Service Costing

Unit costing is the method of costing used when the cost units are identical.
Identical cost units should have identical costs and this concept of equality of
costs is the basic feature of unit costing.

It may be noted that process costs, output costing and service costing are the sub-
divisions of unit costing method.

Service Costing � Nature and Problem:

Service or operating cost is the cost of providing services. Service costing is the
term applied to describe the system used to find the cost of performing a service
such as transport, gas or electricity. Service costs are particularly suitable for
the costing of road and rail transport services an they are also utilized by
electricity undertaking, hospitals, canteen, boiler house, etc. the method of
costing is different from that used in connection with production, and the
difference lies chiefly in the manner of assembling the cost data and finally in
its allocation to cost units. The principle of service or operating costing is to
accumulate costs under suitable headings and to express them in terms of the unit
of service rendered.

Service Costing In Different Undertakings:

Service costing is similar to output costing. All costs are suitably classified
under fixed and variable. These costs are then collected, analyzed and expressed in
terms of an appropriate cost unit. The classification of costs into fixed and
variable is very important, as it draws management�s attention to the fixed costs
to which they are committed regardless of the units of service ultimately given. It
also indicates the change in the cost structure due to change in the operating
level.

Transport Costing:

In transport undertakings most of the statistical data required for cost finding
and cost control purposes are obtained from Daily Log Report.

All repairing and maintenance work are recorded on repair tickets and are then
costed.

In order to prepare a Transport Cost Sheet for a transport undertaking the costs
may be subdivided as under:-

a) Wages and running costs: - These include cost of petrol, oil, grease, wages of
assistants and drivers, etc.
b) Maintenance charges: - These include repairs and overhauling of vehicles, garage
charges, tyres, etc.

c) Fixed charges: - These fixed expenses include insurance, license, depreciation,

etc.
The statistical data regarding costs, maintenance and performance are helpful in
preparing a performance in respect of each vehicle.

In order to compare the operating efficiency for each period, the total costs thus
arrived at are divided by the bases such as number of hours or days, number of
kilometers run, number of commercial ton-kilometers, etc. Costs per unit thus
obtained are compared with the past result. A monthly Vehicle Cost Sheet and
Performance Statement are generally used in many transport undertakings.

Cost control is always possible by means of comparison of actual performance with

the budgeted performance. Various control measures, viz., securing the optimum use
of vehicles, regular maintenance as a planned operation, avoidance of loading and
unloading delays prevention of overlapping and duplicated journeys, planned
replacement of vehicles, etc., may be instituted.

Where transport department is treated as service department all costs are collected
and apportioned to other departments on the basis of commercial ton-kms. The
haulage of incoming material might be charged as an addition to cost of raw
material, and the haulage of fabricated goods to customers becomes a part of
distribution overhead.

Generally, commercial ton-km, is obtained by multiplying the total tonnage carried

by the kilometers traveled and dividing the product by two. This is done where the
vehicles return empty as is found in most cases.

Industrial Visit to Adhunik Transport Organization Limited

Introduction:

The visit was made to Adhunik Transport Organization Limited. The company was
established in the year 1988 as an organization. In 1991, it got the status of a
limited company after reaching the minimum turnover level. The company currently
has a turnover of approximately Rs. 10 Crores. The company is a member of Bombay
Goods Transport Association (BGTA) AND Indian Bank Association (IBA), which is very
essential for the smooth conduct of their business activities. BGTA checks all
business malpractices and IBA is needed for regulating payments within different
states. The company has its 17 branches all over the country, along with 3 agencies
in certain remote areas. The company also provides warehousing facilities to
companies like Philips-India and Colgate. The company is involved in delivery of
goods all over the country.

Number of vehicles:

The company has owned as well as dedicated trucks and trailers.

Owned Vehicles

8 HCVs- Heavy Commercial Vehicles

4 Trailers
Dedicated Vehicles

25 LCVs- Light Commercial Vehicles

Dedicated Vehicles are delivery trucks, which are made according to certain
specifications, operated under the name of another company for which they give a
minimum amount of business and certain running costs are borne by that company.

The company has its LCVs dedicated to ELBEE Delivery Services. They are used for
delivering goods given by ELBEE. The driver charges and maintenance charges are
borne by Adhunik Transport. Other expenses are borne by Elbee. The advantage to
Elbee is that its capital is not blocked. The advantage to the company is that it
does not have to look for customers and keeps getting a minimum amount of business.

No. of Employees:

The company has on an average 8 office staff members per branch. There are 30 staff
members in the head office in Mumbai. The salaries of these employees vary from Rs.
2,000- Rs. 10,000 depending upon the nature of the job they do.

Measurement of Materials is done in tons.

COSTS:

FIXED COSTS

Salaries 54,00,000
Insurance 8,00,000
Transport Permits (Every 5 yrs) 1,00,000
Administrative Overheads 2,11,00,000
Taxes
Depreciation 30,00,000
Interests 34,00,000
TOTAL 3,38,00,000

VARIABLE COSTS

Maintenance (Per Vehicle)

HCV 10,000
LCV 6,000
TRAILERS 15,000
Wages
Drivers 2,000
Cleaners 1,200
Transit Expenses 500-1,500
TOTAL 35,000
Approx

Notes:

� There are 2 drivers and 1 cleaner for every long journey.

� In case of short journeys, there is only 1 driver and 1 cleaner.
� The maximum distance covered in a day is 300kms. The average distance covered
225-280kms.

� THE CUSTOMERS ARE CHARGED:

Rs. 1.20 PER KM PER TON (For HVC)

Rs. 1.00 PER KM PER TON (For LVC)

� The Profit-Margin is between 10%-20%.

Contents
- What is Service Costing?
- What is Transport Costing?

- Industrial Visit to Adhunik Transport Organization Limited

- Industrial Visit to Chawla Transport