Professional Documents
Culture Documents
INTRODUCTION TO TOPIC
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.
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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.
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(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.
It provides statistical data on the basis of which future estimates are prepared and
quotations are submitted.
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
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.
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.
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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.
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.
Start-up businesses are typically more costly and risky since there is no proven formula.
In order to obtain capital to fund the business, a lengthy detailed business plan must be
put together.
All of the details of starting the business, including licenses, marketing, naming the
business, finding product sources, etc. are the responsibility of the owner
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CHAPTER 2
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.
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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:
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
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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.
Advertising
Raw materials
investment value of the funds used to purchase the land, if it is owned instead of
rented or leased
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Maintenance of equipment
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.
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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.
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.
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.
Documents like the daily log sheet, cost sheet etc. are used for the collection of cost data
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Hotel
College/Schools
Hospitals
Electricity
Kilowatt-hours
Swimming pool
Canteen
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Particulars
Standing charges :-
Total cost
Cost per km
License fees
Insurance Premium
Road tax
Garage rent
Drivers wages
Attendant-cum-cleaners wages
Depreciation
Total
Total charges [ (A) + (B) ]
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CHAPTER 3
Hospital industry
Hotel industry
HOSPITAL COSTING
Service costing system is used in ascertaining the cost of operations of a hospital. The activities
of a hospital are divided into a number of cost centers, which are:
Out-patient department
ii
Pathology centre
iii
Wards
iv
Operation theatre
Laundry
vi
Kitchen
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Cost is collected for each such cost centers, and the cost per unit of output is ascertained with
respect to each cost center. Costs are classified into fixed and variable for preparing operating
cost sheet
Cost unit: Different cost centers have different cost units to measure the output. Cost-output
relationship and all other relevant factors will have to be considered to select a cost unit. The
following cost units are used generally:
Bed-days for in-patients department (Ward)
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TRANSPORT COSTING
Service costing method is used to ascertain the cost of services provided by an organization
(transport firm) which uses its vehicles for transporting goods or passengers. In motor transport
costing, the cost unit is tone-km or passenger-km.
Analysis of operating costs, namely, wages, full cost, insurance, repairs and
maintenance.
Control of operating and running costs and avoidance of waste of fuel and other
consumable material.
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TRANSPORTER
A transport company is running 5 bus between 2 town which are 15 Km apart setting capacity of
each bus is 50 passenger the following particular were obtain from the book April 1998.
PARTICULAR
AMT
Wages
24000
10000
35000
Repair
8000
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Taxation insurance
16000
Depreciation
26000
20000
Additional Information:
Actually passenger carried were 75% of capacity all buses run on all day. If each bus made 1
round trip per day find out cost of per passenger km.
SOLUTION:
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PARTICULAR
AMT
AMT
Wages
24000
10000
Taxation insurance
16000
20000
70000
8000
69000
26000
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Depreciation
Total cost
(A+B)
139000
Working note:
50* 75% * 50*2*30*5 = 562500
Cost passenger Km = Total cost
passenger Km
= 139000
562500
(ANS): = 0.247
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CHAPTER 4
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:
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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 overallocate 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, hotels being described as labor
intensive companies devote a big percentage of their financial resources to such an expense.
Rooms
Telephone
Gift Shops
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
Marketing
Data Processing
Human Resources
3. Other Financial Reporting Centers include Energy Costs and Fixed Charges (Rent
Expense, Property Taxes, Insurance Expense, Interest Expense, Depreciation and Amortization
Expenses)
Each Financial Reporting Center should be assigned an Identification Number. To illustrate,
consider the following Example:
Identification Number
11
15
17
31
36
38
41
51
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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
Cost of Sales
Payroll Expenses
Payroll-related Expenses
Operating Supplies
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
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Marketing Expense
| UNDISTRIBUTED EXPENSES
Energy Costs
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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FORMAT:-
Amount
(Rs.)
Amount Per
room
1) Salaries to staff
2) Salaries of room attendants
3) Laundry expenses
3) Electricity charges
4) Repairs and maintenance
5) Interior and tapestry
6) Sundry expenses
7) Depreciation
8) Interest
9) Rent
10) Administration charges
Total Cost
Cost Per Room Day
Add: Profit
Rent per room day
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ILLUSTRATIONS 1 :-
New Ranjeet hotel has three types of suites for his customer, viz. single room, double room and
three rooms respectively. State the rent to be charged for each type of suite on the basis of the
following information:
The number of suites of each type are:
Single room suites 100.
Double room suites 30.
Three room suites 20.
The rent of double room suites is to be fixed at 11/2 times the single room suites and that of three
room suites as twice the single room suite.
The occupancy of each type of suite is as under:
Summer
a) Single room suites
b) Double room suites
c) Three room suites
The annual expenses are as follows:
a) Staff salaries Rs. 2,20,000.
b) Room attendants wages when occupied:
a) Single room suites
b) Double room suites
c) Three room suites
Winter
90%
80%
60%
Summer
Rs. 2
Rs. 3
Rs. 4
50%
20%
20%
Winter
Rs. 3
Rs. 4.50
Rs. 6
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Rs. 40
Rs. 60
Rs. 80
Rs. 42,000
Linen, etc.
Rs. 45,000
Interior decoration
Rs. 50,000
Sundries
Rs. 31,550
Power
Rs. 20
Rs. 30
Rs. 40
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Solution:
In the Books of New Ranjeet Hotel
Operating Cost Statement (Per annum)
Particulars
Rs.
Staff salaries
2,20,000
93,150
Lighting, heating
55,400
Power
27,700
42,000
Linen
45,000
Interior decoration
50,000
Sundries
31,550
70000
10000
20000
1,00,000
6,64,800
+ Profit 25%
1,66,200
Total Rent
8,31,000
Room Days
Single rooms
Summer = 100 X 90% X 7 X 30 = 18900
Winter = 100 X 50% X 5 X 30 = 7500
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ii)
iii)
A) 26400
Double rooms
Summer = 30 X 80% X 7 X 30
= 5040
Winter = 30 X 20% X 5 X 30
=
900
5940
Equivalent to total single room
= X 1.5
B)
8910
Three rooms
Summer = 20 X 60% X 7 X 30
= 2520
Winter = 20 X 20% X 5 X 30
= 600
3120
Equivalent to total single room
= X2
C)
6240
= 41550
Single
= 18900 X 2
= 37800
Double = 5040 X 3
= 15120
Three
= 10080
= 2520 X 4
2) Winter
Single = 7500 X 3
= 22500
= 4050
Three = 600 X 6
= 3600
93150
= 35200
Double = 5940/30 X 60
= 11880
Three = 3120/30 X 80
= 8320
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55400
IV) Power
Single = 26400/30 X 20
= 17600
Double = 5940/30 X 30
= 5940
Three = 3120/30 X 40
= 4160
27700
Illustration 2:From the given information relating to a hotel, calculate the room rent to be charged to give a
profit of 25% on cost excluding interest charged on loan for the year ended 31st March, 2008:
1
Wages of the room attendant : Rs. 20 per day per room when the room is
occupied.
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b) Power is used only in winter and the charges are Rs. 200 for a room, when
occupied.
4
10 There are 200 rooms in the hotel, 80% of the rooms are generally occupied in
summer. 60% in the winter and 30% in rainy season.
The period of summer, winter and rainy season may be considered to be of 4 months in each
case. A month may be assumed of 30 days of an average.
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Particulars
Salaries of office staff (50000 X 12)
Rs.
6,00,000
8,16,000
Lighting, heating
6,80,000
Power
96,000
30,000
50,000
License fees
12,400
1,20,000
1,00,000
Depreciation :
On building ( 20,00,000 X 5%)
1,00,000
50,000
26,54,400
+ 25% Profit
6,63,600
Total rent
Room rent to be charged :
33,18,000
Working notes :
I)
Room days :
Summer = 200 x 4 x 30 x 80%
= 19200
= 14400
= 7200
40800
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II)
III)
= 320000
= 240000
= 120000
680000
ii. Power
winter = 200 x 4 x 200 x 60%
= 96000
Illustration 3:
From the following information, prepare operating cost statement for hotel SEA LINK and
also suggest room rent to be charged per day so that owner earns profit @ 20% on capital
employed Rs.75,70,000.
a) Staff salaries Rs. 4,00,000 p.a.
b) Room attendant charged Rs. 200 per day per room when occupied.
c) Power Rs. 250 per month per room when occupied during summer and Rs. 150 p.m. per
room when occupied during winter.
d) Repairs to building Rs. 30,000 p.a.
e) Sundries Rs. 1,50,000 p.a.
f) Furnishings Rs. 80,000 p.a.
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g)
Depreciation building at 10% p.a. on Rs. 40,00,000 and furniture on Rs. 10,00,000 at
15% p.a.
There are 200 rooms in a hotel, 60% of the rooms are occupied in summer and 20% of the rooms
are occupied in winter.
During the year, summer is 7 months and winter is of 5 months, assume 30 days of month.
Rs.
4,00,000
62,40,000
Power
2,40,000
Repairs to building
Sundries
Furnishing
30,000
1,50,000
80,000
Depreciation
On building (40,00,000 x 10%)
4,00,000
1,50,000
76,90,000
+ Profit 20%
15,14,000
92,04,000
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Working notes:I)
Room days
Summer = 200 x 7 x 30 x 60%
= 25200
= 6000
31200
II)
III)
Power
Summer = 250 x 7 x 200 x 60%
Winter = 150 x 5 x 200 x 20%
= 6240000
= 210000
= 30000
240000
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CONCLUSION
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
Hotel industry
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Transport industry
BIBLIOGROPHY
www.operatingcosting.com
www.wikipedia.com
www.icai.com
www.investopedia.com
Advanced cost accounting: - Dr. Varsha M. Ainapure
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