OPERATING OR SERVICE COSTING

Definitions, Characteristics And Applications OF

Operating Costing

The ICMA terminology defines operating cost as “the cost of providing a service” and
operating costing as “that form of operation costing which applies where standardized
services are provided either by an undertaking or by a service cost-centre within an
undertaking. The method may be used where the service is not completely standardized
but it is convenient to regard it as such, and to calculate average costs per period in
relation to the standardized unit of measurement. From these definitions it is clear that the
cost of providing a service is known as operating cost and the method employed to
ascertain cost of such service is known as operating costing.

Characteristic Features of Operating Costing

The characteristic feature of operating costing are as follows:
1. The industries which adopt this method of costing do not produce any tangible
goods. Instead they are concerned with rendering the services to public at large.
They render uniform service to all those who apply for such services.
2. The cost unit used by such undertakings is known as composite unit as compared
to the use of simple cost unit by rest of the undertakings. Some of the examples of
composite units used by the u8ndertakings are as follows:
Railways - Passanger-kilometer or ton-kilometer
Hospitals - Patient-day
Hotel (Lodging) - Room-day
Hotel (Boarding) - Plate-meals
Gas distribution - Cubic-meter
3. Classification of expenses into fixed and variable plays an important role. The
cost of rendering additional service is affected by variable cost.
4. In most of the cases, it involves many stages and processes in converting basic
materials to the ultimate service.
5. Costs are usually computed period-wise. However, under special circumstances
costs are computed order-wise as in the case of utilization of vehicles, use of
road-roller, etc.
6. The demand for the services of industries adopting this method of costing
fluctuates. Hence, it is difficult to estimated the cost accurately.
7. There is no difficulty faced in respect of valuation of work-in-progress or closing
stock when compared to other industries.
8. Only medium and large sized undertakings deal in manufacturing and rendering
services. Such industries assume the portion of monopolistic undertakings or
public utility undertakings.
Applications : Operating costing is applied to those organizations which render service
externally (i.e., to public at large) or internally (i.e., to various departments of the same
organization). Some examples of services rendered to outsiders are electricity supply,
water supply, gas supply, boarding and lodging and so on. While services such as repairs
and maintenance, purchasing and storage, internal transport, etc. constitute services
rendered internally. There is a point of difference in respect of accounting of services
rendered. Whereas the objective of accounting external service is to know the total cost
of manufacturing and profit on provision of such service , the object of internal service to
facilitate apportionment of service department cost to various other departments.

Operating costing is applied to the following undertakings :

1. Transport undertakings such as Roadways, Railways, Tramways and Airways.
2. Municipal services such as supply of water, street lights, etc.
3. Stream and electricity undertakings.
4. Hotels covering boarding and lodging.
5. Hospitals.
6. Educational Institutions.
7. Public libraries.
8. Service departments in big factories.
9. Cinemas.
10. Distribution of gas, air compressor, air-conditioning.
11. Sports and recreational clubs.
12. Services such as supply cranes, road roller, water pumping, fire extinguishers, etc.

COMPONENTS OF TOTAL COSTS IN OPERATING COSTING

As compared to other methods of costing, where the total cost comprises of prime cost,
factory cost, the total cost under operating costing is classified under the following
headings :
1. Capital Expenditure : This includes :
(a) Buildings
(b) Plant
(c) Vehicles
(d) Equipments from the use of which service is provided.
2. Direct or variable cost : This includes :
(a) Expenses on medicines (in hospitals)
(b) Fuel (in railways, buses, trucks, taxies)
(c) Pilot salaries (in hotels)
(d) Provisions (in hotels)
3. Fixed cost : This includes :
(a) Depreciation
(b) Rent and taxes
(c) Taxes and insurance
(d) License fee.
Transportation costing

The Transport Costing System provides a means to calculate the

current operating costs for road transport operations. The relevant
"input costs" that are currently applicable in the transport industry (for
example license fees, fuel costs, capital costs, tire costs, etc) are
updated in the system on a regular basis. Therefore the results from
the Transport Costing System are not 3, 6 or 12 months behind. They
are current!

The main objects of transport costing are (a) to ascertain the cost of
operating a vehicle and (b) to fix up a fair for carrying passengers or
goods for a certain distance.

Advantages of transport costing:

The advantages of operating costing are as follows:
1. To decide whether to own a vehicle or to hire a vehicle
2. To provide a basis for apportioning service departments
expenses to production departments
3. To enable the owner of a vehicle to charge fair to the clients,
including concessional and special rates
4. To know efficiency by comparing the cost of maintaining and
running one vehicle with similar type of vehicle; car vs. matador
5. To choose between two modes of transport, as for example
between lorry or railway in order to deliver goods to customers.

Components of transport costing

The total cost of operating service by a transport company is as
follows:
1. Standing charges or fixed cost: these include
a. Administrative expenses such as salaries of manager,
accountant, mechanic, etc
b. Garage rent
c. Taxes and insurance of vehicles
d. Wages of drivers, conductors, and cleaners
e. Depreciation of vehicles
2. Running charges or variable cost: these include:
a. Petrol
b. Diesel, oil
c. Lubricant
3. Maintenance cost
a. Repeirs and maintenance charges
b. Tyres, tubes, batteries, etc

Recording Of Cost under Transport Costing

Two important documents are used under transport costing. They are
as follows:
1. Daily report sheet or log sheet:
This document is used when an owner owns a fleet of vehicles. This
report is prepared either by a driver, foreman or a clerk at the garage
or depot. The purpose of this document is to enable the accumulation
and control cost. This document contains particulars about each
journey made by the vehicle. These particulars enable the owner to
utilize the vehicle without allowing for idle running capacity. Besides
this, the data

In this report also enables to apportion expenses to other vehicle. The proforma of this
document is shown below:

Daily report sheet or log sheet

Vehicle No.............. No. Of Sheet.................

Route...................... Date....................
Driver.................... Starting Time..................
Registration No…..

Particulars Of Trip

Trip no. From To Passenger/ Distance time

goods Out In
Out Enroute

Employee Name: Delays: Supplier:

Driver................... Loading.............. Petrol............
Cleaner............... Traffic............... Oil.................
Conductor........... Accident........... Grease...........
Mechanic............. Breakdown........ Tire..........

2. Operating cost sheet or cost summery performance statement: this document helps
in calculating cost per carrying passenger or goods for one kilometer. The cost of
operating the vehicles helps the owner in the following ways:
a) To avoid waste of oil, fuel etc
 b) To know the efficiency by comparing with other vehicle

c) Facilitates in quoting hire charges

d) Cost of idle vehicle and lost running time can be known

e) Helps in apportioning overheads to other departments

f) Helps in controlling cost by comparing operating cost of one year with previous
year

The operating cost sheet is prepared on a periodical basis. The information for this
purpose is collected from log sheets.

The specimen of this document is shown below:

Cost summery and performance statement

Registration no……… month ended…….

Capacity

Monthly charges
A- Operating Cost B- Maintenance Charges C- Fixed Charges
1. Petrol 1. Tires 1. Insurance
2. Oil 2. Repairs 2. Interest
3. Grease 3. Overhead 3. Depreciation
4. Driver 4. Garage 4. Tax, License
5. Assistant 5. Others
6. Mechanics
Total

Monthly Cost Sheet

1. Total capital cost

Performance record
2. Days operated
3. Days idle
4. Days maintained
5. Total hours operated
6. Total kilometers covered
7. Total trip made

Performance Averages
8. Averages kilometers per day maintained 6/4
9. Averages kilometers per day operated 6/2
10. Average kilometers per trip 6/7

Costs For The Month

11. Total expences for the month(A+B+C)
12. Cost per day operated 11/2
13. Cost per day maintained 11/4
14. Cost per kilometer operated 11/6
15. Cost per hour 11/5