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Operating costing/ Transport costing/ Service costing

Operating costing is a method of ascertaining cost in those undertakings which


provide services. Examples of such undertakings are transport companies, hospitals,
hotels, hostels, cinema houses, schools and colleges, etc. These undertakings do not
manufacture any tangible goods. The cost of providing a service is known as ‘operating
cost’.
Operating costing should not be confused with ‘operation costing’. These are two
different methods. Whereas operating costing is applied to determine the cost of
providing a service, the operation costing is a separate method and is a refined and
detailed application of process costing.

Transport Costing

Method of ascertaining cost in transport undertakings is known as transport costing.


Its main objects are as follows:
1. To ascertain the operating cost of running a vehicle per kilometer.
2. To fix the rates of cartage of goods and passengers on the basis of operating
costs.
3. To decide the hire charges where vehicles are given on hire.
4. To compare the cost of using own motor vehicles with that of using alternative
modes of transport.
5. To determine the cost to be charged to departments which use internal
transport facilities.

Daily Log Sheet

A log sheet is a record which is generally maintained by the driver of the vehicle on
daily basis. In this log sheet are recorded most of the details required for transport
costing, e.g. details of journeys, running time, capacity, distance covered in
kilometers, cost of petrol/diesel, lubricants, accidents, loading and unloading time etc.
These details not only help in ascertaining the operating cost but also enable the
management to avoid idleness of vehicles, prevent waste of capacity and exercise other
controls.

Operating Cost Sheet

The procedure of ascertaining costs in transport undertakings is to prepare an


operating cost sheet. The following steps are taken in preparing an operating cost
sheet.

1. Determination of Cost unit or Unit of Service. A basic problem in transport


costing is the adoption of a suitable cost unit. Cost unit in transport costing may be of
the following two types.

1. Simple cost Unit; e.g. per kilometer or per mile, i.e. ascertaining the cost of
running a vehicle per km or per mile.
2. Composite Cost unit: e.g. per passenger kilometer or per ton kilometer, i.e. cost
of transporting a passenger or a tonnes of goods for one kilometer. Thus if 50

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passengers in a bus travel for 100 kilometers, it will represent 5,000 (.e. 50
*100) passenger kilometers.

2. Compilation of Costs. In transport costing costs are classified and compiled in an


operating cost sheet as follows:
1. Fixed Costs: These are constant costs and do not change with the increase or
decrease in the number of units of service rendered by the company. Examples
are wages of drivers and conductors, garage, rent, office expenses, license fees,
insurance of vehicles, road tax etc.
2. Variable or operating costs: These are running costs and are incurred only when
the vehicles run. Examples are petrol or diesel oil, lubricating oil, depreciation,
tyres and tubes, wages of drivers ( if the payment is according to distance or
trips) etc. Depreciation is a semi variable cost. It may be treated as fixed or
variable item depending upon the method of charging depreciation. In operating
cost sheet, depreciation is mostly treated as variable cost.

3. Determining Cost per Unit of Service. As the service rendered by transport


undertakings is of uniform type, the cost per unit of service is the average cost,
i.e. the total cost divided by the number of units of service. For example, if total
cost per month in a transport company is Rs 24,000 and the bus has run for
48,000 km. during the month, the operating cost per kilometer will be Rs
24,000 / 48,000 kms = 50 paise.

NOTE: Depreciation is always considered under variable charges irrespective of


the method of depreciation followed

Problem # 1.
A transporter operates between 2 cities which are 50 kms apart. He makes one round
trip a day for 25 days in a month. Fuel consumption is 12 kms per liter. Diesel cost
is Rs 58. What are his fuel expenses for the month?

Problem # 2.
Calculate the total passenger kilometers covered. Number of buses 10, days operated
in a month 25, round trip made by each bus is 4 per day, distance of route 20 km one
way, capacity of bus 40 seats, normal occupancy is 90% of capacity.

Problem # 3.
A truck starts with a load of 10 tons of goods from P it unloads 4 tons at Q and rest of
the goods at R. It reaches back directly to station P after getting reloaded with 8 tons
of goods at R. The distances between P to Q, Q to R, and then from R to P are 40 km,
60 km and 80 km respectively. Compute absolute ton km and commercial ton km.

Problem # 4.
A transport company has a fleet of lorries for carrying goods from Delhi to Panipat,
100 kms off. Each lorry which operates 25 days on an average in a month, starts
every day from Delhi with a load of 4 tons and returns from Panipat with a load of 2
tons. Calculate the total commercial ton km and cost per commercial ton km, when

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the total monthly charges for a lorry are Rs 27,000. What should the company charge
as rate per ton if it plans to earn a gross profit of 20% on the freightage?

Problem # 5.
A bus with a capacity of 50 passengers makes a return trip from P to Q, via station X
every day. The distance between P and X is 60 kms, between X and Q is 40 kms.
During the onward journey, the bus is full up to X but only 60% full between X and Q.
On the other hand, on return it is full from Q to X, but 40% occupied between X and
P. Compute the total passenger kms.

Problem # 6.
City Bus Service Ltd., run the following fleet of buses within the limits of Delhi City.
Carrying capacity
10 buses 50 Passengers
15 buses 40 Passengers
On an average, each bus makes 10 trips a day covering a distance of 8 kms in each
trip and 75% of the seats are occupied. Calculate the effective passenger kms, for the
month of March 2011.

Problem # 7.
From the following information, calculate (i) total kilometers and (ii) total passenger
kilometers
No. of buses 4
Days operated in a month 30
Trips made by each bus 2
Distance of route 100 km (one side)
Capacity of each bus 40 passengers
Average passengers travelling 75% of capacity
What difference would it make if the passengers carried are 90% of the capacity?

Problem # 8.
A transport company is running a fleet of six buses between two towns 75 km apart.
Seating capacity of each bus is 40 passengers. Te following particulars are available
for the month of June 2015.
Rs.
Wages of drivers, conductors and cleaners 3,60,000
Salaries of office and other staff 1,50,000
Diesel and other oils 10,32,000
Repairs and maintenance 1,20,000
Taxation, Insurance, etc 2,40,000
Depreciation 3,90,000
Interest on capital 3,00,000
Actual passengers carried were 80% of the seating capacity. All the buses ran on all
the days of the month. Each bus made one round trip per day. Find out the cost per
passenger-kilometer.

Problem # 9.

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From the following data relating to two different vehicles A and B, compute the cost
per running mile.
Vehicle A Vehicle B
Mileage run (Annual) 15,000 6,000
Cost of vehicle Rs. 25,00,000 Rs. 15,00,000
Road license (Annual) Rs. 75,000 Rs. 75,000
Insurance (Annual) Rs. 70,000 Rs. 40,000
Garage rent (Annual) Rs. 60,000 Rs. 50,000
Supervision and salaries Rs. 1,20,000 Rs. 1,20,000
Driver’s wage per hour Rs.30 Rs. 30
Cost of fuel per gallon Rs. 50 Rs. 50
Miles run per gallon 20 miles 15 miles
Repairs and maintenance Rs. 16.50 Rs. 20
per mile
Tyre allocation per mile Rs. 8 Rs. 6
Estimated life of vehicles 1,00,000 miles 75,000 miles
Charge interest at 5% per annum on cost of vehicles. The vehicles run 20 miles on an
average.

Problem # 10.
Joseph owns a fleet of taxis and the following information available from the records
maintained by him:
Number of taxis 10
Cost of each taxi Rs. 4,00,000
Salary of manager Rs. 15,000 per month
Salary of accountant Rs. 10,000 per month
Salary of cleaner Rs. 5,000 per month
Salary of mechanic Rs. 7,000 per month
Garage rent Rs. 6,000 per month
Insurance premium 5% per annum
Annual tax Rs. 6,000 per taxi
Driver’s salary Rs. 10,000 p.m. per taxi
Annual repair Rs. 10,000 per taxi
Total life of a taxi is 2, 00,000 km. A taxi runs in all 3,000 km in a month of which
30% it runs empty. Petrol consumption is one litre for 10 km @ 60.80 per litre. Oil and
other sundries are Rs. 50 per 100 km. Calculate the cost of running a taxi per km.

Problem # 11.
A transport company operates two trucks. The following is the data regarding the
monthly cost of operating them:
Truck A (Rs.) Truck B (Rs.)
Drivers’ salaries 10,000 12,000
Cleaners’ wages 1,500 1,600
Petrol 30,000 35,000
Mobil oil 2,500 3,000
Garage rent 8,000 8,000
Taxes and insurance 1,000 1,000
Depreciation 3,000 3,200

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Expenses of supervision 1,000 1,000
Repairs 1,200 1,400
Overheads 400 400
Two trucks carried 150 tonnes of goods each during the month of November 2005. The
distances covered were A 3,500 km and B 5,000 km. Prepare an Operating Cost Sheet
for November from the above data.

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