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.
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 organisation itself certain departments too
are known as service departments which provide ancillary services to the
production departments. E.g. Maintenance department, power house, boiler house,
canteen, hospital, internal transport.

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.

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.

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:
(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.

THE FEATURES OF COST ACCOUNTING:

1. It is a process of accounting for costs.
2. It records income and expenditure relating to goods and services
3. It provides statistical data on the basis of which future estimates are
prepared and quotations are submitted.
4. It is concerned with cost ascertainment, cost control and cost reduction.
5. Finally it involves the preparation of right information to the right person at
the right time so that it may be helpful to management for planning,
evaluation of performance, control and decision-making

ADVANTAGES OF COST ACCOUNTANCY

1. It enables a concern to measure the efficiency and than to maintain and
improve it. This can be done with the help of comparison of data made
available of the previous periods and current period.
2. It provides information upon which estimates and tenders are based.
3. It guides for future production polices. It explains the cost incurred and there
by provides data on the basis of which production can be appropriately
planned.
4. The extract cause of decrease or increase in profit/loss can be detected. A
concern may suffer not because of the cost of production is high or prices are
low but also because the output is much below the capacity of the concern.
5. Efficiency of public enterprises. Costing has a more important role to play in
public enterprises than in private enterprises. The primary objective of the
public enterprises is not to raise profits but it is to serve the society by
providing quality good at cheaper rates.

CHAPTER 2 OPERATING COSTING: A BRIEF REVIEW

It is defined as the refinement of process costing. It is concerned with the
determination of the cost of each operation rather than the process. In those
industries where a process consists of distinct operations, the method of costing
applied or used is called operation costing. 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. The two costing
methods included under this head are process costing and service costing.

Preparation of Cost Sheet under Operating Costing

For preparing a cost sheet under operating cost, costs are usually accumulated for a specified
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:
Which are the same whether the operation is closed or running at 100% capacity.
Fixed Costs include items such as the rent of the building. These generally have to
be paid regardless of what state the business is in.

2. Variable costs or running charges, (Fuel, Driver Wages, Depreciation, oil etc.):
Which may increase depending on whether more production is done, and how it is
done (producing 100 items of product might require 10 days of normal time or take
7 days if overtime is used. It may be more or less expensive to use overtime
production depending on whether faster production means the product can be more
profitable). Variable Costs include indirect overhead costs such as Cell Phone
Services, Computer Supplies, Credit Card Processing, Electrical use, Janitorial
Supplies, Office Products, Payroll Services, Telecom, Uniforms, Utilities, or Waste
Disposal etc.

3. Semi-variable costs or maintenance costs. (Supervision salary, Repairs and Maintenance)

Under operating costing, the per unit cost of service may be calculated by dividing the total cost
for the period by the total units of service in the period.

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.
Examples of overhead costs include:

payment of rent on the office space a business occupies

cost of electricity for the office lights

some office personnel wages

Non-overhead costs are incremental costs, such as the cost of raw materials used in the goods a
business sells.
Operating Cost is calculated by Cost of goods sold + Operating Expenses. Operating Expenses
consist of:

Administrative and office expenses like rent, salaries, to staff, insurance,

directors fees etc.

Selling and distribution expenses like advertisement, salaries of salesmen. It

includes all operating cost such as salary, rent, stationery, furniture 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.

Equipment operating costs may include:

Salaries or Wages of personnel

Advertising

Raw materials

License or equivalent fees (such as Corporation yearly registration fees)

imposed by a government

Real estate expenses, including

o

Rent or Lease payments

Office space rent

furniture and equipment

investment value of the funds used to purchase the land, if it is owned

instead of rented or leased

property taxes and equivalent assessments

Operations taxes, such as fees assessed on transportation carriers for

use of highways

Fuel costs such as power for operations, fuel for production

Public Utilities such as telephone service, Internet connectivity, etc.

Maintenance of equipment

Office supplies and consumables

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.

Taxes on production or operation (such as subsidence fees imposed on oil

wells)

Income taxes

Some of these are not applicable in all instances. For example,

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.

formula for operating cost: total cost*no. of weeks

The main features of operating costing are as following:

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.

Total cost is averaged over the total amount of service rendered.

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.

Service costing can be used for service performed internally or externally.

Documents like the daily log sheet, cost sheet etc. are used for the collection of cost data.

examples of the cost units for services

Transport

Ton- Kilometer, Passenger KM, KM Travelled

Hotel

Bed- nights available, occupied, meals

College/Schools

Students hours, full time/part time student hours

Hospitals

Patient bed days, occupied, per operation, per visit

Electricity

Kilowatt-hours

Swimming pool

Bathers attended, Hours of opening

Canteen

Meals provided, Ingredients of Dishes

Illustration of Operating cost sheet:Particulars

A

Standing charges :License fees

Insurance Premium

Total cost

Cost per km

Road tax
Garage rent
Drivers wages
Attendant-cum-cleaners wages
Salaries and wages of other staff
Total
B

Running charges :Repairs and maintenance

Cost of fuel (diesel, petrol etc.)
Lubricants, grease and oil
Cost of tires, tubes and other spare parts
Depreciation
Total

Total charges [ (A) + (B) ]

CHAPTER 3: MAIN AREAS OF OPERATING COSTING

Operating costing is further divided in and used in 3 main areas namely

Hotel industry
Hospital industry &
Transport industry

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 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 underallocate 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.
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,