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OPERATING COSTING
Chapter 1
INTRODUCTION
Operating costing 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 organization
itself certain departments too are known as service departments which
provide ancillary services to the production departments. For example:
maintenance department; power house; boiler house; canteen; hospital;
internal transport.
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. It is the category of the basic
costing method, applicable, where standardized goods or services result from
a sequence of repetitive and more or less continuous operations, or processes
to which costs are charged before being averaged over the units produced
during the period. The two costing methods included under this head are
process costing and service costing.
3
2.
COST UNIT:
For ascertaining costs, it is necessary to decide suitable cost units for each
type of service industry. Basically, Operating Costing is a type of Process
Costing. Thus it uses the methods of Process Costing when ascertaining the
cost of supply of electricity, steam etc. However, sometimes Operating
Costing may adopt a particular Job as a unit of costs as for example when
costing a particular trip by a bus so as to quote the charges. In such cases
Operating Costing uses the methods of Job Costing by treating a specific trip
as a separate job. A cost unit under operating costing may be of two types
a.
b.
Following is the list of different cost units used in different types of service
enterprises
Service Industries
Passenger Transport
Goods Transport
Road Maintenance
Water Supply
Canteen
Service Industries
Passenger Transport
Goods Transport
Electricity
Steam, Gas
Hospital
Library
Thus, it can be seen that in Operating Costing, in most cases the cost unit is
a compound unit. It refers to both the Quantum of Service and Period of
Service. Thus a transporter charges for carrying so much weight (tons) for so
much distance (Km); an electricity company charges one for use of both the
Quantum (Kilowatt) and the Period (Hours); and so on.
Chapter 2
TRANSPORT COSTING:
Transport operating costs refer to costs that vary with vehicle usage,
including fuel, tires,
maintenance,
depreciation costs (Booz Allen & Hamilton, 1999). Projects that alter vehicle
miles traveled, traffic speed and delay, roadway surfaces, or roadway
geometry may affect travelers' vehicle operating costs, which should be
considered in a benefit-cost analysis.
Vehicle ownership costs refer to fixed costs that are not directly affected by
vehicle mileage, including time-dependent depreciation, insurance and
registration fees, financing, and residential parking.
Projects that change per capita vehicle ownership rates, such as significant
changes in the quality of alternative modes and land use accessibility, may
affect vehicle ownership costs, which should be considered in benefit-cost
analysis.
Estimate changes in vehicle travel speeds and delay due to road and
traffic conditions.
C.
D.
E.
VARIABLE COST
Salaries and Wages of Drivers, Cleaners & other xx
Operating Staff
xx
Fuel and Lubricants
..
xx
Consumables
xx
Spares
...
xx
Repairs & Maintainable
XX
XX
XX
XX
VEHICAL NO
XXX
XXX
DAYS OPERATED
XXX
Cost structure
Operating expenses
A railways operating expenses include all recurrent costs associated with
producing the railway service. The six main components of operating costs
are labor, energy, materials, services, rental, and depreciation (Figure 4.5).40
Labor - all costs for railway staff salaries, pensions, and benefits such
as medical insurance.
Energy - costs of electricity
and diesel fuel. For freight and
passenger entities, most energy
costs are associated with
traction, but some costs may
include electricity for facilities.
Some railways classify diesel
fuel
as
materials and
electricity as services.
Materials - costs of track
materials such as rails,
sleepers, and ballast, spare
parts, and other consumables
for
rail operations and
maintenance (but not for capital investments).
Services - all externally purchased services such as maintenance on
rolling stock and infrastructure, computer support, and passenger train
catering.
Rental - payments for use of any asset or facility; typically, this
includes lease payments for rolling stock, which can be substantial. Also,
railways pay rental per diem when they interchange traffic and use
neighboring railways rolling stock. Often, per diem payments and receipts
balance, so the net effect is insignificant. But per diem payments can be a
significant expense if a railway receives or terminates more traffic using
other railways wagon than it originates or forwards with its own wagons.
Figure 1If railways are experiencing financial difficulties, they may attempt
to manage cash flows by extending payment periods for their bills. The size
of accounts payable relative to operating costs will indicate the
10
magnitude
of
payments.
Illustrations 1:
1
1.
2. NEW India Transport Corporation has been facing financial and operational
problems owing to the spiralling rise in fuel prices, high cost of spares and
also high wages. The operational expenses for the one-year period ended
September 30, 2002, are shown in Table 8.
3. The total fleet of vehicles is 600 single deck buses.
4. The average passengers per each trip is 50.
5. The aggregate of administrative overhead is to be absorbed in the
operating cost on the basis of available number of buses in the operating
(assuming average breakdown @ 12 per cent).
6. Depreciation on buses is computed @ 20 per cent based on straight-line
method.
7. Based on this information, you are required to advise the management on
the fare structure, assuming cost plus15 per cent margin for the following
stages of travel (rounded off to nearest 50 paise):
11
8. First stage of travel 2 km; second stage of travel 5 km; third stage
of travel 10 km; fourth stage of travel 15 km.
9. Assume that the fare is charged in proportion to kilometre travelled.
10.
11.
The statement of operating cost per bus per annum (600 buses 12.5 per cent = 525 buses available) is given in Table 9. Transcript
Illustrations 2:
A mineral is transported from two mines A and B and uploaded at plots in
a Railway station. Mine A is at a distance of 10kms, and B is at a distance of
15kms. From railhead plots. A fleet of lorries of 5 tonne carrying capacity is
used for the transport of mineral from the mines. Records reveal that the
lorries average a speed of 30kms per hour , when running and regularly take
10 minutes to unload at the railhead. At mine A loading time averages 30
minutes per load while at mine B loading time averages 20 minutes per
load.
Drivers wages, depreciation, insurance and taxes are found to coat Rs9 per
hour operated. Fuel, oil, tyres, repairs and maintainance cost Rs 1.20 per
Km.
12
Solution
1.
Operating analysis
Particulars
I.
II.
20km
30km
30mins
b. Loading time
b.
III.
20mins
20mins
30mins
10mins
10mins
(5*10km) , (5*15km)
80mins
90mins
50tonn-km 75tonn-km
13
2.
12
13.50
24
36.00
49.50
36
14
Chapter 3
HOTEL COSTING:
Hotel and lodges, providing daily accommodation facility to general public,
have mushroomed all over the country due to the impetus provide by
modern civilization to travel both on personal and commercial work.
The Operating Costing is applied in lodging houses in order to find out the
cost of accommodation provided.
The convenient form measuring the accommodation facility is in terms of
Room day.
Cost per room day means the cost of maintaining one room in usable
condition for one day when occupied.
When different classes of rooms are provided, they can be expressed in term
of a single class with the help of weights based on appropriate width.
While determining the cost per room day, factors such as room
accommodation available, whether cubicles or dormitories, number of
persons lodging, facilities provided to the lodgers, etc. are to be taken into
account.
Most of the costs in the lodging houses are fixed in nature like depreciation,
staff salaries, maintenance, etc.
Hence, the distinctions between fixed and operating charges are rarely
observed. In case the customers are provided food and drinks along with
accommodation facility, a separate charge may be levied from them.
The cost per room day is arrived at by dividing the total cost with the
number of room day.
15
Some amount of profit is added to the cost per room per day to determine
charge per room day.
Once the charge per room day is determined, the same is to be multiplied
with the assigned weights to arrive at the rate to be charged for different
classes of room per day.
Hotels, restaurants employ operating costing. The total operation of a hotel
is divided into number of cost centers.
Restaurant-cost unit is number of meals served
Housekeeping-cost unit is no. of rooms cleaned
Laundry-cost unit is number of clothes washed.
The important heads of expenditure is:
Provisions: Vegetables, fruits, meat. Flour, milk, oil, sugar
Labor: Salary of cooks, kitchen assistance, supervisors
Service: steam, gas, electricity, power and light
Consumable stores: crockery, glassware
Misc. overheads: Rent, rates, depreciation, insurance
Credit: Charges of meals. Tea and other sales.
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Rs
Rs
XX
XX
XX
XX
Power
XX
Linen
XX
Interior decoration
XX
Sundries
XX
Depreciation
-Buildings
-Furniture & fixtures
XX
-Air-conditioners
XX
Premises rent
XX XX
XX
Interest on investment
XX
XX
XX
XX
XX
17
Illustration1:
A hotel has a capacity of 100 single rooms and 20 double rooms. The
average occupancy of both single and double rooms is expected to be 80%
throughout the year of 365 days. The rent for double room has been fixed at
125% of the rent of a single room. The costs are as under:
Variable costs: single room Rs 220 each per day
Double rooms Rs 350 each per day
Fixed costs
Calculate the rent chargeable for single and double rooms per day in such a
way that the hotel earns a profit of 20% on hire charges of rooms
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Solution:
Single rooms = 100 * 365 * 80/100 = 28200 Room days
Double rooms = 20 * 365 * 80/100 = 5840 Room days
C
D
E
b.
Amt
Amt
16790000
29200
7300
36500
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Illustration 2:
From the following 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 31 March, 2008:
st
1.
2.
Wages of the room attendant: Rs 20 per day per room when the
room is occupied.
3.
a.
The normal lighting expenses for a room for the full month is Rs
Power is used only in winter and charges are Rs 200 for a room,
when occupied.
Repair to bed and other furniture: Rs 30,000 per annum.
4.
4.
4.
4.
There are 200 rooms in the Hotel, 80% of the rooms are generally
20
Rs p.a.
Rs p.a.
6,00,000
8,16,000
6,80,000
Power (WN 3)
96,000
30,000
Repair to building
50,000
License fee
12,400
1,20,000
1,00,000
Depreciation:
Building @ 5%
1,00,000
Equipment @10%
5,00,000
Total Cost
Add: Profit 25% of Cost (Excluding interest on
1,50,000
26,54,400
loan)
6,63,600
Total Earnings
33,18,000
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Chapter 4
HOSPITAL COSTING:
A concern of most countries is health sector resources: the sources of finance
for health services, the ability to maintain past funding levels, resource
allocation patterns, and the efficiency of health services delivery. The
hospitals of these countries are an important element of the concern about
health resources because they are the largest and most costly operational unit
of these health systems and account for a large portion of the health sector's
financial, human, and capital resources. In aggregate terms,
hospitals utilize nearly half of the total national expenditure for the
health sector;
2.
X Ray Department,
Scanning Centre,
Pathology Laboratory,
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4.
Sonography Department.
General Services Departments:
Bolier House,
Power House,
Catering department,
Laundry Room,
Administrative Department,
5.
Transport Department,
Dispensary Department,
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UNIT OF COST:
The common units of costs of various departments in a hospital are as
follows:
Department
Unit of Cost
Per out-patient
per Room-day
3. X Ray Department
4. Scanning centre
per case
5. Pathology Laboratory
6. Laundry Department
7. Catering Department
The cost of hospital is divided into fixed and variable costs. Fixed costs
include staff salaries, depreciations of building, rent of building whereas
variable cost include light and power, water, laundry charges, food
supplied to patients etc.
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25
Premises Rent
xx
xx
xx
xx
Depreciation
...
xx
xx XX
xx
Food
xx
Medicines
xx
Diagnostic Services
xx
Laundry
...
..
xx XX
xx
XX
XX
XX
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Illustration 1:
Apollo Hospital runs an Intensive Care Unit in a hired building at a rent of
Rs. 7500 p.m. The Hospital has undertaken to bear the cost of repairs and
maintenance.
The Intensive Care Unit consists of 35 beds and 5 more beds can be
conveniently accommodated whenever required. The permanent staff
attached to the unit is as follows:
2 Supervisors, each at a salary of Rs. 2500 p.m., 4 Nurses each at a salary of
Rs. 2000 p.m., 4 Ward boys each at a salary of Rs.500 p.m.
Though the unit was open for the patients all the 365 days in a year but it
was found that only 150 days in a year, the unit has the full capacity of 35
patients per day and for another 80 days it had on an average 25 beds only
occupied per day. But there were occasions when the beds were full, extra
beds were hired from outside at a charge of Rs. 10 per bed per day. This did
not come to more than 5 beds extra above the normal capacity any one day.
The total hire charges for the extra beds incurred for the whole year
amounted to Rs. 7500.
The unit engaged expert doctors from outside to attend on the patients and
fees were paid on the basis of the number of patients attended and time spent
by them on an average worked out to Rs.25000 per month in the year 2003.
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Rs. 8100
Rs. 88000
Rs. 30000
Rs.60000
Rs. 75000
Rs. 108000
Rs. 100000
Calculate the profit per patient day made by the unit in the year 2003
if the unit recovered on the overall amount of Rs. 200 per day on an average
from each patient.
2.
The unit wants to work on a budget for the year 2004, but the number
2000
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STATEMENT OF COST
Particulars
1. Income Received (Rs. 200 * 8000 Patient days)
2. Variable Costs (Marginal Costs) Per Annum:
Rs
Food
Janitor charges
Laundry Charges
Medicines supplied
Doctors Fees
Rs
1600000
88000
30000
60000
75000
(25000 *12) 300000
7500
560500
1039500
3. Fixed costs
a. Salaries:
Supervisors
(2 * 2500 * 12)
60000
Nurses
(4 * 2000 *12)
96000
Ward Boys
(4 * 500 * 12)
b. Rent
(7500 *12)
c. Repairs and Maintenance
24000
90000
8100
108000
e. General Administration
100000
486100
553400
29
= Rs. 69.175
Break even Point =
Fixed Cost / Contribution * Income
486100 / 1039500 * 1600000
= Rs. 748206
Break-even Point for Patient-days = 782206 / 200
= 3741 patients-days.
Illustration 2:Care Hospital operates a fitness center to provide counseling
on nutrition, exercise and health care for major surgery patients after their
release from the hospital. Average patient will make three visits to the center.
Each visit lasts 40 minutes. The hospital has estimated the following costs of
operating the center:
Particulars
Occupancy costs per month
Amt
18000
12000
4000
44
16
Solution:
30
Particulars
Indirect cost per month
Amt
Occupancy
18000
Clerical
12000
Other costs
4000
3400
A.
3____
80
3____
16
44____
240
300
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CASE STUDY
Reducing Operating Costs by Over 12%
The oil price decreased sharply from a historic high of USD 145/bbl in July
2008 to USD 35/bbl in December 2008. As a consequence, our client, a
major oil and gas company, suffered cashflow constraints, putting funding
for new projects in jeopardy.
In response, the CEO made operating expenditure (OPEX) reduction a top
corporate priority. SBC was tasked to work with five business units to
materially reduce costs.
Improving the bottom line
We worked with asset leadership to identify and implement cost
savings. Through a heavily data-driven exercise, we benchmarked costs
across the business units, identifying potential opportunities for efficiency
improvement. We challenged aspects of their current operating approaches
and agreed priority areas for cost reduction.
For each agreed area, we evaluated associated risks and feasibility of
identified cost reduction opportunities. We went on to develop detailed,
formalized action plans to bring about cost reduction/elimination.
SBC identified three broad categories for the opportunities, that had relative
ease of implementation to deliver cost reductions:
1. Cancellation or postponement of an activity
2. Contract negotiation to achieve better cost savings
3. Activity optimization based on improved planning and crossfunctional coordination
Once specific opportunities were agreed, we focused our efforts on
developing improved planning and supporting cross-functional collaboration
to bring about optimization of activities and encourage a different way of
thinking about cost management across each business unit.
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33
CONCLUSION
Operating costs are expenses that relate to a buisness operations. It can also
refer to the costs of operating a specific device or branch of a corporation.
These costs usually fall into two categories, called fixed costs and variable
costs, and a business may have more of one type than the other.
Fixed operating costs are expenses that tend to remain the same whether the
business or device is inactive or operating at full capacity. Examples of such
expenses include employee salaries and machinery leasing fees. Salaries
must be differentiated from hourly wages in this regard.
Flexible expenditures are known as variable operating costs. These expenses
fluctuate based on a variety of factors. Money dispensed on hourly wages,
for example, can be adjusted by varying the amount of time recipients are
engaged in labor.
Operating costs are not unique to any country, although actual expenses may
vary from one country to another or even from one location to another.
Within an industry, it is very possible for expenses to vary. It is, however,
difficult to find a business that does not have any of these costs. Even
Internet businesses, in which the costs of operations can often be reduced, it
is almost impossible to completely eliminate them.
Process costing method is applicable where goods or services result from a
sequence of continuous or repetitive operations or processes and products
are identical and cannot be segregated. Costs are charged to processes and
averaged over the units produced during the period.
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Single or output costing is used when the production is uniform and identical
and a single article is produced. The total production cost is divided by the
number of units produced to get unit or output cost. Examples are mining,
breweries, brick making, etc.
Operation costing refers to the methods where each operation in each stage
of production or process is separately costed. Thereafter, the cost of finished
unit is determined. This is suitable to industries dealing with mass
production of repetitive nature for example, motor cars, cycles, toys, etc.
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.
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BIBLIOGRAPHY
www.google.com
www.wikipedia.com
Advanced Cost Accounting Manan Prakashan