Operating Costing or Service Costing - Methods of Costing, Cost Accounting | Cost Accounting - B Com PDF Download

Operating Costing
(Service Costing)
It is the costing procedure used for determining the cost of per unit of service rendered. It is a method of costing applied to undertaking which provides service rather than production of commodities. The services may be in the form of transport, supply service, welfare service, etc. There is a difference between operating costing and operation costing. Operating costing is a method of costing designed to find out the cost of operating or rendering a service. On the other hand, operation costing is a method of costing applied to determine the total cost and unit cost of each operation. Though service undertakings are of different types, but here we discuss only transport operating costing.

Transport costing:
Transport industries include Air, Water, Rail and Road. They render services to the community at large. We have to give utmost care while selecting the cost unit. The cost unit of other forms operation costing is quite different from that of a service undertaking. The cost unit of a service organization is a composite unit. The important factors to be considered includes the number of passengers, tonnage carried, distance covered etc.

Classification of Costs:
Operating costs of a transport undertaking comprising different items, which are classified under the following three groups.

1. Standing or fixed charges: These charges are incurred in spite of the kilometers run. It is fixed in nature. Eg. Insurance, Motor vehicle tax, license fee, rent, salary of operating manager etc
2. Maintenance charges: It includes semi variable expenses Eg. Tyres and tubes, repairs and paintings etc.
3. Operating and running charges: These charges vary more or less in direct proportion to kilometers. All the variable charges of running vehicles are included in this group. Generally it includes, petrol, oil,, grease etc., wages of driver, attendant if payment is related to time or distance of trip etc. In the place of the above classification, all expenses can be divided into two – fixed cost and variable costs. Here, both maintenance charges and running charges are considered as variable charges.

Selection of Unit: 
In transport costing, a composite unit such as passenger mile or passenger kilometer or tone kilometer is often selected. Such unit takes into account both the number of passengers or weight of goods carried and distance run.

Absolute passenger or commercial passenger/ tone km:
It is calculated by multiplying every part of distance travelled/covered with either weight carried or passenger carried.. After getting the product of each journey we add all the products. The total is absolute ton/quintal km
In the case of goods transport the equation is Distance of each part of journey x weight carried In the case of passenger transport, the following formula is used Distance of each part of journey x No. of passengers taken for the same distance

Commercial method:
The following steps are used to find out the commercial tone km
a. Find out average trip load
b. Find out total distance of journey
c. Multiply a and b , the resultant figure is commercial tone km

Example 1 
A truck starts with a load of 10 tonnes of goods from station P. It unloads 4 tonnes at station Q and rest of the goods at station R. It reaches back directly to station P after getting reloaded with 8 tonnes of goods at station R. The distance between P to Q, Q to R and then from R to P are 40 kms, 60 kms, and 80 kms respectively. Compute absolute tone kms and commercial tone-km .
Absolute ton/ km = Total distance x weight carried
= (40 x 10) + (60 x 6) + (80 x 8) = 400+360+640 = 1400
Commercial tone/km = Distance x average load
= [40+60+80] x{10+6+8/3}= 180 x 8 = 1440

Types of Service Costing
When we talk about services, our mind recalls the multiple intangible products we use on a day to day basis. But do you know that all these services have different cost units and elements during computation?
This is because each of these services is unique and involves a variety of different type of overheads. Thus, the service costing for each kind of service organization varies and can be classified as follows:

Transport Costing
The costing in the transport industry meets multiple objectives. These objectives can be segregated as follows by the type of transport service an organization provides:

• Private Transport: When the vehicle is hired individually for private tours, service costing is used to determine the hiring charges to be applied.
• Passenger Transport: It also ascertains the cost of conveyance, per passenger up to to a certain distance in case of public or passenger transport companies.
• Goods Transport: When we talk about goods transport services, the cost of carrying a defined quantity of goods up to a particular distance is also decided through service costing.

The common objectives of transport costing include a comparison between two different vehicles or group of vehicles and; whether to use an alternative source of transport or own vehicle, in terms of cost involved.
To get a practical overview of transport costing, please go through the example given in this article which is in the context of goods transport services.

Power Generation and Distribution Costing
The powerhouses produce energy in the form of electricity through water, gas or sunlight. The cost of power generation services majorly includes fixed costs, i.e., interest on capital, depreciation, repairs and maintenance, administration expenses; and variable costs such as steam consumed, labour wages, lubricants, coal, etc.

Boiler House Costing
The boiler house provides supporting services to power and electricity generation units, in the form of steam which is used in the air conditioning, power generation and air compression.
The overheads involved in the total cost of boiler services include fuel (coal, oil), direct and indirect labour, water and its processing, indirect material (tools, service material), maintenance and fixed costs (rent, taxes, depreciation, administration expenses, etc.)

Canteen Costing
The government organizations, factories, companies, offices, colleges, schools and even hospitals have canteens to provide affordable foodstuff like meals, refreshment, snacks, etc. to the staff, students and patients.
The canteen manager or supervisor keeps control over the costs and performs service costing to ascertain revenue of these business organizations.
The costs involved in canteen services include the cost of material, labour, services, consumable stores and miscellaneous overheads.

Hospital Costing
The services provided by the medical organizations like hospitals health centres, nursing homes, medical camps and clinics require cost analysis, which is possible through service costing.
The hospital cost includes fixed charges such as labour salaries, maintenance charges, rent, administration expenses and other overheads. Also, the variable charges like medicines, bed charges, doctors fees, etc. are involved in the total cost.

Hotel Costing
The hotels provide accommodation to the guests as services; thus, it involves a high maintenance cost along with the fixed cost. The fixed cost includes depreciation, staff salaries, interest on capital, taxes, etc. Whereas, variable cost involves electricity charges, temporary staff salary, etc.

Problems on Operating Costing (With Solution)
Operating Costing Problem 1:
Union Transport Company supplies the following details in respect of a truck of 5-tonne capacity:

The truck carries goods to and from city covering a distance of 50 miles each way.
While going to the city freight is available to the extent of full capacity.
Assuming that the truck runs on an average 25 days a month, work out:
(i) Operating cost per tonne-mile, and
(ii) Rate per ton per trip that the company should charge if profit of 50% on freightage is to be earned.
Solution.

Freight rate per trip both ways = 300 x Re. 1.00 = Rs. 300
Tonne-miles are computed as under : (50 x 5) + (50 x 1) x 25 = 7,500 tonne-mile.

Operating Costing Problem 2:
The Kangaroo Transport operates a fleet of lorries. The records for lorry L-14 reveal the following information for September, 1990:

The following information is made available:
A. Operating costs for the month
Petrol Rs.400, oil Rs.170, grease Rs.90, wages to driver Rs.550, wages to khalasi Rs.350.
B. Maintenance costs for the month.
Interest Rs.40, other overheads Rs.190.
D. Capital costs:
Cost of acquisition Rs.54,000
Residual value at the end of 5 years life is Rs.36,000. Prepare a Cost Sheet and performance statement showing:
(a) Cost per day maintained;
(b) Cost per day operated ;
(c) Cost per kilometer;
(d) Cost per hour;
(e) Cost per commercial tonne
Solution.



Operating Costing Problem 3:
Mr. Sohan Singh has started transport business with a fleet of 10 taxis. The various expenses incurred by him are given below:
(a) Cost of each Taxi Rs.75,000.
(b) Salary of Office staff Rs.1,500. p.m.
(c) Salary of garage staff Rs.2,000. p.m.
(d) Rent of garage Rs.1,000. p.m.
(e) Drivers salary (per taxi) Rs.400. p.m.
(f) Road Tax and Repairs per taxi Rs.2,160. p.a.
(g) Insurance premium @ 4% of cost p.a.
The life of a taxi is Rs.3,00,000 km. and at the end of which it is estimated to be sold at Rs.15,000. A taxi runs on an average 4,000 km. per litre of petrol costing Rs.6.30 per litre. Oil and other sundry expenses amount to Rs.10 per 100 km. Calculate the effective cost of running a taxi per kilometer. If the hire charge is Rs.1.80 per kilometer, find out the profit Mr. Sohan Singh may expect to make in the first year of operation.
Solution:
Hire charges earned in the 1st year of operation:
A taxi runs on an average 4,000 km. per month of which 20% it runs empty
i.e., effective running will be 3,000 km. per month.
(i.e., 4,000 – 20% of 4,000)
Hence, total hire charges earned in the 1st year on 10 Taxis = 3,200 x 12 months x 10 Taxis. = 3,84,000 km. at Rs.1.80 = Rs.6,91,200.

Operating Costing Problem 4:
Shanker has been promised a contract to run a tourist car on a 20 km. long mute for the chief executive of a multinational firm. He buys a car costing Rs.1,50,000. The annual cost of insurance and taxes are Rs. 4,500 and Rs.900 respectively. He has to pay Rs.500 per month for a garage where he keeps the car when it is not in use.
The annual repair costs are estimated at Rs.4,000. The car is estimated to have a life of 10 years, at the end of which the scrap value is likely to be Rs.50,000.
He hires a driver who is to be paid Rs.300 per month plus 10% of the takings as commission. Other incidental expenses are estimated at Rs.200 per month. Petrol and oil will cost Rs.100 per 100 kms. The car will make 4 round trips each day. Assuming a profit of 15% on takings is desired and that the car will be on the road for 25 days on an average per month what should he charge per round-trip?
Solution:
Working Notes:
1. Total km. in a month:
One Round Trip = 20 km. outward + 20 km. Inward = 40 km. Total km. = 40 km. x 4 x 25 days = 4,000 km.
2. No. of round trips in a month = 25 x 4 = 100.
3. Petrol & Oil will cost Rs.100 per 100 km. i.e., Re. 1 per one km.

Driver’s Commission + Profit = 0.10 T + 0.15 T = 0.25 T.
Total Takings per month = Total Cost + Driver’s Commission + Profit.
T = 6,617 + 0.10 T + 0.15 T.
T = 6,617 + 0.25 T
T – 0.25 T = 6,617
0.75 T = 6,617 or T = Rs. 6,617 x 100/75
T = Rs.8, 822. 67 per month.
Charge per round trip = Rs.8,822.67/100 = Rs.88.23 say Rs.89.

Operating Costing Problem 5:
Mr. X owns a bus which runs according to the following schedule:
(i) Delhi to Chandigarh and back, the same day.
Distance covered: 150 kms. one way.
Number of days run each month: 8
Seating capacity occupied 90%.
(ii) Delhi to Agra and back, the same day.
Distance covered : 120 kms. one way.
Number of days run each month: 10
Seating capacity occupied 85%
(iii) Delhi to Jaipur and back, the same day.
Distance covered: 270 kms. one way.
Number of days run each month: 6
Seating capacity occupied 100%

Passenger tax is 20% of the total takings. Calculate the bus fare to be charged from each passenger to earn a profit of 30% on total taking.
The fares are to be indicated per passenger for the journeys:
(i) Delhi to Chandigarh
(ii) Delhi to Agra
(iii) Delhi to Jaipur
Solution.