OPERATING COSTING

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 costingapplied to undertakings which provide service rather thanproduction of commodities. Service may be performed internallyand externally. Services are termed as internal when they have tobe 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 forthe service costing. Thus operating costing is a method of costaccumulation which is designed to determine the cost of services.

MEANING OF OPERATING COSTINGOperating costing is a method of ascertaining the cost of providing 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 services are 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

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, percup of tea sold in a canteen and per child in a school. In a certaincases a composite unit is used i.e. Passenger – Kilometer in atransport company. The following are some of example of cost unitsused in different organizationsEnterprises Cost per unitPassenger transport KilometerGoods transport Ton – KilometerHotel Per room per dayHospital Per bed per dayCanteen Per item, per mealWater supply Per 1000 litersElectricity Per kilowatt

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 categorieshelps to improve managerial control over cost.

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 withanother group• To determine the cost to be charged against departments usingthe service• To ensure the cost of maintenance and repairs is not excessive

Particulars Rs. Total Rs. Per Km Rs.

A. Fixed Cost (or Standing charges)

1. Road Tax 2. Insurance 3. Driver’s Salary 4. Conductor’s Salary5. Depreciation 6. Interest on Capital 7. Garage Rent 8. Office & Administration Overheads

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B. Variable (Running) costs

1.Depreciation2. Petrol Diesel3. Oil & Grease4. Repairs and maintenance5. Tyres and tubes

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Total operating cost XXXX XXXX

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

HOSPITAL COSTINGHospitals comes under service sector, big companies alsomaintain 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 laundry etc.(5) Other services such as transport, dispensary, cleaning etc.

Format of a cost Sheet of a HospitalParticulars Rs. Rs.

A) Fixed standing charges1.Rent , Repairs and maintenance 2.General administrative expenses 3.Depreciation 4.Salaries to staff 5.Cost of Oxygen, X ray etc

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B) Running or maintenance costs1.Doctor’s fees 2.Food 3.Medicines 4.Laundry 5.Hire charges

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Total operating cost XXXX

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

HOTEL COSTINGHotel 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 areas etc. 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, power etc. 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.

Particulars Rs. Rs.

A) Fixed Charge1.Salaries to Staff 2.Repairs and Renovation 3.Depreciation 4.Interior decoration 5.Lighting, heating & power 6.Laundry contract cost 7.License fee

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B) Running charges (Variable cost)1.Cost of free tea, coffee, meal, breakfast2.Laundry cost of bed sheets & towel

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Operating cost sheet of a Hotel

Canteen CostingCanteen 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.

Format of Canteen Operating Cost SheetParticulars Total (Rs) Per Unit (Rs)

(A) Provisions:1.Wheat flour2.Bread3.Vegetable & Milk4.Cold drinks, Tea & coffee

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Wages & Salaries of Staff XX XX

(B) Services:1.Gas & Water2.Power & Lighting

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(C) Consumable stores:1.Crockery and Glassware2.Cleaning materials

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(D) Miscellaneous:1.Rent & Insurance2.Depreciation

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(E) Total XX XX

(F) Profit XX XX

(G) Sales XX XX