What is Operating Costing?

Operating costing is an extension and refined form of process costing. It is also more or less very similar to
single or output costing. The operating costing gives more emphasis on providing services rather than the cost of
manufacturing an article. The services provided may be for sale to the general public or they may be provided
within an organization.

The operating costing is also called as service costing, period costing or terminal costing. Service costing means
rendering service to the public or to an organization for which cost is accumulated and calculated. Period costing
means the costs data collected and calculated for a specific period. Terminal costing means a bus or truck of a
transport undertaking chartered for a specific trip.

Definition of Operating Costing

ICMA, London,
Operating costing is that form of operation costing which applies where standardized services are provided either
by an undertaking or by a service cost center within an undertaking.

Features of Operating Costing

The basic features of operating costing are presented below.

1. Uniform service is provided to all the customers.

2. The costs are classified into fixed and variable.
3. The fixed and variable cost classification is necessary to ascertain the cost of service and the unit cost of
service.
4. There is no physical stock of article if an undertaking renders a service.
5. If a cost center is operating for an undertaking, there is no sale of service but render the service. In other
words, if a cost center is operating for public, it sells its service to the public.
6. The cost unit may be simple in certain cases or composite or compound in other cases like transport
undertakings.
7. Total costs are averaged over the total amount of service rendered.
8. The costs are collected from the authentic documents like daily log sheet, operating cost sheet, boiler house
cost sheet, canteen cost sheets etc.
9. Operating cost is the cost of rendering service.
10. Operating costing is the method of ascertaining costs.
11. The productive enterprises can quote prices by ascertaining cost data.
Objectives of Operating Costing

The objectives of operating costing are listed below:

1. To supply the information through which the efficiency in rendering service is improved.
2. To provide a basis for fixing accurate quotation and fare.
3. To ensure that the services are provided in proper time.
4. To control the fuel consumption and its expenses.
5. To ensure that the service equipments are properly maintained.
6. To provide cost comparison between own service and alternative service i.e. hiring.
7. To compare the cost of one service center with another.
8. To determine the apportionment cost if the services are provided within an organization.
9. To decide the price that can be charged for use of vehicle.
10. To control the cost of maintenance and repairs.
11. To select efficient and suitable routing of vehicles to reduce the costs to production departments that uses the
service.
12. To avoid the under utilization of capacity and idle time of the work force.
13. To absorb the fixed costs proportionately and systematically that is allocated to the units of services.
Selection of Cost under Operating Costing
Cost is expressed in terms of the unit of service rendered. Though, operating cost is relating to units of costing
the cost unit is not as tangible as a job or a contract. Any person cannot easily select a cost unit. Thus, the
selection of cost unit requires more skill, technical and statistical talent on the part of the cost accountant.
The following table gives a clear picture on the cost unit along with the nature of service of the undertaking.

TRANSPORT COSTING
Q1. From the following information, calculate total Km and total Passenger Km.

No. Of Buses 8
Days operated in the month 25
Trips made by each bus 2
Distance of route 20 Km. (one side)
Capacity of Bus 80 passengers
Normal Passengers travelling 90% Capacity

Q2. From the following details, calculate operating cost per passenger Km and Per Km of a bus:

A bus covers a distance of 15 Km between two cities on an average it does not remain on road for five days in a
month. It takes 5 round trips each day. Its capacity is 50 passenger and on an average 80% of the seats remain
occupied.

Driver’s Salary per month 300

Salary of Conductor and Cleaners per month 500
Petrol, etc. per month 3500
Cost 80,000
Estimated life 5 Years
Insurance, Taxes, etc. p.a 3,000
Repairs and Renewals, p.a 4,000

Q3. The following data relate to a vehicle of a transport company. The vehicle in question runs, on an average 20
km per hour. After charging interest on cost of vehicle @5% p.a., compute cost per km run by the vehicle:

Estimated life 2,00,000 Km.

Annual Kilometre 60,000 Km.
Cost of Vehicle 50,000
Driver’s wages per hour 6
Petrol per gallon 5
Repairs per km. .25
Tyre allocation per km. .10
Licence Per annum 1000
Insurance Per annum 1100
Garage Rent per annum 800
Supervision and Salaries 1500
The vehicle runs 20 Km per gallon.

Q4. A Transport company is running 4 buses between two towns which are 50 Km. Apart, Seating capacity of
each bus is 40 passengers. The following particulars were obtained from their books for April 2011:

Wages and Drivers and Cleaners 1400

Wage of conductor 1000
Salaries of office staff 1200
Diesel oil and other oils 3800
Repair and maintenance 900
Depreciation 1500
Taxes and insurance 2600
Road licence fee per year 500
Interest and other charges 1500
Actual passenger lorried were 75% of the seating capacity. All the four buses run on all days of the month. Each
bus made one round trip per day. Find out the cost per passenger Km.

Q5. From the following data relating to two different vehicles A and B, compute the cost per running mile:
 Vehicle A Vehicle B
Km. Run (annual) 15,000 6,000
Cost of vehicle 25000 15000
Road Licence (annual) 750 750
Insurance (annual) 700 400
Garage rent (annual) 600 500
Supervision and Salaries 1200 1200
Driver’s wages per hour 3 3
Cost of fuel per litre 3 3
Km. Run per litre 20 Km. 15 km.
Repairs and Maintenance per Km. 1.65 2.00
Tyre allocation per km. .80 .60
Estimated life of vehicles 1,00,000 Km. 75,000 Km.
Charge interest at 5% per annum on cost of vehicles. The vehicles run 20 Km per hour on an average.

Q6. Mr. Goel owns a fleet of taxies and the following information is available from the records maintained by
him:

Number of taxies 10
Cost of each taxi 20,000
Salary of Manager (per month) 600
Salary of accountant (per month) 500
Salary of cleaner (per month) 200
Salary of mechanic (per month) 400
Garage rent (per month) 600
Insurance Premium (per annum) 5%
Annual Tax (per taxi) 600
Driver’s Salary (per month per taxi) 200
Annual repairs (per taxi) 1000
Total life of a taxi is about 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 @ Rs. 1.8 per litre. Oil and other sundries are Rs. 5 per 100 Km.
Calculate the cost of running a taxi per Km.

Q7. A Transport Co. has been given a 20 Km. Long route to run a bus. The bus costs Rs. 50,000 and has been
insured @60% p.a. While annual taxes amount to Rs. 2,000. Garage rent is Rs. 100 p.m. yearly repairs will be
Rs. 2,000 and the bus is likely to last for 5 years.

The driver’s Salary will be Rs. 3000 p.a and that of conductor’s Rs. 1800 p.a in addition to 10% of the takings as
commission (to be shared by the driver and the conductor equally). Cost of stationery will be Rs. 600 p.a.
Manager’s Salary is Rs. 400 p.m. who also looks after accounts.

Petrol and oil will be Rs. 25 per 100 Km. The bus will make 3 round trips carrying on the average 40 passengers
on each trip. Assuming 25% profit on takings, calculate the bus fare to be charged from each passenger. The bus
runs on an average 25 day in a month.

Q8. The practising Chartered Accountant now spends Rs. .90 per Km. On taxi for his clients work. He is
considering two other alternatives, the purchase of a new small car or an old bigger car. The estimated cost
figures are:

Items New Small Car Old Bigger Car

Purchase Price 35000 20000
Sale price after 5 year 19000 12000
Repair and servicing per annum 1000 1200
Taxes and insurance per annum 1700 700
Petrol consumption per litre 10 Km. 7 Km.
Petrol price per litre 3.50 3.50
He estimates that he does 10,000 Km annually. Which of the three alternatives will be the cheapest ? If his
practice expands and he has to do 19000 Kms. Per annum, what should be his decision? At how many Kms. Per
annum, will the cost of the two cars break even and why? Assume petrol only as variable cost. Ignore interest
and income tax.

POWER HOUSE OPERATING COSTING

Q9. The following cost data pertaining to the year 2010 are collected from the books of ABC power Co. Ltd.
Prepare a cost sheet showing the cost of generation of power per unit of kWh.

Total Units generated 14,00,000 kWh

Operating Labour 87500
Plant Supervision 12500
Lubricants and Supplies 65000
Repairs and Maintenance 42000
Administrative overhead 113000
Capital Cost 200000
Coal consumed per kWh for the year is 2.205 Ib and cost of coal delivered to the power station is Rs. 250 per
metric tonne. Depreciation rate chargeable is 4% per annum and interest on capital is to be taken at 11%. 1 MT is
equal to 2204.62 lb

Q10. The Iron and steel works which generates its own electricity for the purpose of using the same for running
the factory, gives the following information:

1. Fuel-Coal consumed during the month 1,000 quintals @ Rs. 12 per quintal.
2. Oil 15 quintals @ Rs. 1,000 per quintal
3. Water 2,00,000 litres @ Rs. 1.00 per 1,000 litres.
4. Cost of steam boiler Rs. 50,000 which has the residual value of Rs. 2,000. The life of steam boiler is 10
year.
5. Salaries and wages for the Boiler House:
a. 20 men @Rs. 150 per month
b. 40 women @ Rs. 60 per month
6. Share of Administration charges Rs. 1050 per month.
7. Sale of ash Rs. 300
8. Generating plant cost Rs. 1,50,000. Depreciation @10%
9. Repair and Maintenance of Steam Boiler and Generating Plant Rs. 1000
10. Salaries and wages for Generating plant:
a. 10 skilled workers @ Rs.300 per month
b. 15 unskilled workers @ Rs. 100 per month
11. No. of units generated 2,00,000
12. 1/10 of units generated were used by Generating department itself.

Q11. Following are the information’s given by an owner of hotel. You are required to advise him what rent
should be charged from the customers per day so that he is able to earn 25% on cost other than interest.

1. Staff salaries Rs. 800000 per annum.

2. Room Attendant’s salary Rs. 20 per day. The salary is paid on daily basis and services of room attendants
are needed only when the room occupied. There is one room attendant for one room.
3. Lighting, Heating and Power : The normal lighting expenses for a room if it is occupied for whole month
is Rs. 500 per room. Power is used only in winter and normal charge per month if occupied for a room is
Rs. 200.
4. Repair to Buildings Rs. 1,00,000 per annum.
5. Linen etc. Rs. 48,000 per annum.
6. Sundries Rs. 66,000 per annum.
7. Interior decoration and furnishing Rs. 1,00,000 per annum.
8. Cost of building Rs. 40,00,000, Rate of depreciation 5%.
9. Other equipments Rs. 10,00,000, Rate of depreciation 10%.
10. Interest @ 5% may be charged on its investments of Rs. 50,00,000 in the building and equipments.
11. There are 100 rooms in the hotel and 80% of the rooms are normally occupied in summer and 30% of the
rooms are busy in winter. You may assume that period of summer and winter is six months each. Normal
days in a month may be assumed to be 30.