PROJECT REPORT

ON
OPERATING COSTING.

MASTER OF COMMERCE
(2013-2014)
ACCOUNTANCY PART 1
AFFILIATED BY UNIVERSITY OF MUMBAI

UNDER GUIADANCE OF
PROF C.A KINJAL JOTA

SUBMITTED BY
MITISHA. C. DEDHIA.
ROLL NO. 8

K.J.SOMAIYA COLLEGE OF ARTS & COMMERCE.

VIDHYAVIHAR.

DECLARATION BY STUDENT
1

I Dedhia Mitisha C., Roll No.

08, the student of M.com (1)-(2013-2014)
hereby declare that I have completed the
project on OPERATING COSTING.
The information submitted is true and original
to the best of my knowledge.

Thank you.

Your's faithfully,
MITISHA. C. DEDHIA
Roll no 08
DATE:
PLACE:

DECLARATION BY GUIDE
2

I, the undersigned PROF.

C.A. KINJAL JOTA, have guided MISS DEDHIA.
MITISHA. C. for her project. she has completed the
project OPERATING COSTING.
I hereby, declare that the
information provided in this project is true as per my
knowledge.

THANK YOU.

YOUR's FAITHFULLY.
PROF. C.A. KINJAL JOTA

DATE:
PLACE:

ACKNOWLEDGEMENT
3

I would like to thank all the

people who helped me in undertaking the study
and completing the project, by imparting me
the valuable information and guidance that was
required at every stage of my project work.
I would like to thank our
principal and course co-ordinate, and our coordinate, for giving me an opportunity and
encouragement to prepare this project.
Last but not the least, I
would like to thank my project guide prof. C.A.
KINJAL JOTA. for guiding n helping me
throughout the preparation of my project, right
from the selection of the topic till its
completion.

MITISHA DEDHIA.

K J SOMAIYA COLLEGE OF ARTS & COMMERCE

VIDYAVIHAR (E)

EVALUATION CERTIFICATE
This is to certify the undersigned have
assessed and evaluated the project on OPERATING

COSTING. submitted by MITISHA DEDHIA

student of M Com

Part-1(2013-2014), ROLL NO- 08.

This project is original to the best of our
knowledge and has been accepted for Internal Assessment.

INTERNAL EXAMINER
EXAMINER

EXTERNAL

(PROF. C.A. KINJAL JOTA)

PRINCIPAL
(DR. SUDHA VYAS)

OPERATING
COSTING.

INDEX
TOPIC
PAGE NO
COST ACCOUTING

ELEMENTS OF COST.
11

CLASSIFICATION OF COST.
12

TYPES OF COST.
17

OPERATING COSTING.
19

HOW OPERATING COST WORKS.

20

WHICH PRODUCTS ARE SUITABLE.?

20

HOW TO DETERMINE THE BATCHES ?

21

FEATURES OF OPERATING COSTING.

21

COST IN DIFFERENT UNDERTAKINGS.

25

ILLUSTRATION.
27

OVERVIEW.

32

COST ACCOUNTING
Cost accounting is a process of collecting, analyzing, summarizing and
evaluating various alternative courses of action. Its goal is to advise the
management on the most appropriate course of action based on the cost
efficiency and capability. Cost accounting provides the detailed cost
information that management needs to control current operations and plan
for the future.
Since managers are making decisions only for their own organization,
there is no need for the information to be comparable to similar
information from other organizations. Instead, information must be
relevant for a particular environment. Cost accounting information is
commonly used in financial accounting information, but first we are
concentrating on its use by managers to make decisions.
Unlike the accounting systems that help in the preparation of financial
reports periodically, the cost accounting systems and reports are not subject
to rules and standards like the Generally Accepted Accounting Principles.
As a result, there is wide variety in the cost accounting systems of the
different companies and sometimes even in different parts of the same
company or organization.
Origins
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All types of businesses, whether service, manufacturing or trading, require

cost accounting to track their activities. Cost accounting has long been
used to help managers understand the costsof running a business. Modern
cost accounting originated during the industrial revolution, when the
complexities of running a large scale business led to the development of
systems for recording and tracking costs to help business owners and
managers make decisions.
In the early industrial age, most of the costs incurred by a business were
what modern accountants call "variable costs" because they varied directly
with the amount of production. Money was spent on labor, raw materials,
power to run a factory, etc. in direct proportion to production. Managers
could simply total the variable costs for a product and use this as a rough
guide for decision-making processes.
Some costs tend to remain the same even during busy periods, unlike
variable costs, which rise and fall with volume of work. Over time, these
"fixed costs" have become more important to managers. Examples of fixed
costs include the depreciation of plant and equipment, and the cost of
departments such as maintenance, tooling, production control, purchasing,
quality control, storage and handling, plant supervision and engineering. In
the early nineteenth century, these costs were of little importance to most
businesses. However, with the growth of railroads, steel and large scale
manufacturing, by the late nineteenth century these costs were often more
important than the variable cost of a product, and allocating them to a
broad range of products lead to bad decision making. Managers must
understand fixed costs in order to make decisions about products and
pricing.
For example: A company produced railway coaches and had only one
product. To make each coach, the company needed to purchase $60 of raw
materials and components, and pay 6 laborers $40 each. Therefore, total
variable cost for each coach was $300. Knowing that making a coach
required spending $300, managers knew they couldn't sell below that price
without losing money on each coach. Any price above $300 became a
contribution to the fixed costs of the company. If the fixed costs were, say,
$1000 per month for rent, insurance and owner's salary, the company could
therefore sell 5 coaches per month for a total of $3000 (priced at $600
each), or 10 coaches for a total of $4500 (priced at $450 each), and make a
profit of $500 in both cases.
10

Cost Accounting vs Financial Accounting.

Financial accounting aims at finding out results of accounting year in

the form of Profit and Loss Account and Balance Sheet. Cost
Accounting aims at computing cost of production/service in a scientific
manner and facilitate cost control and cost reduction.

Financial accounting reports the results and position of business to

government, creditors, investors, and external parties.

Cost Accounting is an internal reporting system for an organizations

own management for decision making.

In financial accounting, cost classification based on type of

transactions, e.g. salaries, repairs, insurance, stores etc. In cost
accounting, classification is basically on the basis of functions,
activities, products, process and on internal planning and control and
information needs of the organization.

Financial accounting aims at presenting true and fair view of

transactions, profit and loss for a period and Statement of financial
position (Balance Sheet) on a given date. It aims at computing true and
fair view of the cost of production/services offered by the firm.[3]

Types of cost accounting

The Following are different Cost Accounting Approaches:

standardized or standard cost accounting

lean accounting

activity-based costing

resource consumption accounting

throughput accounting
11

Life cycle costing

environmental accounting

Target costing

Elements of cost
Basic cost elements are:
1. Raw materials
2. Labor
3. Indirect expenses/overhead

Material (Material is a very important part of business)

Direct material/Indirect material

Labor

Direct labor/Indirect labor

Overhead (Variable/Fixed)

Production or works overheads

Administration overheads

Selling overheads

Distribution overheads
12

Maintenance & Repair

Supplies

Utilities

Other Variable Expenses

Salaries

Occupancy (Rent)

Depreciation

Other Fixed Expenses

(In some companies, machine cost is segregated from overhead and

reported as a separate element)
Classification of costs
Classification of cost means, the grouping of costs according to their
common characteristics. The important ways of classification of costs are:
1. By Element: There are three elements of costing i.e. material, labor
and expenses.
2. By Nature or Traceability:Direct Costs and Indirect Costs. Direct
Costs are Directly attributable/traceable to Cost Object. Direct costs
are assigned to Cost Object. Indirect Costs are not directly
attributable/traceable to Cost Object. Indirect costs are allocated or
apportioned to cost objects.
3. By Functions: production,administration, selling and distribution,
R&D.
4. By Behavior: fixed, variable, semi-variable. Costs are classified
according to their behavior in relation to change in relation to
production volume within given period of time. Fixed Costs remain
fixed irrespective of changes in the production volume in given
13

period of time. Variable costs change according to volume of

production. Semi-variable Costs costs are partly fixed and partly
variable.
5. By control ability: controllable, uncontrollable costs. Controllable
costs are those which can be controlled or influenced by a conscious
management action. Uncontrollable costs cannot be controlled or
influenced by a conscious management action.
6. By normality: normal costs and abnormal costs. Normal costs arise
during routine day-to-day business operations. Abnormal costs arise
because of any abnormal activity or event not part of routine
business operations. E.g. costs arising of floods, riots, accidents etc.
7. By Time: Historical Costs and Predetermined costs. Historical costs
re costs incurred in the past. Predetermined costs are computed in
advance on basis of factors affecting cost elements. Example:
Standard Costs.
8. By Decision making Costs: These costs are used for managerial
decision making.

Marginal Costs: Marginal cost is the change in the aggregate costs

due to change in the volume of output by one unit.

Differential Costs: This cost is the difference in total cost that will
arise from the selection of one alternative to the other.

Opportunity Costs: It is the value of benefit sacrificed in favor of an

alternative course of action.

Relevant Cost: The relevant cost is a cost which is relevant in various

decisions of management.

Replacement Cost: This cost is the cost at which existing items of

material or fixed assets can be replaced. Thus this is the cost of
replacing existing assets at present or at a future date.

14

Shutdown Cost:These costs are the costs which are incurred if the
operations are shut down and they will disappear if the operations are
continued.

Capacity Cost: These costs are normally fixed costs. The cost
incurred by a company for providing production, administration and
selling and distribution capabilities in order to perform various
functions.

Other Costs

Standard cost accounting

In modern cost account of recording historical costs was taken further, by
allocating the company's fixed costs over a given period of time to the
items produced during that period, and recording the result as the total cost
of production. This allowed the full cost of products that were not sold in
the period they were produced to be recorded in inventory using a variety
of complex accounting methods, which was consistent with the principles
of GAAP (Generally Accepted Accounting Principles). It also essentially
enabled managers to ignore the fixed costs, and look at the results of each
period in relation to the "standard cost" for any given product.
For example: if the railway coach company normally produced 40
coaches per month, and the fixed costs were still $1000/month, then
each coach could be said to incur an Operating Cost/overhead of $25
=($1000 / 40). Adding this to the variable costs of $300 per coach
produced a full cost of $325 per coach.
This method tended to slightly distort the resulting unit cost, but in massproduction industries that made one product line, and where the fixed costs
were relatively low, the distortion was very minor.
For example: if the railway coach company made 100 coaches one
month, then the unit cost would become $310 per coach ($300 +
($1000 / 100)). If the next month the company made 50 coaches, then
the unit cost = $320 per coach ($300 + ($1000 / 50)), a relatively
minor difference.

15

An important part of standard cost accounting is a variance analysis,

which breaks down the variation between actual cost and standard
costs into various components (volume variation, material cost
variation, labor cost variation, etc.) so managers can understand why
costs were different from what was planned and take appropriate
action to correct the situation.

Marginal costing
The cost-volume-profit analysis is the systematic examination of the
relationship between selling prices, sales, production volumes, costs,
expenses and profits. This analysis provides very useful information for
decision-making in the management of a company. For example, the
analysis can be used in establishing sales prices, in the product mix
selection to sell, in the decision to choose marketing strategies, and in the
analysis of the impact on profits by changes in costs. In the current
environment of business, a business administration must act and take
decisions in a fast and accurate manner. As a result, the importance of costvolume-profit is still increasing as time passes.

CONTRIBUTION MARGIN
A relationship between the cost, volume and profit is the contribution
margin. The contribution margin is the revenue excess from sales over
variable costs. The concept of contribution margin is particularly useful in
the planning of business because it gives an insight into the potential
profits that can generate a business. The following chart shows the income
statement of a company X, which has been prepared to show its
contribution margin:
Sales

$1,000,000
16

(-) Variable Costs

$600,000

Contribution Margin

$400,000

(-) Fixed Costs

$300,000

Income from Operations

$100,000

CONTRIBUTION MARGIN RATIO

The margin contribution can also be expressed as a percentage. The
contribution margin ratio, which is sometimes called the profit-volume
ratio, indicates the percentage of each sales dollar available to cover fixed
costs and to provide operating revenue. For the company Fusion, Inc. the
contribution margin ratio is 40%, which is computed as follows:

The contribution margin ratio measures the effect on operating income of

an increase or a decrease in sales volume. For example, assume that the
management of Fusion, Inc. is studying the effect of adding $80,000 in
sales orders. Multiplying the contribution margin ratio (40%) by the
change in sales volume ($80,000) indicates that operating income will
increase $32,000 if additional orders are obtained. To validate this analysis
the table below shows the income statement of the company including
additional orders:
Sales

$1,080,000

(-) Variable Costs

$648,000 (1,080,000 x 60%)

Contribution Margin

$432,000 (1,080,000 x 40%)

17

(-) Fixed Costs

$300,000

Income from Operations

$132,000

Variable costs as a percentage of sales are equal to 100% minus the

contribution margin ratio. Thus, in the above income statement, the
variable costs are 60% (100% - 40%) of sales, or $648,000 ($1'080,000 X
60%). The total contribution margin $432,000, can also be computed
directly by multiplying the sales by the contribution margin ratio
($1'080,000 X 40%).
TYPE OF COST:
Up-front costs comprise the initial investments and expenses necessary to
implement MSW services. These include public education and outreach,
land acquisition, permitting, and building construction or modification.
Operating costs are the expenses of managing MSW on a daily basis,
including operations and maintenance, capital costs, debt service, and any
unexpected costs.
Back-end costs include expenditures to properly wrap up operations and
take proper care of landfills and other MSW facilities at the end of their
useful lives. Costs include site closure, building/equipment
decommissioning, postclosure care, and retirement/health benefits for
current employees.
Remediation costs at inactive sites include investigation, containment, and
cleanup of known releases and closure and postclosure care at inactive
sites. Many local governments have inactive MSW landfills that require
"corrective action" for known contamination of ground water, soil, or
surface water. These remediation costs can be relatively well estimated,
though with somewhat more uncertainty than other types of engineering
projects such as road building.
18

Including these costs in FCA is a matter of choice. The decision to include

remediation costs depends on the intended use of the FCA information. For
example, if you are using FCA to document the revenue needs of an MSW
program, you might want to include costs entailed by inactive sites.
However, if you intend to use FCA to reveal the current economics (e.g.,
cost per ton) of current MSW management or compare your performance
to other communities or state benchmarks, you might want to exclude
inactive sites from such calculations.

Contingent costs are costs that might or might not be incurred at some
point in the future. Examples include the costs of remediating unknown or
future releases of pollutants, such as leaks from currently operating
municipal landfills. Contingent costs also include the liability costs of
compensating for undiscovered or future damage to property or persons
adversely affected by MSW services. Both of these types of contingent
costs can be projected, but not very precisely. (In contrast, where there is a
known need to remediate, costs can be projected much more precisely.)
Environmental costs are the costs of environmental degradation that
cannot be easily measured or remedied, are difficult to value, and are not
subject to legal liability. To truly capture all of the important life-cycle cost
elements, some people advocate assessing the upstream and downstream
environmental costs of resource use, pollution, and waste generated by
providing goods and services.
Social costs are adverse impacts on human beings, their property and
welfare that cannot be compensated through the legal system. Social costs
(also termed "social externalities") might include the impacts of MSW
transport on neighborhoods along the routes taken, as well as the impacts
of MSW facilities themselves. Adverse effects on property values,
community image, and aesthetics, as well as the increase of noise, odor,
and traffic all contribute to social costs.

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Operating cost
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.
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
20

schedule and need to be paid accordingly for the company to

maintain good credit.
Operation costing is an accounting method used to allocate costs of similar
products that are manufactured in batches. It combines two other popular
costing methods to get a more accurate picture of how a particular
company's manufacturing process works. It simplifies the accounting
process by only differentiating activities that cause a variation in cost
between products. Similar items are allocated in batches that reflect the
actual cost involved in creating that group. Here is a basic guide to the
operation costing accounting method.
Operation costing: How it works
Operation costing is a combination of process costing and job-order
costing. Process costing is an accounting method used for the creation of
identical products. The costs are allocated to all products in a batch equally
because they are all identical. Job-order costing is better suited for
products that are different from each other. The products are separated into
batches. The costs of each batch tracked separately and allocated only to
the products contained in that batch.
Operation costing: What products are suitable
Operation costing works for products that have some similarities, but can
still be separated out into batches. Some common products that use
operation costing are electronic equipment or cosmetics. The
manufacturing process is similar for all of the individual products, but
there may be different costs involved. Using computer monitors as an
example, each size of monitor may use the same manufacturing process,
but will incur different levels of materials cost. The labor costs could then
be allocated using a process costing system while the materials costs are
allocated with a job-order costing system to account for the different sizes.

Operation costing: Procedures vary by company

Each company has its own specific operation costing procedures, but most
of them will resemble both process costing and job-order costing. Direct
21

materials costs are usually booked into work-in-process accounts in

batches the way they would be under a job-order system. Most operation
costing systems require the use of several work-in-process accounts to
keep the batches separate. Conversion and labor costs are tracked in a lump
sum that is later spread to all units produced during the accounting period.

Operation costing: How to determine the batches

The variation between products can be large or small, as long as it can be
differentiated from another group of products. When deciding how to
group products for operation costing, the difference in cost is the most
important consideration. One product may have more features than
another, but that only matters if it costs significantly more to produce that
item. Each company must tailor its operating costing system to their
specific products.

FEATURES OF OPERATING COSTING

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 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.
22

(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.
Operating (cost) characteristics
In some cases, the supplier and customer may wish to come to an
agreement about how the risks of incorrect decisions might be shared
between them by examining the respective levels of risk in the first case,
in percent risk terms, but also in economic terms.
Operating characteristic (power) curves

23

Operating characteristic
Classical statistical hypothesis testing [Montgomery 1996] uses percent
risk tools such as the so-called operating characteristic or power curve.
This is obtained by calculating the risk of incorrect decisions associated
with either measurement uncertainty or entity dispersion in terms of the
area of the probability distribution function extending beyond the
specification limit, for instance, in the case of consumer risk, the tail
(figure (a)) above the upper specification limit. This risk is calculated as
the location of the uncertainty interval of fixed width is swept across
the specification limit, USL, of interest, as illustrated.
Customer and supplier can use such curves to agree on:
a maximum level, , of consumer risk say, 10% where the
uncertainty interval is located at the value LQL (limiting quality
level) of the quality characteristic. Characteristic entity values further
away from (below) the (upper) specification limit, will have
probabilities of in-correctly accepting a non-conforming entity less
than .
a minimum level, , of supplier risk say, 95% where the
uncertainty interval is located at the value AQL (acceptable quality
level) of the quality characteristic. Characteristic entity values further
away from (above) the (upper) specification limit, will have
24

probabilities of correctly rejecting a non-conforming entity greater

than .
Operating cost characteristic (power) curves
It may be more meaningful and easier to communicate between customer
and supplier in economic terms rather than just percentage terms.
Additionally, economics terms can capture additional impact factors, such
as increasing costs as product deviates increasingly from specification, as
well as whether it is a profit or loss in terms of the sign for either party.
Overall costs equation
In a new kind of plot [Pendrill 2008] the operating cost characteristic
overall costs, according to the above equation, can be plotted over:
(I) a range of quantity values of ym for a given test dispersion, , and
guard-band factor h
yielding an operating cost characteristic analogous to the traditional,
probability-based operating characteristic.

Cost operating characteristic

in the case of a linear cost model.

25

Operating Costing In Different Undertakings:

Operating 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.

Transport Costing:
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.
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 kilometers run, number of commercial ton-kilometers,
26

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 kilometers traveled and dividing the product by
two. This is done where the vehicles return empty as is found in most
cases.

27

ILLUSTRATION 1:
Adhunik Transport Organization Limited
The visit was made to Adhunik Transport Organization Limited. The
company 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 PhilipsIndia and Colgate. The company is involved in delivery of goods all over
the country.
Number of vehicles:
The company has owned as well as dedicated trucks and trailers.
Owned Vehicles
8 HCVs- Heavy Commercial Vehicles
4 Trailers
Dedicated Vehicles
25 LCVs- Light Commercial 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.
28

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 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.
Measurement of Materials is done in tons.
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
Maintenance (Per Vehicle)
HCV

10,000
29

LCV

6,000

TRAILERS

15,000

Drivers

2,000

Cleaners

1,200

Wages

Transit Expenses
TOTAL

500-1,500
35,000
Approx

Notes:
There are 2 drivers and 1 cleaner for every long journey.
In case of short journeys, there is only 1 driver and 1 cleaner.
The maximum distance covered in a day is 300kms. The average
distance covered 225-280kms.
THE CUSTOMERS ARE CHARGED:
Rs. 1.20 PER KM PER TON (For HVC)
Rs. 1.00 PER KM PER TON (For LVC)
The Profit-Margin is between 10%-20%

30

IILUSTRATION 2:
Costing Club Transport Limited is running 4 buses between two towns, which
are 180 kilometers apart. Seating capacity of each bus is 45 passengers. The
following particulars are obtained from their books for January 2013.
Particulars
Wage of drivers, conductors and cleaners
Salaries
Diesel
Repairs and Maintenance
Taxation and Insurance
Depreciation
Interest
Total

Amount (Rs.)
5,20,000
1,50,000
6,30,000
1,20,000
2,20,000
3,20,000
3,00,000
22,60,000

Passenger carried were 75% of seating capacity. All buses ran on all day of the month. Each
bus made one round trip per day.
Find out the cost per passenger kilometer.

Solution:
Costing Club Transport Limited
January 2012
Vehicle No. xxxxxxx
Registration No.xxxxxxxx
operated: 31 days
Particulars
A) Standing Charges/Fixed charges
Wages of drivers, conductors and cleaners
Salaries
Taxation and Insurance
Interest
Depreciation
Total
B) Running Charges/Variable Expenses
Petrol/Diesel
Total
C) Maintenance Charge/Semi- Variable
Repairs & Maintenance

Days
Amount (Rs.)

Amount (Rs.)

5,20,000
1,50,000
2,20,000
3,00,000
3,20,000

15,10,000

6,30,000

6,30,000

1,20,000
31

Total
D)
Total Cost
E)
Total passenger kilometer ( shown below)
F)
Cost per ton kilometer/passenger
kilometer
=22,60,000/4,46,400

(A+B+C)

1,20,000
22,60,000
4,46,400
5.062

Passenger kilometers are computed as shown below:

Number of buses X Distance in one round trip X Seating Capacity
X Percentage of Seating Capacity actually used X Number of days in a month
= 4 buses X 50 kilometer X 2 X 45 passengers X 80% X 31 days = 4,46,400

32

OVERVIEW
OPERATING COSTING
INTRODUCT The method of costing used in service rendering undertakings is
ION
known as operating costing.
This method of costing is generally made use of by
transport companies, gas and water works
departments, electricity supply companies, canteens,
OPERATING Preparation of Cost Sheet under Operating Costing : For
preparing a cost
COST
SHEET
sheet under operating cost, costs are usually accumulated for a
spe cified
period viz., a month, a quarter, or a year etc.
All of the accumulated costs should be classified under the
following three heads:
1. Fixed costs or standing charges,
2. Variable costs or running charges, ( Fuel, Driver Wages,
Depreciation, oil etc.)
3. Semi-variable costs or maintenance costs. (Supervision
salary,
Repairs and Maintenance)
Particulars
Total
Cost
per
cost

33

Standing
charges :License fees
Insurance
Premium Road
tax
Garage rent

34

Total
B

Running
charges :Repairs and maintenance

Cost of fuel (diesel, petrol

etc.) Lubricants, grease
and oil
Total
C Total charges [ (A) + (B) ]
CHART SHOWING COST UNITS
COST UNITS No.
F OR
1.
VARIOUS
ENTERPR
2.
ISES

Enterprise

Cost per unit

Railways or bus
companies
Hospital

Per passenger-kilometer

3.

Canteen

4.

Water supply service

Per patient/day, per

bed/day
Meals served , cups of
tea
Per 1000 gallons

5.

Boiler House

1000 kg of steam

6.

Goods Transport

7.

Electricity Boards

Per tonne km, quintal

km
Per kilowatt hours

8.

Road maintenance
department
Bricks

Per mile or road

maintenance
One thousand

9.

10. Hotel

BASIC

Per room/day

1. Absolute (weighted average) tonnes-kms:

FORMULAS Absolute tonnes-kms., are the sum total of tonnes-kms.,

arrived at by multiplying various distances by respective
load quantities carried.
35

2. Commercial (simple average) tonnes-kms :

Commercial tonnes-kms., are arrived at by multiplying total
distance kms.,
by average load quantity.

Commercial Tonne Km =

Total Dist x Average Qty

EXAMPLE
A lorry starts with a load of 20 tonnes of goods from station A. It
unloads 8
tonnes at station B and rest of goods at station C. It reaches back
directly to
station A after getting reloaded with 16 tonnes of goods at
station C. The distance between A to B, B to C and then from C
to A are 80 kms., 120 kms., and 160 kms., respectively.
Compute Absolute tonnes-kms., and
Commercial tonnes-kms.
Solution
Absolute tonnes-kms. = 20 tonnes 80 kms + 12 tonnes 120
kms + 16
tonnes 160 kms. = 5,600 tonnes-kms.
Commercial tonnes-kms. = Average load total kilometres
travelled
16 tonnes( i.e. (20+12+16)/3 ) 360 kms. = 5,760 tonnes-kms.

36

IMPORTANT Question 1:
QUESTIO
N S F OR
THEORY

The more the kilometre you travel with your own vehicle the
cheaper it becomes. Comment briefly on the statement.
Solution:
The given statement is based on the fact that when we travel
more, the costs which are fixed in nature or do not vary with
output remain same. As we all are aware of the fact that all the
costs can be classified as fixed and variable in nature. In the
above case, the costs relating to cost of vehicle( i.e.
depreciation), wages of driver etc. are fixed costs and on the
other hand, fuel expenses, repairs and maintenance etc. are
variable. As we travel more and more, there is a proportionate
rise in variable costs and fixed costs remain the same. Thus,
when we compute the cost per kil ometre, i t kee ps on decli ni ng
for more kil ometres and Hence, the travelli ng becomes cheaper.

Question 2:
Write a short note on operating costing?
Solution:
Operating Costing - The method of costing used in service
rendering
undertakings is known as operati ng costing.
This method of costing is generally made use of by
transport companies, gas and water works departments,
electricity supply companies, canteens, hospitals,
theatres, schools etc.

37

TREATMEN
T OF
SOME
SPECIAL
ITEMS
REVSION

Depreciation - Depreciation if related to effluxion of

time, may be treated as fixed. If it is related to the activity
level, it may be treated as variable.

The Union Transport Company has been given a twenty kilomet

er long

ILLUSTRAT
ION
route to ply a bus. The bus costs the company ` 1,00,000. It has
been
insured at 3% per annum. The annual road tax amounts to `
2,000. Garage
rent is ` 400 per month. Annual repair is estimated to
cost ` 2,360 and the bus is likely to last for five yea` The
salaries of the
driver and the conductor are ` 600 and ` 200 per month
respectively in
addition to 10% of the takings as commission to be shared
equally by them.
The managers salary is ` 1,400 per month and stationery will
cost ` 100

per month. Petrol and oil will cost ` 50 per 100 kilometres. The
bus will
make three round trips per day carrying on an
average 40 passengers in each trip. Assuming 15% profit on
takings and
that the bus will ply on an average 25 days in a month, prepare
operating
cost statement on a full year basis and also calculate the bus fare
to be
charged from each passenger pe r kilometer.
Solution
Union Transport Company Statement showing operating cost
of the bus per annum:
A Standing Charges:
38

Calculation of bus fare to be

charged:
Effective
passenger kilometers:
(2 * 20 km * 3 trips * 40 passengers * 25 days * 12 months) =
14,40,000.

Rate to be charged per km. from each passenger:

= ` 1,03,680 /14,40,000 = ` 0.072.

39