Operating Costing

CERTIFICATE

I Professor AMIT PRAJAPATI here by certify that Mr. SARFARAZ EDRISH of master of commerce (M.com) part-1, Roll No.21 Academic Year 2015-2016 has completed project on OPERATING COSTING The information submitted is true and original to the best of my knowledge.

AMIT PRAJAPATI(Professor)

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AKBAR PEERBHOY COLLEGE OF COMMERCE & ECO.

(2015-2016)

SEMESTER-2

NAME: EDRISH MD SARFARAZ MD ZAHIRUDDIN

ROLL NO: - 21.

CLASS: - M.Com (Part-I)

SUBJECT: - COSTING ACCOUNTING

TOPIC: OPERATING COSTING

INTERNAL EXAMINER EXTERNAL EXAMINER

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ACKNOWLEDGEMENT

I WOULD LIKE TO THANKS EVERYONE WHO HELPED ME IN THE

COMPILING OF MY DISSERTATION, FROM, INITIAL RESEARCH TO FINAL

DOCUMENTATION. SPECIALLY THANKS TOWARDS MY INTERNAL PROJECT

GUIDE PROF. GEETA GANGWANI WHO SUPERVISED THIS STUDY AND

GAVE VALUABLE FEEDBACK AND ADVICE THROUGHOUT. AND ALSO I AM

VERY THANKS TO MY EXTERNAL GUIDE, PROF._________________.

I OWE MY INDEBTEDNESS TOWARDS ALL THE TEACHERS OF K.M.

AGRAWAL COLLEGE FOR THEIR COOPERATION AND ENCOURAGEMENT

EXTENDED TO ME DURING THE COURSE OF PRESENT STUDY.

I AM ALSO THANKFUL TO ALL MY FRIENDS WHO ARE THE CURIOUS

LEARNERS AND HAVE DEEPENED MY INTEREST IN THE SUBJECT MATTER

AND IN TURN, IT HAS HELPED ME TO IMPROVE MY KNOWLEDGE ON THE

THEME. FURTHER THANKS TO MY PARENTS AND MY FAMILY FOR THEIR

UNLIMITED AND SUPPORT DURING MY STUDY.

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CONTENTS

SL. N0. PARTICULARS PAGE NO.

CHAPTER 1- INTRODUCTION TO TOPIC

1. Introduction 6

1.2 Essential features of operating costs 7

1.3 advantages of cost accountancy 8

CHAPTER 2 -OPERATING COSTING: A BRIEF REVIEW

2.1 Preparation of Cost Sheet under Operating Costing 9

2.2 The main features of operating costing 13

2.3 Examples of the cost units for services 14

CHAPTER 3 -MAIN AREAS OF OPERATING COSTING

3.1 Hotel industry 15

3.2 Hospital industry 20

3.3 Transportation industry 25

CHAPTER 4- TRANSPORT COSTING CASE STUDY

4.1 Adhunik Transport Organization Limited 30

CHAPTER 5 -FINDINGS

5.1 Conclusion 33

5.2 Bibliography 34

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Operating Costing

CHAPTER 1: INTRODUCTION TO TOPIC

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. E.g. Maintenance department,

power house, boiler house, canteen, hospital, internal transport.

The information concerning the business enterprise is very helpful to the management to

control it in an efficiently way. As the other branches like financial accountancy and

management accountancy, the cost accountancy also serves the important information to the

management regarding the operating efficiency of the business. It becomes very easy for

management to lay down management policies, to guide management decisions or evaluate

operating management performance with the information provided by cost accounting.

The term operation in business terminology refers to an activity of the business. It is very

important to study the operations of the business in detail because depends on the operations,

which it performs. The management should always concentrate on the efficiency of the

operation and also the costs associated to the operations. It is very important to control the

costs associated to the operations for the enterprises like manufacturing companies,

companies engaged in the process of extraction of materials from earth like, coal mines etc.

Generally, the above mentioned business enterprises depend on the operation that it has to be

performed in to produce in to produce the final output. The costs associated with such

operations are generally higher. These costs are called as “operating costs”.

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The costs, which are incurred to perform the operation of the enterprise, are called as

operating costs. These costs are to be accounted for in order to arrive at the total costs of

operation or process, which helps in determining the price of the final product.

“Cost accounting is the classifying, recording and appropriate allocation of expenditure for

the determination of the costs of products or services, and to the presentation of suitably;

arranged data for the purposes of control and guidance of management.”

It includes the ascertainment of the costs of every process, operation, services or contrast as

may be appropriate. It deals with the cost of production, selling and distribution. It thus, the

provision of such analysis and classification of expenditure as will enable the total cost of any

particular unit of production to be ascertained with reasonable degree of accuracy and at the

same time to disclose exactly how such total cost is constituted (i.e. the value of material

used, the amount of labour and other expenses incurred) so as to control and reduce the cost.

Operating Costs are the costs incurred by undertakings which do not manufacture any

product but provide a service. Such undertakings for example are — Transport concerns, Gas

agencies; Electricity Undertakings; Hospitals; Theatres etc. Because of the varied nature of

activities carried out by the service undertakings, the cost system used is obviously different

from that followed in manufacturing concerns.

ESSENTIAL FEATURES OF OPERATING COSTS ARE AS

FOLLOWS:

(1) The operating costs can be classified under three categories. For example in the case of

transport undertaking these three categories are as follows:

(a) Operating and running charges. It includes expenses of variable nature. For example

expenses on petrol, diesel, lubricating oil, and grease etc.

(b) Maintenance charges. These expenses are of semi-variable nature and include the cost of

tyres and tubes, repairs and maintenance, spares and accessories, overhaul, etc.

(c) Fixed or standing charges. These includes garage rent, insurance, road licence,

depreciation, interest on capital, salary of operating manager, etc.

(2) The cost unit used is a double unit like passenger-mile; Kilowatt-hour, etc.

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It can be implemented in all firms of transport, airlines, bus-service, etc., and by all firms of

Distribution Undertakings.

THE FEATURES OF COST ACCOUNTING:

1. It is a process of accounting for costs.

2. It records income and expenditure relating to goods and services

3. It provides statistical data on the basis of which future estimates are prepared and

quotations are submitted.

4. It is concerned with cost ascertainment, cost control and cost reduction.

5. Finally it involves the preparation of right information to the right person at the right

time so that it may be helpful to management for planning, evaluation of performance,

control and decision-making

ADVANTAGES OF COST ACCOUNTANCY

1. It enables a concern to measure the efficiency and than to maintain and improve it.

This can be done with the help of comparison of data made available of the previous

periods and current period.

2. It provides information upon which estimates and tenders are based.

3. It guides for future production polices. It explains the cost incurred and there by

provides data on the basis of which production can be appropriately planned.

4. The extract cause of decrease or increase in profit/loss can be detected. A concern

may suffer not because of the cost of production is high or prices are low but also

because the output is much below the capacity of the concern.

5. Efficiency of public enterprises. Costing has a more important role to play in public

enterprises than in private enterprises. The primary objective of the public enterprises

is not to raise profits but it is to serve the society by providing quality good at cheaper

rates.

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CHAPTER 2 OPERATING COSTING: A BRIEF REVIEW

It is defined as the refinement of process costing. It is concerned with the determination of

the cost of each operation rather than the process. In those industries where a process consists

of distinct operations, the method of costing applied or used is called operation costing.

Operation costing offers better scope for control. It facilitates the computation of unit

operation cost at the end of each operation by dividing the total operation cost by total input

units. The two costing methods included under this head are process costing and service

costing.

Preparation of Cost Sheet under Operating CostingFor 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:

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.

2. Variable costs or running charges, (Fuel, Driver Wages, Depreciation, oil etc.):

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, Janitorial Supplies, Office Products, Payroll Services, Telecom,

Uniforms, Utilities, or Waste Disposal etc.

3. Semi-variable costs or maintenance costs. (Supervision salary, Repairs and Maintenance)

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.

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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, director’s

fees etc.

Selling and distribution expenses like advertisement, salaries of salesmen. It includes

all operating cost such as salary, rent, stationery, furniture etc.

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.

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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

o Rent or Lease payments

o Office space rent

o furniture and equipment

o investment value of the funds used to purchase the land, if it is owned instead

of rented or leased

o property taxes and equivalent assessments

o 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 and routine

wear and tear.

Taxes on production or operation (such as subsidence fees imposed on oil wells)

Income taxes

Some 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.

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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 staffs needed to keep the shop operational are mostly considered as

overhead.

formula for operating cost: total cost*no. of weeks

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The main features of operating costing are as following:

The undertaking which adopts service costing does not produce any tangible goods.

These undertakings render unique services to their customers.

The expenses are divided into fixed and variable cost. Such a classification is

necessary to ascertain the cost of service and the unit cost of service.

The cost unit may be simple or composite. The examples of simple cost units are cost

per unit in electricity supply, cost per liter in water supply, cost per meal in canteen

etc. Similarly cost per passenger kilometers in transport cost per patient-day in

hospital, costs per room-day in hotel etc. are the examples of composite cost unit.

Total cost is averaged over the total amount of service rendered.

Costs are usually computed period-wise. However, in the case of utilization of

vehicles, use of road-rollers etc., the costs are computed order wise.

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

Documents like the daily log sheet, cost sheet etc. are used for the collection of cost

data.

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examples of the cost units for services

Transport Ton- Kilometer, Passenger KM, KM Travelled

Hotel Bed- nights available, occupied, meals

College/Schools Students hours, full time/part time student hours

Hospitals Patient bed days, occupied, per operation, per visit

Electricity Kilowatt-hours

Swimming pool Bathers attended, Hours of opening

Canteen Meals provided, Ingredients of Dishes

Illustration of Operating cost sheet:-

Particulars Total cost Cost per km

A Standing charges :-

License fees

Insurance Premium

Road tax

Garage rent

Driver’s wages

Attendant-cum-cleaner’s wages

Salaries and wages of other staff

Total

B Running charges :-

Repairs and maintenance

Cost of fuel (diesel, petrol etc.)

Lubricants, grease and oil

Cost of tires, tubes and other spare parts

Depreciation

Total

C Total charges [ (A) + (B) ]

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CHAPTER 3: MAIN AREAS OF OPERATING COSTING Operating costing is further divided in and used in 3 main areas namely

Hotel industry

Hospital industry &

Transport industry

Hotel industry

In the hotel industry, expenses are divided into two main categories:

Direct Expenses :

These are the expenses that vary with the level of production. For example, in the Food and

Beverage department, the Cost of Food Sales is a direct expense. For, the more dishes we

serve, the more cost of Food Sales the Hotel incurs. Moreover, in the Telephone Department,

the Cost of Calls is a direct expense. For, the more we connect guests to whatever destination

wanted, the more cost of calls the hotel incurs.

At this very stage a bracket would be opened to explain that there is a primordial difference

between revenue generator departments. In fact, revenue generator departments are classified

into two: Service Type departments versus merchandising departments. Service type

departments are revenue generators making money from solely providing services (Ex.

Rooms Division department). On the other hand, merchandising departments ensure revenue

by getting use of certain raw material, processing it, and then sell the final product (Ex. F&B

department, Telephone department…). Therefore, only merchandising departments have a

direct expense called Cost of Sales.

Indirect Expenses :

These are the expenses that do not vary with the level of production, or variable costs that

cannot be feasibly distributed to various Financial Reporting Centers. In the hotel industry,

indirect expenses are, hence, divided into two different categories:

1. Fixed Charges:

Examples might include rent, insurance, property taxes, and interest expense. For, these very

expenses are incurred for the benefit of the hotel as a whole not for the benefit of each single

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department. To illustrate, if a hotel insures itself against fire, theft and burglary, and one day

some valuable equipment has been stolen, from any department whatsoever, the insurance

company will indemnify the hotel.

2. Undistributed Expenses:

Examples might include electricity, energy, and water expenses. For, usually the hotel

receives a total energy bill to be paid. In the old days, some hotels went for allocating this

amount according to certain factors (ex. Surface, Department Usage…). However, this

practice proved to be misleading, since it might under-allocate energy expenses for some

departments and over-allocate it for others. Nowadays, most of the hotels decide not to

allocate such expenses any more. Rather, hotels report such expenses in separate schedules.

At this stage, departments of a typical hotel would be listed along with their various related

direct expenses. Later, examples of fixed charges and undistributed expenses would be

discussed. Last, a bracket would be opened to discuss one of the most important Direct

Expenses in any hotel, which is Payroll and Related Expenses. For, hotels being described as

labor intensive companies devote a big percentage of their financial resources to such an

expense.

Financial Reporting Centers:

A Financial Reporting Center is an area of responsibility for which separate Cost Information

must be collected

Might be classified as Revenue Centers, Support Centers, and Other Financial Reporting

Centers

1. Revenue Centers Generate Revenue through sales of Products and/or Services to Guests

Rooms

Food and Beverage

Telephone

Gift Shops

Garage and Parking

Other Operated Departments

Rentals and other Income

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2. Support Centers those departments that have minimal Guest Contact and do not produce

Sales. Yet, they do provide services to Revenue Centers, which, in turn, provide Services to

Guests

Administrative & General

Marketing

Property Operation and Maintenance

Data Processing

Human Resources

3. Other Financial Reporting Centers include Energy Costs and Fixed Charges (Rent

Expense, Property Taxes, Insurance Expense, Interest Expense, Depreciation and

Amortization Expenses)

Each Financial Reporting Center should be assigned an Identification Number. To

illustrate, consider the following Example:

Financial Reporting Center Identification Number

Rooms 11

Food and Beverage 15

Telephone 17

Administrative & General 31

Marketing 36

Property Operation and Maintenance 38

Energy Costs 41

Fixed Charges 51

Furthermore, each Account should be assigned an Identification Number. Hotels

commonly opt for either the Five-Digit (xx-xxx) or Eight-Digit Account Numbering Systems

(xx-xxx-xxx)

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Responsibility Accounting:Aim provides Financial Information useful in evaluating the effectiveness of Managers and

Department Heads. That's why only Direct Expenses should be charged to Specific

Departments

1. Expenses include the day-to-day Costs of Operating the Business, the Expired Costs of

Assets through Depreciation and Amortization, and the "write-off" of pre-paid items.

Expenses are classified as Direct expenses (Cost of Sales and Operating Expenses), Indirect

Expenses (Fixed Charges and Undistributed Expenses) and Income Taxes

a) Direct Expenses they are Costs incurred solely for the benefit of a particular

Department

Cost of Sales

Payroll Expenses

Payroll-related Expenses

Operating Supplies

China, Glassware, Silver, and Linen

Laundry and Dry Cleaning

b) Indirect Expenses They are incurred for the benefit of the Hotel as a whole, and cannot

be identified with any particular Department

Property Insurance |

Interest Expense |

Property Taxes | FIXED CHARGES

Rent Expense |

Depreciation and Amortization |

Marketing Expense |

Administrative & General Expenses | UNDISTRIBUTED EXPENSES

Property Operations and Maintenance |

Energy Costs |

c) Income Taxes it is neither a Direct Expense, nor an Indirect Expense. It should appear

as a separate Line Item on a Hotel's Summary Income Statement

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2-Departmental Expense Accounting:

Separate Expenses versus one Lump-sum Amount of Expenses

Payroll and Payroll-related Expenses:1. Salaries and Wages (Payroll Expense) Includes Salaries, Wages, Overtime Pay, and any

Employee Bonuses and Commissions

2. Employee Benefits Include Vacation and Holiday Pay

3. Payroll Taxes Includes Social Security Taxes (Employer's Portion)

4. Employee Meals Includes the Cost of Food furnished to Employees as a Convenience to

the Employer

5. Worker's Compensation Insurance Includes the Expense of Worker's Compensation

Insurance

6. Employee Group Plans Includes Life and Health Insurance, and Other Forms of

Employee Group-plan Fringe Benefits

Hospital industry

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Hospital cost information is derived by relating the inputs of resources in monetary terms to

the outputs of services provided by the hospital. Cost information is part of the basic

information needed by managers and policy makers for making decisions about how to

improve the performance of a hospital, where to allocate the resources within or among

hospitals, or to compare the performance of different hospitals to one another. Some of the

basic reasons for wanting cost information are to improve efficiency, increase effectiveness,

enhance sustainability, and improve quality.

Cost data can be used for two primary purposes, relative to time: for the present and for the

future. It can be used to assess the current situation of a hospital, such as for assessing its

efficiency, determining the effectiveness of the hospital, reviewing its priorities, and setting

of prices. Cost information may also be used for the future: making cost projections,

budgeting, and scenario planning with “what if?” situations.

Information on the costs and outputs of hospitals can provide considerable information for

managers of hospitals, regional coordinators of health services, and policy makers overseeing

the issues of the national health system. The information can be used to assess the internal

operations and performance of a single hospital—such as helping assess the utilization of

health personnel in different departments of the hospital in providing services—and to make

comparisons of the operations and efficiency of different hospitals. Some of the specific

potential uses of cost information for a health care administrator are:

Comparison across facilities to identify those that are efficient from those those are

not,

comparison of costs with fees,

development of a cross-subsidization strategy,

evaluation of the financial requirements of a new program, or

Analysis of the effect of changing the use of staff, equipment, and supplies in

providing services in an existing program.

When the cost data (the financial cost of the resource inputs) can be related to information

about the outputs (the type and quantity of services provided) assessments of efficiency of the

input output relationship can be made.

Cost data on a series of hospitals, within an area or country, may be used by national,

regional, and provincial managers to compare the performance of similar types of hospitals.

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They may also use such information to establish standards of performance and efficiency for

hospitals.

The managers or administrators of hospitals may also use the cost data on their individual

hospital. This information can be used to

measure performance of different departments, wards or units within the hospital;

examine composition of costs: staff, supplies; and

assess revenue generation to costs of various services

The process of determining the costs of a hospital involves six steps:

The steps in costing of the hospital services are provided in the six sections below.

Step 1: Defining the major and relevant activity areas of the hospital

Define the relevant areas of hospital operations which need to be costed. Factors to consider

are

(1) The importance of an activity relative to the hospital’s total output or level of activity,

(2) The Amount of detailed costing information available, and

(3) The amount of detail needed from the Output of this exercise.

Major Cost Areas for Hospital

1. Inpatient

¨ Medical ward

¨ Surgical ward

¨ Maternity

¨ Private ward

2. Outpatient clinic

3. Ancillary services

¨ Pharmacy

¨ Laboratory

¨ Radiology (X-Ray)

4. Outreach services (services provided off-site: mobile MCH clinics, patrols, etc.)

5. Training school

Step 2: Gathering information on the services provided or the output of the hospital

Information to be gathered for each of these areas will be based on a typical measure of

workload. For inpatient services two outputs are sought: total inpatient days and total

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admissions. The reason for two measures is that since these measures will serve as a

denominator and determine the outputs of this model, it is often useful to have not only the

unit cost per day of hospitalization (total costs/total patient days) but also to have the average

cost per admission (total costs/total admissions). This latter output of the model—total cost

per admission—is especially helpful if attempting to determine the payments or premiums on

a capitation basis.

For outpatient clinics it is typical to use total visits for a time period as a measure of

workload.

Ancillary services will use the number of examinations, procedures, or prescriptions filled.

Outreach services would use number of visits to the mobile clinic, number of contacts, or

number of surveillance visits. Training schools may be a major source of resource

commitment.

The number of students enrolled would be a useful measure of the workload of the institution.

Step 3: Determining the labour and other recurrent costs

In this step you must identify the major cost components for the major activities identified in

step

The major components of expenditure are detailed below

Recurrent costs:

Labour

Salaries

Allowances (uniforms, housing, education, home leave, rural or hardship incentive

pay, etc.)

“Free” labour (foreign or missionary health personnel who provide their services at

no cost to the facility). Their services should be costed as the equivalent of what a

national would receive for doing that same job

Drugs

Medical Supplies

Transportation (petrol and maintenance for vehicles and ambulances)

Maintenance (for all facilities and equipment other than vehicles)

Food (total food costs incurred for both patients and staff)

Telecommunications

Office expenses

Other

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Step 4: Ascertaining the capital costs of the hospital

Building (construction or modification but not routine maintenance, which is

included in recurrent costs)

Equipment (major equipment purchased for the facility). Equipment is considered

capital equipment if its cost is higher than some set amount (such as US$ 200) and it

has an expected useful life of more than one year. If it does not meet these

requirements then it is a recurrent cost. For example, waste cans have a useful life of

greater than one year but because they cost much less than $200 their purchase is

considered a recurrent rather than a capital cost.

Vehicles

Step 5: Allocating the indirect costs

The model includes a summary chart, constructed from the labour and the other costs listed,

which lists the total cost for each activity area. Because we also want the unit costs of those

areas providing patient care services, the indirect or administrative costs must be allocated to

the inpatient, outpatient, other ancillary services, and any other activities as defined in the

first step.

The administrative costs are considered indirect in that they support the care and ancillary

services delivered to patients and are part of the total costs of the facility. To allocate these

indirect costs of administration we must use what is termed “the step-down allocation

method.”

Since the ancillary, inpatient, and outpatient services cannot use a common workload

measure we will use the other direct costs as a basis for allocating the indirect costs. The

assumption is that the indirect costs follow the same proportional representation that the

direct service costs use among these areas.

Step 6: Reviewing and using the hospital cost summary

The resulting information can be used by an individual institution or for comparing several

institutions. The uses, as mentioned in the introduction, include:

1. Accountability

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Using the information to report to the hospital board or the ministry how financial resources

have been used, and that they have been used properly and efficiently. Budgets may be

generated using cost information.

2. Assessing efficiency

Efficiency is achieved when more hospital services (outputs) are produced with the same

amount of resources (staff, finances, equipment) or when the same output is produced with

fewer resources. So when cost profiles of several hospitals are available for the manager to

review, an assessment of their relative levels of efficiency may be made.

3. Establishing standards

When cost information is available for a cross-section of similar type hospitals, the

comparison can result in setting a standard for what that type of hospital should be able to

produce with a given set of resources.

4. Cost Recovery: Establishing prices

Knowing the cost of services allows the managers to set prices for all services “at cost” plus a

small margin, or determine which services will receive cross subsidies.

5. Cost Projections: Planning for the future

What-if” scenarios may be generated with the service volume and costing information

generated.

This can help in the planning of new services or expanding existing services

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Transportation industry

Price, cost and investment issues in transportation garner intense interest. This is certainly to

be expected from a sector that has been subject to continued public intervention since the

nineteenth century. While arguments of market failure, where the private sector would not

provide the socially optimal amount of transportation service, have previously been used to

justify the economic regulations which characterized the airline, bus, trucking, and rail

industries, it is now generally agreed, and supported by empirical evidence, that the move to a

deregulated system, in which the structure and conduct of the different modes are a result of

the interplay of market forces occurring within and between modes, will result in greater

efficiency and service.

Many factors have led to a reexamination of where, and in which mode, transportation

investments should take place. First and perhaps most importantly, is the general move to

place traditional government activities in a market setting. The privatization and

corporatization of roadways and parts of the aviation systems are good examples of this

phenomenon. Second, there is now a continual and increasing fiscal pressure exerted on all

parts of the economy as the nation reduces the proportion of the economy’s resources which

are appropriated by government. Third, there is increasing pressure to fully reflect the

environmental, noise, congestion, and safety costs in prices paid by transportation system

users. Finally, there is an avid interest in the prospect of new modes like high speed rail

(HSR) to relieve airport congestion and improve in environmental quality. Such a major

investment decision ought not to be made without understanding the full cost implications of

a technology or investment compared to alternatives.

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There are many types of costs. Key terms and brief definitions are below.

Fixed costs: The costs which do not vary with output.

Variable costs: The costs which change as output levels are changed. The

classification of costs as variable or fixed is a function of both the length of the time

horizon and the extent of indivisibility over the range of output considered.

Total costs: Total expenditures required to achieve a given level of output.

o Total costs = fixed costs + variable costs.

Average costs: The total cost divided by the level of output.

Marginal (or incremental) cost: The derivative (difference) of Total Cost with respect

to a change in output.

Opportunity costs: The actual opportunities forgone as a consequence of doing one

thing as opposed to another. Opportunity cost represents true economics costs, and

thus, must be used in all cases.

Social cost: The cost the society incurs when its resources are used to produce a given

commodity, taking into accounts the external costs and benefits.

Private cost: The cost a producer incurs in getting the resources used in production

Sunk costs: These are costs that were incurred in the past. Sunk costs are irrelevant for

decisions, because they cannot be changed.

Indivisible costs: Do not vary continuously with different levels of output or must

expenditures, but be made in discrete "lumps". Indivisible costs are usually variable

for larger but not for smaller changes in output

Escapable costs (or Avoidable costs): A cost which can be avoided by curtailing

production. There are both escapable fixed costs and escapable variable costs. The

escapability of costs depends on the time horizon and indivisibility of the costs, and

on the opportunity costs of assets in question

The production of transport services in most modes involves joint and common costs. A joint

cost occurs when the production of one good inevitably results in the production of another

good in some fixed proportion. For example, consider a rail line running only from point A to

point B. The movement of a train from A to B will result in a return movement from B to A.

Since the trip from A to B inevitably results in the costs of the return trip, joint costs arise.

Some of the costs are not traceable to the production of a specific trip, so it is not possible to

fully allocate all costs nor to identify separate marginal costs for each of the joint products.

For example, it is not possible to identify a marginal cost for an i to j trip and a separate

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marginal cost for a j to i trip. Only the marginal cost of the round trip, what is produced, is

identifiable.

Common costs arise when the facilities used to produce one transport service are also used to

produce other transport services (e.g. when track or terminals used to produce freight services

is also used for passenger services). The production of a unit of freight transportation does

not, however, automatically lead to the production of passenger services. Thus, unlike joint

costs, the use of transport facilities to produce one good does not inevitably lead to the

production of some other transport service since output proportions can be varied. The

question arises whether or not the presence of joint and common costs will prevent the

market mechanism from generating efficient prices. Substantial literature in transport

economics has clearly shown that conditions of joint, common or non-allocable costs will not

preclude economically efficient pricing.

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CHAPTER 4 TRANSPORT COSTING CASE STUDY

Unit costing is the method of costing used when the cost units are identical. Identical cost

units should have identical costs and this concept of equality of costs is the basic feature of

unit costing. It may be noted that process costs, output costing and service costing are the

sub-divisions of unit costing method.

Service or operating cost is the cost of providing services. Service costing is the term applied

to describe the system used to find the cost of performing a service such as transport, gas or

electricity. Service costs are particularly suitable for the costing of road and rail transport

services and they are also utilized by electricity undertaking, hospitals, canteen, boiler house,

etc. the method of costing is different from that used in connection with production, and the

difference lies chiefly in the manner of assembling the cost data and finally in its allocation to

cost units. The principle of service or operating costing is to accumulate costs under suitable

headings and to express them in terms of the unit of service rendered.

Service 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

management’s 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.

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.

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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 kilometres run, number of

commercial ton-kilometres, 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

kilometres travelled and dividing the product by two. This is done where the vehicles return

empty as is found in most cases.

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Adhunik Transport Organization Limited

Introduction:

Adhunik Transport Organization Limited 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 Vehicles

8 HCVs- Heavy Commercial Vehicles

4 Trailers

Dedicated Vehicles

25 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.

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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

Salaries 54,00,000

Insurance 8,00,000

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

Administrative Overheads 2,11,00,000

Taxes  

Depreciation 30,00,000

Interests 34,00,000

TOTAL 3,38,00,000

VARIABLE COSTS

Maintenance (Per Vehicle)  

HCV 10,000

LCV 6,000

TRAILERS 15,000

Wages

Drivers 2,000

Cleaners 1,200

Transit Expenses 500-1,500

TOTAL 35,000 approx

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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%.

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CHAPTER 5 FINDINGS

After studying the topic in depth and data collection from a firm following are the findings

from the project

As the subject, important features and advantages of cost accounting are studied and

the project throws light on 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.

It is applied by transport companies, gas and water works, electricity supply

companies, canteens, hospitals, theatres school etc.

The costs, which are incurred to perform the operation of the enterprise, are called as

operating costs. These costs are to be accounted for in order to arrive at the total costs

of operation

Operating Costs are the costs incurred by undertakings which do not manufacture any

product but provide a service.

The various steps and items of the operating cost sheet is explained in depth along

with illustrative example and cost units for various services

The three main area namely

o Hotel industry

o Hospital industry &

o Transport industry

In which massive use of this method of costing is used are explained with illustrations

Finally , the cost details of adhunik transport organisation limited are provided

herewith which will help us to know more about operating costing

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Bibliography

http://www.businessdictionary.com/definition/operating-cost.html#ixzz2uvBn7sy2

http://www.mbajunction.com/career/transport_service.htm

http://www.wonderwebs.com/Portals/46/Content/Documents/Secured/Bankable

%20Feasibility%20Study/17%20-%20Section%2015%20-%20Operating%20-

%20Cost.pdf

http://nexus.umn.edu/papers/truckoperatingcosts.pdf

http://costingclub.com/article-details/Operating-Costing-format-for-Transport-

Company/132#sthash.WMlndW6e.dpuf

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