UNIVERSITY OF MUMBAI

PROJECT REPORT ON
ADVANCED COST ACCOUNTING
OPERATING COSTING

BY

Mr. OJAS NITIN NARSALE

M.COM (Part-I) (SEM-II) (Roll No.40)

ACADEMIC YEAR 2015-2016

PROJECT GUIDE
PROF. SUMITA MADAV

PARLE TILAK VIDYALAYA ASSOCIATION’S

M.L. DAHANUKAR COLLEGE OF COMMERCE

DIXIT ROAD, VILE PARLE ( E)

MUMBAI- 400057

1
 DECLERATION

I, Mr. OJAS NITIN NARSALE of PARLE TILAK VIDYALAYA

ASSOCIATION’S M.L. DAHANUKAR COLLEGE OF COMMERCE
of M.COM(Part-I) (SEM-II) (Roll No.40) hereby declare that I have
completed this project on Operating Costing in the ACADEMIC YEAR
2015-2016. This information submitted is true and original to the best of
my knowledge.

(Signature of Student)

2
 ACKNOWLEDGEMENT

To list who all helped me is difficult because they are so numerous and
the depth is so enormous.

I would like to acknowledge the following as being idealistic channels

and fresh dimensions in the completion of this project.

I would firstly thank the University of Mumbai for giving me chance to

do this project.

I would like to thank my Principal, Dr. Madhavi Pethe for providing

the necessary facilities required for completion of this project.

I even will like to thank our co-ordinator, for the moral support that I
received.

I would like to thank our College Library, for providing various books
and magazines related to my project.

Finally I proudly thank my Parents and Friends for their support

throughout the Project.

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 Table of Contents

Sr.
Topic Page No.
No.

1. Objectives of Study 5

2. Introduction 6

3. Methods of Costing 7

4. Operating Costs and Operating Costing 10

5. Examples of Operating Costing 13

6. Features of Operating Costing 15

7. Users of Operating Costing 17

8. Steps in Operating Costing 18

Operating Cost Statements of Various Service

9.
Organizations

Transport Costing 21 - 27

Hotel Costing 28 - 34

Hospital Costing 35 – 39

10. Conclusion 40

11. Bibliography 41

4
 Objectives of study

The aim of this study is to understand the concept of “Operating Costing” and its

importance in the functioning of any event or a service. The study is conducted to understand the

utility of operating costing system in three different areas i.e. Transport service, Hotel Industry

and Hospitals. Various aspects are discussed in detail.

Research Methodology

The data contained in this study has been collected from various sources that have been

duly recognized at the end of the study. The information is secondary information collected from

websites and a book.

5
 Introduction

Costing or cost accounting is a branch of accounting which deals with recording

classifying and appropriate allocation of expenditure to determine the cost of product and

services. After determining the cost one can fix the profit margin and also the fix the selling

price. In this complex and competitive market scenario, it is essential to determine the cost of

products and services. It also help the management to take an informed decision to reduce cost

and increase the profit, reduce the manufacturing cost, whereby reducing the selling price. To

sustain in this competitive market, producers needs to reduce the selling price and increase the

quality.

According to Harold J Wheldon, "Costing is the classifying, recording and appropriate

allocation of expenditure for the determination of the costs of products or services; and for the

presentation suitably of arranged data for purposes of control and guidance of management.”

The term "Costing" and "Cost Accounting" are used interchangeably. However, Costing

refers to the technique and process of ascertaining costs. There are specified rules and principles

which are used to determine the cost of products and services. Whereas the term Cost

Accounting refers the process of finding out the cost.

According to the Institute of Cost and Management Account "Cost accounting is that part

of management accounting which establishes budgets and standard costs and actual costs of

operations, processes, departments or products and the analysis of variances, profitability or

social use of funds."

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 Methods of Costing

As per the nature and peculiarities of the business, different Industries follow different

methods to find out the cost of their product. There are different principles and procedure for

doing the costing. However the basic principle and procedure of costing remain the same. Some

of the methods are mentioned below:

1. Unit Costing

2. Job Costing

3. Contract Costing

4. Batch Costing

5. Operating Costing

6. Process Costing.

7. Multiple Costing

8. Uniform Costing

7
  Unit Costing: This method also called 'Single output costing'. This method of costing is

used for products which can be expressed in identical quantitative units and is suitable for

products which are manufactured by continuous manufacturing activity. Costs are

ascertained for convenient units of output. Examples: Brick making, mining, cement

manufacturing, dairy, flour mills etc.

 Job Costing: Under this method, costs are ascertained for each work order separately as

each job has its own specifications and scope. Examples: Painting, Car repair,

Decoration, Repair of building etc.

 Contract Costing: Under this method costing is done for big jobs which involves heavy

expenditure and stretches over a long period and often it is undertaken at different sites.

Each contract is treated as a separate unit for costing. This is also known as Terminal

Costing. Construction of bridges, roads, buildings, etc. comes under contract costing.

 Batch Costing: This method of costing is used where the units produced in a batch are

uniform in nature and design. For the purpose of costing, each batch is treated as a job or

separate unit. Industries like Bakery, Pharmaceuticals etc. usually use batch costing

method.

 Operating Costing or Service Costing: Where the cost of operating a service such as

nursing home, Bus, railway or chartered bus etc. this method of costing is used to

ascertain the cost of such particular service. Each particular service is treated as separate

units in operating costing. In the case of a Nursing Home, a unit is treated as the cost of a

bed per day and for buses operating cost for a kilometer is treated as a unit.

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  Process Costing: This kind of costing is used for the products which go through different

processes. For example, manufacturing clothes goes through different process. Fist

process is spinning. The output of spinning is yarn. It is a finished product which can be

sold in the market to the weavers as well as used as a raw material for weaving in the

same manufacturing unit. For the purpose of finding out the cost of yarn, the cost of

spinning process is to be ascertained. The second step is the weaving process. The output

of weaving process is cloth which also can be sold as a finished product in the market. In

such case, the cost of cloth needs to be evaluated. The third process is converting cloth in

to finished product such as shirt or trouser etc. Each process is to be evaluated separately

as the output of each process can be treated as a finished good as well as consumed as a

raw material for the next process. In such industries process costing is used to

ascertaining the cost at each stage of production.

 Multiple Costing: When the output comprises many assembled parts or components

such as in television, motor Car or electronic gadgets, costs have to be ascertained for

each component as well as the finished product. Such costing may involve different

methods of costing for different components. Therefore this type of costing is known as

composite costing or multiple costing.

 Uniform Costing: This is not a separate method of costing. This is a system of using the

same method of costing by a number of firms in the same industry. It is treated as a

common system of using agreed principles and standard accounting practices in the

identical firms or industry. This helps in fixation of price of the product and inter-firm

comparisons.

9
 Operating Costs

Operating costs are the expenses which are related to the operation of a business, or to the

operation of a device, component, piece of equipment or facility. They are the cost of resources

used by an organization just to maintain its existence.

The costs incurred in departments rendering services or service organizations are grouped

under the following heads:

 Fixed or standard charges

 Semi-fixed or maintenance charges

 Variable or running charges

To ascertain the cost per unit, these charges are aggregated and divided by the number of

service units during the specified period.

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 Operating Costing

Services performed may be internal or external. Services are termed as internal where

they have to be performed on inter-departmental basis in the factory itself, e.g. supplying power,

gas or electricity from factory's own power-house, catering from the factory's canteen; supplying

steam raised from the boiler house, repairing necessary items by the repair and maintenance

department etc. Services are termed as external when they have to be provided to outside parties.

Such concerns are service undertakings, e.g. transport corporations carrying loads of goods or

human beings; electricity companies generating electricity or power; hospitals serving patients or

carrying out operations; canteens serving meals or dishes of different varieties etc. The method

employed to find out the cost of rendering a service, either internal or external, is service costing

or, so to say, operating costing.

The Chartered Institute of Management Accountants, London defines "operating cost" as "the
cost of providing a service."

Operating costing is just a variant of unit or output costing. The method of computing

operating cost is very simple. The expenses of operating a service for a particular period are

grouped under suitable headings and their total is divided by the number of service units for the

same period, and thus cost per unit of service is obtained. The cost for a future period may be

estimated on the basis of estimated service units and the estimated costs. This will help in fixing

the price to be charged for the service units and the estimated costs. Thus, the principle involved

under operating costing is the same as under unit costing but they differ in the manner in which

costing information have to be collected and allocated to cost units. The data about expenses are

11
to be classified according to their nature of variability and moreover, the units of cost may be

simple or composite.

Operating Costing is a method of costing applied in ascertaining the cost of rendering

services. It is not applicable for entities manufacturing tangible goods. The main objective

of operating costing is to compute the cost of the services offered by the organization.

Entities/companies usually use this method of costing are as follows:

a) Utility Services: canteen, hospital

b) Distribution Services: Electricity

c) Transportation Services: Railways, Bus etc

d) Other Services: such as Management Consultants, courier services etc

Operation costing is a mix of job costing and process costing, and is used in either of the

following situations:

 A product initially uses different raw materials, and is then finished using a common

process that is the same for a group of products; or

 A product initially has identical processing for a group of products, and is then finished

using more product-specific procedures.

In both cases, you use a mix of job costing and process costing to compile the cost of a

product; this mixed costing environment is called operation costing. The job costing element is

based on the concept that you can assign costs to specific products, which is the case when

12
something is produced in units of one or in very small quantities. The process costing element is

based on the concept that you allocate the cost of producing a large group of products equally to

all the products in that group, since they are manufactured in an identical manner.

In short, operation costing is most applicable to the more complex manufacturing

environments that require a mix of different types of production processes in order to create

goods.

Examples of Operating Costing

1. A company manufactures watches in lots of 1,000. The watch casings and workings for

all 1,000 units are identical, so the company simply adds up the cost of the production run

and divides by 1,000 units to arrive at the per-unit cost. In addition, watch bands are

custom-made for the wrist size of the customer, and use a variety of unique materials.

These costs are compiled for each individual watch. Thus, we have process costing for

one portion of the production process (the watch casings and workings) and job costing

for another portion (the watch bands). When combined, this is operational costing.

2. An example of the reverse situation is when a product initially has unique raw materials,

but is then finished using a common process. For example, a company builds unique,

custom-designed race cars. It uses job costing to compile the cost of each car. However,

all cars are then run through a paint shop, which is essentially a fixed cost. The cost of the

paint booth is allocated equally to all of the cars run through it, which is process costing.

13
 Thus, we use job costing for the first part of the production process and process costing

for the second part. Again, this is an example of operation costing.

Operating costing is a form of Hybrid Costing

Service costing is in use where services are rendered but articles/goods are not produced.

Usually, it refers to the cost procedure used for determining the cost per unit of service rendered.

Operating costing is a variant of unit or output costing. The terminology of CIMA defines

service costing as “the cost of specific services and functions, e.g., maintenance, personnel,

canteen etc. These may be referred as service centres, departments or functions.”

Service costing involves the method of determination of the cost of services. The cost of

providing a service is computed at ease. At the end of specified periods, the expenses (costs) of

operating a service are grouped under suitable headings. The aggregate of these costs is to be

divided by the quantity of services provided during the specified period to arrive at the cost per

unit of service.

14
 Features of Operating Costing

1. Cost classification: Costs are classified into variable and fixed. In case additional

service is provided, variable cost will be affected.

2. Periodical ascertainment of costs: Under this system, the costs are ascertained

periodically, generally at the end of specific periods.

3. Many stages and processes: The conversion of basic materials into services involves

many stages and processes.

4. Valuation of work-in-progress: In this system, the valuation of work-in-progress is

comparatively easy in relation to other types.

5. Intangible products: Service organizations do not produce tangible goods. On the

other hand, they are engaged in providing services to the public.

6. Cost unit differs: As service organizations provide a wide variety of services, it is

difficult to provide a common cost unit. It differs from organization to organization.

15
Operation costing may be said to be a retirement of process costing.

 A process may consist of several operations.

 Under this, each operation in each process or stage of production is separately costed.

 Operation costing involves the determination of unit operation cost by each operation

which forms part of a production process.

 It may also be referred to as conversion cost (cost of labour and overheads).

 At the end of each operation, the unit operation cost is determined by dividing the

conversion cost by output.

 The procedure of costing for operation is similar to that of process costing, except the

material cost computation.

 An important feature is that while computing the material cost, the initial input weight

has to be taken into account and not the ultimate output weight.

16
 Users of Operating Costing

Operating costing is widely used by service organizations and departments within organizations

rendering services to other departments.

 Service organisations: Organizations that are engaged in the business of rendering

services to outsiders to earn profit are called service organizations.

Examples of such service organisations are power generation and distribution

firms, hotels, transport firms, educational institutions, consultancy firms—law,

accounting and management, airlines and shipping.

 Internal services: Departments within organization render services to the

production as well as to other departments.

Examples: Hospitals, canteen, boiler house, captive power generation unit, water

supply and maintenance services.

17
 Steps in Operating Costing
1. Cost Unit:

A cost unit is a quantitative unit of product or service in relation to which costs are

ascertained. The costs incurred during a period are duty collected, analysed and expressed

in terms of cost unit. The selection of proper unit is not an easy task because service

organizations provide a wide variety of services. It becomes difficult to define the cost

unit. The unit may be simple or composite depending upon the nature of service

organizations. Below is the list of cost units used by a representative group of service

organizations: It is necessary to decide the unit of cost. The cost units vary from industry

to industry. For example, in goods transport industry, cost per ton kilometer is to be

ascertained while in case of passenger transport, cost per passenger kilometer is to be

ascertained. Costs units may be single or composite.

Single Unit

Transport Per ton / Per kilometer / Per passenger

Hospital Per bed

Water Supply Per gallon

Composite Unit

Passenger transport Per passenger kilometer

Goods transport Per ton kilometre

Hotel Per room day

Cinema Per seat per show

Electricity Per kilowatt hour

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 2. Identify Costs:

The next step is to identify various costs under different heads:

 Fixed or standing charges

 Semi-fixed or maintenance charges

 Variable or running charges

Calculation of cost per unit

Determination of cost per unit serves the following purposes:

1. It is used for price fixation.

2. It is used for cost control.

The cost per unit is commonly derived when a company produces a large number of identical

products. The cost is derived from the variable costs and fixed costs incurred by a production

process, divided by the number of units produced.

Variable costs, such as direct materials, vary roughly in proportion to the number of units

produced, though this cost should decline somewhat as unit volumes increase, due to greater

purchasing discounts. Fixed costs, such as building rent, should remain unchanged no matter

how many units are produced, though they can increase as the result of additional capacity being

needed (known as a step cost, where the cost suddenly steps up to a higher level once a specific

19
unit volume is reached). Examples of step costs are adding a new production facility or

production equipment, adding a forklift, or adding a second or third shift. When a step cost is

incurred, the total fixed cost will now incorporate the new step cost, which will increase the cost

per unit. Depending on the size of the step cost increase, a manager may want to leave capacity

where it is and instead outsource additional production, thereby avoiding the additional fixed

cost. This is a prudent choice when the need for increased capacity is not clear.

Within these restrictions, then, the cost per unit calculation is:

(Total fixed costs + Total variable costs) / Total units produced

The cost per unit should decline as the number of units produced increases, primarily because

the total fixed costs will be spread over a larger number of units (subject to the step costing issue

noted above). Thus, the cost per unit is not constant.

For example, ABC Company has total variable costs of Rs. 50,000 and total fixed costs of Rs.

30,000 in January, which it incurred while producing 10,000 units. The cost per unit is:

(Rs.30,000 Fixed costs + Rs.50,000 variable costs) / 10,000 units = Rs.8 cost per unit

In the following month, ABC produces 5,000 units at a variable cost of Rs.25,000 and the same

fixed cost of Rs.30,000. The cost per unit is:

(Rs.30,000 Fixed costs + Rs.25,000 variable costs) / 5,000 units = Rs.11 cost per unit

20
 Operating cost statements of various service organizations

Transport Costing
Service costing method is used to ascertain the cost of services provided by an

organization (transport firm) which uses its vehicles for transporting goods or passengers. In

motor transport costing, the cost unit is tonne-km or passenger-km.

Objectives of Transport Costing

 Analysis of operating costs, namely, wages, full cost, insurance, repairs and

maintenance.

 Control of operating and running costs and avoidance of waste of fuel and other

consumable material.

 Comparison of cost of running and maintenance of different vehicles.

 Assignment of costs to services provided by each vehicle.

 To quote hiring rates.

 To compute cost of idle vehicle and lost running time.

 Collection and analysis of cost for cost control.

21
Cost sheet format for Transport Organisation

Particulars Amount Amount

(Rs.) (Rs.)

A ) Standing Charges/Fixed charges

Insurance
License
Salaries of Drivers, cleaner etc
Depreciation
Interest

Total

B) Running Charges/Variable Expenses

Petrol/Diesel
Oil
Grease

Total

C) Maintenance Charge/Semi- Variable

Repairs
Tyres
Spares
Garage Charges

Total

D) Total Cost

E) Total ton kilometer/passenger kilometer

F) Cost per ton kilometer/passenger kilometer

22
Illustration 1
Costing Club Transport Limited is running 4 buses between two towns, which are

180 kilometers apart. Seating capacity of each bus is 45 passengers. The following particulars are

obtained from their books for January 2015.

Particulars Amount (Rs.)

Wage of drivers, conductors and cleaners 5,20,000

Salaries 1,50,000

Diesel 6,30,000

Repairs and Maintenance 1,20,000

Taxation and Insurance 2,20,000

Depreciation 3,20,000

Interest 3,00,000

Total 22,60,000

Passengers carried were 75% of seating capacity. All buses ran on all day of the month. Each bus

made one round trip per day.

Find out the cost per passenger kilometer.

23
Solution:

Costing Club Transport Limited

January 2015

Particulars Amount (Rs.) Amount (Rs.)

A) Standing Charges/Fixed charges

Wages of drivers, conductors and cleaners

5,20,000
Salaries
1,50,000
Taxation and Insurance
2,20,000
Interest
3,00,000
Depreciation
3,20,000
Total 15,10,000

B) Running Charges/Variable Expenses

Petrol/Diesel 6,30,000

Total 6,30,000

C) Maintenance Charge/Semi- Variable

Repairs & Maintenance

1,20,000
Total 1,20,000

D) Total Cost (A+B+C) 22,60,000

E) Total passenger kilometer ( shown below) 4,46,400

F) Cost per ton kilometer/passenger kilometer

5.062
=22,60,000/4,46,400

24
Passenger kilometers are computed as shown below:

Number of buses X Distance in one round trip X Seating Capacity X Percentage of Seating

Capacity actually used X Number of days in a month

= 4 buses X 50 kilometer X 2 X 45 passengers X 80% X 31 days = 4,46,400

Illustration 2

Jayesh Autocare distributes its goods to regional dealer using a single lorry. The dealers

premises are 40 km away by road. The lorry has a capacity of 10 tonnes and makes the journey

twice a day fully loaded on the outward journey and empty on return journey. The following

information is available for a 4 week period during the year 2015:

Petrol Consumption 8 km per litre

Petrol cost Rs. 13 per litre

Oil Rs. 100 per week

Drivers wages Rs. 400 per week

Repairs Rs. 100 per week

Garage Rent Rs. 150 per week

Cost of lorry (excluding tyres) Rs. 450000

Life of lorry 80000 km

Insurance Rs. 6500 per annum

Cost of tyres Rs. 6250

Life of tyres 25000 km

Estimated sale value of lorry at end of its life Rs. 50000

25
Vehicle license cost Rs. 1300 per annum

Other overhead cost Rs. 41600 per annum

The lorry operates on a 5 day week.

Solution:

Jayesh Autocare

January to December 2015

Particulars Amount (Rs.) Amount (Rs.)

A) Standing Charges/Fixed charges

Drivers wages
1600
Repairs
400
Garage Rent
600
Insurance
500
Vehicle License Cost
100
Other overhead costs
3200
Total 6400

B) Running Charges/Variable Expenses

Petrol consumption cost 5200

Oil 400

Depreciation on lorry 16000

Depreciation on tyres 800

26
 Total 22400

C) Total Cost (A+B) 28800

D) Total tonne kilometer ( shown below) 16000

E) Cost per tonne kilometer 1.80

Total kilometers for 4 weeks

Kilometers X complete trips X journey X number of days in the week X number of weeks

= 40 X 2 X 2 X 5 X 4

= 3200 kilometres

Total Tonne Kilometres

Total kilometers X average tones per trip

10+0
= 3200 𝑋 2

= 16000 tonne kilometers

27
 Costing of Hotels
Cost sheet format for Hotels

Particulars Amount Amount

(Rs.) (Rs.)

A ) Standing Charges/Fixed charges

Insurance
Salary
Taxes
Depreciation
Interest
Room Rent

Total

B) Running Charges/Variable Expenses

Crockery
Glassware
Towels
Consumables

Total

C) Maintenance Charge/Semi- Variable

Repairs

Total

D) Total Cost

E) Total Room Days

F) Room Rent per day per room

28
Illustration 1
Balaji 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 the double room has been fixed at 125% of the rent of the single room. The

costs are as under:

Variable costs- Single rooms 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 an overall profit of 20% on hire charges of rooms.

29
Solution:

Balaji Hotel Ltd.

Statement of operating cost for a year

Particulars Amount Amount

(Rs.) (Rs.)

A ) Standing Charges/Fixed charges

Single room (36500 * 120) 43,80,000
Double room (7300 * 250) 18,25,000

Total 62,05,000

B) Running Charges/Variable Expenses

Single room (29200 * 220) 64,24,000
Double room (5840 * 350) 20,44,000

Total 84,68,000

146,73,000
C) Total Cost

36,68,250
D) Profit 1/4th of cost

183,41,250
E) Total Revenue / Rent
F) Total Room Days (weighted) 36,500
G) Rent per weighted room day 502.50

Single room rent = 502.50

Double room rent = 628.13 (502.50 * 1.25)

30
Room days (weighted)

Rooms X weights X days X occupancy

Single 100 X 1 X 365 X 80% = 29200

Double 20 X 1.25 X 365 X 80% = 7300 36500

Effective Room Days

Single 100 X 365 X 80% =29200

Double 20 X 365 X 80% =5840

Effective Room Days

Single 100 X 365 =36500

Double 20 X 365 =7300

31
Illustration 2
From the following information relating to a hotel, calculate the room rent to be a charged at a

profit of 25% on cost excluding interest charged on loan for the year ended 31 st March 2015.

a) Salaries Rs. 50000 per month

b) Wages Rs. 20 per day per room when room is occupied

c) Lighting, heating and power:

Lighting Rs 500 per month when occupied

Power is used only in winter Rs. 200 per room when occupied

d) Repairs Rs. 80000 per month

e) License fees Rs 12400 per annum

f) Sundries Rs. 10000 per month

g) Interior decoration Rs. 100000 per annum

h) Depreciation @ 5% p.a. on building costing Rs. 2000000 and @ 10% p.a. on equipments.

i) There are 200 rooms in the Hotel. 80% are generally occupied in summer, 60% in winter

and 30% in rainy season.

j) The period of summer, winter and rainy season may be considered to be of 4 months

each. Month comprises of 30 days average.

32
Solution:

Statement of operating cost for a year ended 31 st march 2015

Particulars Amount Amount

(Rs.) (Rs.)

Salaries 6,00,000

Wages 8,16,000

Lighting 6,80,000

Power 96,000

Repairs 80,000

License fees 12,400

Sundries 1,20,000

Interior decoration 1,00,000

Depreciation : Building 1,00,000

Equipments 50,000

Total Operating Cost 26,54,400

Profit (25% on cost) 6,63,600

Total Revenue / Rent 33,18,000

Total Room Days 40,800

Room Rent per day per room 81.32

33
Room days (Effective when occupied)

Number of rooms X Number of days X Capacity X Number

in a month of months

Summer 200 X 30 X 80% X 4 = 19200

Winter 200 X 30 X 60% X 4 = 14400

Rainy 200 X 30 X 30% X 4 = 7200

Total 40800

Wages: 20 X 40800 = 8,16,000

500
Lighting : 40800 X 30

200
Power : 14400 X ( only in winter )
30

34
 Costing of Hospitals
Service costing system is used in ascertaining the cost of operations of a hospital. The

activities of a hospital are divided into a number of cost centres, which are:

 Out-patient department
 Pathology centre
 Wards
 Operation theatre
 Laundry
 Kitchen
Cost sheet format for Hospitals

Particulars Amount Amount

(Rs.) (Rs.)

A ) Standing Charges/Fixed charges

Salary
Repairs and maintenance
General administration expenses
Depreciation
Cost of oxygen, X-ray etc
Premises Rent
Total

B) Running Charges/Variable Expenses

Doctor’s fees
Food
Medicines
Diagnostic Services
Laundry
Hire charges for extra beds
Total

C) Total Operating Cost

D) Number of Patient Days

E) Cost per Patient Day (C ÷ 𝑫)

35
Illustration 1

Criti Care Hospital operates a fitness centre to provide counseling on nutrition for major

surgery patients. Average patient will make three visits to the centre. Each visit lasts 40 minutes.

The hospital has estimated following costs of operating the centre:

Occupancy costs per month 18,000

Clerical costs per month 12,000

Other costs per month 4,000

Medication charges per patient 44

Records charge per patient 16

Staffing cost per visit 9

Computer record update per visit 3

Hospital expects to have an average of 500 visits per month. What could be the amount charged

to each patient in order to cover the above costs?

36
Solution:

Statement of Operating Cost Sheet

Particulars Amount (Rs)

Indirect cost per month

 Occupancy 18,000

 Clerical 12,000

 Other costs 4,000

Total 34,000

Indirect cost per visit (34000 ÷ 500) 68

Staffing cost per visit 9

Computed record update per visit 3

Total cost per visit 80

Visits per patient 3

Total Cost per patient 240

Records charge per patient 16

Medication charge per patient 44

Total average cost per patient 300

Per patient charge is Rs. 60 + Rs. 80 per visit

37
Illustration 2
A hospital is run by a company. It has hired a building at a rent of Rs. 5000 per month
plus it would bear the repair charges also. The hospital is having 25 beds and 5 more beds can be
accommodated when need arises.

The staff of the hospital is as follows:

2 supervisors each at a salary of Rs. 500 per month

4 nurses each at a salary of Rs. 300 per month.

2 ward boys each at a salary of Rs. 150 per month.

Although the hospital is open for patients all 365 days a year, records for the year 2013
disclose that only for 120 days in the year the unit had full capacity of 25 patients per day and for
another 80 days, it had on an average 20 beds only occupied per day. But there were occasions
when the beds were full, extra beds were hired at a charge of Rs.5 per bed per day and this did
not come to more than 5 beds extra above the normal capacity on any one day. The total hire
charges for extra beds incurred for the whole year were Rs. 2000.

The unit engaged expert doctors from outside to attend on the patients and the fees was paid on
the basis of the number of patients attended and time spent by them which on an average worked
out to Rs. 10000 per month in 2004.

The other expenses for the year were as under:

Repairs Rs.3600
Food to patients Rs. 44000
Sanitary services Rs. 12500
Laundry charges Rs. 28000
Medicines Rs. 35000

Cost of oxygen, X-ray etc. other than directly borne for treatment of patients Rs. 54000

Administration charges Rs. 49550

If the hospital recovered an amount of Rs. 100 per day on an average from each patient, compute
the profit per patient day made by the hospital as per operating cost sheet for the year 2013.

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Solution:

Statement of Operating Cost Sheet

Particulars Amount (Rs.) Amount (Rs.)

Income ( 100 * 5000) 5,00,000
Less: Variable cost:
Food 44,000
Sanitary services 12,500
Laundry 28,000
Medicines 35,000
Doctor’s fees (10000 * 12) 1,20,000
Hire charges for extra bed 2,000
Total 2,41,500
Contribution 2,58,500
Less: Fixed cost:
Salaries{(2*500) + (4*300) + (2*150)}*12 30,000
Rent (5000*12) 60,000
Repairs 3,600
Administration 49,550
Cost of Oxygen, X-ray etc 54,000
Total 1,97,150
Total profit 61,350

𝟔𝟏,𝟑𝟓𝟎
Profit per patient day = 𝟓,𝟎𝟎𝟎
= Rs. 12.27

Where Number of patient days in 2013:

25 beds X 120 days 3000

20 beds X 80 days 1600

𝑅𝑠.2000
Extra bed days (total hire charges of extra beds/ charges per bed per day = ) 400
𝑅𝑠.5

Total patient days 5000

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 Conclusion

Service costing is a method of costing which is employed by service organizations for the

determination of service cost. It is helpful to service sector to calculate service cost because of

not being organizations which produce goods and only provide service to customer.

Having gone through this project, one would be able to understand the relevance of

operating costing while fixing the cost/fares in transport sector, hotel sector and hospitals. It

helps one to understand the method in which the expenses are segregated to fix the cost/fares.

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 Bibliography

 www.businessdictionary.com

 www.accountancycareers.com

 www.safaribooksonline.com

 Advanced Cost Accounting – Ainapure

 Institute of Chartered Accountants of India Study Materials – IPCC and CA Final

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