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Meaning
Operating costs are the expenses which are related to the operation of a business, or to the
operation of a device, component, and piece of equipment or facility. They are the cost of
resources used by an organization just to maintain its existence.
Expenses associated with administering a business on a day to day basis. Operating costs include
both fixed costs and variable costs. Fixed costs, such as overhead, remain the same regardless of
the number of products produced; variable costs, such as materials, can vary according to how
much product is produced.
Businesses have to keep track of both operating costs and costs associated with non-operating
activities, such as interest expenses on a loan. Both costs are accounted for differently in a
company's books, allowing analysts to see how costs are associated with revenue-generating
activities and whether or not the business can be run more efficiently.
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 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.
4. Total costs 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 order wise.
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.
The term fixed should never be taken to mean static or unchanging, but merely to indicate that
any changes that may occur in such costs are related only indirectly or distantly to changes in
volume.
Examples of Fixed costs are:
Variable Costs
Variable costs are clearly related to hotel occupancy and business volume. As business volume or
occupancy increases, variable costs will increase; as hotel occupancy decreases, variable costs
should decrease as well.
Examples of variable costs are:
Costs
Salaries To Staff
Room Attendant Wages
Repairs And Renovation
Lighting And Heating
Power
Linen
Interior Decoration
Sundries
Depreciation
Rs
Rs
xx
xx
xx
xx
xx
xx
xx
xx
-Buildings
xx
xx
-Air Conditioner
Premises Rent
Other Administration Expenses
Interest On Investment
TOTAL OPERATING COST (I)
NO. OF ROOM DAYS (II)
COST PER ROOM DAY (I)/(II)
xx
xx
xx
xx
xx
xx
xx
xx
New Ranjeet Hotel has three types of suites for its customers, viz., single room, double room and
three respectively. State the rent to be charged to each type of room on the basis of the following
information:
i) The number of suites of each type are:
a) Single room suites 100
b) Double room suites 30
c) Three room suites 20
ii) The rent of double room suite is to be fixed at 1.5 times the single room suite and that of the
three room suite as twice the single room suite.
iii) The occupancy of each type of suite is as under:
SUMMER
90%
80%
60%
WINTER
50%
20%
20%
SUMMER (Rs.)
2
3
4
WINTER (Rs.)
3
4.50
6
20
60
80
30
40
Solution
In The Books of New Ranjeet Hotel
Operating Cost Statement (Per Annum)
Particulars
Staff salaries
Room attendant wages
Lighting, heating
Rs.
2,20,000
93,150
55,400
7
Power
Repairs and renovation
Linen
Interior decoration
Sundries
Depreciation
27,700
42000
45000
50,000
31,550
1,00,000
6,64,800
1,66,200
8,31,300
41,550 days
Working notes
1)
= 20 per day
=20 per day
=30 per day
=4 per day
2) Room Days
18,900
7500
(A)
26,400
5040
900
5940
(B)
8910
2520
600
3120
(C)
6240
41,550
37800
15120
10080
22500
4050
3600
93,150
4) Lighting, Heating:
Single Room = 26,400/30*40
35,200
9
11,880
8,320
55,400
5) Power:
Single Room = 26,400/30*20
17,600
5,940
4,160
27,700
cost
accounting
principles
for
tracing/identifying
an
element
of
cost,
its
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The expenses involved in moving products or assets to a different place, which are often passed
on to consumers. For example, a business would generally incur a transportation cost if
it needs to bring its products to retailers in order to have them offered for sale to consumers.
The expenses a company incurs when it transfers its inventory or other assets to another location.
For example, a company must pay a trucking or shipping company. If a company is delivering a
product, it may pass on the costs to the customer. Alternatively, it may spread its transportation
across all products, or it may simply absorb the costs. See also: Inco term, Shipping and
handling, Transportation risk.
Transport Costs and Rates Transport systems face requirements to increase their capacity and to
reduce the costs of movements. All users (e.g. individuals, enterprises, institutions, governments,
etc.) have to negotiate or bid for the transfer of goods, people, information and capital because
supplies, distribution systems, tariffs, salaries, locations, marketing techniques as well as fuel
costs are changing constantly. There are also costs involved in gathering information,
negotiating, and enforcing contracts and transactions, which are often referred as the cost of
doing business. Trade involves transactions costs that all agents attempt to reduce since
transaction costs account for a growing share of the resources consumed by the economy.
Frequently, enterprises and individuals must take decisions about how to route passengers or
freight through the transport system. This choice has been considerably expanded in the context
of the production of lighter and high value consuming goods, such as electronics, and less bulky
production techniques. It is not uncommon for transport costs to account for 10% of the total cost
of a product. This share also roughly applies to personal mobility where households spend about
10% of their income for transportation, including the automobile which has a complex cost
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structure. Thus, the choice of a transportation mode to route people and freight within origins and
destinations becomes important and depends on a number of factors such as the nature of the
goods, the available infrastructures, origins and destinations, technology, and particularly their
respective distances. Jointly, they define transportation costs.
Transport costs are a monetary measure of what the transport provider must pay to produce
transportation services. They come as fixed (infrastructure) and variable (operating) costs,
depending on a variety of conditions related to geography, infrastructure, administrative barriers,
energy, and on how passengers and freight are carried. Three major components, related to
transactions, shipments and the friction of distance, impact on transport costs.
Transport costs have significant impacts on the structure of economic activities as well as on
international trade. Empirical evidence underlines that raising transport costs by 10% reduces
trade volumes by more than 20%. In a competitive environment where transportation is a service
that can be bided on, transport costs are influenced by the respective rates of transport
companies, the portion of the transport costs charged to users.
Rates are the price of transportation services paid by their users. They are the negotiated
monetary cost of moving a passenger or a unit of freight between a specific origin and
destination. Rates are often visible to the consumers since transport providers must provide this
information to secure transactions. They may not necessarily express the real transport costs.
The difference between costs and rates either results in a loss or a profit from the service
provider. Considering the components of transport costs previously discussed, rate setting is a
complex undertaking subject to constant change. For public transit, rates are often fixed and the
result of a political decision where a share of the total costs is subsidized by the society. The goal
is to provide an affordable mobility to the largest possible segment of the population even if this
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implies a recurring deficit (public transit systems rarely make any profit). It is thus common for
public transit systems to have rates that are lower than costs. For freight transportation and many
forms of passenger transportation (e.g. air transportation) rates are subject to a competitive
pressure. This means that the rate will be adjusted according to the demand and the supply. They
either reflect costs directly involved with shipping (cost-of-service) or are determined by the
value of the commodity (value-of-service). Since many actors involved in freight transportation
are private rates tend to vary, often significantly, but profitability is paramount.
Definition
Cost of Transportation comprises of the cost of freight, cartage, transit insurance and cost of
operating fleet and other incidental charges whether incurred internally or paid to an outside
agency for transportation of goods but does not include detention and demurrage charges.
Explanation
Cost of transportation is classified as inward transportation cost and outward transportation Cost.
Objective
1. To bring uniformity in the application of principles and methods used in the
determination of averaged/equalized transportation cost.
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2. To prescribe the system to be followed for maintenance of records for collection of cost
of transportation, its allocation/apportionment to cost centers, locations or products.
For example, transportation cost needs to be apportioned among excisable, exempted,
non-excisable and other goods for arriving at the average of transportation cost of each
class of goods.
3. To provide transparency in the determination of cost of transportation.
Scope
This standard should be applied for calculation of cost of transportation required under any
statute or regulations or for any other purpose. For example, this standard can be used for:
1. Determination of average transportation cost for claiming the deduction for arriving at the
2.
3.
4.
5.
1. Terminal costs
Costs that are related to the loading, transshipment and unloading. Two major terminal
costs can be considered; loading and unloading at the origin and destination, which are
unavoidable, and intermediate (transshipment) costs that can be avoided. For complex
transport terminals, such as ports and airports, terminal costs can involve a wide array of
components.
2. Line haul costs
Costs that are a function of the distance over which a unit of freight or passenger is
carried. Weight is also a cost function when freight is involved. They include labor and
fuel and commonly exclude transshipment costs.
3. Capital costs
Costs applying to the physical assets of transportation mainly infrastructures, terminals
and vehicles. They include the purchase or major enhancement of fixed assets, which can
often be a one-time event. Since physical assets tend to depreciate over time, capital
investments are required on a regular basis for maintenance.
Transport providers make a variety of decisions based on their cost structure, a function of all the
above types of transport costs. To simplify transactions and clearly identify the respective
responsibilities specific commercial transportation terms have been set. While the transport price
plays an important role in modal choice, firms using freight transport services are not always
motivated by notions of cost minimization. They often show "satisfying behavior" whereby the
transport costs need to be below a certain threshold combined with specific requirements
regarding reliability, frequency and other service attributes. Such complexities make it more
difficult to clearly assess the role of transport price in the behavior of transport users. The role of
transport companies has sensibly increased in the general context of the global commercial
geography. However, the nature of this role is changing as a result of a general reduction of
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transport costs but growing infrastructure costs, mainly due to greater flows and competition for
land. Each transport sector must consider variations in the importance of different transport costs.
While operating costs are high for air transport, terminal costs are significant for maritime
transport. Several indexes, such as the Baltic Dry Index, have been developed to convey a
pricing mechanism useful for planning and decision making. Technological changes and their
associated decline in transport costs have weakened the links transport modes and their
terminals. There is less emphasis on heavy industries and more importance given to
manufacturing and transport services (e.g. warehousing and distribution). Indeed, new functions
are being grafted to transport activities that are henceforward facilitating logistics and
manufacturing processes. Relations between terminal operators and carriers have thus become
crucial notably in containerized traffic. They are needed to overcome the physical and time
constraints of transshipment, notably at ports. The requirements of international trade gave rise to
the development of specialized and intermediary firms providing transport services. These are
firms that do not physically transport the goods, but are required to facilitate the grouping,
storage and handling of freight as well as the complex paperwork and financial and legal
transactions involved in international trade. Examples include freight forwarders, customs
brokers, warehousing, insurance agents and banking, etc. Recently, there has been a trend
to consolidate these different intermediate functions, and a growing proportion of global trade is
now being organized by multi-national corporations that are offering door to door logistics
services. They are defined as third party logistics providers.
Costs and Time Components
Transportation offers a spectrum of costs and level of services, which results in substantial
differences across the world. The price of a transport service does not only include the direct out16
of-the-pocket money costs to the user but also includes time costs and costs related to possible
inefficiencies, discomfort and risk (e.g. unexpected delays). However, economic actors often
base their choice of a transport mode or route on only part of the total transport price. For
example, motorists are biased by short run marginal costs. They might narrow down the price of
a specific trip by car to fuel costs only, thereby excluding fixed costs such as depreciation,
insurance and vehicle tax. Many shippers or freight forwarders are primarily guided by direct
money costs when considering the price factor in modal choice. The narrow focus on direct
money costs is to some extent attributable to the fact that time costs and costs related to possible
inefficiencies are harder to calculate and often can only be fully assessed after the cargo has
arrived. Among the most significant conditions affecting transport costs and thus transport rates
are:
1. Geography
Its impacts mainly involve distance and accessibility. Distance is commonly the most
basic condition affecting transport costs. The more it is difficult to trade space for a cost,
the more the friction of distance is important. It can be expressed in terms of length, time,
economic costs or the amount of energy used. It varies greatly according to the type of
transportation mode involved and the efficiency of specific transport routes. Landlocked
countries tend to have higher transport costs, often twice as much, as they do not have
direct access to maritime transportation. The impact of geography on the cost structure
can be expanded to include several rate zones, such as one for local, another for the
nation and another for exports.
2. Type of product
Many products require packaging, special handling, are bulky or perishable. Coal is
obviously a commodity that is easier to transport than fruits or fresh flowers as it requires
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costs. Consequently, if a trade balance is strongly negative (more imports than exports),
transport costs for imports tend to be higher than for exports. Significant transport rate
imbalances have emerged along major trade routes. The same condition applies at the
national and local levels where freight flows are often unidirectional, implying empty
backhaul movements.
6. Infrastructures
The efficiency and capacity of transport modes and terminals has a direct impact on
transport costs. Poor infrastructures imply higher transport costs, delays and negative
economic consequences. More developed transport systems tend to have lower transport
costs since they are more reliable and can handle more movements.
7. Mode
Different modes are characterized by different transport costs, since each has its own
capacity limitations and operational conditions. When two or more modes are directly
competing for the same market, the outcome often results in lower transport costs.
Containerized transportation permitted a significant reduction in freight transport rates
around the world.
8. Competition and regulation
Concerns the complex competitive and regulatory environment in which transportation
takes place. Transport services taking place over highly competitive segments tend to be
of lower cost than on segments with limited competition (oligopoly or monopoly).
International competition has favored concentration in many segments of the transport
industry, namely maritime and air modes. Regulations, such as tariffs, cabotage laws,
labor, security and safety impose additional transport costs, particularly in developing
countries.
9. Surcharges
Refer to an array of fees, often set in an arbitrary fashion, to reflect temporary conditions
that may impact on costs assumed by the transporter. The most common are fuel
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surcharges, security fees, geopolitical risk premiums and additional baggage fees. The
passenger transport industry, particularly airlines, has become dependent on a wide array
of surcharges as a source of revenue.
The transport time component is also an important consideration as it is associated with the
service factor of transportation. They include the transport time, the order time, the timing, the
punctuality and the frequency. For instance, a maritime shipping company may offer a container
transport service between a number of North American and Pacific Asian ports. It may take 12
days to service two ports across the Pacific (transport time) and a port call is done every two
days (frequency). In order to secure a slot on a ship, a freight forwarder must call at least five
days in advance (order time). For a specific port terminal, a ship arrives at 8AM and leaves at
5PM (timing) with the average delay being six hours (punctuality).
xx
xx
DAYS OPERATED
Steps
xx
Costs
Rs
20
Rs
C
D
E
FIXED COSTS
Insurance
License Fee, Permit Fee And Taxes
Depreciation
Other Fixed Costs (Specify)
VARIABLE COSTS
Salaries And Wages Of Drivers, Cleaners And Other
Operating Staff
Fuel And Lubricants
Consumables
Amortized Cost Of Tyre, Tube And Battery
Spares
Repairs And Maintenance
Other Variable Cost (Specify)
TOTAL OPERATING COST
PROFIT/LOSS
REVENUE (TAKINGS)
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
10
Rs. 54,600
Rs. 700 p.m
Rs. 500 p.m
Rs. 200 p.m
Rs. 400 p.m
Rs. 600 p.m
Rs. 900 per taxi
Rs. 350 per taxi
Rs. 1,000 per taxi
5% p.a
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Total life of a taxi is about 2,00,000 kms. A taxi runs 3,000 kms in a month and 30% of this
distance is run without any passengers. Petrol consumption is one litre for every 10 kms @ Rs.
4.41 per litre. Oil and sundry expenses are Rs. 10.50 per 100 kms.
Calculate the cost of running a taxi per effective km.
Solution
Statement Showing Total Operating Cost
Cost Sheet
Step
A
Costs
FIXED CHARGES
Rs.
60.00
227.50
75.00
Depreciation
819.00
70.00
50.00
Drivers Salary
350.00
20.00
22
40.00
83.33
1,323.00
315.00
(A + B)
3,432.83
Working Notes
1) Effective Kilometres = Total Running (p.m) Run without Passengers
= 3,000 kms. (30%*3,000)
= 2,100 kms.
2) The cost classification is as per CAS-5. Salary of operating staff (driver, cleaner and
mechanic)
is
treated
as
running
expenses
23
(CAS-5). Administrative
salaries
24
C
D
E
Costs
FIXED STANDING COSTS
Salaries To Staff
Premises Rent
Repairs And Maintenance
General Administration Expenses
Cost Of Oxygen, X-Ray, Etc.
Depreciation
RUNNING OR VARIABLE COSTS
Doctors Fees
Food
Medicines
Diagnostic Services
Laundry
Hire Charges For Extra Beds
TOTAL OPERATING COST
NO. OF PATIENT DAYS
COST PER PATIENT DAY (C)/(D)
Rs
Rs
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
25
xx
xx
xx
xx
xx
Rs.
18,000
12,000
4,000
44
15
9
3
Hospital expects to have an average of 500 visits per month. What should be the amount charged
to each patient in order to cover the above costs?
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Solution
Particulars
Indirect cost per month
Occupancy
Clerical
Other costs
A. Indirect costs per visit (34,000 / 500)
Staffing cost per visit
Computer record update per visit
Total cost per visit
Visits per patient
Rs.
18,000
12,000
4,000
34,000
68
9
3
80
3
240
16
27
44
300
Bibliography
Books:
1. Dr. Ainapure M Varsha, (July 2014), Advanced Cost Accounting, Manan Prakashan,
page no 281, 303, 309
Websites:
1. http://www.investopedia.com/terms/o/operating-cost.asp
2. http://www.businessdictionary.com/definition/operating-cost.html
3. http://accountancycareers.blogspot.in/2010/03/features-of-operatingcosting.html
4. http://my.safaribooksonline.com/book/accounting/9789332515642/11dot1introduction/h40005_chapter011_xhtml
5. http://costauditorindia.co.in/pdf/05CAS-5-Transportation%20Cost.pdf
6. http://www.setupmyhotel.com/train-my-hotel-staff/front-office-training/187-fixed-costand-variable-cost-in-hotels.html
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