounting methods, which was consistent with the principles ofGAAP(Generally Accepted Accounting Principles). It also essentially enabled managers to ignore the fixed costs, and look at the results of each period in relation to the "standard cost" for any given product.

For example: if the railway coach company normally produced 40 coaches per month, and the fixed costs were still $1000/month, then each coach could be said to incur an Operating Cost/overhead of $25 =($1000 / 40). Adding this to the variable costs of $300 per coach produced a full cost of $325 per coach.

This method tended to slightly distort the resulting unit cost, but in mass-production industries that made one product line, and where the fixed costs were relatively low, the distortion was very minor.

For example: if the railway coach company made 100 coaches one month, then the unit cost would become $310 per coach ($300 + ($1000 / 100)). If the next month the company made 50 coaches, then the unit cost = $320 per coach ($300 + ($1000 / 50)), a relatively minor difference.

An important part of standard cost accounting is avariance analysis, which breaks down the variation between actual cost and standard costs into various components (volume variation, material cost variation, labor cost variation, etc.) so managers can understandwhy costs were different from what was plannedand take appropriate action to correct the situation.

Marginal costing

The cost-volume-profit analysis is the systematic examination of the relationship between selling prices, sales, production volumes, costs, expenses and profits. This analysis provides very useful information for decision-making in the management of a company. For example, the analysis can be used in establishing sales prices, in the product mix selection to sell, in the decision to choose marketing strategies, and in the analysis of the impact on profits by changes in costs. In the current environment of business, a business administration must act and take decisions in a fast and accurate manner. As a result, the importance of cost-volume-profit is still increasing as time passes.

CONTRIBUTION MARGIN

A relationship between the cost, volume and profit is the contribution margin. The contribution margin is the revenue excess from sales over variable costs. The concept of contribution margin is particularly useful in the planning of business because it gives an insight into the potential profits that can generate a business. The following chart shows the income statement of a company X, which has been prepared to show its contribution margin:

Sales$1,000,000

(-) Variable Costs$600,000

Contribution Margin$400,000

(-) Fixed Costs$300,000

Income from Operations$100,000

CONTRIBUTION MARGIN RATIO

The margin contribution can also be expressed as a percentage. The contribution margin ratio, which is sometimes called the profit-volume ratio, indicates the percentage of each sales dollar available to cover fixed costs and to provide operating revenue. For the company Fusion, Inc. the contribution margin ratio is 40%, which is computed as follows:

The contribution margin ratio measures the effect on operating income of an increase or a decrease in sales volume. For example, assume that the management of Fusion, Inc. is studying the effect of adding $80,000 in sales orders. Multiplying the contribution margin ratio (40%) by the change in sales volume ($80,000) indicates that operating income will increase $32,000 if additional orders are obtained. To validate this analysis the table below shows the income statement of the company including additional orders:

Sales$1,080,000

(-) Variable Costs$648,000 (1,080,000 x 60%)

Contribution Margin$432,000 (1,080,000 x 40%)

(-) Fixed Costs$300,000

Income from Operations$132,000

Variable costs as a percentage of sales are equal to 100% minus the contribution margin ratio. Thus, in the above income statement, the variable costs are 60% (100% - 40%) of sales, or $648,000 ($1'080,000 X 60%). The total contribution margin $432,000, can also be computed directly by multiplying the sales by the contribution margin ratio ($1'080,000 X 40%).

TYPE OF COST:

Up-front costscomprise the initial investments and expenses necessary to implement MSW services. These include public education and outreach, land acquisition, permitting, and building construction or modification.

Operating costsare the expenses of managing MSW on a daily basis, including operations and maintenance, capital costs, debt service, and any unexpected costs.

Back-end costsinclude expenditures to properly wrap up operations and take proper care of landfills and other MSW facilities at the end of their useful lives. Costs include site closure, building/equipment decommissioning, post closure care, and retirement/health benefits for current employees.

Remediation costsat inactive sites include investigation, containment, and cleanup of known releases and closure and post closure care at inactive sites. Many local governments have inactive MSW landfills that require "corrective action" for known contamination of ground water, soil, or surface water. These remediation costs can be relatively well estimated, though with somewhat more uncertainty than other types of engineering projects such as road building.

Including these costs in FCA is a matter of choice. The decision to include remediation costs depends on the intended use of the FCA information. For example, if you are using FCA to document the revenue needs of an MSW program, you might want to include costs entailed by inactive sites. However, if you intend to use FCA to reveal the current economics (e.g., cost per ton) of current MSW management or compare your performance to other communities or state benchmarks, you might want to exclude inactive sites from such calculations.

Contingent costsare costs that might or might not be incurred at some point in the future. Examples include the costs of remediating unknown or future releases of pollutants, such as leaks from currently operating municipal landfills. Contingent costs also include the liability costs of compensating for undiscovered or future damage to property or persons adversely affected by MSW services. Both of these types of contingent costs can be projected, but not very precisely. (In contrast, where there is a known need to remediate, costs can be projected much more precisely.)

Environmental costsare the costs of environmental degradation that cannot be easily measured or remedied, are difficult to value, and are not subject to legal liability. To truly capture all of the important life-cycle cost elements, some people advocate assessing the upstream and downstream environmental costs of resource use, pollution, and waste generated by providing goods and services.

Social costsare adverse impacts on human beings, their property and welfare that cannot be compensated through the legal system. Social costs (also termed "social externalities") might include the impacts of MSW transport on neighborhoods along the routes taken, as well as the impacts of MSW facilities themselves. Adverse effects on property values, community image, and aesthetics, as well as the increase of noise, odor, and traffic all contribute to social costs.

Operation Cost

Operating costs are the expenses which are related to the operation of a business, or to the operation of a device, component, piece of equipment or facility. They are the cost of resources used by an organization just to maintain its existence.

1)Business operating costs2)Business overhead costs3)Equipment operating costs

For a commercial enterprise, operating costs fall into two broad categories:Fixed costs, which are the same whether the operation is closed or running at 100% capacity. Fixed Costs include items such as the rent of the building. These generally have to be paid regardless of what state the business is in.variable costs, which may increase depending on whether more production is done, and how it is done (producing 100 items of product might require 10 days of normal time or take 7 days if overtime is used. It may be more or less expensive to use overtime production depending on whether faster production means the product can be more profitable). Variable Costs include indirect overhead costs such as Cell Phone Services, Computer Supplies, Credit Card Processing, Electrical use, Express Mail, Janitorial Supplies, MRO, Office Products, Payroll Services, Telecom, Uniforms, Utilities, or Waste Disposal etc.Business overhead costs

Overhead costs for a business are the cost of resources used by an organization just to maintain its existence. Overhead costs are usually measured in monetary terms, but non-monetary overhead is possible in the form of time required to accomplish tasks.Examples of overhead costs include:

Payment of rent on the office space a business occupies cost of electricity for the office lights some office personnel wages. Non-overhead costs are incremental costs, such as the cost of raw materials used in the goods a business sells.Operating Cost is calculated by Cost of goods sold - Operating Expenses. Operating Expenses consist of:

Administrative and office expenses like rent, salaries, to staff, insurance, directors fees etc. Selling and distribution expenses like advertisement, salaries of salesmen. It includes all operating cost such as salary, rent, stationery, furniture etc.

Equipment operating costs

In the case of a device, component, piece of equipment or facility (for the rest of this article, all of these items will be referred to in general as equipment), it is the regular, usual and customary recurring costs of operating the equipment. This does not include the capital cost of constructing or purchasing the equipment (depending on whether it is made by the owner or was purchased as a constructed system).

Operating costs are incurred by all equipment unless the equipment has no cost to operate, requires no personnel or space and never wears out (any examples? perhaps intangibles, though not equipment, per se). In some cases, equipment may appear to have low or no operating cost because either the cost is not recognized or is being absorbed in whole or part by the cost of something else.Equipment operating costs may include:

Salaries or Wages of personnel Advertising Raw materials License or equivalent fees (such as Corporation yearly registration fees) imposed by a government Real estate expenses, including Rent or Lease payments Office space rent furniture and equipment Investment value of the funds used to purchase the land, if it is owned instead of rented or leased Property taxes and equivalent assessments Operations taxes, such as fees assessed on transportation carriers for use of highways Fuel costs such as power for operations, fuel for production Public Utilities such as telephone service, Internet connectivity, etc. Maintenance of equipment Office supplies and consumables Insurance premium

Depreciation of equipment and eventual replacement costs (unless the facility has no moving parts it probably will wear out eventually). Damage due to uninsured losses, accident, sabotage, negligence, terrorism, routine wear and tearTaxes on production or operation (such as subsidence fees imposed on oil wells) Income taxesSome of these are not applicable in all instances. For example,

A solar panel placed on one's home for use in generating electric power generally has only capital costs; once it's running there are no personnel costs, utility costs or depreciation and it uses no extra land (that wasn't already part of the place where it is located) so it has no real operating costs; however there may need to be taken into account costs of replacement if damaged.

An automobile or any other item purchased for personal use has no salary cost because the owner does not charge themselves for operating the device.An item which is leased may have some or all of these costs included as part of the purchase price.

It might be questionable to assert that the cost of ten extra people on the sales force are an incremental cost or an overhead cost, since the wages for these people are both overhead and incremental. The staff needed to keep the shop operational is mostly considered overhead.

formula for operating cost = total cost* number of weeks

Operating cost

Operating costs are costs that are incurred on aday-to-day basisrelated to the business operations. It can also be related to the operation of a device, component, and piece of equipment or facility. Operating costs are also known asoperating expenses. For example sales and administration costs are operating costs. Operating costs are referred to ascost per unitof a product or service, or the annual cost incurred on a continuous process. The operating costs are those that do not includecapital outlaysor the costs incurred indesign and implementationphases of a new process.

Operating costs are divided into two categories. They arefixed costsandvariable costs. Fixed costs are those which are fixed and do not vary with the changes in the level of output. They do not change whether the business isinactive or operating at full capacity. Variable costs are those costs which vary with the changes in the level of output. Flexible expenditures are also known as the variable operating costs. The expensesfluctuateon the basis of a variety of factors.

Operating expenses differ in every country. Theactual expensesvary in every location. The calculation of operating costs is essential forsound business planning. These costs should be properly budgeted; otherwise it will adversely affect the business. The lack of planning in a business increases the risk that a business will not maintain adequate funds to operate properly. When the operating costs are fixed, the likelybusiness interruptionsoreconomic declinesshould be taken into consideration. The business generally cannot be deferred until a business finds it convenient to pay them. Fixed operating costs are set on a payment schedule and need to be paid accordingly for the company to maintaingood credit.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.

FEATURES OF OPERATING COSTING

The main features of operating costing are as following:

(1)The undertaking which adopts service costing does not produce any tangible goods. These undertakings render unique services to their customers.

(2)The expenses are divided into fixed andvariable cost. Such a classification is necessary to ascertain the cost of service and the unit cost of service.

(3)The cost unit may be simple or composite. Theexamplesof simple cost units are cost per unit inelectricity supply, cost per liter in watersupply, 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 theexamplesof composite cost unit.

(4)Total cost are averaged over the total amount of service rendered.

(5)Costs are usually computed period-wise. However, in the case of utilization ofvehicles, use of road-rollers etc., the costs are computed order wise.

(6)Service costing can be used for service performed internally or externally.

(7)Documents like the daily logsheet, costsheetetc. are used for thecollection ofcost data.

Operating (cost)characteristics

In some cases, the supplier and customer may wish to come to an agreement about how the risks of incorrect decisions might be shared between them by examining the respective levels of risk in the first case, in percent risk terms, but also in economic terms.

Operating characteristic (power) curves

Operating characteristic

Classical statistical hypothesis testing [Montgomery 1996] uses percent risk tools such as the so-called operating characteristic or power curve. This is obtained by calculating the risk of incorrect decisions associated with either measurement uncertainty or entity dispersion in terms of the area of the probability distribution function extending beyond the specification limit, for instance, in the case of consumer risk, the tail (figure (a)) above the upper specification limit. This risk is calculated as the location of the uncertainty interval of fixed width is swept across the specification limit,USL, of interest, as illustrated.

Customer and supplier can use such curves to agree on:

A maximum level,, ofconsumer risk say, 10% where the uncertainty interval is located at the valueLQL(limiting quality level) of the quality characteristic. Characteristic entity values further away from (below) the (upper) specification limit, will have probabilities of in-correctly accepting a non-conforming entity less than.

A minimum level,, ofsupplier risk say, 95% where the uncertainty interval is located at the valueAQL(acceptable quality level) of the quality characteristic. Characteristic entity values further away from (above) the (upper) specification limit, will have probabilities of correctly rejecting a non-conforming entity greater than.

Operating cost characteristic (power) curves

It may be more meaningful and easier to communicate between customer and supplier in economic terms rather than just percentage terms. Additionally, economics terms can capture additional impact factors, such as increasing costs as product deviates increasingly from specification, as well as whether it is a profit or loss in terms of the sign for either party.Overall costs equation

In a new kind of plot [Pendrill 2008] the operating cost characteristic overall costs, according to the above equation, can be plotted over:

(I) a range of quantity values ofymfor a given test dispersion,, and guard-band factorh yielding an operating cost characteristic analogous to the traditional, probability-based operating characteristic.

Cost operating characteristic in the case of a linear cost model.

Operating Costing In Different Undertakings:

Operating 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.

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.

ILLUSTRATION 1:

Adhunik Transport Organization Limited

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 Vehicles8 HCVs- Heavy Commercial Vehicles 4 Trailers

Dedicated Vehicles25 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. 2,000- Rs. 10,000 depending upon the nature of the job they do.

Measurement of Materials is done in tons.

COSTS:

FIXED COSTS

Salaries54,00,000

Insurance8,00,000

Transport Permits (Every 5 yrs)1,00,000

Administrative Overheads2,11,00,000

Taxes

Depreciation30,00,000

Interests34,00,000

TOTAL3,38,00,000

VARIABLE COSTS

Maintenance (Per Vehicle)

HCV10,000

LCV6,000

TRAILERS15,000

Wages

Drivers2,000

Cleaners1,200

Transit Expenses500-1,500

TOTAL35,000

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 225-280kms.

THE CUSTOMERS ARE CHARGED:Rs. 1.20 PER KM PER TON (For HVC)Rs. 1.00 PER KM PER TON (For LVC)The Profit-Margin is between 10%-20%

IILUSTRATION 2:Costing Club Transport Limited is running 4 buses between two towns, which are 180kilometersapart.Seating capacityof each bus is 45passengers. The followingparticularsare obtained from their books for January 2013.

ParticularsAmount (Rs.)

Wage of drivers,conductorsandcleaners5,20,000

Salaries1,50,000

Diesel6,30,000

Repairs and Maintenance1,20,000

Taxation and Insurance2,20,000

Depreciation3,20,000

Interest3,00,000

Total22,60,000

Passenger carried were 75% of seating capacity. All buses ran on all day of the month. Each bus made one round trip per day. Find out the cost per passenger kilometer.

Solution:Costing Club Transport LimitedJanuary 2012Vehicle No. xxxxxxxRegistration No. xxxxxxxx operated: 31 days

ParticularsAmount (Rs.)Amount (Rs.)

A)Standing Charges/Fixed chargesWages of drivers, conductors and cleanersSalariesTaxation and InsuranceInterestDepreciationTotal5,20,0001,50,0002,20,0003,00,0003,20,00015,10,000

B)Running Charges/Variable ExpensesPetrol/DieselTotal6,30,0006,30,000

C)Maintenance Charge/Semi- VariableRepairs & MaintenanceTotal1,20,0001,20,000

D)Total Cost(A+B+C)22,60,000

E)Total passenger kilometer ( shown below)4,46,400

F)Cost per ton kilometer/passenger kilometer=22,60,000/4,46,4005.062

Passenger kilometers are computed as shown below:

Number of buses X Distance in one round trip X Seating Capacity XPercentage ofSeating Capacity actually used X Number of days in a month= 4 buses X 50 kilometer X 2 X 45 passengers X 80% X 31 days = 4,46,400

OVERVIEW

OPERATING COSTINGINTRODUCTIONThe method of costing used in service rendering undertakings is known as operating costing.

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.

OPERATINGCOST SHEETPreparation 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)

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.

ParticularsTotalcostCost perkm

AStanding charges :-

License fees Insurance Premium Road taxGarage rent

Drivers wages

Attendant-cum-cleaners wages

Salaries and wages of other staff

Total

BRunning charges :-

Repairs and maintenance

Cost of fuel (diesel, petrol etc.) Lubricants, grease and oilCost of tires, tubes and other spare parts

Depreciation

Total

CTotal charges [ (A) + (B) ]

COST UNITSFOR VARIOUS ENTERPRISES CHART SHOWING COST UNITS

No.EnterpriseCost per unit

1.Railways or bus companiesPer passenger-kilometer

2.HospitalPer patient/day, per bed/day

3.CanteenMeals served , cups of tea

4.Water supply servicePer 1000 gallons

5.Boiler House1000 kg of steam

6.Goods TransportPer tonne km, quintal km

7.Electricity BoardsPer kilowatt hours

8.Road maintenance departmentPer mile or road maintenance

9.BricksOne thousand

10.HotelPer room/day

BASICFORMULAS1. 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

EXAMPLE

A lorry starts with a load of 20 tonnes of goods from station A. It unloads 8 tonnes at station B and rest of goods at station C. It reaches back directly to station A after getting reloaded with 16 tonnes of goods at station C. The distance between A to B, B to C and then from C to A are 80 kms., 120 kms., and 160 kms., respectively. Compute Absolute tonnes-kms, and Commercial tonnes-kms.

SolutionAbsolute tonnes-kms. = 20 tonnes 80 kms + 12 tonnes 120 kms + 16 tonnes 160 kms. = 5,600 tonnes-kms.

Commercial tonnes-kms. = Average load total kilometres travelled 16 tonnes( i.e. (20+12+16)/3 ) 360 kms. = 5,760 tonnes-kms.

IMPORTANT QUESTIONS FOR THEORY

TREATMENT OF SOME SPECIAL ITEMSQuestion 1:The more the kilometre you travel with your own vehicle the cheaper it becomes. Comment briefly on the statement.

Solution:The given statement is based on the fact that when we travel more, the costs which are fixed in nature or do not vary with output remain same. As we all are aware of the fact that all the costs can be classified as fixed and variable in nature. In the above case, the costs relating to cost of vehicle (i.e. depreciation), wages of driver etc. are fixed costs and on the other hand, fuel expenses, repairs and maintenance etc. are variable. As we travel more and more, there is a proportionate rise in variable costs and fixed costs remain the same. Thus, when we compute the cost per kilometre, it keeps on declining for more kilometres and Hence, the travelling becomes cheaper.

Question 2:Write a short note on operating costing?

Solution:Operating Costing - The method of costing used in service rendering undertakings is known as operating costing.

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.Depreciation - Depreciation if related to effluxion of time, may be treated as fixed. If it is related to the activity level, it may be treated as variable.

Interest - If information about interest is explicitly given, it may be treated as fixed cost.

1REVSIONILLUSTRATIONThe Union Transport Company has been given a twenty kilometer long route to ply a bus. The bus costs the company ` 1,00,000. It has been insured at 3% per annum. The annual road tax amounts to ` 2,000. Garage rent is ` 400 per month. Annual repair is estimated to cost ` 2,360 and the bus is likely to last for five year. The salaries of the driver and the conductor are ` 600 and ` 200 per month respectively in addition to 10% of the takings as commission to be shared equally by them.

The managers salary is ` 1,400 per month and stationery will cost ` 100per month. Petrol and oil will cost ` 50 per 100 kilometers. The bus willmake 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.

SolutionUnion Transport Company Statement showing operating cost of the bus per annum:A Standing Charges:Managers salary (` 1,400 * 12) = 16,800Drivers salary (` 600 * 12) = 7,200Conductors salary (` 200 * 12) = 2,400Road tax = 2,000Insurance (3% of ` 1,00,000) = 3,000Garage rent (` 400 * 12) = 4,800Stationery (` 100 * 12) = 1,200Depreciation (` 1,00,000/5 years) = `20,000

B Maintenance Costs Repairs `2,360

C Running charges:Petrol and oil (36,000 km. * ` 50)/100= `18,000Total costs (A+B+C) 77,760Add: 10% of takings for commission ofdriver and conductor15% Profit desired on takings25% on total takings = 33-1/3 of cost 25,920` 1,03,680

Calculation of total distance covered: (20 km. * 2 * 3 * 25 * 12) = 36,000 km. per annum.

Calculation of bus fare to be charged: Effective passenger kilometers:(2 * 20 km * 3 trips * 40 passengers * 25 days * 12 months) = 14,40,000.

Rate to be charged per km. from each passenger: = ` 1,03,680 /14,40,000 = ` 0.072.