Chapter 1

1. INTRODUCTION TO OPERATING COSTING

Operating costing is a method of costing applied by undertakings which

provide service rather than production of commodities. Like unit costing and
process costing, operating costing is thus a form of operation costing.
The emphasis under operating costing is on the ascertainment of cost of
rendering services rather than on the cost of manufacturing a product. It is
applied by transport companies, gas and water works, electricity supply
companies, canteens, hospitals, theatres, school etc. Within an organization
itself certain departments too are known as service departments which provide
ancillary services to the production departments. For example: maintenance
department; power house; boiler house; canteen; hospital; internal transport.
Operation costing offers better scope for control. It facilitates the
computation of unit operation cost at the end of each operation by dividing the
total operation cost by total input units. It is the category of the basic costing
method, applicable, where standardized goods or services result from a
sequence of repetitive and more or less continuous operations, or processes to
which costs are charged before being averaged over the units produced during

the period. The two costing methods included under this head are process
costing and service costing.
CIMA has defined Operating Costing As that form of operation costing
which applies when standardized services are provided either y an undertaking
or by a service cost center within an undertaking.
Cost Accounting Standard 1 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.
Because of the varied nature of activities carried out by the service
undertaking, the cost system used is obviously different from that followed in
manufacturing concerns.
The essential features of operating costs are as follows:
1 The operating costs can be classified under three categories. For example
in the case of transport undertaking these three categories are as follows:
Operating and running charges: It includes expenses of variable
nature. For example expenses on petrol, diesel, lubricating oil, and grease
etc.

 Maintenance charges: These expenses are of semi-variable nature and

include the cost of tyres and tubes, repairs and maintenance, spares and
accessories, overhaul, etc.
Fixed or standing charges: These includes garage rent, insurance, road
license, depreciation, interest on capital, salary of operating manager, etc.
2.

The cost unit used is a double unit like passenger-mile; Kilowatt-hour,

etc. It can be implemented in all firms of transport, airlines, bus-service, etc.,

and by all firms of Distribution Undertakings

2. APPLICATION OF OPERATING COSTING

1 Transport Service: Under this method of costing, the operating cost of

each vehicle is determined. The common unit of service is ton kilometers
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.

4 Municipal Services: It includes services like road maintenance, garbage

disposal, street lighting, etc.

3. COST UNIT

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

Simple Cost Unit

Passenger Transport

Per Kilometer

Goods Transport

Per Kilometer

Road Maintenance

Per K.M. of Road maintained

Water Supply

Per Kilo Liter of Water Supplied

Canteen

Per Meal / Dish

Service Industries

Composite Cost Unit

Passenger Transport

Per Passenger - K.M.

5

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.

4. PROCEDURE
1 DETERMINE COST UNIT: The first in operating costing is the
determination of the cost unit. This is a complex task as explained in
para1.3.
6

2 ASCERTAIN COST: The next point to be notes is that operating cost

are period cost. The cost of supplying the service for a period are
ascertained in the following manner (taking the example of a transport)
VEHICLE NO.: Each vehicle is treated as accost center and given a
specific number. All the cost account against this number. A separate
account is opened to record the cost and income of each vehicle.
VARIABLE COST: Variable cost are the running and operating. This
included expenses of variable nature e.g. petrol, diesel, lubricating oil,
grease etc. the material requisition notes and time sheet (or Log) bears
the vehicle no. the relevant vehicle account is debited with it direct
material and direct labour cost. Direct expenses such as a fuel are
debited to vehicle account on the basic of log book and the cash /
purchase / journal vouchers.
FIXED COSTS: Fixed cost (fixed charge) included garages rent,
insurance, road license fees etc. the fixed charges are apportioned and
absorbed by each vehicle no. on the basic of overhead absorption rate
which may be actual or pre determine. The fixed cost attributable to
the vehicle are debited to the relevant vehicle account.
REVENUE: The revenue from the vehicle is credited to the vehicle
account.
PROFIT OR LOSS: The vehicle account at this stage will reveal the
profit or loss made on operating that vehicle. The profit or loss is then
transfer to the costing profit and loss account the total operating cost

of a period is divided by the number of cost unit (KM/Passenger/ Ton)

supplied during the period to arrive at the operating cost Per unit for
that period.
3 NO STOCK: In case of a service industry there is no question of any
closing stock or work-in-progress since it is not possible to store a service
for future use.
4 ABNORMAL COST: According to cost accounting standard 5
(transportation cost) abnormal and non-recurring cost shall be directly
debited to P&L a/c and shall not form part of operating cost. Example are
penalty, detention charge demurrage and cost related to abnormal
breakdown.

5.LIMITATIONS
Operating Cost Accounting has certain limitations
a) Based on estimates: Indirect costs are not charged fully to a product or
process. It is charged to all the products and processes on the basis of estimates.
Actual cost varies from estimated cost. Due to these limitations, all cost
accounting results are taken as mere estimates.

b) Lack of uniformity: Procedures of cost accounting followed by different

organizations are different for different products. There is no uniformity. There

is also possibility of difference in pricing material issues for production. All

these lead to different cost results for the same operation.

c) Many conventions: There are many conventions for classification of costs,

pricing of material issues, apportionment of indirect costs, adoption of marginal
or standard cost, etc. These create difficulty in determining the exact cost,
because no one type of cost is suitable for all. Purposes and in all circumstances.
d) Expensive: Cost accounting is expensive. It involves lots of clerical won for
maintaining various costing records for different purposes. For medium and
small size concern, the benefit derived from costing system may not justify the
cost involved.
e) Result requires reconciliation: Information and results provided by
financial accounting and cost accounting may be different for the as activity.
This requires reconciliation to find out correctness of the two before taking any
decision.
f) Dependent: It is not an independent system of accounting. It depends on
other accounting systems.

g) Does not include all items of expense and income: Items of purely
financial nature such as interest, financial charges, discount and loss on issue of
shares and debentures, etc. are not taken into consideration in Cost Accounting.
h) Not an exact science: Like other accounting system, it is not an exact]
science but an art that has developed through theories and practices.

Chapter 2

6. RESEARCH METHODOLOGY
One important aspect of analyzing cost data is the challenge of how to
present the findings in a manner that potential users may be able to apply to
10

their own settings. Consequently, a key question underlying the development of

this report is: who are the potential users of operating cost information and how
will the information be used?
Since this analysis has been motivated by informational needs of
provincial Ministries of health, the analysis below assumes that the primary
users of the findings will be provincial Ministries of health and other significant
purchasers of health care services, such as the B.C. Health Services Purchasing
Organization (HSPO).
This analysis assumes that the primary users of the methods and findings
regarding operating costs of hospitalizations will be provincial Ministries of
health and other significant purchasers of health care services.

7. FEATURES OF OPERATING COSTING

11

The main features of operating costing are as following:

(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 liter 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 order wise.

(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.

12

8. ADVANTAGES & DISADVANTAGES OF OPERATING

COSTING

Advantages of operating costing:

1 Invest in more training for your employees. Wait-isn't this article
about reducing operating expenses? Well, it is. Investing in more training
for employees will reduce the number of errors that are made, which will
inevitably save money for the company. Not only that, but investing more
in your employees will show them that they are valued. In return, they
will be more engaged and produce more (and better) work.
2 Cut office supply expenses. Reducing supply expenses can significantly
reduce your operating expenses and improve your bottom line. This can
be done by going from paper to electronic whenever possible or ordering
supplies in bulk in order to obtain discounts. In addition, if you purchase
all of your supplies at the same outlet, you may be able to negotiate a
better price. At the very least, shop around for lower prices and any
loyalty programs offered by potential suppliers.
3 Cut out travel and entertainment expenses. Although T & E expenses are
considered a "perk," during tough times, these are expenses a business

13

can do without. Instead of traveling to business meetings, hold conference

calls or meetings online. Also, try not to spend funds on company
outings, meals, or other entertainment.
4 Rent

or

lease

equipment

as

opposed

to

purchasing

new

equipment. Leasing business equipment and tools preserves capital and

provides flexibility. According to Nolo.com, a legal advice website, the
primary advantage of leasing business equipment is that it allows
businesses to acquire assets with minimal initial expenditures. In addition
to this, leasing offers the benefits of improved cash flow, tax advantages,
flexible terms, and the ability to easily upgrade equipment.\
5 Reduce marketing and advertising expenses. Business magazine and
websiteEntrepreneur.com suggests that business owners "split advertising
and promotion costs with neighboring businesses. Jointly promote a
sidewalk sale, or take your marketing alliance further by

sharing

mailing lists, distribution channels and suppliers with businesses that sell
complementary goods or services." If you are advertising via television or
radio ads, look for cheaper time slots as another option.
6 Reduce your staff-well, sort of. This doesn't necessarily mean completely
laying off your workers. Instead, consider rehiring your workers on a

14

contract basis as a temporary employee. This could save you money on

salary expenses as well as
Employee benefits until the business gets back on track and is able to
rehire workers on a permanent basis.
7. Outsource administrative functions. Consider outsourcing functions such as
your accounting and payroll to help reduce your business expenses. This will
give you more time to focus on building your business and costing projects,
while possibly reducing the expense of these functions if you are able to
outsource them for cheaper than performing them within your business.
While cutting expenses may seem like something to do temporarily to maintain
your business, actually implementing these ideas when revenues are increasing
will continue to help your business generate the most profitability possible.

Disadvantages of operating costing:

Start-up businesses are typically costlier and risky since there is no

proven formula.

In order to obtain capital to fund the business, a lengthy detailed business

plan must be put together.
15

All of the details of starting the business, including licenses, marketing,

naming the business, finding product sources, etc. are the responsibility of the
owner.

9. COST ANALYSIS

The costs incurred in departments rendering services or service organizations

are grouped under the following heads:
1 Fixed or standard charges
2 Semi-fixed or maintenance charges
3 Variable or running charges
To ascertain the cost per unit, these charges are aggregated and divided by
the number of service units during the specified period.
Cost per unit = Total cost during the period
Number of service unit during the period

Determination of cost per unit serves the following purposes:

1 It is used for price fixation.
16

2 It is used for cost control.

Chapter 3

10.TYPES OF OPERATING COSTING

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

Cost Statement:
The expenses of hospital can be broadly divided into two categories i.e. (1) Capital
Expenditure and (2) Maintenance Expenditure this includes salaries and wages,

17

provision, staff uniforms clothing, medical and surgical appliances and

equipments, fuel light and power, laundry, water etc.

Format of a cost Sheet of a Hospital:

Particulars
A) Fixed standing charges
Rent
Repairs and maintenance
General administrative expenses
Depreciation
Salaries to staff
Cost of Oxygen, X ray etc.
B) Running or maintenance costs
Doctors fees
Food
Medicines
Laundry
Hire charges
Total operating cost

Rs.

Rs.

xx
xx
xx
xx
xx
xx

xx

xx
xx
xx
xx
xx

xx
xx

Total Operating cost

Cost per patient day =

----------------------------------No of Patient Days

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,

18

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, sundries 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.

Operating cost sheet of a Hotel:

Particulars
A) Fixed Charge
Salaries to Staff
Repairs and Renovation
Depreciation
Interior decoration
Sundries
Laundry contract cost
Rent
B) Running charges (Variable cost)
Power
Attendant salaries
Total Operating Cost
No. of Room Days
Cost per Room Days

19

Rs.

Rs.

xx
xx
xx
xx
xx
xx
xx

xx

xx
xx

xx
xx
xx
xx

 TRANSPORT COSTING
Meaning
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 changed against departments using the service
To ensure the cost of maintenance and repairs is not excessive

Classification of costs:
Costs are classified into the following three heads:
1. Standing or Fixed Charges: These charges are including whether vehicle is
operating or not. Insurance, tax, depreciation and part of driver wages. Interest on
capital, general supervision, and salary of operating managers is items come under
the category of fixed or standing charges.
2. Maintenance charges: There are semi variable expenses in nature and include
wear on tires, repairs and overheads painting etc.

20

3. Operating and running charges: Running costs are the cost of operations. These
charges vary more or less in direct proportion to kilometers etc. These expenses are
variable in nature because they are dependent on distance covered and trips made.

Though the above three classifications are done, in practical it is difficult to

distribute. It depends basically on the circumstances of each case e.g. if the salary
paid to driver is on monthly basis then it is a fixed charged but if the same is
limited to kilometer run then it is a running cost.

Collection of Cost Data:

Each vehicle is given a separate unique number and all the basic documents will
contain the assigned number of the respective vehicles. A separate daily log sheet
for each vehicle is maintains to record the details of trips, running time, capacity,
distance cover, cost of petrol / diesel, lubricants, loading and unloading time etc on
daily basis. A specimen of log sheet is given below:

Daily log sheet Table

Vehicle No.:
Route No.: -------------Date of Purchase: .
Driver:
21

Make and Specification: .

Time of Leaving:
License No.:
Time of Returning: .

Remark
Packages

Trip
From To
no.

Ou
t

Kilometer

Collecte

Time
s
I
Out

Hrs
n

Supplies:
Workers time:
abnormal delays:
Petrol / diesel:
Driver:
Loading / unloading:
Oil:
Conductor:
Accident:
Grease:
22

Cleaner:
Traffic Delays:
Others:

The cost sheet for transport organizations can be prepared in the following
manner.

XYZ Transport Company Ltd.

Cost Sheet October 2007
Vehicle No:

Days Operated:

Registration No.

Particulars

Amount-Rs Amount-Rs

23

A] Standing charges/Fixed charges

Insurance
License/Permit Fees
Salaries of drivers, cleaners etc.
Depreciation
Interest
Total

B] Running charges / Variable charges

Petrol/Diesel

Oil
Grease

Total
C] Maintenance Charges

Repairs

Tyres

Spares
Garage charges

Total
D] Total cost
E] Total ton kilometers / passenger kilometers
F] Cost per ton kilometers / passenger kilometers

24

11.Illustrations:
TRANSPORTER
Illustrations 1:
1. From the following information calculate total kms and total passengers
Kms
No. of Buses=6
Days Operated in the month=25
25

Trips mage by each bus = 4

Distance of route 20 Kms (one way)
Capacity of Bus = 40 passengers
Normal passenger travelling 90% of capacity.

Solution:
Total Kms covered = Run
Distance * Two ways * No. of trips * No. of days * No. of buses
20 Kms * 2 * 4 *25 * 6 = 24000 Kms
Total passenger-Kms. Covered = Run * Load
Load = Maximum capacity* Used capacity
= 40 * 90% = 36
Total Passenger Kms Covered = 24000*36

Illustration 2:
From the following data relating to two different vehicles A and B, compute cost
per running mile.
Particulars
Milage run (annual)

Vehicle A
15000
26

Vehicle B
6000

Cost of vehicles
Road License (Annual)
Immune (Annual)
Garage rent (Annual)
Supervision and Salaries (Annual)
Drivers wage per hour
Cost of fuel per gallon
Miles runs per gallon
Repairs and maintenance per mile (Rs.)
Tire allocation per mile
Estimated life of vehicle (miles)

Rs. 25000
750
700
600
1200
3
3
20
1.65
0.8
1,00,000

Rs. 15000
750
400
500
1200
3
3
15
2
0.6
75,000

Charge interest @ 5 % p.a. on cost of vehicles. The vehicles run 20 miles per hour
on an average.
Solution:
Operating cost sheet (cost per mile)

Particulars
A. Operating and Maintenance Charges
Depreciation A 25000 / 100000
B 15000 / 75000
Repairs and maintenance
Tire allocation
Fuel (3 / 20 miles)
Drivers wages (A 3 / 20) (3 3 / 15)

Vehicle AVehicle B
0.25

B. Standing Charges

A
Rs.
Road license
750.00
Insurance
700.00
Charges
600.00
Supervision
1200.00
Interest @ 5 % p.a.
1250.00
4500.00
Mileage run per annum
15000.00
Fixed standing charge per mile
0.30
27

B
Rs.
750.00
400.00
500.00
1200.00
750.00
3600.00
6000.00
0.60

1.65
0.80
0.15
0.15
3.00

0.20
0.20
2.00
0.60
0.15
3.15

0.30

0.60

Operating cost per mile

3.30

3.75

Note:
(1) Depreciation is linked with mileage so operating cost.
(2) Driver wage is taken as operating since it is paid per hour.

Illustration 3:
A company presently brings coal to its factory from a nearby yard and the rate paid
for transportation of coal from the yard located 6 kms. Away to factory is Rs. 50
per ton. The total coal to be handled in a month is 24,000 tones. The company is
considering proposal to buy its own trucks and has the option of buying either a 10
ton capacity or a 8 ton capacity trucks.
The following information is available:

Particulars

10 Ton

8 Ton Truck

Purchase Price Rs.

Life (Years)
Scrap value at the end f 5th year
KM Per liter of diesel
Repair and maintenance p.a. per

Truck
10,00,000
5
Nil
3
60,000

8,50,000
5
Nil
4
48,000

truck (Rs.)
Other fixed expenses p.a. (Rs.)
Lubricants and sundries per 100 km

60,000
20

36,000
20

(Rs.)

28

Each truck will daily make 5 trips (to and fro) on an average for 24 days in a
month. Cost of diesel Rs. 15/- per liter. Salary of driver Rs. 3,000/-, p.a. month.
Two drivers will be required per truck. Other staff expenses Rs. 1, 08,000 p.a.
Present a comparative cost sheet on the basis of above data showing transport cost
per ton of operating 10 tons and 8-ton Truck at full capacity utilization.
Solution:
Comparative statement of operating cost sheet:
Particulars

10 Ton 8 Ton Truck

Truck

Fixed Charges (p.m.)

Drivers Salary (working no. 1)
12,000
Staff expenses
9,000
Other fixed expenses
5,000
Operating & Maintenance Charges (p.m.)
Depreciation (Note No. 2)
3,33,333
Diesel Cost (Note No. 3)
1,44,000
Lubricants & Sundries(Note No. 3)
5,760
Repairs & Maintenance
1,00,000
Total Cost (A)
7,17,093
Tons Carried (B)
24,000
Cost per ton (A/B)
29.87

15,000
9,000
3,000
3,54,167
1,35,000
7,200
1,00,000
7,58,367
24,000
31.59

Conclusion: A comparison of cost per ton by using 10 ton trucks is more

economical. The cost paid for bringing coal per ton presently viz. Rs. 50/- is the
highest.

29

Working Note:

Particulars

10 Ton

8 Ton Truck

Truck
1 Total number o trucks and drivers
required
Coal brought to the factory per month
(5 x 24 x 10)
1200
(5 x 24 x 8)
960
No. of truck required to bring24,00024000/1200=20 24000/960=25
tons is
Total number of drivers required 20 x 2 = 40
25 x 2 = 50
2 Total monthly depreciation
Depreciation per truck per annum
2,00,000
1,70,000
Depreciation per truck per month
1,666.66
14,166.66
Total depreciation
16666.66 x 20 14166.66 x 25
3 Diesel requires
Total Km run per truck p.m.
(6 km x 10 trips x 24 days)
Total KM run by all trucks
Km per liter of diesel
Diesel required liters

= 3,33,333

= 3,54,167

1440
28800
3
9600
(28800 / 3)

1440
36000
4
9000
(36000 / 4)

Illustration.4:
You are required to calculate a suggested fare per passenger
Km from the following information for a mini bus.
(i)

Length of route 30 km

(ii)

Purchase price Rs. 4, 00,000.

30

(iii)

Part of above cost meet by loan, annual interest Rs. 10,000 p.a.

(iv)

Other annual charges: Insurance Rs. 15,000, Garage Rent Rs. 9,000, Road
Taxes Rs. 3,000, Repairs and Maintenance Rs. 5,000. Administrative
charges Rs. 5000.

(v)

Running expenses: Driver & Conductor Rs. 5000 p.m.,

Repairs / Replacement of tyre tube Rs. 3600 p.a. Diesel and Oil cost per
Km Rs. 5/-

(vi)

Effective life of vehicle is estimated at 5 years at the end of which it will

have a scrap value of Rs. 10,000.

(vii) Mini Bus has 20 seats and is planned to make six two way trips for 25
days / p.m.
(viii) Provide profit @ 20 % of total revenue.
(ix)
Solution:

Particulars

Fixed Expenses :
Insurance
Garage Rent
Road Tax
Administrative charges
Depreciation (4,00,00010,000

Cost per

Cost Per

Annum

Month

Rs.

Rs.

15,000
9,000
3,000
5,000
78,000

31

 5 years)
Interest on Loan
Total
Running Expenses :
Repairs & Maintenance
Replacement of tyre tube
Diesel and oil cost (9000 km x

10,000
1,20,000
15,000
3,600

10,000
1,250
300
45,000

Rs. 5/-)
Driver & Conductors Salary
Total Cost per month
Add : Profit 20 % of total

5,000
61,550
15,387.50

Revenue 25 % Total cost

Total Revenue

76,937.50

Rate per passenger km: Rs. 36937.50 / 1, 80,000 passenger km = 0.4274305 or

0.43 paise.

Workings:
Total distance travelled by mini bus in 25 days = 60 km x 6 trips x 25 days = 9000
km

Total passenger km = 9000 km x 20 seats = 1, 80,000 passengers km

Illustration 5:
Mr. Sampath owns a fleet of taxies and the following information is available from
the records maintained by him.

32

1. Number of Taxis 10
7. Garage Rent Rs 7000 p.m.
2. Cost of each Taxi Rs. 2,00,000
8. Insurance premium 5 %
3. Salary of manager Rs. 6000 p.m. 9. Annual Tax Rs. 6000 per taxi
4. Salary of Accountant Rs. 5000 p.m 10. Drivers Salary Rs. 4000 p.m.
5. Salary of cleaner Rs. 3000 p.m. 11. Annual Repairs Rs. 15,000 per taxi
6. Salary of Mechanic Rs. 4000 p.m.
Total life of a taxi is about 2, 00,000 kms. A taxi runs in all 3000 kms. in a month
of which 25 % its runs empty. Petrol consumption is one liter for 10 kms @ Rs. 40
per liter. Oil and other sundries are Rs. 10 per 100 kms.
Calculate the cost of running a taxi per km.
Solution:

Particulars

Amount

Cost per

per month

Km

Rs.

Rs.

Fixed Expenses (for the whole fleet)

Salary of manager
6000
Salary of accountant
5000
Salary of Cleaner
3000
Salary of mechanic
4000
Garage Rent
7000
Insurance premium 5 % on Rs. 2,00000 x 10 8333
Tax 6000 x 10 / 12
40000
Total Fixed Expenses
5000
Effective kilometer 3000x10x 75 % =
22,500
Fixed expenses per km
Running expenses (per taxi)
Depreciation (2,00,000200000 x 10 x
3000)
33

3.48147
1.33333

Repairs (15,000 x 10 12)

Petrol (3000 x 40) (10 x 22500)
Oil and other sundries (10 x 3000)

0.55555
0.53333
0.13333

(100(22500)
Cost per km
= 864000

6.03701

12.CONCLUSION
Operating costs are expenses that relate to a business 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.

34

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.
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

35

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.

BIBLIOGRAPHY

www.icai.com
www.investopedia.com
Advanced Cost Accounting Manan Prakashan

36

37