NAME: KAZI MINAAZ .M. SHAFI CLASS: SYBBI (banking & insurance) ROLL NO: 04 SUB: M.

A (MANAGEMENT ACCOUNTING) TOPIC: operating/service COSTING PROJECT: 1 PROJECT

ST

PROF-IN-CHARGE: MRS.AARTI VERMA

I have made sincere efforts in this project. I have referred different books and collected information through internet. First of all, I would like to thank our respected teacher Mrs. AARTI VERMA for her suggestions, encouragement and support. Secondly, I would like to thank our respected principal of the college Mrs. ARJUMAND RAWAL and library staff for providing reference books. Last but not the least; I would like to thank my parents for their support and co-operation.

YEAR: 2011-2012 CLASS: SYBBI (BANKING & INSURANCE) This is to certify that the work entered in this project is the work of Miss. KAZI MINAAZ .M. SHAFI class: SYBBI (BANKING & INSURANCE) roll no: 04 who has worked satisfactorily for the entire project of the year 2011-2012 studying in A.E. KALSEKAR DEGREE COLLEGE.

__________ College stamp:

__________ Teachers sign:

SERVICE COSTING/ OPERATING COSTING

INTRODUCTION:
DEFINITION:
1. According to ICMA, London, Operating costing is that form of operation costing which applies where standardized services are provided either by an undertaking or by a service cost center within an undertaking. 2. According to Wheldon, Operating costing is actually unit costing as applied to the costing of services.

IMPORTANCE:
Service costing is also termed as operation costing, operating costing, period costing or terminal costing. Each service, example a specific chartered trip undertaken by a transport bus or a truck or an aircraft or a helicopter, etc., is considered as a separate unit cost. Service costing is concerned with the technique and process of ascertaining the cost of rending services. Operating costing is the process and technique of accumulation and ascertaining the cost of service. In case of operating costing the method of ascertaining cost is quite different from that adopted in production undertakings.

BASIC FEATURES OF OPERATING COSTING :

1. Service costing involves distinction of cost into fixed and variable costs. 2. Service costing is necessary to ascertain the total cost of service and the unit cost of service. 3. Service costing is applicable for undertakings which do not produce physical articles for sale and stock but it is applicable for undertakings providing services and selling services to the customers. 4. Services are intangible and highly perishable. 5. There is no inventory of the services rendered. 6. The total cost of service is averaged over the total amount of service rendered. 7. Service costing is an extension and refined form of process costing. 8. Service costing is not a separate and distinct method of costing. 9. Under operating costing, costs are classified into fixed, operating and maintenance costs.

10. Operating costing is applied to transport supply, hospitals, theatres, boiler houses, power houses, rail, airlines, trams, shipping, Hotels and motels, and other service enterprises. 11. Operating costing is actually unit costing as applied to the costing of services. 12. Operating cost works with units of costing, the cost unit is not as tangible as a job or a contract. 13. Selection of a suitable cost unit in operating costing is a difficult task and therefore it requires highly skilled, technical and statistical talent on the part of the cost accountant. 14. Service costing helps to ascertain the cost which helps to quote prices for the services rendered.

APPLICABILITY OF SERVICE COSTING:

1) Transport costing:

Transport services include railways, roadways, trams, airways and waterways. Selection of the cost unit is very important. In selecting the cost unit it is necessary to take into consideration factors like number of passengers, tonnage carried, distance covered, capacity, load carried, etc. the cost unit in transport enterprises is usually tone-km., passenger-km., tec. The cost per unit is calculated as follows:

Number of vehicles x Capacity x km. x Days x Passenger/Weight actually carried.

For preparing operating cost statement; costs are classified into three categories.

a)

Fixed charges:

It is also termed as standing charges. They remain fixed irrespective of whether the vehicles are operated or remain idle. Example: Depreciation, Insurance premium, License fees, Road taxes, Interest on capital, Supervisors salary, Garage rent, General supervision costs, salary of operating manager, etc.

b)

Operating charges:
It is also termed as

running charges. They are variable costs. Such costs vary daily according to the
operations and extent of uses. Example: Drivers wages, Lubricating oil, Oil, Grease, Petrol, Gas, tec.

c)

Maintenance charges:

Maintenance charges are semi-variable expenses in nature. Such expenses are incurred on the repairs and maintenance of vehicles and hence called maintenance charges. Example: Repairs, Maintenance, Cost of tyres and tubes, Spares, Cleaning, Painting, Accessories, Overhauling, etc.

PORFORMA OF OPERATING/SERVICE COST SHEET Particulars I. Running costs (variable expenses) (1) Cost of petrol/Diesel/Oil (2) Cost of Grease (3) Drivers wages (4) Conductors wages (5) Cleaners wages II. Maintenance costs (semi-variable Expenses) (1) Repairs and Maintenance (2) Garage Rent (3) Cost of tyres III. Fixed costs (Fixed Expenses) (1) License fees (2) Taxes (3) Depreciation (4) Insurance (5) Clerical staff salary (6) Interest Rs. XX XX XX XX XX XXXX Rs.

XX XX XX XXXX XX XX XX XX XX XX XXXX XXXX

Total cost

2)

CANTEEN COSTING:

Hotels, Motels, Restaurants, Hotel mess, cafeterias, Food Parlours, eating joints, etc. employ operating/service costing. In these organizations, service costing ascertains the total cost of running a canteen and cost per unit of service. The total cost is used to determine cost per cup of coffee/tea, cost per meal, cost per dish, cost per consumer order.

a) Variable charges:
Variable costs vary directly with the activity level. Example: Vegetables, Jam, Butter, Bread, Milk, Tea, Coffee, Biscuits, etc.

b) Fixed costs:
A fixed cost is a cost which remains constant and does not vary due to change in the activity level.

Example: Salary of cooks, salary of helpers, salary of cleaners, depreciation, rent, insurance, etc.

c) Semi-variable costs:
Direct proportion such costs varies but not in to the activity level. Example: Lighting, gas, stream, electricity, etc.

3)

Power Houses/Boiler Houses costing:

Boiler and power house Undertakings are engaged in providing services to the production department. A power house generates electricity while a boiler house produces steam which is then used for the generation of power, air conditioning and air compression.

A) Variable cost: Variable cost varies directly with the activity level. Example: Fuel, power, coal, oil, water charges, labour charges of coal handlers, ash removers, stokers etc. b) Fixed cost: Fixed costs are the fixed overhead which remain constant and does not change due to change in the activity level. Example: Rent, rates, depreciation of plant, insurance, depreciation of building, interest on capital, etc.

c) Semi-variable costs:
Semi-variable costs are also termed as maintenance charges. Example: Boilers, meters, furnaces, service materials, coal bunkers, tools and accessories, supervision charges, etc. Operating costing is exclusively used in service industry. One of the unique features of the products of service industry is that it is intangible. Operating costing is used in the following areas: Passenger transport, goods transport, electricity company, hospitals etc.

Areas of applicability (1) Passenger transport (2) Goods transport (3) Restaurants (4) Electricity company (5) Hospitals (6) Hotels (7) Coaching classes

Selection of cost units Cost per passenger per kilometer. Cost per tone per kilometer. Cost per dish. Cost per kilowatts. Cost per patient/per bed/per operation. Cost per guest/per room. Cost per student.

Service or operating costing is a method of determining the costs of providing and operating a service. In operating costing all costs are divided into three broad categories.

They are: 1) Operating and Running costs: In this category all the variable expenses are included.

2) Maintenance costs:
In this category all the semivariable expenses are included. 3) Standing or Fixed costs: In this category all the fixed expenses are included.

ILLUSTRATIONS:
Q1] A transport service company is running four buses between two towns which are 50 miles apart. The seating capacity of each bus is 40 passengers. The following particulars were obtained from their books for April, 2008: Wages of drivers, conductors, and cleaners Salaries of office and supervisory staff Diesel oil and other materials Repairs and maintenance Taxation, insurance, etc Depreciation Interest and other charges Rs. 2,400 1,000 4,000 800 1,600 2,600 2,000 14,400

Actual passengers carried were 75% of the seating capacity. All the four buses ran on all the days of the month. Each bus made is round trip per day. Find out the cost per passenger mile.

SOLUTION:

Operating cost statement costs (I)Fixed cost: Salaries of office staff Taxes and insurance Interest and other charges (A) (II)Maintenance cost: Repairs and maintenance (B) (III)Operating and running cost: Conductors, cleaners and drivers wages Diesel, oil and other material Depreciation (C) (A+B+C) Per month (Rs.) 1,000 1,600 2,000 4,600 800 800

Total cost Cost per Km = 14,400 = 3,60,000 Working note: Kilometers run

2,400 4,000 2,600 9,000 14,400 0.04

50 x 40 x 2 x 1 x 30 x 75/100 x 4= 3, 60,000Kms.

Q2] from the following relating to two different vehicles A and B, compute the cost of the running kilometers. particulars Kilometer run (Annual) Tones/km.(Average) Cost of vehicle Road license (Annual) Insurance (Annual) Garage rent (Annual) Supervision and salaries Drivers wages per hour Cost of fuel per litre Kilometers run per litre Repairs and maintenance/km Tyre allocation/km Estimated life of the vehicle (kms.) Vehicle A (Rs.) 15,000 6 25,000 750 700 900 2,700 3 3 20 1.65 0.80 1,00,000 Vehicle B (Rs.) 6,000 4 15,000 750 400 500 2,700 3 3 15 2.00 0.60 75,000

Charge interest at 5% per annum on the cost of vehicles. The vehicles run 20 kms per hour on an average.

SOLUTION:

Computation of the Cost per running kilometer costs Kilometer run (Annual) (I)Fixed cost: Road license Insurance Garage rent Supervision and salaries Interest @ 5 percent *Fixed Cost (per km.) (A) (II) Running cost (per km.): Drivers wages (per hour @ Rs.3 for 20 kms) Cost of petrol (per litre @ Rs.3 For 20 Kms.)[3/20;3/15] Repairs and maintenance Tyre Depreciation Running cost per km. (B) Total cost of running km. (A+B) Vehicle A (Rs.) 15,000 750 700 900 2,700 1,250 6,300 0.42 0.15 0.15 1.65 0.80 0.25 3.00 3.42 Vehicle B (Rs.) 6,000 750 400 500 2,700 750 5,100 0.85 0.15 0.20 2.00 0.60 0.20 3.15 4.00

Working note: Fixed cost per km. A 6,300/15,000 =0.42 B 5,100/6,000 =0.85

Q3] Mr. Shyamsunder owns a fleet of taxies and the following information are available from the records maintained by him: Number of taxis 10 Cost of each taxi Rs.54,600 Salary of manager Rs.7,000 p.m. Salary of accountant Rs.5,000 p.m. Salary of cleaner Rs.200 p.m. Salary of mechanic Rs.400 p.m. Garage rent Rs.600 p.m. Annual tax Rs.900 per taxi Drivers wages Rs.350 p.m. per taxi Annual repairs Rs.1,000 per taxi Total life of a taxi is about 2, 00,000 kms. A taxi runs in all 3,000 kms. In a month and 30% of this distance has to be run without any passenger. Petrol consumption is one litre for every 10 kms @ Rs.404 per litre. Oil and other sundries are Rs. 10.50 per 100 kms. Calculate the cost of running a taxi per effective km.

SOLUTION:

Operating cost statement of a Taxi for a month particulars (I)Running cost: 1. Drivers wages 2. cost of petrol 3. cost of Oil and other sundries Total running cost (II) Maintenance cost: 1. Cleaners salary 2. Mechanics salary 3. Garage rent 4. Repairs Total Maintenance cost (III)Fixed cost: 1. Salary of manager 2. Salary of Accountant 3. Taxes 4. Depreciation Total Fixed cost Total cost Cost per Effective km = _ Total cost__ Effective kms Rs. 350 1,323 315 (A) 1,988 20 40 60 83 (B) 203 700 500 75 819 2,094 (C) (A+B+C) 4,285 = 4,285 2,100 =Rs.2.04

Effective km.

=100%-30% without any passenger =70% =3,000 x 70% =2,100 kms.

Working note: (1) Cost of petrol Mileage Consumption Rate Cost 3,000 kms 1 litre for 10 kms 4.41 3,000 x 4.41 10 =1,323 54,600 2, 00,000 kms 3,000 kms 54,600__ x 3,000 2, 00,000 =819

(2) Depreciation Cost per Taxi Estimated life Mileage Depreciation