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OPERATING COSTING, , , , , , BUTT ae on ees roan, , , , , , , , , , , , fir OUTLINE a, No. Topic Page, 1. Operating Costing 272, , 1.1. Meaning, 4.2 Application, 1.3 Cost Unit, 4.4 Procedure, 1.5 Statistics, 1.6 Worksheet 1 : Cost Sheet [Transporter], 1.7. Worksheet 2 : Cost Sheet [Hotel], 41.8 Worksheet 3 : Cost Sheet [Hospital], 2. Solved Problems 276, , 2.1 Transporter, 2.2 Hotel, , ie 2.3. Hospital =y), , , , 4. OPERATING COSTING, , Operating Costing is the method used to ascertain the cost of provi, hotel, hospital, gas or electricity. Operating Costs denote the costs 0, to cost of manufacturing a product. CIMA has defined operating costing as that, costing which applies when standardised services are provided either by an undertaking or by 4, service cost centre within an undertaking. Cost Accounting Standard - | by ICWA defines 'Operating, Cost' "as the cost incurred in conducting a business activity. Operating costs refer to the cost of, undertakings, which do not manufacture any product but which provide services"., , 1.2. APPLICATION, , Operating Costing is employed in different types of service industries such as, - Transport Services e.g. Truck Operator, Road Transport, Railways, Air-Line etc., - Municipal Services like Road Maintenance, Garbage Disposal, Street Lighting etc., , ding a service such as transport,, f providing a service as opposed, form of operation

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operating Costing 274, Supply Services such as Electricity, steam, gas, water cle., Welfare Services c.g. Canteen, Hospital, Library ete,, , aining costs, it is necessary to decide suitable cost units for cach type of service industry, sically, Operating Costing is a type of Process Costing. I hus it uses the methods of Poy,, Costing When ascertaining the cost of supply of electricity, steam etc. [owe sometimes Operating, Costing may adopt a particular Job as a unit of cost as for example when costing a particular trip by, abus so as to quote the charges. In such cases Operating Costing uses the methods of Job ¢ osting by, treating a specific trip as a separate job. A cost unit under operating costing may be of two types, (a) Simple cost unit; or (b) Composite cost unit. Following is the list of different cost units used jn, different types of service enterprises , , , , , , , , , , , , , , , , , , , SERVICE INDUSTRIES SIMPLE COST UNIT, Passenger transport Per Kilometre, , Goods transport Per Kilometre, , Road Maintenance Per K. M. of Road maintained, Water Supply Per Kilo Litre of Water Supplied, Canteen Per Meal / Dish, , SERVICE INDUSTRIES COMPOSITE COST UNIT, Passenger transport Per Passenger - K.M., , Goods transport Per Ton - K.M., , Electricity Per Kilowatt - Hour, , Steam, Gas Per K.G. / Cubic Ft., , Hospital Per Patient - Day, , Library Per Member - Book, , , , , , Thus it can be seen that in Operating Costing, in most cases the Cost Unit is a compound unit. It, refers to both the Quantum of Service and Period of Service. Thus a transporter charges for carrying, so much weight (tons) for so much distance. (Km.);-an electricity company charges one for use of, both the Quantum (Kilowatt) and the Period (Hours); and so on., , 1.4 PROCEDURE, , (1) Determine Cost Unit : The first step in Operating Costing is the determination of the Cost Unit., This is a complex task as explained in Para 1.3., , (2) Ascertain Costs : The next point to be noted is that Operating Costs are Period Costs. The costs, of supplying the services for a period are ascertained in the following manner (taking the example, , ofa transporter)(a) Vehicle No. : Each Vehicle is treated as a cost centre and given a specific number. All the, costs are accounted against this number. A separate Account is opened to record the Costs, , and Income of each Vehicle., , (b) Variable Costs : Variable Costs are the running and operating charges. These include expenses, of Variable Nature, e.g. petrol, diesel, lubricating oil, grease etc. The Material Requisition, Note and Time Sheet (or Log) bears the Vehicle No, The relevant Vehicle Account is debited, with its direct material cost and direct labour cost. Direct Expenses such as fuel are debited to, the Vehicle Account on the basis of the Log Book and the cash/purchase/journal vouchers., , (c) Fixed Costs : Fixed Costs (Fixed Charges) include garage rent, insurance, road licence fees, etc. The Fixed Charges are apportioned and absorbed by each Vehicle No. on the basis of the, Overheads Absorption Rate which may be Actual or Pre-determined. The Fixed Costs, attributable to the Vehicle are debited to the relevant Vehicle Account., , ep bedcs- A cmon ‘b

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274 Costand Management Accounting (M.Com. Part-I: SEM. 1), , (e) Profit or Loss: The Vehicle Account at this stage will reveal the profit or loss made, operating that Vehicle. The profit or loss is then transferred to the Costing Profit and Le, Account. The total Operating Cost of a period is divided by the number of Cost Units (Ke, Passenger/Ton etc.) supplied during the period to arrive at the Operating Cost Per Unit w, that period. “i, , (3) No Stoeks : In case ofa service industry, there is no question of any closing stock or work-j, progress since it is not possible to store a service for future use. aly, , (4) Abnormal Costs : According to Cost Accounting Standard 5 (Transportation Costs), abnorma|, and non-recurring costs shall be directly debited to P & LA/c and shall not form part of operatin,, costs. Examples are - penalty, detention charges, demurrage and costs related to abnormal breake, , down. ,, , SOLE ATA lek), , CAS-S by ICWA also states that proper records shall be maintained to determine the actual Operatin, cost of vehicles showing details of various elements of cost, such as salaries and wages of driver, cleaner and others, cost of fuel, lubricants, grease, amortized cost of tyres and batteries, repairs and, maintenance, depreciation of vehicles, distance covered and trips made, goods hauled and transported,, Two basic documents are normally maintained for collection of cost and operational details - yiz, (i) Log book and (ii) Daily operation schedule. Same as job is assigned a distinct number in job, costing method, each vehicle is provided with a log book or log sheet, which contains all information, for operation and cost control, of one particular vehicle., , , , , , , , , , , , , , , , , , , , , , , , , , , , , , LOG BOOK, Vehicle No. Date :, Licence No. Time left garage :, Route No. Time returned :, Trip record, Package weight Time, Trip No.| From To Out Collected | Kms. Out In Hours, on route : taken, Supplies % sescssecvsseseevessveases Worker's time Remarks :, Petrol : Driver : Loading delay : ..........eee, Oil : Assistant : Traffic delay :, Grease: . Cleaner : Accident, CCR eee, , , , , , , , Most of the details required for controlling the vehicles are available from the log book. A daily, operation schedule has to be maintained by firms operating a fleet of vehicles, so as to keep contro, over utilisation of each vehicle, minimising vehicle idle hours, and also, keeping repairs cost unde, control. A system of "requisition of vehicles" may also be introduced for proper authorisation for ., of vehicles. Similarly, major repairs should be undertaken after obtaining authorisation for the same.

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Sheet For (Month/Year) a, , , , , , , , , , , , Cost XX, VEHICLE NO. XX, CARRIAGE CAPACITY [Seats or Tonnes] —__—__—, DAYS OPERATED Tans [eee, STEP| COSTS, , A. | FIXED Cost 7 ms, , Insurance a ee, , Licence Fee, Permit Feo and Taxes Wh xXx, , Depreciation 4K, , Other Fixed Costs (specify), B. | VARIABLE COST, , Salaries and Wages of Drivers, Cleaners xK, , & Other Operating Staff XK, , Fuel and Lubricants XK, , Consumables xXx, , Amortized Cost of Tyre, Tube and Battery xX, , Spares xX, , Repairs and Maintenance xXx XK, , Other Variable Cost (specify) i xx, C. | TOTAL OPERATION COSTS [A + B] xx, D. | PROFIT/ LOSS xx, E. | REVENUE [TAKINGS] —, , , , , , , , , , , , Tutorial Note :, , The above Cost Sheet is as prescribed in Cost Accounting Standard - 5 by ICWA which is mandatory, wef. 1-4-2010. CAS-5 is mandatory for Cost Audits under the Companies Act and for computing, Transport Cost under the Excise Act. The above cost classification is different from the traditional, cost classification (used in the text-books or exam. suggested answers as on date)., , Hence, students should give a note below their answer that the cost classification is as per CAS-5 by, ICWA which is mandatory w.e.f. 1-4-2010., , In most cases, the final unit cost remains the same, even if the classification vide CAS - 5 is different., Notes :, , (1) Fixed Costs are costs of owning the vehicles. These must be paid whether the vehicle runs or, not. These also include office / administrative overheads., , Variable Costs are incurred to actually run a vehicle. These vary with the operations - the more, a vehicle runs, the higher are the variable costs., , (2) Effective Kilometres = Run x Load = [One way trip (Km.) x Trips per day x Days operated] x, [Carriage capacity x Usage rate], , 2.1 In case of passenger tran, , sport, Carriage capacity is in terms of seats; and Cost unit is Effective, kilometres per Passenger., , 2.2 In case of goods transport, Carriage capacity is in terms of Tonnes; and Cost unit is Effective, kilometres per Tonne., , () Cost per Kilometre = Operation Cost + Effective Kilometres, , (4) Revenue (or Takings = Cost + Profit) per Kilometre =, , () Tariff to be charged per Kilometre =, , (6) Special Points : Cost of Battery, Tyres and Tubes shall be amortized over its useful life., Depreciation is treated as fixed cost as per CAS 5, whether its usefill life is mentioned in terms, of Kms. or years. Salaries of drivers and operating staff is treated as Tunning cost, because no, salary will be paid if the vehicle is, , not in operation. Interest is financial cost and ignored in the, ee sheet. Final Total Operating Cost remains the same whether an item is treated as Fixed or, unning. “2, , Takings + Effective Kilometres, Takings per effective Km. + Distance of Trip

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COST SHEET For (Month/Year), , , , , , , , , , STEP| COSTS, Salaries to Staff, , Room Attendant Wages, , Repairs and Renovation, Lighting and Heating, , Power, , Linen ,, , Interior Decoration, , Sundries, , Depreciation, , - Buildings, , - Furniture and Fixtures, , - Air-conditioners, , Premises Rent, , Other Administration Expenses, Interest on Investment, , TOTAL OPERATING COST (i), NO. OF ROOM DAYS (ii), COST PER ROOM DAY (i) = (ii), , , , , , , , XK, xK, XX, , , , Xx, Xx, Xx, Xx, Xx, XX, XX, XX, , xX, XX, XK, , x ke, , , , , , WORKSHEET 3: COST SHEET [HOSPITAL], COST SHEET For (Month/Year), , , , STEP| COSTS, , , , A. | FIXED STANDING COSTS, Salaries to Staff, , Premises Rent, , Repairs and Maintenance, , General Administration Expenses, Cost of Oxygen, X-ray, etc., Depreciation, , B. | RUNNING OR VARIABLE COSTS, Doctor's Fees, , Food, , Medicines, , Diagnostic Services, , Laundry, , Hire Charges for Extra Beds, TOTAL OPERATING COST, , NO. OF PATIENT DAYS, , COST PER PATIENT DAY (C) + (D), , moo, , , , , , , , , , , , eee ER, , HK HH, , XX, , |, , , , x wsh, , , , 2. SOLVED PROBLEMS |, , 2.1 TRANSPORTER, , Illustration 1 : (Passenger - Kms.), , From the following information calculate total Kms and total passenger Kms., , No. of Buses 6, , Days operated in the month 25, , Trips made by each bus 4, , Distance of route 20 Kms. (one way), Capacity of Bus 40 passengers, , Normal passenger travelling 90% of capacity.