16 Operating Costing 1 [Autosaved]

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OPERATING COSTING


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INTRODUCTIONOperating Costing method is normally used in service sector.

When the service is not completely standardized, it is the cost ofproducing and monitoring a service. It is a method of costing

applied to undertakings which provide service rather than

production of commodities. Service may be performed internally

and externally. Services are termed as internal when they have to

be performed on inter-departmental basis in factory itself e.g.

Power house services, canteen service etc.

Services are termed as external when they are to be rendered

to outside parties. Public utility services like transport, water

supply, electricity supply, hospitals are the best example for

the service costing. Thus operating costing is a method of cost

accumulation which is designed to determine the cost of services.


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MEANING OF OPERATING COSTING

Operating costing is a method of ascertaining the cost ofproviding or operating a service. It is also known as service

costing

CIMA London, defines Operating Costing as that form of

operation costing which applies where standardized servicesare rendered either by an undertaking or by a service cost

renter with in an undertaking.

Steps involved in Operating costing

Selection of cost unit

Collection of Costing Data


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Cost Unit:

Determining the suitable cost unit to be used for cost ascertainment is a

major problem in service costing. Selection of a proper cost unit is a

difficult task. A proper unit of cost must be related with reference to

nature of world and the cost objectives.The cost unit related must be simple i.e. per bed in a hospital, per

cup of tea sold in a canteen and per child in a school. In a certain

cases a composite unit is used i.e. Passenger Kilometer in a

transport company. The following are some of example of cost unitsused in different organizations

Enterprises Cost per unit

Passenger transport Kilometer

Goods transport Ton Kilometer

Hotel Per room per day

Hospital Per bed per day

Canteen Per item, per meal

Water supply Per 1000 liters

Electricity Per kilowatt


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Collection of costing data:

After determining the cost unit, the cost relating to the

service is collected. The collected cost is a presented

under the heads suitable for control purpose i.e. fixed

expenditure and variable expenditure. The presentation

of cost data under difficult categories

helps to improve managerial control over cost.


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TRANSPORT COSTING

Transport costing is method of ascertaining the cost of providing service

by a transport undertaking. This includes air, water, road and railways;motor transport includes private cars, carriers for owners, buses, taxies,

carrier Lorries etc. The objective of motor transport costing may be

summarized as follows:

To ascertain the operation cost of running a vehicle

To provide and accurate basis for quotation and fixing of rates

To provide cost companion between own transport and alternative

e.g. hiring

To compare the cost of monitoring one group of vehicle with

another group To determine the cost to be charged against departments using

the service

To ensure the cost of maintenance and repairs is not excessive


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Particulars Rs. Total Rs. Per Km Rs.

A. Fixed Cost (or Standing charges)

1. Road Tax

2. Insurance

3. Drivers Salary4. Conductors Salary

5. Depreciation

6. Interest on Capital

7. Garage Rent

8. Office & Administration Overheads

XX

XX

XXXX

XX

XX

XX

XX XX

XX

XX

XXXX

XX

XX

XX

XX XX

B. Variable (Running) costs

1.Depreciation

2. Petrol Diesel

3. Oil & Grease4. Repairs and maintenance

5. Tyres and tubes

XX

XX

XXXX

XX

XX

XX

XX

XXXX

XX

XX

Total operating cost XXXX XXXX

Note: Maintenance expenses can be shown separately also depends on cases.


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Tulsian passenger transport company provides you the following information:

No. of buses 5

Normal % of vehicles laid up for

repair 5%

Cost of each bus Rs.3,00,000 no. of round trips per day 3

Estimated life 5 years Distance of route

Repairs & maintenance Rs.7,285 p.m. per bus working days in a month 25

Driver's Salary Rs.800 p.m.per bus Manager's salary Rs. 1,000 p.m.

Conductor's salary Rs.600 p.m.per bus Accountant's salary Rs. 500 p.m.

Garage rent Rs. 6,000 p.a. Peon's salary Rs. 250 p.m.

Insurance 2% p.a. Cleaner's salary 100 p.m.

Taxes Rs. 6,000 p.a. Mechanic's salary Rs. 300 p.m.

Road licenceRs. 600 p.a.per bus Cost of tickets

Rs. 10 per 1000

passenger km

Interest 8% p.a. Office Rent Rs. 250 p.m.

Km per litre of fuel 20 km Office routine expenses Rs. 500 p.m.

Cost of fuel Rs. 300 per 10 litres Cost of each tyre Rs. 3,000Total Capacity 40 passengers Tyres to be replaced per bus 1 p.m.

Average capacity which is

used 90%

Notes: (i) Commission @ 10 % of the taking is to be paid to conductor.

(ii) Profit @ 20% on taking is desired by the owner.

Required- Calculate: a. Cost per month b. Cost per day c. Cost per trip d. Cost per km e. Cost

per passenger km f. Bus fare to be charged from each passenger


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HOSPITAL COSTING

Hospitals comes under service sector, big companies also

maintain hospitals. For costing purpose the hospital service

can be divided in two following categories

(1) Outpatient department(2) Wards

(3) Medical service departments such as radio therapy X ray

etc.

(4) General Services such as heating, lighting, catering laundryetc.

(5) Other services such as transport, dispensary, cleaning etc.


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Format of a cost Sheet of a Hospital

Particulars Rs. Rs.

A) Fixed standing charges

1. Rent , Repairs and maintenance

2. General administrative expenses3. Depreciation

4. Salaries to staff

5. Cost of Oxygen, X ray etc

XX

XXXX

XX

XX

XXXX

B) Running or maintenance costs

1. Doctors fees

2. Food

3. Medicines

4. Laundry

5. Hire charges

XX

XX

XX

XX

XX

XXXX

Total operating cost XXXX

Cost per patient day = Total Operating cost/No of Patient Days


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A public health centre runs an intensive medical care unit. For this purpose, it has hired

a building at a rent of Rs. 5,250 p.m. with the understanding that it would bear the repairs and

maintenance charges also.

The unit consists of 25 beds but 5 more beds can be comfortably accommodated when the occasion

demands. The permanent staff attached to the unit is as follows:

2 supervisors, each at a salary of Rs. 2,500 p.m.

4 nurses, each at a salary of Rs. 1,500 p.m.2 ward boys, each at a salary of Rs. 750 p.m.

Though the unit remains open for the patients all the 365 days in a year , it has full capacity of 25 patients

per day only for 120 days. For 245 days it has on average 20 beds occupied per day. But there were

occasions when the beds are full and extra beds are hired from outside at a charge of Rs. 10 per bed per

day. However , this does not come to more than 5 extra beds above the normal capacity on any one day.

The total hire charges for the extra beds incurred for the whole year amount to Rs. 5,000.

The unit has engaged expert doctors from outside to attend patients. The fees are paid on the basis of thenumber of patients attended and time spent by them. On an average it works out to Rs. 33,500 p.m.

The other expenses for the year are as under:

Repairs & maintenance 7,200 Medicines supplied 64,000

food supplied to patients 88,000 Cost of oxygen, X-rays 1,08,000

Janitor & other services 25,000 General administration charges 99,000

Laundry charges 28,000

Required: 1. If the unit recovered an over-all average amount of Rs. 150 per patient per day, what is the

profit made by unit.

2. The unit wants to work on a budget for the next year, but the number of patients requiring intensive

medical care is a very uncertain factor.

Assuming that the same revenue and expenses will prevail next year also, work out no. of patient-days

required by the of break-even.


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HOTEL COSTING

Hotel industry is a service industry and covers various activities

such as provision for food and accommodation. It also provides

other comforts like recreations, business facilities, shopping areasetc. The expenses incurred in a hotel are fixed or variable. Fixed

expenses comprises of staff salaries, repairs, interior decoration,

laundry contract cost and depreciation on fixed assets. The

variable expenses incurred are lighting, attendants salaries, poweretc. To find out room rent to be charged from customers a notional

profit is added with the cost and divided by the number of rooms

available. The number of rooms available is calculated after for

considering availability of suits and occupancy.

Rooms rent may be different from season to season. Sometime

besides accommodation they also provide food. Then the cost of

meals, other direct and indirect costs are considered to work out

the costs to be charged from customers.


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Particulars Rs. Rs.

A) Fixed Charge

1. Salaries to Staff

2. Repairs and Renovation

3. Depreciation

4. Interior decoration

5. Lighting, heating & power

6. Laundry contract cost7. License fee

XX

XX

XX

XX

XX

XXXX

XXXX

B) Running charges (Variable cost)

1. Cost of free tea, coffee, meal, breakfast

2. Laundry cost of bed sheets & towel

XX

XXXXXX

Total Operating Cost XXXX

Operating cost sheet of a Hotel


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From the following information relating to a hotel, calculate the room rent to be charged

to give a profit of 25% on cost excluding interest

a. Salaries of staff: Rs. 1,02,200 p.a.

b. Wages of the room attendant : Rs. 4 per day

c. There is a room attendant for each room. He is paid wages only when the room is

occupied.

d. Lighting, Heating and power

The normal lighting expenses for each room for the whole month is Rs. 100 when

occupied.

Power is used only in winter and the charges are Rs. 40 p.m. for a room, when

occupied.e. Repairs to buildings: Rs. 10,000 p.a.

f. License etc : Rs. 4,800 p.a.

g. Sundries: Rs. 6,600 p.a.

h. Interior decoration and furnishing: Rs. 10,000 p.a.

i. Depreciation @ 5% is to be charged @ 20% on investment in buildings costing Rs.4,00,000 and 10% on equipments.

j. Interest to be charged @ 20% on investment in buildings and equipments

amounting to Rs. 5,00,000.

k. There are 100 rooms in hotel 80% of the rooms are generally occupied in summer

and 30% in winter. The period of summer winter may be considered to be of 6

month in each case: a month can be assumed of 30 days.


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Canteen Costing

Canteen costing is a method of ascertaining the cost of

providing meals or dishes of different types. The objectives

of canteen costing is to ascertain the cost of producing

meals and to fix the rates of meals.


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Format of Canteen Operating Cost Sheet

Particulars Total (Rs) Per Unit (Rs)

(A) Provisions:

1. Wheat flour

2. Bread3. Vegetable & Milk

4. Cold drinks, Tea & coffee

XX

XXXX

XX

XX

XXXX

XX

Wages & Salaries of Staff XX XX

(B) Services:

1. Gas & Water2. Power & Lighting

XXXX

XXXX

(C) Consumable stores:

1. Crockery and Glassware

2. Cleaning materials

XX

XX

XX

XX

(D) Miscellaneous:1. Rent & Insurance

2. Depreciation

XX

XX

XX

XX

(E) Total XX XX

(F) Profit XX XX

(G) Sales XX XX

f f f


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From the following data for the month of April 2011, calculate cost

per meal for the canteen Run by joint councils of workers and

management of Ratex Ltd:

1. Purchases for the month of April

Meat 50 kgs @ Rs. 15 per kg Eggs 36 dozens @ Rs. 5 per dozen

Vegetables Rs. 300

Bread etc Rs. 400

Rice Rs. 6002. Wages and Salaries

2 Cooks @ Rs. 400 p.m. each

1 Manager who is paid Rs. 50 p.m. as allowance ( because he

is already an employee)

3. Consumable stores Rs. 5,000 p.a.

4. Gas & Electricity Rs. 200 p.m.

5. Overheads allocated to the canteen Rs. 1,200 p.a.

6. Company subsidy Rs. 2,000 p.a.

7. No. of meals served in the month of April: 2000


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Electricity Generation Costing

Power houses engaged in electricity generation orsteam generation use Power House Costing.

Operating cost statement can be prepared by

identifying the costs associated with the powergeneration or steam generation. Cost unit is different

for electricity generation and steam generation. For

electricity generation, cost unit is cost per kilowatt-hour while for steam it is lb.

S i f l t i it ti ti


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Specimen of electricity generation costing

Power House Cost Sheet

XYZ Ltd. October 2007

Total Steam Produced:

Total Steam Produced: Electricity Generated:

Particulars Amount

Cost per

unit [lbs] Rs.

Total Cost

Rs.

A] Fixed Charges

Rent, Rates, Taxes

Insurance

DepreciationSalaries

XX

XX

XXXX

XX

XX

XXXX

B] Fuel Charges XX XX

C] Maintenance Charges

Meters

FurnacesService materials

Tools etc.

XX

XXXX

XX

XX

XXXX

XX

D] Water Charges XX XX

E] Wages/Labour Charges XX XX

G] Total Charges XX XX

Y t d t C t Sh t h i th t f


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You are requested to prepare a Cost Sheet showing the cost of

generation of power per kilo Watt-Hours (kWH).

Total Units Generated 15,00,000 kWH p.a.

Rs.

Operating Labour 16,500 p.a.

Plant Supervision 5,250 p.a

Lubricant and Supplies 10,500 p.a.

Repairs & Maintenance 21,000p.a.Administrative overheads 9,000 p.a.

Capital Cost 1,50,000

Coal consumed per kWH is 1.5 lbs and cost of coal delivered tothe power station is Rs. 33.06 per metric ton. Depreciation rate

chargeable is 4% p.a. and interest on capital is to be taken @7%.

Take 1 metric ton = 2205 lbs.

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