OPERATING COSTING

INTRODUCTI The method of costing used in service rendering

ON
undertakings is
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, hospitals, theatres, schools etc.
OPERATING Pre paration of Cost Shee t unde r Ope rating Costing :
COST SHEET For preparing a cost
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)
Note : In the absence of information about semi -variable
costs, the costs may be shown under two heads only, i.e.,
fixed and variable.
Under operating costing, the per unit cost of service may
be calculated
by dividing the total cost for
the period
Particulars
Total
Costby per
cost
A

Standing
charge s :License fees
Insurance
Premium Road
tax
Garage rent
Drivers wages
Attendant-cum-cleaners
wages

km

Total
B

Running
charge s :Repairs and maintenance
Cost of fuel (diesel,
petrol etc.) Lubricants,
grease and oil
Cost of tires, tubes and
other
Total

C Total charges [ (A) + (B) ]

COST UNITS
FOR
CHART SHOW ING COST UNITS FOR VARIOUS
No. Enterprise
Cost per unit
VARIOUS
ENTERPRI
1. Railways or bus
Per passengerSES
companies
kilometer
2. Hospital
Per patient/day, per
bed/day
3. Canteen
Meals served , cups of
tea
4. Water supply service
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
FORMULAS

Per room/day

1. Absolute (weighted average) tonnes-kms:

Absolute tonnes-kms., are the sum total of tonnes-kms.,
arrived at by multiplying various distances by
respective load quantities carried.
Absolute Tonne Km =

Dist1 x Qty1 + Dist2 x Qty2

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
IMPORTANT Que stion 1:
QUESTIO
The more the kilometre you travel with your own vehicle
NS FOR
the cheaper it becomes. Comment briefly on the
THEORY
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, whe n we compute the
cost pe r kil ome tre , i t kee ps on de cli ni ng for more
kil ome tre s and He nce , the trave lli ng be come s che ape r.
Que stion 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.

TREATMENT
OF
SOME
SPECIAL
ITEMS
REVSION
ILLUSTRATI
ON

De pre ciation - Depreciation if related to efluxion of

time, may be treated as fixed. If it is related to the
activity level, it may be treated as variable.
Inte re st - If information about interest is explicitly
given, it may be treated as fixed cost.
The Union Transport Company has been given a twenty
kilomet er long
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:
Managers salary (` 1,400 * 12) = 16,800
Drivers salary (` 600 * 12) = 7,200
Conductors salary (` 200 * 12) = 2,400
Road tax = 2,000
Insurance (3% of ` 1,00,000) = 3,000
Garage rent (` 400 * 12) = 4,800
Stationery (` 100 * 12) = 1,200
Depreciation (` 1,00,000/5 years) = `20,000
B Maintenance Costs Repairs `2,360
C Running charges:

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.