NAME: KAZI MINAAZ .M. SHAFI

CLASS: SYBBI

(banking & insurance)

ROLL NO: 04

SUB: M.A (MANAGEMENT

ACCOUNTING)

TOPIC: operating/service

COSTING

PROJECT: 1STPROJECT

PROF-IN-CHARGE: MRS.AARTI

VERMA

I have made sincere efforts in this project. I have referred different books and collected information through internet.

First of all, I would like to thank our respected teacher Mrs. AARTI VERMA for her suggestions, encouragement and support.

Secondly, I would like to thank our respected principal of the college Mrs. ARJUMAND RAWAL and library staff for providing reference books.

Last but not the least; I would like to thank my parents for their support and co-operation.

YEAR: 2011-2012

CLASS: SYBBI (BANKING & INSURANCE)

This is to certify that the work

entered in this project is the work of

Miss. KAZI MINAAZ .M. SHAFI class:

SYBBI (BANKING & INSURANCE) roll no: 04

who has worked satisfactorily for the

entire project of the year 2011-2012

studying in A.E. KALSEKAR DEGREE

COLLEGE.

__________ __________

College stamp: Teacher’s sign:

SERVICE COSTING/

OPERATING COSTING

INTRODUCTION:

DEFINITION:

1. According to ICMA, London,

“Operating costing is that form of operation

costing which applies where standardized services

are provided either by an undertaking or by a

service cost center within an undertaking.”

2. According to Wheldon,

“Operating costing is actually unit costing as

applied to the costing of services.”

IMPORTANCE:

Service costing is also termed as operation

costing, operating costing, period costing or terminal

costing. Each service, example a specific chartered trip

undertaken by a transport bus or a truck or an aircraft

or a helicopter, etc., is considered as a separate unit

cost. Service costing is concerned with the technique

and process of ascertaining the cost of rending services.

Operating costing is the process and technique of

accumulation and ascertaining the cost of service. In

case of operating costing the method of ascertaining

cost is quite different from that adopted in production

undertakings.

BASIC FEATURES OF

OPERATING COSTING :

1. Service costing involves distinction of cost into

fixed and variable costs.

2. Service costing is necessary to ascertain the total

cost of service and the unit cost of service.

3. Service costing is applicable for undertakings which

do not produce physical articles for sale and stock

but it is applicable for undertakings providing

services and selling services to the customers.

4. Services are intangible and highly perishable.

5. There is no inventory of the services rendered.

6. The total cost of service is averaged over the total

amount of service rendered.

7. Service costing is an extension and refined form of

process costing.

8. Service costing is not a separate and distinct

method of costing.

9. Under operating costing, costs are classified into

fixed, operating and maintenance costs.

10. Operating costing is applied to transport

supply, hospitals, theatres, boiler houses, power

houses, rail, airlines, trams, shipping, Hotels and

motels, and other service enterprises.

11. Operating costing is actually unit costing as

applied to the costing of services.

12. Operating cost works with units of costing, the

cost unit is not as tangible as a job or a contract.

13. Selection of a suitable cost unit in operating

costing is a difficult task and therefore it requires

highly skilled, technical and statistical talent on the

part of the cost accountant.

14. Service costing helps to ascertain the cost

which helps to quote prices for the services

rendered.

APPLICABILITY OF SERVICE

COSTING:

1) Transport costing:

Transport services include

railways, roadways, trams, airways and waterways.

Selection of the cost unit is very important. In

selecting the cost unit it is necessary to take into

consideration factors like number of passengers,

tonnage carried, distance covered, capacity, load

carried, etc. the cost unit in transport enterprises is

usually tone-km., passenger-km., tec.

The cost per unit is calculated as follows:

Number of vehicles x Capacity x km. x Days x Passenger/Weight actually carried.

For preparing operating cost statement; costs

are classified into three categories.

a) Fixed charges:

It is also termed as standing

charges. They remain fixed irrespective of

whether the vehicles are operated or remain

idle.

Example:

Depreciation, Insurance premium, License

fees, Road taxes, Interest on capital,

Supervisor’s salary, Garage rent, General

supervision costs, salary of operating manager,

etc.

b) Operating charges:

It is also termed as

running charges. They are variable costs.

Such costs vary daily according to the

operations and extent of uses.

Example:

Drivers wages, Lubricating oil, Oil,

Grease, Petrol, Gas, tec.

c) Maintenance charges:

Maintenance charges are

semi-variable expenses in nature. Such

expenses are incurred on the repairs and

maintenance of vehicles and hence called

maintenance charges.

Example:

Repairs, Maintenance, Cost of tyres and

tubes, Spares, Cleaning, Painting, Accessories,

Overhauling, etc.

PORFORMA OF OPERATING/SERVICE COST SHEET

Particulars Rs. Rs.

I. Running costs (variable expenses) (1) Cost of petrol/Diesel/Oil (2) Cost of Grease (3) Drivers wages (4) Conductors wages (5) Cleaners wages

II. Maintenance costs (semi-variable

Expenses) (1) Repairs and Maintenance (2) Garage Rent (3) Cost of tyres

III. Fixed costs (Fixed Expenses)

(1) License fees (2) Taxes (3) Depreciation (4) Insurance (5) Clerical staff salary (6) Interest

Total cost

XX XX XX XX XX

XX XX XX

XX XX XX XX XX XX

XXXX XXXX XXXX

XXXX

2) CANTEEN COSTING:

Hotels, Motels, Restaurants,

Hotel mess, cafeterias, Food Parlours, eating joints,

etc. employ operating/service costing. In these

organizations, service costing ascertains the total

cost of running a canteen and cost per unit of

service. The total cost is used to determine cost per

cup of coffee/tea, cost per meal, cost per dish, cost

per consumer order.

a) Variable charges:

Variable costs vary directly with

the activity level.

Example:

Vegetables, Jam, Butter, Bread, Milk,

Tea, Coffee, Biscuits, etc.

b) Fixed costs:

A fixed cost is a cost which

remains constant and does not vary due to

change in the activity level.

Example:

Salary of cooks, salary of helpers, salary

of cleaners, depreciation, rent, insurance,

etc.

c) Semi-variable costs:

Direct proportion such costs

varies but not in to the activity level.

Example:

Lighting, gas, stream, electricity, etc.

3) Power Houses/Boiler Houses

costing:

Boiler and power house

Undertakings are engaged in providing

services to the production department. A

power house generates electricity while a

boiler house produces steam which is then

used for the generation of power, air

conditioning and air compression.

A) Variable cost:

Variable cost varies directly with

the activity level.

Example:

Fuel, power, coal, oil, water charges,

labour charges of coal handlers, ash removers,

stokers etc.

b) Fixed cost:

Fixed costs are the fixed

overhead which remain constant and does not

change due to change in the activity level.

Example:

Rent, rates, depreciation of plant,

insurance, depreciation of building, interest on

capital, etc.

c) Semi-variable costs:

Semi-variable costs are also

termed as maintenance charges.

Example:

Boilers, meters, furnaces, service

materials, coal bunkers, tools and

accessories, supervision charges, etc.

Operating costing is exclusively used in

service industry. One of the unique features of

the products of service industry is that it is

intangible. Operating costing is used in the

following areas: Passenger transport, goods

transport, electricity company, hospitals etc.

Areas of applicability Selection of cost units (1) Passenger

transport (2) Goods

transport (3) Restaurants (4) Electricity

company (5) Hospitals

(6) Hotels (7) Coaching

classes

Cost per passenger per kilometer. Cost per tone per kilometer. Cost per dish. Cost per kilowatts. Cost per patient/per bed/per operation. Cost per guest/per room. Cost per student.

Service or operating costing is a method

of determining the costs of providing and

operating a service.

In operating costing all costs are divided

into three broad categories.

They are:

1) Operating and Running costs: In this category all the variable

expenses are included.

2) Maintenance costs:

In this category all the semi-

variable expenses are included.

3) Standing or Fixed costs: In this category all the fixed

expenses are included.

ILLUSTRATIONS:

Q1] A transport service company is running four buses

between two towns which are 50 miles apart. The seating

capacity of each bus is 40 passengers. The following

particulars were obtained from their books for April, 2008:

Rs. Wages of drivers, conductors, and cleaners Salaries of office and supervisory staff Diesel oil and other materials Repairs and maintenance Taxation, insurance, etc Depreciation Interest and other charges

2,400 1,000 4,000

800 1,600 2,600 2,000

14,400

Actual passengers carried were 75% of the seating

capacity. All the four buses ran on all the days of the month.

Each bus made is round trip per day.

Find out the cost per passenger mile.

Operating cost statement

costs Per month (Rs.)

(I)Fixed cost: Salaries of office staff Taxes and insurance Interest and other charges (A) (II)Maintenance cost: Repairs and maintenance

(B)

(III)Operating and running cost: Conductors, cleaners and drivers wages Diesel, oil and other material Depreciation (C) Total cost (A+B+C) Cost per Km = 14,400 = 3,60,000

1,000 1,600 2,000

4,600

800

800

2,400 4,000 2,600

9,000

14,400

0.04

Working note:

Kilometers run

50 x 40 x 2 x 1 x 30 x 75/100 x 4= 3, 60,000Kms.

SOLUTION:

Q2] from the following relating to two different vehicles A

and B, compute the cost of the running kilometers.

particulars Vehicle A (Rs.)

Vehicle B (Rs.)

Kilometer run (Annual) Tones/km.(Average) Cost of vehicle Road license (Annual) Insurance (Annual) Garage rent (Annual) Supervision and salaries Driver’s wages per hour Cost of fuel per litre Kilometers run per litre Repairs and maintenance/km Tyre allocation/km Estimated life of the vehicle (kms.)

15,000 6 25,000 750 700 900 2,700 3 3 20 1.65 0.80 1,00,000

6,000 4 15,000 750 400 500 2,700 3 3 15 2.00 0.60 75,000

Charge interest at 5% per annum on the cost of

vehicles. The vehicles run 20 kms per hour on an average.

Computation of the Cost per running kilometer

costs Vehicle A (Rs.)

Vehicle B (Rs.)

Kilometer run (Annual) (I)Fixed cost: Road license Insurance Garage rent Supervision and salaries Interest @ 5 percent *Fixed Cost (per km.) (A) (II) Running cost (per km.):

Driver’s wages (per hour @ Rs.3 for 20 kms)

Cost of petrol (per litre @ Rs.3 For 20 Kms.)[3/20;3/15]

Repairs and maintenance Tyre Depreciation Running cost per km. (B) Total cost of running km. (A+B)

15,000

750 700 900

2,700 1,250

6,300

0.42

0.15

0.15

1.65 0.80 0.25

3.00

3.42

6,000

750 400 500

2,700 750

5,100

0.85

0.15

0.20

2.00 0.60 0.20

3.15

4.00

SOLUTION:

Working note:

Fixed cost per km.

A B

6,300/15,000 5,100/6,000

=0.42 =0.85

Q3] Mr. Shyamsunder owns a fleet of taxies and the

following information are available from the records

maintained by him:

Number of taxis Cost of each taxi Salary of manager Salary of accountant Salary of cleaner Salary of mechanic Garage rent Annual tax Drivers wages Annual repairs

10 Rs.54,600 Rs.7,000 p.m. Rs.5,000 p.m. Rs.200 p.m. Rs.400 p.m. Rs.600 p.m. Rs.900 per taxi Rs.350 p.m. per taxi Rs.1,000 per taxi

Total life of a taxi is about 2, 00,000 kms. A taxi runs in

all 3,000 kms. In a month and 30% of this distance has to be

run without any passenger. Petrol consumption is one litre for

every 10 kms @ Rs.404 per litre. Oil and other sundries are Rs.

10.50 per 100 kms.

Calculate the cost of running a taxi per effective km.

Operating cost statement of a Taxi for a month

particulars Rs. (I)Running cost: 1. Drivers wages 2. cost of petrol 3. cost of Oil and other sundries Total running cost (A) (II) Maintenance cost:

1. Cleaners salary 2. Mechanics salary 3. Garage rent 4. Repairs

Total Maintenance cost (B) (III)Fixed cost:

1. Salary of manager 2. Salary of Accountant 3. Taxes 4. Depreciation

Total Fixed cost (C) Total cost (A+B+C) Cost per Effective km = _ Total cost__ Effective kms

350 1,323 315

1,988

20 40 60 83

203

700 500 75 819

2,094

4,285

= 4,285 2,100 =Rs.2.04

SOLUTION:

Effective km. =100%-30% without any passenger

=70%

=3,000 x 70%

=2,100 kms.

Working note:

(1) Cost of petrol

Mileage 3,000 kms

Consumption 1 litre for 10 kms

Rate 4.41

Cost 3,000 x 4.41

10

=1,323

(2) Depreciation

Cost per Taxi 54,600

Estimated life 2, 00,000 kms

Mileage 3,000 kms

Depreciation 54,600__ x 3,000

2, 00,000

=819