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A PROJECT REPORT ON
SUBMITTED BY
MISS. MANALI. R. GODHIA,
ROLL NO: 6212
M.Com. SEM- II
(ADVANCED COST ACCOUNTINY)
ACADEMIC YEAR: 2015-16
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Mulund (West) 400080, studying in M.Com Part- I hereby declare that I have completed the
project on titled A STUDY ON OPERATING COSTING under the guidance of project guide
Prof. (Mrs.) Anuradha Ganesh during the academic year 2015-16. The information submitted
Date: Signature
Place:
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CERTIFICATE
I, Prof. (Mrs.) Anuradha Ganesh, hereby certify that Miss. Manali. R. Godhia R.No. 6212 of
Mulund College of Commerce, S. N. Road, Mulund (West), Mumbai -400080 of M.com Part
COSTING during the academic year 2015-16. The information submitted is true and original
____________________ ___________________
_____________________ ___________________
Co-coordinator Principal
Date:
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ACKNOWLEDGEMENT
Commerce DR. (Mrs.) Parvathi Venkatesh, Course - Coordinator Prof. Rane and our
sincere gratitude to the non - teaching staff of our college. I sincerely thank to all of
them in helping me to carrying out this project work. Last but not the least, I wish to
friends and my beloved parents for their mutual support, strength, help and for
everything.
PLACE: Signature
DATE:
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CONTENTS
PAGE
SL. N0. PARTICULARS
NO.
1. Introduction 6
5.1 Conclusion 33
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5.2 Bibliography 34
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The information concerning the business enterprise is very helpful to the management to
control it in an efficiently way. As the other branches like financial accountancy and
management accountancy, the cost accountancy also serves the important information to the
management regarding the operating efficiency of the business. It becomes very easy for
management to lay down management policies, to guide management decisions or evaluate
operating management performance with the information provided by cost accounting.
The term operation in business terminology refers to an activity of the business. It is very
important to study the operations of the business in detail because depends on the operations,
which it performs. The management should always concentrate on the efficiency of the
operation and also the costs associated to the operations. It is very important to control the
costs associated to the operations for the enterprises like manufacturing companies,
companies engaged in the process of extraction of materials from earth like, coal mines etc.
Generally, the above mentioned business enterprises depend on the operation that it has to be
performed in to produce in to produce the final output. The costs associated with such
operations are generally higher. These costs are called as operating costs.
The costs, which are incurred to perform the operation of the enterprise, are called as
operating costs. These costs are to be accounted for in order to arrive at the total costs of
operation or process, which helps in determining the price of the final product.
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Cost accounting is the classifying, recording and appropriate allocation of expenditure for
the determination of the costs of products or services, and to the presentation of suitably;
arranged data for the purposes of control and guidance of management.
It includes the ascertainment of the costs of every process, operation, services or contrast as
may be appropriate. It deals with the cost of production, selling and distribution. It thus, the
provision of such analysis and classification of expenditure as will enable the total cost of any
particular unit of production to be ascertained with reasonable degree of accuracy and at the
same time to disclose exactly how such total cost is constituted (i.e. the value of material
used, the amount of labour and other expenses incurred) so as to control and reduce the cost.
Operating Costs are the costs incurred by undertakings which do not manufacture any
product but provide a service. Such undertakings for example are Transport concerns, Gas
agencies; Electricity Undertakings; Hospitals; Theatres etc. Because of the varied nature of
activities carried out by the service undertakings, the cost system used is obviously different
from that followed in manufacturing concerns.
(1) The operating costs can be classified under three categories. For example in the case of
transport undertaking these three categories are as follows:
(a) Operating and running charges. It includes expenses of variable nature. For example
expenses on petrol, diesel, lubricating oil, and grease etc.
(b) 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.
(c) Fixed or standing charges. These includes garage rent, insurance, road licence,
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.
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Overhead costs for a business are the cost of resources used by an organization just to
maintain its existence. Overhead costs are usually measured in monetary terms, but non-
monetary overhead is possible in the form of time required to accomplish tasks.
Non-overhead costs are incremental costs, such as the cost of raw materials used in the goods
a business sells.
Administrative and office expenses like rent, salaries, to staff, insurance, directors
fees etc.
In the case of a device, component, piece of equipment or facility (for the rest of this article,
all of these items will be referred to in general as equipment), it is the regular, usual and
customary recurring costs of operating the equipment. This does not include the capital cost
of constructing or purchasing the equipment (depending on whether it is made by the owner
or was purchased as a constructed system).Operating costs are incurred by all equipment
unless the equipment has no cost to operate, requires no personnel or space and never wears
out (any examples? perhaps intangibles, though not equipment, per se). In some cases,
equipment may appear to have low or no operating cost because either the cost is not
recognized or is being absorbed in whole or part by the cost of something else.
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Advertising
Raw materials
o investment value of the funds used to purchase the land, if it is owned instead
of rented or leased
Maintenance of equipment
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Insurance premium
Depreciation of equipment and eventual replacement costs (unless the facility has no
moving parts it probably will wear out eventually)
Damage due to uninsured losses, accident, sabotage, negligence, terrorism and routine
wear and tear.
Income taxes
A solar panel placed on one's home for use in generating electric power generally has
only capital costs; once it's running there are no personnel costs, utility costs or
depreciation and it uses no extra land (that wasn't already part of the place where it is
located) so it has no real operating costs; however there may need to be taken into
account costs of replacement if damaged.
An automobile or any other item purchased for personal use has no salary cost
because the owner does not charge themselves for operating the device.
An item which is leased may have some or all of these costs included as part of the
purchase price.
It might be questionable to assert that the cost of ten extra people on the sales force are an
incremental cost or an overhead cost, since the wages for these people are both overhead and
incremental. The staffs needed to keep the shop operational are mostly considered as
overhead.
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The undertaking which adopts service costing does not produce any tangible goods.
These undertakings render unique services to their customers.
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.
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, costs per room-day in hotel etc. are the examples of composite cost unit.
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Documents like the daily log sheet, cost sheet etc. are used for the collection of cost
data.
Electricity Kilowatt-hours
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Hotel industry
In the hotel industry, expenses are divided into two main categories:
Direct Expenses:
These are the expenses that vary with the level of production. For example, in the Food and
Beverage department, the Cost of Food Sales is a direct expense. For, the more dishes we
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serve, the more cost of Food Sales the Hotel incurs. Moreover, in the Telephone Department,
the Cost of Calls is a direct expense. For, the more we connect guests to whatever destination
wanted, the more cost of calls the hotel incurs.
At this very stage a bracket would be opened to explain that there is a primordial difference
between revenue generator departments. In fact, revenue generator departments are classified
into two: Service Type departments versus merchandising departments. Service type
departments are revenue generators making money from solely providing services (Ex.
Rooms Division department). On the other hand, merchandising departments ensure revenue
by getting use of certain raw material, processing it, and then sell the final product (Ex. F&B
department, Telephone department). Therefore, only merchandising departments have a
direct expense called Cost of Sales.
Indirect Expenses:
These are the expenses that do not vary with the level of production, or variable costs that
cannot be feasibly distributed to various Financial Reporting Centers. In the hotel industry,
indirect expenses are, hence, divided into two different categories:
1. Fixed Charges:
Examples might include rent, insurance, property taxes, and interest expense. For, these very
expenses are incurred for the benefit of the hotel as a whole not for the benefit of each single
department. To illustrate, if a hotel insures itself against fire, theft and burglary, and one day
some valuable equipment has been stolen, from any department whatsoever, the insurance
company will indemnify the hotel.
2. Undistributed Expenses:
Examples might include electricity, energy, and water expenses. For, usually the hotel
receives a total energy bill to be paid. In the old days, some hotels went for allocating this
amount according to certain factors (ex. Surface, Department Usage). However, this
practice proved to be misleading, since it might under-allocate energy expenses for some
departments and over-allocate it for others. Nowadays, most of the hotels decide not to
allocate such expenses any more. Rather, hotels report such expenses in separate schedules.
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At this stage, departments of a typical hotel would be listed along with their various related
direct expenses. Later, examples of fixed charges and undistributed expenses would be
discussed. Last, a bracket would be opened to discuss one of the most important Direct
Expenses in any hotel, which is Payroll and Related Expenses. For, hotels being described as
labor intensive companies devote a big percentage of their financial resources to such an
expense.
2. Support Centers those departments that have minimal Guest Contact and do not
produce Sales. Yet, they do provide services to Revenue Centers, which, in turn, provide
Services to Guests
Administrative & General
Marketing
Property Operation and Maintenance
Data Processing
Human Resources
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3. Other Financial Reporting Centers include Energy Costs and Fixed Charges (Rent
Expense, Property Taxes, Insurance Expense, Interest Expense, Depreciation and
Amortization Expenses)
Responsibility Accounting:
Aim provides Financial Information useful in evaluating the effectiveness of Managers
and Department Heads. That's why only Direct Expenses should be charged to Specific
Departments
1. Expenses include the day-to-day Costs of Operating the Business, the Expired Costs of
Assets through Depreciation and Amortization, and the "write-off" of pre-paid items.
Expenses are classified as Direct expenses (Cost of Sales and Operating Expenses), Indirect
Expenses (Fixed Charges and Undistributed Expenses) and Income Taxes
a) Direct Expenses they are Costs incurred solely for the benefit of a particular
Department
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Cost of Sales
Payroll Expenses
Payroll-related Expenses
Operating Supplies
China, Glassware, Silver, and Linen
Laundry and Dry Cleaning
b) Indirect Expenses They are incurred for the benefit of the Hotel as a whole, and cannot
be identified with any particular Department
Property Insurance |
Interest Expense |
Property Taxes | FIXED CHARGES
Rent Expense |
Depreciation and Amortization |
Marketing Expense |
Administrative & General Expenses | UNDISTRIBUTED EXPENSES
Property Operations and Maintenance |
Energy Costs |
c) Income Taxes it is neither a Direct Expense, nor an Indirect Expense. It should appear
as a separate Line Item on a Hotel's Summary Income Statement
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Hospital industry
Hospital cost information is derived by relating the inputs of resources in monetary terms to
the outputs of services provided by the hospital. Cost information is part of the basic
information needed by managers and policy makers for making decisions about how to
improve the performance of a hospital, where to allocate the resources within or among
hospitals, or to compare the performance of different hospitals to one another. Some of the
basic reasons for wanting cost information are to improve efficiency, increase effectiveness,
enhance sustainability, and improve quality.
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Cost data can be used for two primary purposes, relative to time: for the present and for the
future. It can be used to assess the current situation of a hospital, such as for assessing its
efficiency, determining the effectiveness of the hospital, reviewing its priorities, and setting
of prices. Cost information may also be used for the future: making cost projections,
budgeting, and scenario planning with what if? situations.
Information on the costs and outputs of hospitals can provide considerable information for
managers of hospitals, regional coordinators of health services, and policy makers overseeing
the issues of the national health system. The information can be used to assess the internal
operations and performance of a single hospitalsuch as helping assess the utilization of
health personnel in different departments of the hospital in providing servicesand to make
comparisons of the operations and efficiency of different hospitals. Some of the specific
potential uses of cost information for a health care administrator are:
Comparison across facilities to identify those that are efficient from those those are
not,
comparison of costs with fees,
development of a cross-subsidization strategy,
evaluation of the financial requirements of a new program, or
Analysis of the effect of changing the use of staff, equipment, and supplies in
providing services in an existing program.
When the cost data (the financial cost of the resource inputs) can be related to information
about the outputs (the type and quantity of services provided) assessments of efficiency of the
input output relationship can be made.
Cost data on a series of hospitals, within an area or country, may be used by national,
regional, and provincial managers to compare the performance of similar types of hospitals.
They may also use such information to establish standards of performance and efficiency for
hospitals.
The managers or administrators of hospitals may also use the cost data on their individual
hospital. This information can be used to
measure performance of different departments, wards or units within the hospital;
examine composition of costs: staff, supplies; and
assess revenue generation to costs of various services
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Step 1: Defining the major and relevant activity areas of the hospital
Define the relevant areas of hospital operations which need to be costed. Factors to consider
are
(1) The importance of an activity relative to the hospitals total output or level of activity,
(2) The Amount of detailed costing information available, and
(3) The amount of detail needed from the Output of this exercise.
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Outreach services would use number of visits to the mobile clinic, number of contacts, or
number of surveillance visits. Training schools may be a major source of resource
commitment.
The number of students enrolled would be a useful measure of the workload of the institution.
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Transportation industry
Price, cost and investment issues in transportation garner intense interest. This is certainly to
be expected from a sector that has been subject to continued public intervention since the
nineteenth century. While arguments of market failure, where the private sector would not
provide the socially optimal amount of transportation service, have previously been used to
justify the economic regulations which characterized the airline, bus, trucking, and rail
industries, it is now generally agreed, and supported by empirical evidence, that the move to a
deregulated system, in which the structure and conduct of the different modes are a result of
the interplay of market forces occurring within and between modes, will result in greater
efficiency and service.
Many factors have led to a reexamination of where, and in which mode, transportation
investments should take place. First and perhaps most importantly, is the general move to
place traditional government activities in a market setting. The privatization and
corporatization of roadways and parts of the aviation systems are good examples of this
phenomenon. Second, there is now a continual and increasing fiscal pressure exerted on all
parts of the economy as the nation reduces the proportion of the economys resources which
are appropriated by government. Third, there is increasing pressure to fully reflect the
environmental, noise, congestion, and safety costs in prices paid by transportation system
users. Finally, there is an avid interest in the prospect of new modes like high speed rail
(HSR) to relieve airport congestion and improve in environmental quality. Such a major
investment decision ought not to be made without understanding the full cost implications of
a technology or investment compared to alternatives.
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There are many types of costs. Key terms and brief definitions are below.
Variable costs: The costs which change as output levels are changed. The
classification of costs as variable or fixed is a function of both the length of the time
horizon and the extent of indivisibility over the range of output considered.
Marginal (or incremental) cost: The derivative (difference) of Total Cost with respect
to a change in output.
Social cost: The cost the society incurs when its resources are used to produce a given
commodity, taking into accounts the external costs and benefits.
Private cost: The cost a producer incurs in getting the resources used in production
Sunk costs: These are costs that were incurred in the past. Sunk costs are irrelevant for
decisions, because they cannot be changed.
Indivisible costs: Do not vary continuously with different levels of output or must
expenditures, but be made in discrete "lumps". Indivisible costs are usually variable
for larger but not for smaller changes in output
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Escapable costs (or Avoidable costs): A cost which can be avoided by curtailing
production. There are both escapable fixed costs and escapable variable costs. The
escapability of costs depends on the time horizon and indivisibility of the costs, and
on the opportunity costs of assets in question
The production of transport services in most modes involves joint and common costs. A joint
cost occurs when the production of one good inevitably results in the production of another
good in some fixed proportion. For example, consider a rail line running only from point A to
point B. The movement of a train from A to B will result in a return movement from B to A.
Since the trip from A to B inevitably results in the costs of the return trip, joint costs arise.
Some of the costs are not traceable to the production of a specific trip, so it is not possible to
fully allocate all costs nor to identify separate marginal costs for each of the joint products.
For example, it is not possible to identify a marginal cost for an i to j trip and a separate
marginal cost for a j to i trip. Only the marginal cost of the round trip, what is produced, is
identifiable.
Common costs arise when the facilities used to produce one transport service are also used to
produce other transport services (e.g. when track or terminals used to produce freight services
is also used for passenger services). The production of a unit of freight transportation does
not, however, automatically lead to the production of passenger services. Thus, unlike joint
costs, the use of transport facilities to produce one good does not inevitably lead to the
production of some other transport service since output proportions can be varied. The
question arises whether or not the presence of joint and common costs will prevent the
market mechanism from generating efficient prices. Substantial literature in transport
economics has clearly shown that conditions of joint, common or non-allocable costs will not
preclude economically efficient pricing.
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Unit costing is the method of costing used when the cost units are identical. Identical cost
units should have identical costs and this concept of equality of costs is the basic feature of
unit costing. It may be noted that process costs, output costing and service costing are the
sub-divisions of unit costing method.
Service or operating cost is the cost of providing services. Service costing is the term applied
to describe the system used to find the cost of performing a service such as transport, gas or
electricity. Service costs are particularly suitable for the costing of road and rail transport
services and they are also utilized by electricity undertaking, hospitals, canteen, boiler house,
etc. the method of costing is different from that used in connection with production, and the
difference lies chiefly in the manner of assembling the cost data and finally in its allocation to
cost units. The principle of service or operating costing is to accumulate costs under suitable
headings and to express them in terms of the unit of service rendered.
Service costing is similar to output costing. All costs are suitably classified under fixed and
variable. These costs are then collected, analyzed and expressed in terms of an appropriate
cost unit. The classification of costs into fixed and variable is very important, as it draws
managements attention to the fixed costs to which they are committed regardless of the units
of service ultimately given. It also indicates the change in the cost structure due to change in
the operating level.
In transport undertakings most of the statistical data required for cost finding and cost control
purposes are obtained from Daily Log Report. All repairing and maintenance work are
recorded on repair tickets and are then costed. In order to prepare a Transport Cost Sheet for a
transport undertaking the costs may be subdivided as under:-
a) Wages and running costs: - These include cost of petrol, oil, grease, wages of assistants and
drivers, etc.
b) Maintenance charges: - These include repairs and overhauling of vehicles, garage charges,
tyres, etc.
c) Fixed charges: - These fixed expenses include insurance, license, depreciation, etc.
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The statistical data regarding costs, maintenance and performance are helpful in preparing a
performance in respect of each vehicle.
In order to compare the operating efficiency for each period, the total costs thus arrived at are
divided by the bases such as number of hours or days, number of kilometres run, number of
commercial ton-kilometres, etc. Costs per unit thus obtained are compared with the past
result. A monthly Vehicle Cost Sheet and Performance Statement are generally used in many
transport undertakings.
Cost control is always possible by means of comparison of actual performance with the
budgeted performance. Various control measures, viz., securing the optimum use of vehicles,
regular maintenance as a planned operation, avoidance of loading and unloading delays
prevention of overlapping and duplicated journeys, planned replacement of vehicles, etc.,
may be instituted.
Where transport department is treated as service department all costs are collected and
apportioned to other departments on the basis of commercial ton-kms. The haulage of
incoming material might be charged as an addition to cost of raw material, and the haulage of
fabricated goods to customers becomes a part of distribution overhead.
Generally, commercial ton-km, is obtained by multiplying the total tonnage carried by the
kilometres travelled and dividing the product by two. This is done where the vehicles return
empty as is found in most cases.
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Introduction:
Adhunik Transport Organization Limited was established in the year 1988 as an organization.
In 1991, it got the status of a limited company after reaching the minimum turnover level.
The company currently has a turnover of approximately Rs. 10 Crores. The company is a
member of Bombay Goods Transport Association (BGTA) AND Indian Bank Association
(IBA), which is very essential for the smooth conduct of their business activities. BGTA
checks all business malpractices and IBA is needed for regulating payments within different
states. The company has its 17 branches all over the country, along with 3 agencies in certain
remote areas. The company also provides warehousing facilities to companies like Philips-
India and Colgate. The company is involved in delivery of goods all over the country.
Number of vehicles:
Owned Vehicles
4 Trailers
Dedicated Vehicles
Dedicated Vehicles are delivery trucks, which are made according to certain specifications,
operated under the name of another company for which they give a minimum amount of
business and certain running costs are borne by that company.
The company has its LCVs dedicated to ELBEE Delivery Services. They are used for
delivering goods given by ELBEE. The driver charges and maintenance charges are borne by
Adhunik Transport. Other expenses are borne by Elbee. The advantage to Elbee is that its
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capital is not blocked. The advantage to the company is that it does not have to look for
customers and keeps getting a minimum amount of business.
No. of Employees:
The Company has on an average 8 office staff members per branch. There are 30 staff
members in the head office in Mumbai. The salaries of these employees vary from Rs. 2,000-
Rs. 10,000 depending upon the nature of the job they do.
COSTS:
FIXED COSTS
Salaries 54,00,000
Insurance 8,00,000
Transport Permits (Every 5 yrs) 1,00,000
Administrative Overheads 2,11,00,000
Taxes
Depreciation 30,00,000
Interests 34,00,000
TOTAL 3,38,00,000
VARIABLE COSTS
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Notes:
The maximum distance covered in a day is 300kms. The average distance covered
225-280kms.
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CHAPTER 5 FINDINGS
After studying the topic in depth and data collection from a firm following are the findings
from the project
As the subject, important features and advantages of cost accounting are studied and
the project throws light on operating costing
It 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.
It is applied by transport companies, gas and water works, electricity supply
companies, canteens, hospitals, theatres school etc.
The costs, which are incurred to perform the operation of the enterprise, are called as
operating costs. These costs are to be accounted for in order to arrive at the total costs
of operation
Operating Costs are the costs incurred by undertakings which do not manufacture any
product but provide a service.
The various steps and items of the operating cost sheet is explained in depth along
with illustrative example and cost units for various services
The three main area namely
o Hotel industry
o Hospital industry &
o Transport industry
In which massive use of this method of costing is used are explained with illustrations
Finally , the cost details of adhunik transport organisation limited are provided
herewith which will help us to know more about operating costing
Bibliography
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http://www.businessdictionary.com/definition/operating-cost.html#ixzz2uvBn7sy2
http://www.mbajunction.com/career/transport_service.htm
http://www.wonderwebs.com/Portals/46/Content/Documents/Secured/Bankable
%20Feasibility%20Study/17%20-%20Section%2015%20-%20Operating%20-
%20Cost.pdf
http://nexus.umn.edu/papers/truckoperatingcosts.pdf
http://costingclub.com/article-details/Operating-Costing-format-for-Transport-
Company/132#sthash.WMlndW6e.dpuf
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