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PROJECT ON
OPERATING COSTING.
SUBMITTED BY
MADHURI JADHAV
ROLL NO.: 29
ADVANCED ACCOUNTANCY PART 1 (SEM 2)
ADVANCED COST ACCOUNTING
IN PARTIAL FULLFILLMENT OF THE DEGREE OF
MASTER OF COMMERCE
2015-16
UNDER THE GUIDENCE OF
PROF. VARSHA PENDSE
VIDYA PRASARAK MANDAL, THANE
K.G.JOSHI COLLEGE OF ARTS &
N.G. BEDEKAR COLLEGE OF COMMERECE
CHENDANI BUNDER ROAD, THANE-400601
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Declaration
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PLACE
MADHURI JADHAV
ROLL NO: 29
DATE
ACKNOWLEDGEMENT
It is indeed a great pleasure and proud privilege to present this project work.
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I take this opportunity to express my gratitude and acknowledge to all the individuals
involved both directly and indirectly for their valuable help and guidance.
This project has been an attempt to give information about the OPERATING
COSTING.
I express special thanks to my guide Prof. VARSHA PENDSE under whose guidence
the project conceived , planned and executed.
I would also like to thank the college library and its staff for patiently listening and
guiding me. I would like to thank my family also.
Thank You.
INDEX
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Chapter
Sub
no
chapter
1.1
Introduction
1.2
1.3
Unit of cost
1.4
Classification of cost
1.5
10
1.6
12
1.7
Cost unit
13
2.1
14
2.2
Literature review
25
3.1
Company profile
26
4.1
Conclusion
29
4.2
Bibliography
31
Particulars
Page no
Chapter 1
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1.1 Introduction
CIMA defines the method Operating costing applies where standardized services are
provided by an undertaking.
Such undertakings are: transport concern (shipping, air, railways and motor transport
etc.), catering establishments (hotels, hostel, canteen etc.) and public utility undertakings like
gas, electricity, steam generating, hospitals, theatres, schools, laundries etc. In many factories
utility services like motor transport, power house, hospital and canteen are departmentally run
divisions which provide services to the producing departments of the factory.
Operating costing is used by concern running diverse nature of activities, the cost
system is obviously different from that for manufacturing concerns. In this system a suitable
cost-unit is adopted, which is not a job or process but is related to service rendered e.g. tonkilometer, passenger-kilometer of transport services, unit of electricity or kilowatt hour, cubic
meter of gas etc.
It is a method of ascertaining costs of providing or operating a service. This method of
costing is applied by those undertakings which provide services rather than production of
commodities. The emphasis under operating costing is on the ascertainment of cost of
services rather than on the cost of manufacturing a product. This costing method is usually
made use of by transport companies, gas and water works departments, electricity
supply companies, canteens,hospitals, theatres, schools etc.
Cost per unit of a product or service, or the annual cost incurred on a continuous
process. Operating costs do not include capital outlays or the costs incurred in design and
implementation phases of a new process.
Operating costs are costs that are incurred on a day-to-day basis related to the
business operations. It can also be related to the operation of a device, component, and
piece of equipment or facility. Operating costs are also known as operating expenses. For
example sales and administration costs are operating costs. Operating costs are referred to
as cost per unit of a product or service, or the annual cost incurred on a continuous process.
The operating costs are those that do not include capital outlays or the costs incurred
in design and implementation phases of a new process.
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Operating costs are divided into two categories. They are fixed costs and variable
costs. Fixed costs are those which are fixed and do not vary with the changes in the level of
output. They do not change whether the business is inactive or operating at full capacity.
Variable costs are those costs which vary with the changes in the level of output. Flexible
expenditures are also known as the variable operating costs. The expenses fluctuate on the
basis of a variety of factors.
Operating expenses differ in every country. The actual expenses vary in every
location. The calculation of operating costs is essential for sound business planning. These
costs should be properly budgeted; otherwise it will adversely affect the business. The lack
of planning in a business increases the risk that a business will not maintain adequate funds
to operate properly. When the operating costs are fixed, the likely business
interruptions or economic declines should be taken into consideration. The business
generally cannot be deferred until a business finds it convenient to pay them. Fixed
operating costs are set on a payment schedule and need to be paid accordingly for the
company to maintain good credit.
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(1) The undertaking which adopts service costing does not produce any tangible goods.
These undertakings render unique services to their customers.
(2) The expenses are divided into fixed and variable cost . Such a classification is necessary
to ascertain the cost of service and the unit cost of service.
(3) The cost unit may be simple or composite. The examples of simple cost units are cost per
unit in electricity supply , cost per litre in water supply, cost per meal in canteen etc.
Similarly cost per passenger kilometers in transport cost per patient-day in hospital, cost per
room-day in hotel etc. are the examples of composite cost unit.
(4) Total cost are averaged over the total amount of service rendered.
(5) Costs are usually computed period-wise. However,in the case of utilization of vehicles,
use of road-rollers etc., the costs are computed orderwise.
(6) Service costing can be used for service performed internally or externally.
(7) documents like the daily log sheet, cost sheet etc. are used for the collection of cost data
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Variable Costs
Variable costs, like the name implies, are comprised of costs that may vary.
Unlike fixed costs, variable costs will increase as production increases and decrease as
production decreases. Examples of variable costs include raw material costs, payroll and the
cost of electricity and other utilities. For example, in order for a fast-food restaurant chain
that sells French fries to increase its French fry sales, it will need to increase the size of its
purchases from its potato supplier.
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In addition to fixed and variable costs, it is also possible for a companys operating
costs to be considered semi-variable (or semi-fixed). These costs represent a mixture of
fixed and variable components and thus can be thought of as existing between fixed costs and
variable costs. Semi-variable costs vary in part with increases or decreases in production, like
variable costs, but still exist when production is zero, like fixed costs. This is what primarily
differentiates semi-variable costs from fixed costs and variable costs.
A relatively simple example of semi-variable costs is overtime labor. Regular
wages for workers are generally considered to be fixed costs, as while a companys
management can reduce the number of workers and paid work-hours, it will always need a
work force of some size in order to operate. Yet, overtime payments are often considered to
be variable costs, as the number of overtime hours that a company pays to its workers will
generally rise with increased production and drop with reduced production. Because wages
paid in conditions allowing for overtime have both fixed and variable components, they are
considered to be semi-variable.
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1 Transport Service: Under this method of costing, the operating cost of each vehicle
is determined. The common unit of service is tonne kilometer in case of goods
transport, and passenger kilometer in case of passenger transport. Examples of
transport service are Truck operators, road transport, Railways, Airlines, etc.
2 Supply service: It includes services like electricity, steam, gas, water, etc. where
steam is used for the purpose of generating electricity, it is possible to compute the
cost of electricity generated by aggregating the steam production costs with other
related cost of electricity generation. A cost unit is generally in terms of kilograms.
3 Welfare Services: It includes services like canteen, hospital, library, etc. Hotels,
restaurants employ operating costing. The total operation of a hotel can be divided
into number of cost centers like Restaurant, Housekeeping, Laundry, etc. The cost unit
is generally in terms of per meal/ dish.
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For ascertaining costs, it is necessary to decide suitable cost units for each type of service
industry. Basically, Operating Costing is a type of Process Costing. Thus it uses the methods
of Process Costing when ascertaining the cost of supply of electricity, steam etc. However,
sometimes Operating Costing may adopt a particular Job as a unit of costs as for example
when costing a particular trip by a bus so as to quote the charges. In such cases Operating
Costing uses the methods of Job Costing 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 in different types of service enterprises
Service Industries
Passenger Transport
Per Kilometer
Goods Transport
Per Kilometer
Road Maintenance
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Water Supply
Canteen
Service Industries
Passenger Transport
Goods Transport
Electricity
Steam, Gas
Hospital
Library
Transport costing
Transport operating costs refer to costs that vary with vehicle usage, including fuel, tires,
maintenance, repairs, and mileage-dependent depreciation costs (Booz Allen & Hamilton,
1999). Projects that alter vehicle miles traveled, traffic speed and delay, roadway surfaces, or
roadway geometry may affect travelers' vehicle operating costs, which should be considered
in a benefit-cost analysis.
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Projects that change per capita vehicle ownership rates, such as significant changes in the
quality of alternative modes and land use accessibility, may affect vehicle ownership costs,
which should be considered in benefit-cost analysis.
Estimate changes in vehicle travel speeds and delay due to road and traffic conditions.
Estimate fuel consumption rates, fuel prices, and non-fuel-related operating costs.
For improvements to ride quality, such as pothole repairs and curve or grade
reductions, estimate effects on vehicle wear.
STE
P
COSTS
Rs Rs.
.
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A.
FIXED COST
Insurance
xx
..... xx
X
xx X
Depreciation
xx
xx
VARIABLE COST
..
Consumables
C.
D.
Amortization
Cost
of
Tyre
,Tube
&
E.
Laundry
Spares
X
X
xx X
Battery
X
xx
X
xx X
xx X
...
xx
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...
Illustrations:
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A truck starts with a load of 10 tonnes of goods from station P. It unloads 4 tonnes at station
Q and rest of the goods at station R. It reaches back directly to station P after getting reloaded
with 8 tonnes of goods at station R. The distance between P to Q to R and then R to P is 40
Kms, 60 Kms and 80 Kms respectively. Compute
1. Absolute Tonnes-Kilometers
2. Commercial Tonnes-Kilometers
Solution:
Absolute Tonnes- Kilometer
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HOTEL COSTING
The Operating Costing is applied in lodging houses in order to find out the cost of
accommodation provided.
The convenient form measuring the accommodation facility is in terms of Room
day.
Cost per room day means the cost of maintaining one room in usable condition for
one day when occupied.
When different classes of rooms are provided, they can be expressed in term of a
single class with the help of weights based on appropriate width.
While determining the cost per room day, factors such as room accommodation
available, whether cubicles or dormitories, number of persons lodging, facilities provided to
the lodgers, etc. are to be taken into account.
Most of the costs in the lodging houses are fixed in nature like depreciation, staff
salaries, maintenance, etc.
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Step
Costs
Rs
Rs
Salaries to staff
XX
XX
XX
XX
Power
XX
Linen
XX
Interior decoration
Sundries
Depreciation
XX
XX
XX
XX
XX
-Buildings
-Furniture & fixtures
-Air-conditioners
Premises rent
Other Administration Expenses
Interest on investment
total operating cost (1)
no. of room days(2)
cost per room day (1+2)
XX
XX
XX
XX
XX
XX
XX
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Illustration
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 charged on loan for the year ended 31 st March,
2008:
1.
2.
Wages of the room attendant: Rs 20 per day per room when the room is occupied.
3.
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SOLUTION:
Particular
Rs p.a.
Rs p.a.
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6,00,000
8,16,000
6,80,000
Power (WN 3)
96,000
30,000
Repair to building
50,000
License fee
12,400
1,20,000
1,00,000
Depreciation:
Building @ 5%
Equipment @10%
Total Cost
1,00,00
0
5,00,00
1,50,000
26,54,400
Total Earnings
6,63,600
33,18,000
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HOSPITAL COSTING:
A concern of most countries is health sector resources: the sources of finance for health
services, the ability to maintain past funding levels, resource allocation patterns, and the
efficiency of health services delivery. The hospitals of these countries are an important
element of the concern about health resources because they are the largest and most costly
operational unit of these health systems and account for a large portion of the health sector's
financial, human, and capital resources. In aggregate terms,
hospitals utilize nearly half of the total national expenditure for the health sector;
hospitals use a large proportion of the most highly trained health personnel
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A.
xx
Premises Rent
xx
xx
xx
xx
Depreciation
...
XX
xx
xx
XX
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Food
xx
Medicines
xx
XX
Diagnostic Services
xx
XX
Laundry
...
xx
XX
C.
D.
E.
..
Illustration
Care Hospital operates a fitness center to provide counseling on nutrition, exercise and health
care for major surgery patients after their release from the hospital. Average patient will make
three visits to the center. Each visit lasts 40 minutes.
The hospital has estimated the following costs of operating the center:
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Particulars
Amt
18000
12000
4000
44
16
Hospital expects to have an average of 500 visits per month. What should be the amount
charged to each patient in order to cover the above costs?
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Solution:
Particulars
Indirect cost per month
Amt
18000
Occupancy
12000
Clerical
4000
Other costs
3400
68
3____
80
3____
240
16
44____
300
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Chapter 3
3.1 Company Profile
The National Center for Transit Research analyzed vehicle expenses in
Exploration of a Shift in Household Transportation Spending from Vehicles to Public
Transportation (Polzin, Chu and Raman 2008) . The accompanying spreadsheet model
calculates marginal savings that result from reductions in household vehicle ownership;
for example, due to transit oriented development or other travel option improvements.
They find the annual cost to households per additional vehicle averaged about $3,500 in
2006, but conclude that marginal annual savings per reduced vehicle are probably
somewhat less since households are likely to shed lower value vehicles. In the model
they use a marginal cost of $0.20 per mile,but suggest that this value be adjusted to
reflect specific situations. Average household vehicle expenditures and marginal savings
per reduced vehicle.
Hybrid and Electric Cars
Hybrid vehicles are more costly to purchase but more fuel efficient in urban conditions
than standard models.16 For example, the 2009 Camry Hybrid lists for about $6,600 more
than a non-hybrid version, a 9 per vehicle-mile premium if depreciated over 5 years at
8% interest and 15,000 annual miles.17 It is rated at 33 miles-per-gallon (MPG) in city
driving, 50% better than a standard Camrys 22 MPG, but only achieves a 10% gain (31
vs. 34 MPG) in highway driving. The Toyota Prius achieves 48 MPG in city driving and
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45 MPG in highway driving. A 2008 GMC Yukon four wheel drive hybrid is rated at 20
MPG in both city and highway conditions, which is not very fuel efficient but
significantly more efficient than the standard models 15 MPG city driving rating.
The US DOE reports that electric cars require new battery sets every 20,000-30,000 miles
costing $2,000-$3,000 (averaging 6-15 per vehicle-mile), and consume 0.25 to 0.5 kWh
Vehicle Expenditures Including Rental Cars (Polzin, Chu and Raman 2008)
(2006 Dollars)
Vehicles per HH
0
1
2
3
4
5+
1
$355
$3,102
$9,972
$10,891
$10,862
$11,208
5+
$680
$5,481
$7,198
$10,481
$14,307
$29,324
$764
$3,949
$7,411
$10,976
$15,078
$26,729
5+
$4,801
$1,717
$3,283
$3,827
$15,016
fairly small sample, the general trends indicated may be more reliable than specific
values.
operating various vehicle types as summarized in Table 5.1.5-4. This reflects costs during the
first five years of a vehicles life and so has relatively high depreciation and insurance costs,
and almost no repair costs. Note that depreciation is now adjusted for mileage, unlike earlier
AAA data.
American Automobile Association 2008 Vehicle Cost Estimates
Small Sedan
8.21
4.26
0.61
13.08
$948
$419
$2,430
$553
$4,350
$5,985
$0.35
Medium Sedan
10.54
4.51
0.87
15.92
$957
$572
$3,401
$786
$5,716
$7,706
$0.46
Large Sedan
11.51
4.92
0.82
17.25
$1,022
$711
$4,551
$998
$7,282
$9,438
$0.58
SUV
Van
14.39
4.94
0.95
20.28
$948
$727
$4,619
$1,023
$7,317
$9,852
$0.59
12.16
4.87
0.74
17.77
$897
$602
$3,818
$832
$6,149
$8,370
$0.49
This table summarizes vehicle cost estimates published by the American Automobile
Association. It represents typical costs during the first six years of vehicle operation,
and so tends to overestimate depreciation and financing costs and underestimate repair
costs. It also ignores incidental costs, such as user parking fees and road tolls.
Annual
Operating
Costs (variable)
$1,500.00
$2,000.00
$2,250.00
$3,000.00
$4,000.00
Annual
Ownership
Costs (fixed)
$7,081.00
$7,081.00
$7,081.00
$7,261.00
$7,501.00
Total Cost
$8,581.00
$9,081.00
$9,331.00
$10,261.00
$11,501.00
Cost per
Kilometer
$0.715
$0.568
$0.518
$0.428
$0.359
Chapter 4
4.1 Conclusion
Operating costs are expenses that relate to a buisness operations. It can also refer to the costs
of operating a specific device or branch of a corporation. These costs usually fall into two
categories, called fixed costs and variable costs, and a business may have more of one type
than the other.
Fixed operating costs are expenses that tend to remain the same whether the business or
device is inactive or operating at full capacity. Examples of such expenses include employee
salaries and machinery leasing fees. Salaries must be differentiated from hourly wages in this
regard.
Flexible expenditures are known as variable operating costs. These expenses fluctuate based
on a variety of factors. Money dispensed on hourly wages, for example, can be adjusted by
varying the amount of time recipients are engaged in labor.
Operating costs are not unique to any country, although actual expenses may vary from one
country to another or even from one location to another. Within an industry, it is very possible
for expenses to vary. It is, however, difficult to find a business that does not have any of these
costs. Even Internet businesses, in which the costs of operations can often be reduced, it is
almost impossible to completely eliminate them.
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Process costing method is applicable where goods or services result from a sequence of
continuous or repetitive operations or processes and products are identical and cannot be
segregated. Costs are charged to processes and averaged over the units produced during the
period.
Single or output costing is used when the production is uniform and identical and a single
article is produced. The total production cost is divided by the number of units produced to
get unit or output cost. Examples are mining, breweries, brick making, etc.
Operation costing refers to the methods where each operation in each stage of production or
process is separately costed. Thereafter, the cost of finished unit is determined. This is
suitable to industries dealing with mass production of repetitive nature for example, motor
cars, cycles, toys, etc.
Expenses associated with administering a business on a day to day basis. Operating costs
include both fixed costs and variable costs. Fixed costs, such as overhead, remain the same
regardless of the number of products produced; variable costs, such as materials, can vary
according to how much product is produced.
Businesses have to keep track of both operating costs and costs associated with non-operating
activities, such as interest expenses on a loan. Both costs are accounted for differently in a
company's books, allowing analysts to see how costs are associated with revenue-generating
activities and whether or not the business can be run more efficiently.
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4.2 Bibliography
www.google.com
www.wikipedia.com
Advanced Cost Accounting Manan Prakashan
Advanced cost accounting- sheth prakashan
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