Operating costing

Cost accounting chapter Operating costing for Bcom

1. Operating Costing Cost Accounting (Bcom Sem -4) Commerce Gokul College of Commerce and management

2. OPERATING COSTING BY:_ Asst.Prof Gianchandani Damini H

3. What is operating costing? Operating costing method is one designed to ascertain and control the costs of the undertakings which do not produce products but which render services Also known as service costing Operation costing is the cost of rendering services It is the cost of producing and maintaining a service Industries using operating costing do not produce tangible poducts ; but useful service is rendered; for eg-transport services, utility services like hospitals, canteens etc, distribution services like supply of electricity, gas etc.

4. Service Costing Service or operating cost is the cost of providing service. The term service costing is applied to describe the system used to find the cost of performing a service such as transport, gas or electricity. Services rendered to customers are of unique and standardised type Distinction between fixed cost and variable cost is of special importance as the scale of operations considerably affects the cost per unit of service rendered A large chunk of total capital invested in fixed assets and relatively less working capital is required The method of costing is different from that used in connection with production and difference lies mainly in the manner of accumulating the cost data and finally in its allocation to cost units

5. Cost Unit-Selection of cost unit is different in operating costing SNO NAME OF THE U N DE R T A K I N G COST UNIT 1 Passenger transport Passenger km/mile 2 Goods transport Ton mile/km 3 Hotel lodging Per bed, per person, per day 4 Hospitals Per bed, per day, per operations, per patient, per test, per x-ray etc. 5 Electricity Kilowatt-hour 6 Boiler house Kilograms of streams supplied 7 Cinema theatre Man-show 8 Canteens Meals served, cups of tea sold 9 Gas works Per 100 cubic ft produced 1 Water supply Per 1000 gallons

6. to their Classification of Costs Fixed costs or standing charges Semi-variable costs or manufacturing charges Variable costs or operating-running charges Characteristics  T h e s e un d e r t ak in g s r ende r u n iq u e s e rv i c es customers T h e y i n v e s t l a rg e p r o po r ti o n of their c a p it a l in f ixed assets The requirement of working capital comparatively is less The operating cost is divided into fixed and variable and they are of utmost importance

7. TRANSPORT COSTING Objective of Transport Costing  Ascertaining the rates of carriage of good/passengers on the basis of operating costs  Ascertaining the price at which the vehicle should be hired out  Comparing the cost of using own motor vehicles and that of using alternative forms of transport  Ascertaining what should be charged against the departments , or others, using the service Cost Unit Absolute (Weighted Average) tonnes-kms: 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 Commercial (Simple Average) tonnes-kms : Arrived at by multiplying total distance kms., by average load quantity Commercial Tonne Km = Total Dist x Average Qty

8. E XAMP LE Question: 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 tonnes × 160 kms. = 5,600 tonnes-kms Commercial tonnes-kms. = Average load × total kilometres travelled 16 tonnes( i.e. (20+12+16)/3 ) × 360 kms. = 5,760 tonnes-kms

9. PREPARATION OF COST SHEET UNDER TRANSPORT COSTING Costs are usually accumulated for a specified period viz., a month, a quarter, or a year. All of the accumulated costs should be classified under the following thread Fixed Costs or Standing Charges(license Fee And Insurance,, Administrative Expenses, Depreciation and Tax ,Wages Of drivers, conductors and cleaners) Variable Costs or Running Charges( Fuel, Oil, grease/Lubricants Etc.) Semi-variable Costs or Maintenance Costs.(Supervision Salary, Repairs and Maintenance, Garage Costs, Tubes and Tyres) Note : In the absence of information about semi-variable costs, the costs may be shown under two heads only, i.e., fixed and variable Depreciation - Depreciation if related to effluxion of time, may be treated as fixed. If it is related to the activity level, it may be treated as variable Interest - If information about interest is explicitly given, it may be treated as fixed cost

10. E X A M P L E Question:- The Union Transport Company has been given a twenty kilometer 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 year. 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 manager’s 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 per kilometre.

11. S OL U T I ON Union Transport Company Statement showing operating cost of the bus per annum: A – Standing Charges: Manager’s salary (1,400 * 12) = 16,800 Driver’s salary (600 * 12) = 7,200 Conductor’s 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

12. C O N T I NUED … B – Maintenance Costs – Repairs 2,360 C – Running charges: Petrol and oil (36,000 km. * 50)/100= 18,000 Total costs (A+B+C) 77,760 Add: 10% of takings for commission of driver and conductor 15% Profit – desired on takings 25% on total takings = 25,920(77760*25/75) Total Revenue = 1,03,680(77760*100/75)

13. C O N T I NUED … Calculation of total distance covered: (20 km. * 2 * 3 * 25 * 12) = 36,000 km per annum 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

14. POWER HOUSE/BOILER HOUSE COSTING The costs may be considered under the following headings: SUPERVISION-Wages of foremen, and salary of work engineers. LABOUR-Wages of coal handlers, stokers and ash removers. MAINTENANCE-furnace repairs, renewal of the fire bars, replacement of fire irons etc. INDIRECT MATERIALS-service materials and small tools. FUEL-coal or oil and its carriage, handling and storage. WATER-cost of supply , purification and softening. FIXED OVERHEAD-Rent ,rates , depreciation, insurance and interest on capital.

15. BOILER HOUSE Prepare a cost sheet showing the cost of generation the cost of steam per unit. Total units of steam generated: 1,00,000 units . R S . Coal consumed 4,20,000 Labour cost 72,000 Water and softening charges 24,000 E l ectric i t y 12,000 Works and admin overheads 40,000 Miscellaneous overheads 20,000 Capital invested 4,00,000 Normal consumption of coal for generation of steam is 2 Kg for every unit of steam generated @Rs.200 per quintal. Interest on capital to be included in costs @ 10% per year.

16. SOLUTION: Operating cost sheet of a boiler house Variable Total cost Rs Per unit cost Rs. C oal ( 1,00,000*2* Rs.200/100kg) 4,00,000 4.00 Labour 72,000 0.72 Water and softening charges 24,000 0.24 Electricity 12,000 0.12 Total variable 5,08,000 5.08 costs(A)

17. C O N T I NUED … Fixed costs Works and admin overheads 40,000 Misc.overheads 20,000 Interest on capital(Rs.4,00,000*10 %/12) 3,333 Total fixed costs(B) 63,333 0.63 Total cost(A+B) 5,71,333 5.71

18. POWER HOUSE The f o l lo w ing cost data pertaini n g to the y e a r 1998-99 w e r e collected from the books of A B C power co. ltd Prepare a cost sheet showing the cost of generation of power per unit of Kwh : Total units generated 15,00,000 units RS. Operation labour 16,500 Plant supervision 5,250 Lubricants and supplies 10,500 Repairs and maintenance 21,000 Adminstrative overheads 9,000 Capital cost 1,50,000

19. Q U E S T I O N Coal consumed per Kwh for the year was 1.5 lbs and cost of coal delivered to the power station in Rs. 33.06 per metric tonne.Depreciation rate chargeable was 4% per annum and interest on capital was to be taken at 1% higher than the reserve bank rate at 6% per annum.

20. SOLUTION: ABC POWER CO.LTD Variable Expenses Total Rs. Per Kwh Rs. Coal 33,734 2.25 Operation labour 16,500 1 1 Lubricants& supplies 10,500 7 Repairs and maintenance 21,000 1 4 depreciation 6,000 4 Fixed Expenses Plant supervision 5,250 Admin overheads 9,000 Interest(7% on Rs.1,50,000) 10,500 24,750 16.5 1,12,484 75.0

21. CONTINUED… C ost of 1 m e t r ic to n ne i.e 2 2 4.62 lbs of co a l = Rs.33.06 T he r e f o r e cos t of 1.5 lbs=33.0 6 /2,205 * 1 . 5 = Rs.2.25(approax) Cost of coal for generating 15,00,000 units of power =(33.06*1.5*15,00,000)/2,205 = Rs.33,734(Approax)

22. OPERATION COST OF A MOVIE THEATRE Salaries 1 Manager Rs800 P.M 10 Gate Keepers Rs200 P.M 2 Operators Rs 400 P.M 4 Clerks Rs 250 P.M Electricity and Oil Rs 11,655 Carbon Rs 7,235 Miscellaneous Expense Rs 5,425 Advertisement Rs 34,710 Admin. Expense Rs18,000 Hire of Print Rs 1,40,700 Premise value is Rs.6,00,000 and that of Projector is Rs.3,20,000 and it suffers a depreciation of 10% . Seating capacity :- Class 1 –250 Seats Class 2 – 250 Seats Class 3– 125 Seats

23. Finding cost per man assuming 20% of seats remain v a cant

24. Finding rates of each class for 30% returns on gross proceeds and weightage ratio of classes is take as 1:2:3

25. COSTING OF EDUCATIONAL INSTITUTIONS It’s a type of costing that involves determining the per student cost that is to be charged. Due to varying students, lot of factors have to kept dynamic and based on which total cost is to be determined.

26. P R O B L EM

27.  Prepare statement showing the expenses of operating a single bus and the fleet of 25 buses for a year.  Work out average cost per students per month in respect of:  Students coming from a distance of up to 4 kms.  Students coming from a distance of up to 8 kms.  Students coming from a distance of up to 16 kms.

28. HOSPITAL Costing Key Points Relating costs to services billed to patients. Typical system divides cost accumulation centres into 2 parts – Revenue producing cost centres Supporting service cost centres

29. P r ob l e m Supervisor Salary p.m. 2 , 5 Nurse Salary p.m. 1 , 5 Ward Boy Salary p.m. 7 50 Repairs and maintenance 7 , 2 Food supplies 88,000 Janitor and other supplies 25,000 Laundry Charges for the linen 28,000 Medicines 64,000 Cost of Oxygen, X-Rays, etc. 1,08,000 General Admin. Charges allocated to the unit 99,000 T o t a l 4,19,000

30. Additional points Hospital accommodates 25 beds + 5 additional Building rent Rs 5,250 p.m. 120 days – 25 beds occupied, rest 245 – 20 Extra bed hire charges – Rs 5,000 max. Avg. Fees paid to external doctors – Rs 22,500 p.m. Find profit made by unit if Rs 150 is charged per day

31. Solution No. of patient days (120*25 + 245*20) 7,900 Extra Beds (Rs 5,000/10) 500 Total Patient Days 8,400 Fixed Costs: Rent (Rs 5,250 * 12) 63,000 Salaries: Supervisors (2*2,500*12) 60,000 Nurses 72,000 Ward Boys 18,000 Repairs and Maintenance 7,200 General Admin Charges 99,000 Total fixed costs 3,19,200

32. Variable Costs Fees paid to Expert Doctors 2,70,000 Hire charges for extra beds 5 , Food Supplies to patients 88,000 Janitor and other services 25,000 Laundry Charges 28,000 Medicines Supplied 64,000 Cost of X-Rays 1,08,000 Total Variable Costs 5,88,000 Total Costs 9,07,200 Av e r a g e c h ar g e s p e r p a t i en t p e r d a y 1 50 Less: Cost patient per day 1 08 Profit per patient day 4 2

33. CANTEEN Costing Key Points Meals, snacks and refreshments at subsidized rates. Objective is to acertain total cost of running the canteen and deriving cost per unit of service. ex. Cup of tea Headings in Cost sheet Provisions (all grocery items, soft drinks, cigg, etc) Labour (cooks, waitresses, porters, assistants etc.) Services (steam, gas, electricity, power, light) Consumable Stores (linen, cutlery, crockery, mops, etc) Miscellaneous Overheads (rents, depri., insurance) Credit (charges for meals, tea, other sales)

34. P r ob l e m Profit needed -25% excluding interest Staff Salary – Rs 80,000 p.a. Wages of room attendant : Rs 2 p.d. 1 attendant per room, paid only when room occupied Lighting expense Rs 50 p.m. when occupied Power expense Rs 20 p.m. in winters when occupied Repairs, Linen, Sundries and Decoration/Furnishings – Rs 10,000 4,800, 6,600, 10,000 p.a. respectively Depreciation @5% on Rs 4,00,000 Interest rate @5% on investments in Buildings and equipment amounting to Rs 5,00,000 No. of rooms – 100. Occupancy – 80% in summers and 30% in winters. Each period of 6 month each and each month having 30 days

35. S o luti on Rooms Days (80*30*6 + 30*30*6) 19,800 1 Total Cost R s A Staff Salaries 80,000 B Room attendant wages (Room days * Rs 2) 39,600 C Lighting (Rs 50*6*100*80% + Rs 50*6*100*30%) Power ( 20*6*100*30% ) 33,000 3 , 6 00 D Repairs 10,000 E Linen etc. 4 , 8 00 F Sundries 6 , 6 00 G Interior Decoration/Furnishings 10,000 H Depreciation: Building @5% Equipment @10% 30,000 I Interest on Investment @5% 25,000 Total Cost 2,42,000

36. Continued… 2 Profit @25% on cost excluding interest (on Rs 5 4 , 4 00 2,17,600) Total Rent to be charged for all rooms 2 , 9 7 , 00 3 Room Days 1 9 , 8 00 4 Room Rent per Day (Total Rent/Room Days) 15