Chapter 10

OPERATING COSTINGOPERATING COSTINGAccording to CIMA London, Operating costing is that form of operation costing whichapplies where standardized services are rendered either by an undertaking or by a servicecost centre within an undertaking.

Characteristics

(a)• Services rendered to customers are of unique and standardized type.

(a)

(b)• A large proportion of the total capital is invested in fixed assets and comparatively less working capital  is required.(b) q

• The distinction between  fixed cost and variable cost  is of particular  importance. This is because the economics and scale of operations considerably affect the cost per unit of service rendered. For example, fixed 

(c)p y p p ,

cost like insurance per passenger will be  lower if buses  in transport company run capacity packed.

COST UNITThe selection of a suitable cost unit (unit of service) is very important. The cost units may beof the following two types:g(1) Simple cost unit A few examples are given below:Undertaking Cost unit1. Transport Per kilometre or per mile2. Water works Per 1,000 litres3. Municipality Per km of road maintained4. Canteen Per meal or per dish

(2) Composite cost unit In service undertakings, generally a composite cost unit is used.In this type, two units are rolled into one. For example, in a transport company, weight ofgoods as well as distance covered should be taken into account in evolving a cost unit,i.e., a tonne‐kilometre, which means 1 tonne of goods transported to 1 km. Other examplesare:Undertaking Cost unit1. Transport Per passenger‐km or Per tonne‐km2. Hospital Per bed per day3. Hotel Per room per day4. Cinema Per seat per show (or per man show)5. Electricity Per kilowatt hour (kWh)

TRANSPORT COSTINGTRANSPORT COSTINGObjectives 

To fix the rates of carriage of goods or passengers on the basis of operating costs.

To decide the hire charges where vehicles are given on hire.

To determine what should be charged to departments or others using the service.

h f h l dTo compare the cost of using own motor vehicles and that of using alternate forms of transport.

To  compare  the  cost of maintaining one  vehicle with  To  compare  the  cost of maintaining one  vehicle with  another or  one group  of vehicles with another group.

TRANSPORT COSTING(Contd.)TRANSPORT COSTING(Contd.)Determination of Number of Cost UnitsThe cost unit in passenger transport is usually a passenger kilometre and in goods transport

Absolute tonne‐km and Commercial tonne‐kmIn transport costing composite cost units may be computed in two ways‐

p g p y p g g pit is a tonne‐kilometre.

In transport costing, composite cost units may be computed in two ways‐(a) absolute tonne‐km, and (b) commercial tonne‐kmIn absolute tonne‐km, cost units between each two stations is calculated separately intonne‐kms and then totalled up. But in commercial tonne‐km, the trip is considered as awhole and it is arrived at by multiplying the total distance in kms by average load quantitywhole and it is arrived at by multiplying the total distance in kms by average load quantity.

Log SheetMost of the details required for transport costing are obtained from log sheet A log sheet isMost of the details required for transport costing are obtained from log sheet. A log sheet ismaintained for each vehicle to record details of trips, running time, capacity, mileage, etc.,on daily basis. These details also enable the management to avoid idleness of vehicles, toprevent waste of capacity and to guard against unnecessary duplication of trips.

TRANSPORT COSTING PROCEDURETRANSPORT COSTING PROCEDURECosts are classified and Costs are classified and accumulated under the 

following heads:accumulated under the 

following heads:

Standing or  fixed  charges 

These are  constant costs and 

Running or variable charges These costs are constant costs and 

are  incurred  irrespective of the mileage run. Such costs, therefore, 

These costs are those which vary 

in direct proportion to 

mileage run and should not be allocated to 

specific journeys on the basis of 

il

gso variable cost per unit may be 

computed straightaway.

mileage.

BOILER HOUSE AND POWER HOUSE COSTINGCOSTING

• A boiler house produces steam which may be used either for   ti      b   li d t   t i   d ti  

Boiler House Costing

power generation or may be supplied to certain production departments. The main purpose of boiler house costing is to ascertain the cost of steam produced. For this purposes a Boiler House Cost Sheet may be prepared.

• When steam produced by boiler house  is supplied to power house for generation of electricity  a separate boiler house cost 

Power House Costing

house for generation of electricity, a separate boiler house cost sheet need not be prepared. 

• Instead, a Power House Cost Sheet  should be prepared  to ascertain  the  cost of electricity generated. The  cost of producing steam consumed  in power house  for generation of producing steam consumed  in power house  for generation of electricity  is also  included in the power house costs. 

CANTEEN COSTINGCANTEEN COSTING

Provisions,  like meat, fish, fruits and vegetables, 

etc

Services,  like electricity, gas, 

water, etc.etc.

Miscellaneous 

The costs  i d  i  

Wages and salaries of staff

Miscellaneous overheads, like depreciation, rent and rates,  

incurred  in canteens are generally 

classified as follows:

,insurance, etc.

follows: