Sie sind auf Seite 1von 36

1

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.

CIMA has defined Operating Costing As that form of operation


costing which applies when standardized services are provided either y an
undertaking or by a service cost center within an undertaking.

Cost Accounting Standard 1 by ICWA defines Operating Cost As


the cost incurred in conducting a business activity. Operating costs refer to
the cost of undertakings, which do not manufacture any product but which
provide services.
Because of the varied nature of activities carried out by the service
undertaking, the cost system used is obviously different from that followed
in manufacturing concerns.
The essential features of operating costs are as follows:
1. The operating costs can be classified under three categories. For
example in the case of transport undertaking these three categories are
as follows:

Operating and running charges: It includes expenses of variable


nature. For example expenses on petrol, diesel, lubricating oil, and
grease etc.

Maintenance charges: These expenses are of semi-variable nature


and include the cost of tyres and tubes, repairs and maintenance,
spares and accessories, overhaul, etc.

Fixed or standing charges: These includes garage rent, insurance,


road license, depreciation, interest on capital, salary of operating
manager, etc.

2.

The cost unit used is a double unit like passenger-mile; Kilowatt-hour,

etc. It can be implemented in all firms of transport, airlines, bus-service, etc.,


and by all firms of Distribution Undertakings.

APPLICATION OF OPERATING
COSTING
1 Transport Service: Under this method of costing, the operating cost
of each vehicle is determined. The common unit of service is tonne
kilometer in case of goods transport, and passenger kilometer in case
of passenger transport. Examples of transport service are Truck
operators, road transport, Railways, Airlines, etc.
2 Supply service: It includes services like electricity, steam, gas, water,
etc. where steam is used for the purpose of generating electricity, it is
possible to compute the cost of electricity generated by aggregating
the steam production costs with other related cost of electricity
generation. A cost unit is generally in terms of kilograms.
3 Welfare Services: It includes services like canteen, hospital, library,
etc. Hotels, restaurants employ operating costing. The total operation
of a hotel can be divided into number of cost centers like Restaurant,
Housekeeping, Laundry, etc. The cost unit is generally in terms of per
meal/ dish.

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.

Simple cost unit; or

b.

Composite cost unit.

Following is the list of different cost units used in different types of service
enterprises
Service Industries

Simple Cost Unit

Passenger Transport Per Kilometer


Goods Transport

Per Kilometer

Road Maintenance

Per K.M. of Road maintained

Water Supply

Per Kilo Liter of Water Supplied

Canteen

Per Meal / Dish

Service Industries

Composite Cost Unit

Passenger Transport Per passenger - K.M.


Goods Transport

Per Ton - K.M.

Electricity

Per Kilowatt Hour

Steam, Gas

Per K.G. / Cubic Ft.

Hospital

Per Patient Day

Library

Per Member Book

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, repairs, and mileage-dependent
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 total vehicle miles traveled along a corridor.

Estimate changes in vehicle travel speeds and delay due to road and
traffic conditions.

Estimate fuel consumption rates, fuel prices, and non-fuel-related


operating costs.

Calculate total changes in vehicle operating costs.

For improvements to ride quality, such as pothole repairs and curve or


grade reductions, estimate effects on vehicle wear.

Estimate changes in per capita vehicle ownership in an area.

Estimate average vehicle ownership costs.

Calculate total changes in vehicle ownership costs.

COST SHEET for (Month/Year)


STEP COSTS
Rs. Rs.
A.
FIXED COST
Insurance
.
License fee, Permit fee and Taxes
..... xx
xx
xx
Depreciation
.
XX
xx
Other Fixed costs (specify)

C.
D.
E.

VARIABLE COST
Salaries and Wages of Drivers, Cleaners & other xx
Operating Staff

xx
Fuel and Lubricants
..
xx
Consumables

Amortization Cost of Tyre ,Tube & Battery


xx
xx
Laundry

xx
Spares
...
xx
Repairs & Maintainable

Other Variable Cost (specify)


...
TOTAL OPERATING COST[A+B]
PROFIT/LOSS
REVENUE [TAKINGS]

XX
XX
XX
XX

VEHICAL NO

XXX

CARRAIGE CAPACITY [Seats or Tonnes]

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.
Depreciation is a non cash expense that refers to the investment cost of
assets spread over their useful life; it also represents the annual
investment the railway should make to renew its assets. However,
depreciation is based on the historical cost of assets, so during periods
of high inflation, railways need to restate assets value and depreciation
rates, which will be less than the amount needed to renew them.

10

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 magnitude
of
payments.

11

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):
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.

12

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.
Draw up a statement, showing the cost per tone- kilometer of carrying
mineral from each mine.

13

Assuming the quality and other aspects pertaining to material is same in both
the mines, where should the material be purchased?

Solution
1.

Operating analysis
Particulars
I.

Total kms operated

II.

Total operating time

a.

20km

30km

Time from plot to mine


(10*60/30) , (15*60/30) 20mins

30mins

b. Loading time
c.

Time from mine to plot


(10*60/30) , (15*60/30) 30mins
d. Unloading time

III.

20mins

20mins

30mins

Effective tone kilometer

10mins

10mins

(5*10km) , (5*15km)

80mins

90mins

50tonn-km 75tonn-km

14

2.

Statement showing the cost per tone kilometer of carrying

Mineral from each mine


Costs

Mine A Mine B

(Drivers wages , depreciation , insurance & taxes)


A: 1hour 20minutes @ Rs9 per hour
B: 1hour 30minutes @ Rs9 per hour

12

(refer to working note 1)

13.50

(Fuel, oil , tyres , repairs and maintainance)


A: 20kms @ Rs1.20 per km
B: 30kms @ Rs1.20 per km
Total cost per trip

24
36.00
49.50
36

Cost per ton-km


= Total cost / Total ton-km
A = 36/50 = Rs 0.72
B = 49.5/ 75 = Rs 0.66
cost per tone
= Total cost \ Total tones
A= 36/5 = Rs 7.2
B = 49.5/5 = Rs 9.9 Since the cost per tone is the lowest in case material is
procure from mine A it will be conside

15

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.

16

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.

17

COST SHEET FOR THE YEAR/MONTH


Step Costs

Rs

Rs

Salaries to staff

XX

Room attendant wages

XX

Repairs and renovation

XX

Lighting and heating

XX

Power

XX

Linen

XX

Interior decoration

XX

Sundries

XX

Depreciation
-Buildings
-Furniture & fixtures

XX

-Air-conditioners

XX

Premises rent

XX XX

Other Administration Expenses

XX

Interest on investment

XX

total operating cost (1)

XX

no. of room days(2)

XX

cost per room day (1+2)

XX
XX

18

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

: single rooms Rs 120 each per day


: Double rooms Rs 250 each per day

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

19

Solution:
Single rooms = 100 * 365 * 80/100 = 28200 Room days
Double rooms = 20 * 365 * 80/100 = 5840 Room days

Computation of Total Cost


Steps Costs
A
Variable Costs

C
D

b.

Amt

Amt

Single Rooms ( 29200 room days * rs 220) 6424000


Double Rooms ( 5840 room days * rs 350 ) 2044000 8468000
Fixed Costs
Single Rooms ( 29200 room days * rs 120)
Double Rooms ( 5840 room days * rs 250 ) 3504000
1460000 4964000
13432000
Total Costs
Profit of 20% on Revenue
3358000
(i.e. of 25% on Costs 13432000 * 25% )
Total Revenue

16790000

Room wise Rent


Single Rooms (29200*1)

29200

Double Rooms (5840*1.25)

7300

Notional Single Rooms/day

36500

Rent per day per single room = 16790000/ 36500 = Rs 460


Rent per day per double room = Rs 460 * 1.25 = Rs 575

20

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.

Salaries of office staff Rs 50,000 per month.

2.

Wages of the room attendant: Rs 20 per day per room when the
room is occupied.

3.

Light, heating and power:

a.

The normal lighting expenses for a room for the full month is Rs

500, when occupied.


b.

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.

Repair to Hotel building: Rs 50,000 per annum.

5.

License fees: Rs 12,400 per annum.


6. Sundries: Rs 10,000 per annum.

7.

Interior decoration and furniture: Rs 1, 00,000 per annum.


8. Depreciation @ 5% p.a. is to be charged on building costing Rs
20,000 and @ 10% p.a. on equipments.

9.

There are 200 rooms in the Hotel, 80% of the rooms are generally

occupied in summer, 60% in winter, 30% in rainy season.

21

The period of summer, winter and rainy season may be considered to be


of 4 months in each case. A month may be assumed as 30 days of an
average.

SOLUTION:
Operating Cost Statement
Particular

Rs p.a.

Rs p.a.

Office staff salaries (50,000 12)

6,00,000

Room attendant wages (WN 1)

8,16,000

Lighting and Heating (WN 2)

6,80,000

Power (WN 3)

96,000

Repair to bed and other furniture

30,000

Repair to building

50,000

License fee

12,400

Sundries (10,000 12)

1,20,000

Interior decoration and furnishing

1,00,000

Depreciation:
Building @ 5%

1,00,000

Equipment @10%

5,00,000

Total Cost

1,50,000
26,54,400

Add: Profit 25% of Cost (Excluding interest on


loan)

6,63,600

Total Earnings

33,18,000

22

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;

hospitals commonly account for 50 to 80 percent of government


recurrent health sector expenditure:

hospitals use a large proportion of the most highly trained health


personnel

A hospital is engaged in providing various types of medical services


to the patients.

Hospital costing is applied to decide the cost of these services. A hospital


may have following departments for providing various types of services:
1.

Outdoor Patient Department. (O.P.D

2.

Indoor Patient Department (Medical Wards).

Medical Services Department:

X Ray Department,

Scanning Centre,

23

Pathology Laboratory,

Sonography Department.

4.

General Services Departments:

Bolier House,

Power House,

Catering department,

Laundry Room,

Administrative Department,

5.

Miscellaneous Services Departments:

Transport Department,

Dispensary Department,

General Porting Department.

24

UNIT OF COST:

The common units of costs of various departments in a hospital are as


follows:

Department

Unit of Cost

1. Outdoor Patient Department

Per out-patient

2. Indoor Patient Department

per Room-day

3. X Ray Department

Per 100 units

4. Scanning centre

per case

5. Pathology Laboratory

per 100 Requests

6. Laundry Department

Per 100 items laundered

7. Catering Department

Per Patient per week

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.

25

Why are hospital costs important?


Hospital cost information is derived by relating the inputs of resources in
monetary terms to the outputs of services provided by the hospital. Cost
information is part of the basic information needed by managers and policy
makers for making decisions about how to improve the performance of a
hospital, where to allocate the resources within or among hospitals, or to
compare the performance of different hospitals to one another. Some of the
Basic reasons for wanting cost information are to improve efficiency,
increase effectiveness, enhance sustainability, and improve quality.

How does one do a hospital costing exercise?


The process of determining the costs of a hospital involves six steps:
1. Defining the major and relevant activity areas of the hospital.
2. Gathering information on the services provided or the output of the
hospital.
3. Determining the labor and other recurrent costs.
4. Ascertaining the capital costs of the hospital.
5. Allocating indirect costs.
6. Reviewing and using the hospital cost summary.

26

COST SHEET FOR MONTH/YEAR


A. FIXED STANDING COSTS
Salaries to staff

Premises Rent

xx

Repairs and maintenance

xx

General administration Expenses

. xx

Cost of Oxygen, X-Ray, etc.

Depreciation

...

xx
xx
xx XX

RUNNING OR VARIABLE COSTS


B
Doctors fees

xx

Food

xx

Medicines

xx

Diagnostic Services

xx

Laundry

...

Hire charges for Extra Beds

..

xx XX
xx

C. TOTAL OPERATING COST


D. NO. OF PATIENTS DAYS

XX

E. COST PER PATIENT DAY (C)+(D)

XX
XX

27

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.

28

The other expenses for the year were as under:


Repairs and Maintenance (Fixed)

Rs. 8100

Food supplied to patients (Variable)

Rs. 88000

Janitor and Others Services for patients (Variable)

Rs. 30000

Laundry Charges for their bed linen (Variable)

Rs.60000

Medicines supplied (Variable)

Rs. 75000

Cost Oxygen, X Ray, etc., other


Than directly borne for treatment of patients (Fixed)

Rs. 108000

General Administration Charges allocated


To the unit (Fixed)
1.

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

of patients requiring intensive care is a very uncertain factory.


Assuming that same revenue and expenses prevail in 2004 in the first
instance, work out the number of patients days required by the unit to
break-even.
SOLUTIONS:Calculation of No. of Patients days:
35 beds * 150 days =
5250
25 beds * 80 days

2000

Extra bed days 7500 / 10 = 750


8000

29

STATEMENT OF COST
Particulars

Rs

1. Income Received (Rs. 200 * 8000 Patient days)

Rs
1600000

2. Variable Costs (Marginal Costs) Per Annum:


Food

88000

Janitor charges

30000

Laundry Charges

60000

Medicines supplied

75000

Doctors Fees

(25000 *12) 300000

Hire Charges for extra beds

7500

560500
1039500

Contribution
3. Fixed costs
a. Salaries:
Supervisors

(2 * 2500 * 12)

60000

Nurses

(4 * 2000 *12)

96000

Ward Boys

(4 * 500 * 12)

24000

(7500 *12)

90000

b. Rent
c. Repairs and Maintenance

8100

d. Cost and oxygen etc.

108000

e. General Administration

100000

486100
553400

30

Profit per Patient-day = 553400 / 8000 patients days


= 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

Amt

Occupancy costs per month

18000

Clerical costs per month

12000

Other costs per month

4000

Medication charges per patient

44

Records charge per patient

16

Staffing cost per visit

Computer record update per visit 3

31

Hospital expects to have an average of 500 visits per month. What should be
the amount charged to each patient in order to cover the above costs?

Solution:

Particulars

Amt

Indirect cost per month


Occupancy

18000

Clerical

12000

Other costs

4000
3400

A.

Indirect costs per visit ( 34000/500) 68


9
Staffing cost per visit
Computer record update per visit

3____

Total costs per visit

80

Visits per patient

3____

B. Total cost per patient


Records charge per patient

16

Medication change per patient

44____

C. Total average cost per patient


D.

240

Or per patient (60+80) per visit

300

32

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.

33

We then developed a methodology for our client to quantify cost


improvements and monitor ongoing results. The monitoring system included
operational key performance indicators (KPIs) and targets to track cost
reductions results, performance dashboards and regular meeting reports.
Promoting a new and sustainable way of managing cost
SBC worked with each business unit to point out areas of improvement
particular to each asset, challenge operating practices, and work with each of
the assets to develop a realistic implementation plan to reduce costs.
SBCs efforts helped the client reduce OPEX by 12% across the five
business units. We also helped to establish a cost-conscious culture. Our
client is now rolling the program out more broadly.

34

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.

35

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.

36

BIBLIOGRAPHY

www.google.com
www.wikipedia.com
Advanced Cost Accounting Manan Prakashan