Contents

INTRODUCTION TO OPERATING COSTING ............................................................. 3

MEANING AND APPLICABILITY ............................................................................ 3

FEATURES OF OPERATING COSTING ................................................................... 4

COST UNITS ................................................................................................................. 5

WAYS OF COMPUTING COST UNITS ................................................................. 5

TREATMENT OF SOME SPECIAL ITEMS ............................................................... 7

PROCEDURE OF OPERATING COSTING ................................................................ 7

STATISTICS ................................................................................................................. 8

COST ACCOUNTING STANDARD 5 (CAS 5) ........................................................... 10

Treatment of cost ......................................................................................................... 11

COST SHEET (TRANSPORTER) – AS PER REQUIREMENTS OF CAS-5 .............. 13

COST SHEET (HOTEL) ................................................................................................. 16

COST SHEET (HOSPITAL) ........................................................................................... 17

ILLUSTRATIVE EXAMPLE ON COST SHEET OF TRANSPORT CO. ................... 18

Background .................................................................................................................. 18

Solution ........................................................................................................................ 19

ILLUSTRATIVE EXAMPLE ON COST SHEET OF A HOTEL AS PER COST

ACCOUNTING STANDARDS. ..................................................................................... 21

Background .................................................................................................................. 21

Solution ........................................................................................................................ 22

ILLUSTRATIVE EXAMPLE COST SHEET OF HOSPITAL AS PER COST

ACCOUNTING STANDARDS ...................................................................................... 24

Background .................................................................................................................. 24

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 Solution ........................................................................................................................ 26

CONCLUSION ............................................................................................................... 28

BIBLIOGRAPHY/WEBLIOGRAPHY .......................................................................... 30

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OPERATING COSTING

INTRODUCTION TO OPERATING COSTING

MEANING AND APPLICABILITY

Operating Costing is the method of ascertaining the costs of
providing/operating/rendering a service. It is applicable to undertakings that provide
services rather than produce commodities. This method is usually adopted in the case of
:

 Transport Companies
 Gas and Water Works Departments
 Electricity Supply Companies
 Canteens
 Hospitals
 Theatres
 Schools
 Hospitals
 Road Maintenance
 Garbage Disposal
 Street Lighting
 Libraries

that are engaged in the provision of services.

CIMA has defined operating costing as that form of operation costing which applies
when standardised services are provided either by an undertaking or by a service cost
centre within an undertaking.

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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.

FEATURES OF OPERATING COSTING

The main features of operating costing are as following:

(1) The undertaking which adopts service costing does not produce any tangible goods.
These undertakings render unique services to their customers.

(2) The expenses are divided into fixed and variable cost . Such a classification is
necessary to ascertain the cost of service and the unit cost of service.

(3) The cost unit may be simple or composite. The examples of simple cost units are cost
per unit in electricity supply , cost per litre in water supply, cost per meal in canteen etc.
Similarly cost per passenger kilometers in transport cost per patient-day in hospital, cost
per room-day in hotel etc. are the examples of composite cost unit.

(4) Total cost are averaged over the total amount of service rendered.

(5) Costs are usually computed period-wise. However, in the case of utilization of
vehicles, use of road-rollers etc., the costs are computed orderwise.

(6) Service costing can be used for service performed internally or externally.

(7) documents like the daily log sheet, cost sheet etc. are used for the collection of cost
data.

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COST UNITS

The principle of Operating Costing is to accumulate costs under suitable headings and to
express them in terms of number of units of service rendered. Unlike production
activities where cost unit is readily ascertainable, operating costing requires the
determination of cost units/denominator factors for expression of costs.

The factors that have a bearing on cost are identified based on study of technical and
operating data. Thereafter, the cost units that are unique to a specific service are
identified as the denominator factors.

Some illustrations of cost units usually used in various service undertakings are as
below:

 Hospitals – Patient-days, Room-days, Operations

 Hotels – Guest Days, Room Days
 Passenger Transport – kilometres or passenger-kilometres
 Cargo Transport – tonne-kilometres
 Canteens – meals served, tea cups sold
 Electricity Supplied – kilowatt hours
 Boiler Houses – quantity of steam raised
 Cinema Houses – number of tickets, number of shows

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 (kW) and the period (hrs) and so on.

WAYS OF COMPUTING COST UNITS

Composite Units like tonne-kilometres may be computed in two ways:

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  Absolute (Weighted Average) Tonne-kms – This is the sum total of tonne-
kilometres, arrived at by multiplying various distances by respective load
quantities carried
 Commercial (Simple Average) tonne-kms – It is derived by multiplying total
distance (km) by the average load quantity.

The above mentioned concept can be clearly understood by the below given illustration.

Illustration – Computation of Absolute and Commercial Tonne-km

A truck starts with a load of 10tonnes 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-Q, Q-R, R-P are
40kms, 60kms and 80kms respectively.

SOLUTION

Absolute Tonne-km = P to Q + Q to R + R to P

= (10 MT x 40 km) + (6 MT x 60 km) + (8 MT x 80 km)

= 400 + 360 + 640

= 1400 tonne-kilometres

Commercial Tonne-km = Avg Load x Total Distance Travelled

10 + 6 + 8
= 𝑡𝑜𝑛𝑛𝑒𝑠 𝑥 (40 + 60 + 80) 𝑘𝑚
3

= 8 tonnes x 180 kms

= 1440 tonne-kilometres

Thus, the above given illustration clearly explains the concept of composite units and
their types that are used in operating costing.

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TREATMENT OF SOME SPECIAL ITEMS

 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.

PROCEDURE OF OPERATING COSTING

 Determine Cost Unit : The first step in Operating Costing is the determination
of the cost unit.

 Ascertain costs: The next point to be noted is that Operating Costs are Period
Costs. The costs of supplying the services for a period are ascertained in the
following manner:
1) Vehicle No.: Each vehicle is treated as a cost centre and given a specific
number. All costs are accounted against this number. A separate account is
opened to record the costs and income of each vehicle.

2) Variable Costs: Variable Costs are the running and operating charges. These
include expenses of variable nature, e.g., petrol, diesel, lubricating oil, grease
etc. The Material Requisition Note and Time Sheet (or Log) bears the
Vehicle No. The relevant Vehicle Account is debited with its direct material
cost and direct labour cost. Direct Expenses such as fuel are debited to the
Vehicle Account on the basis of the Log Book and the cash/purchase/journal
vouchers.

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 3) Fixed Costs: Fixed Costs include garage rent, insurance, road licence fees
etc. The Fixed Costs are apportioned and absorbed by each Vehicle No. On
the basis of the overheads absorption rate which may be actual or pre-
determined. The Fixed Costs attributable to the Vehicle are debited to the
relevant vehicle account.

4) Revenue: The revenue from the vehicle is credited to the vehicle account

5) Profit & Loss: The Vehicle Account at this stage will reveal the profit/loss
made on operating that vehicle. The profit or loss is then transferred to the
Costing Profit and Loss Account. The total Operating Cost of a period is
divided by the number of Cost Units (km/passenger/ton etc) supplied during
the period to arrive at the operating cost per unit for that period.

 No Stocks: In case of a service industry, there is no question of any closing stock

or work in progress since it is not possible to store a service for future use.

 Abnormal Costs: According to CAS 5 (Transportation Costs), abnormal and

non-recurring costs shall be directly debited to the P/L A/c and shall not form
part of the operating costs. Eg. Penalty, Detention Charges, Demurrage and costs
related to abnormal breakdown.

STATISTICS
CAS 5 also states that proper records shall be maintained to determine the actual
operating cost of vehicles showing details of various elements of cost, such as salaries
and wages of driver, cleaner and other, cost of fuel, lubricants, grease, amortized cost of
tyres and batteries, repairs and maintenance, depreciation of vehicles, distance covered
and trips made, goods hauled and transported.

Two basic documents are normally maintained for collection of cost and operational
details –viz.

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  Log Book
 Daily Operation Schedule

Same as job assigned a distinct number in job costing method, each vehicle is provided
with a log book or log sheet, which contains all information for operation and cost
control, of one particular vehicle.

Most of the details required for controlling the vehicles are available from the log book.
A daily operation schedule has to be maintained by firms operating a fleet of vehicles, so
as to keep control over utilisation of each vehicle, minimising vehicle idle hours, and
also, keeping repairs cost under control. A system of requisition of vehicles may also be
introduced for proper authorisation for use of vehicles. Similarly, if major repairs should
be undertaken after obtaining authorisation for the same.

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COST ACCOUNTING STANDARD 5 (CAS 5)

Transportation cost is an important element of cost for procurement of materials for

production and for distribution of product for sale. Therefore, Cost Accounting Records
should present transportation cost separately from the other cost of inward materials or
cost of sales of finished goods. The Finance Act 2003 also specifies the certification
requirement of transportation cost for claiming deduction while arriving at the assessable
value of excisable goods cleared for home consumption/ export. There is a need to
standardize the record keeping of expenses relating to transportation and computation of
transportation cost.

This standard should be applied for calculation of cost of transportation required under
any statute or regulations or for any other purpose. For example, this standard can be
used for :

(a) Determination of average transportation cost for claiming the deduction for arriving
at the assessable value of excisable goods

(b) Insurance claim valuation

(c) Working out claim for freight subsidy under Fertilizer Industry Coordination
Committee

(d) Administered price mechanism of freight cost element

(e) Determination of inward freight costs included or to be included in the cost of

purchases attributable to the acquisition.

(f) Computation of freight included in the value of inventory for accounting on inventory
or valuation of stock hypothecated with Banks / Financial Institution, etc.

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Treatment of cost
 Inward transportation costs shall form the part of the cost of procurement of
materials which are to be identified for proper allocation/ apportionment to the
materials / products.
 Outward transportation cost shall form the part of the cost of sale and shall be
allocated / apportioned to the materials and goods on a suitable basis.
Explanation: Outward transportation cost of a product from factory to depot or
any location of sale shall be included in the cost of sale of the goods available
for sale.

 The following basis may be used, in order of priority, for apportionment of

outward transportation cost depending upon the nature of products, unit of
measurement followed and type of transport used :
i) Weight
ii) Volume of goods
iii) Tonne-Km
iv) Unit/Equivalent Unit
v) Value of Goods
vi) Percentage of usage of space

Once a basis of apportionment is adopted , the same should be followed consistently.

 For determining the transportation cost per unit, distance shall be factored in to
arrive at weighted average cost.

 Abnormal and non recurring cost shall not be a part of transportation cost.
Explanation : Penalty, detention charges, demurrage and cost related to abnormal
break down will not be included in transportation cost.

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Page | 12
COST SHEET (TRANSPORTER) – AS PER REQUIREMENTS OF CAS-5
COST SHEET FOR ____ (YEAR)

Vehicle No.: ____________

Carriage Capacity: ________ (seats or tonnes)

Days Operated: ____

STEP COSTS Rs. Rs.

(TOTAL)
A. FIXED COST
Insurance xx
Licence Fee, Permit Fee and Taxes xx
Depreciation xx
Other Fixed Costs (to be specified) xx xx
B. VARIABLE COSTS
Salaries and Wages of Drivers, Cleaners etc xx
Fuel and Lubricants xx
Consumables xx
Amortized Cost of Tyre, Tube and Battery xx
Spares xx
Repairs and Maintenance xx
Other Variable Costs (to be specified) xx xx
C. TOTAL OPERATION COSTS (A + B) xx
D. PROFIT/LOSS xx
E. REVENUE (C + D) xx

The above cost sheet is as prescribed in CAS 5 by ICWA which is mandatory wef 1-4-
2010. CAS-5 is mandatory for Cost Audits under the Companies Act and for computing

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Transport Cost under the Excise Act. The above cost classification is different from the
traditional cost classification.

 Fixed Costs are costs of owning the vehicles. These must be paid whether the
vehicle runs or not. These also include office/administrative overheads.

 Variable Costs are incurred to actually run a vehicle. These vary with the
operations – the more the vehicle runs the higher the variable costs.

 Effective Kilometres = Run x Load = (One way trip km x Trips/day x Days

Operated) x (Carriage Capacity x Usage Rate)

 Cost per kilometre = Operation Cost / Effective Kilometres

 Revenue per Kilometre = Revenue / Effective Kilometres

 Tariff to be charged per kilometre = Takings per effective km / Distance per

trip

Depreciation is treated as a fixed cost as per CAS 5, whether its useful life is mentioned
in terms of kms or years.

Salaries of drivers and operating staff is treated as running costs, because no salary will
be paid if the vehicle is not in operation.

Interest is financial cost and ignored in the cost sheet.

Final Total Operating Cost remains the same whether an item is treated as fixed or
variable.

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TRANSPORT INDUSTRY - OPERATING COSTING 1

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COST SHEET (HOTEL)

Below is the standard format for Cost Sheet of a Hotel as per CAS 5 under the system of
Operating Costing.

COST SHEET FOR ______ (YEAR)

STEP COSTS Rs. Rs.

(TOTAL)
Salaries to Staff xx
Room Attendant Wages xx
Repairs & Renovation xx
Lighting & Heating xx
Power xx
Linen xx
Interior Decoration xx
Sundries xx
Depreciation
-Buildings xx
- Furniture & Fixtures xx
-Air Conditioners xx xx
Premises Rent xx
Other Administrative Expenses xx
Interest on Investment xx

TOTAL OPERATING COST (I) xx

No. Of Room Days (II) xx
Cost Per Room Day (I) / (2) xx

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COST SHEET (HOSPITAL)

COST SHEET FOR ______ (YEAR)

STEP COSTS Rs. Rs.

(TOTAL)
A. FIXED STANDING COSTS
Salaries to Staff xx
Premises Rent xx
Repairs & Maintenance xx
General Administration Expenses xx
Cost of Oxygen, X-Ray xx
Depreciation xx xx
B. RUNNING OR VARIABLE COSTS
Doctors’ Fees xx
Food xx
Medicines xx
Diagnostic Services xx
Laundry xx
Hire Charges for Extra Beds xx xx
C. TOTAL OPERATING COST (A+B) xx
D. NO. OF PATIENT DAYS xx
E. COST PER PATIENT DAY (C/D) xx

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ILLUSTRATIVE EXAMPLE ON COST SHEET OF TRANSPORT CO.

Background
A transport company supplies the following details in respect of a truck of 5 tonne
capacity which carries goods to and from the city covering a distance of 50km each way.

Cost of Truck Rs. 180000

Diesel, Oil, Grease (per trip each way) Rs. 30
Repairs & Maintenance (per trip each way) Rs. 1500
Drivers Wages (monthly) Rs. 1500
Cleaner-cum-Attendant’s wages (monthly) Rs. 750
Insurance (annual) Rs. 9000
Road License (annual) Rs. 3000
General Supervision Charges (per year) Rs. 6000
Estimated Life (in years) 10

While going to the city, freight is available for a full load of the truck and on its return
journey it can fetch only upto 20% of its capacity.

We assume that the truck runs on an average 25 days a month and calculate the
following:

 Operating Cost per tonne-km

 Rate per tonne per trip so that the company should charge if profit is 100% on
cost.
 What freight should the company charge if one wants to engage the truck for one
day for a trip to the city and back.

Page | 18
Solution

COST SHEET FOR 1 month

Vehicle No.: 1

Carriage Capacity: 5 tonnes

Days Operated: 25 days a month

STEP COSTS Total Cost Cost per

per month ton-km
7500 ton-
km
A. FIXED COST
Insurance (9000 / 12) 750 0.200
Licence Fee, Permit Fee and Taxes (3000 / 12) 250 0.100
Depreciation (180000 / (12 x 10)) 1500 0.033
General Supervision (6000 / 12) 500 0.067
B. VARIABLE COSTS
Salaries and Wages of Drivers 1500 0.200
Cleaner-cum-Attendant Wages 750 0.100
Diesel, Oil, Grease (30 x 50 trips) i.e. 2 trips
per day for 25 days 1500 0.200
Repairs & Maintenance 1500 0.200

C. TOTAL OPERATION COSTS PER TON 8250 1.100

KM (A + B)
D. PROFIT/LOSS @ 50% on cost 8250 1.100
E. REVENUE (C + D) 16500 2.200

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Notes:

1. Determination of tonne-km per month

Trip to city: 50km x 5 ton capacity x 25 days = 6250 km
Return trip: 50 km x 1 ton utilisation x 25 days = 1250 km
Thus, total 7500 tonne km.

2. Determination of Freight Rate

Cost per tonne = 1.10
Add: Desired Profit = 1.10
Total (Freight Rate) = 2.20

We have thus seen an example of cost sheet of Transport Company as per provision of
Cost Accounting Standards.

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ILLUSTRATIVE EXAMPLE ON COST SHEET OF A HOTEL AS PER
COST ACCOUNTING STANDARDS.

Background

We take a hypothetical data for hotel “Sea-View” to calculate the room rent to be charge
to give a profit of 25% on cost excluding interest.

1. Salaries of Staff Rs. 180000

2. Wages of the room attendant Rs. 20 per day. There is a room attendant for each
room. He is paid wages when the room is occupied.
3. Lighting, Heating and Power
a. The normal lighting expenses for a room for the whole month is Rs. 500
when occupied
b. Power is used only in winter and the charges are Rs. 200 per month for a
room, when occupied.
4. Repairs to Building Rs. 20000
5. Linen Rs. 6000
6. Sundries Rs. 8000
7. Interior Decoration and Furnishing Rs. 20000
8. Depreciation @ 5% is to be charged on building costing Rs. 400000 and on
equipments at 10% p.a.
9. Interest to be charged @ 5% on investment in buildings and equipment
amounting to Rs. 500000
10. There are 100 rooms in the hotel. 80% of the rooms are generally occupied in the
summer and 30% in winter

The period of summer and winter may be considered to be of 6 months in each case. A
month is assumed to be 30 days.

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 Solution

HOTEL SEA VIEW COST SHEET FOR 1 Year

Room Capacity: 100 rooms

Days Operated: 80% in Summer (6months), 30% in Winter (6months) (30days a

month)

STEP COSTS Total Cost

A. FIXED COST
Salary to Staff 180000

Total 180000

B. VARIABLE COSTS
Room Attendant Wages (Note 1) 396000
Lighting, heating and Power (Note 2) 366000
Repairs to Building 20000
Linen 6000
Sundries 8000
Interior Decoration 20000
Depreciation
-Building@5% on 4,00,000 20000
-Equipment@10% on 1,00,000 10000
Cost Excluding Interest 846000

C. Total Cost Excluding Interest (A+B) 10,26,000

D. Add: Interest on Investment (5% on 5,00,000) 25,000
E. Total Cost Including Interest (C+D) 10,51,000
F. Add: Profit @ 25% on Cost Excluding Interest
(25% on 10,26,000) 2,56,500
G. Total Revenue 13,07,500

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 𝑻𝒐𝒕𝒂𝒍 𝑬𝒂𝒓𝒏𝒊𝒏𝒈 𝒑𝒆𝒓 𝒚𝒆𝒂𝒓 𝟏𝟑, 𝟎𝟕, 𝟓𝟎𝟎
𝑹𝒐𝒐𝒎 𝑹𝒆𝒏𝒕 𝒑𝒆𝒓 𝒅𝒂𝒚 = = = 𝑹𝒔. 𝟔𝟔. 𝟎𝟑/−
𝑻𝒐𝒕𝒂𝒍 𝑹𝒐𝒐𝒎 𝑫𝒂𝒚𝒔 𝑶𝒄𝒄𝒖𝒑𝒊𝒆𝒅 𝟏𝟗, 𝟖𝟎𝟎

Notes:

1. Room Attendant Wages

a. Summer: 100 rooms x Rs. 20 x 6 months x 30 days x 80% = 2,88,000
b. Winter: 100 rooms x Rs. 20 x 6 months x 30 days x 30% = 1,08,000
Total Room Attendant Wages for the year at the hotel = 3,96,000

2. Lighting & Power

a. Lighting
i. Summer: 100 rooms x 80% x 6 months x Rs. 500 = 2,40,000
ii. Winter: 100 rooms x 30% x 6 months x Rs. 500 = 90,000
b. Power
i. Winter: 100 rooms x 30% x 6 months x Rs. 200 = 36,000

Total Lighting & Power Usage for the year at the hotel = 3,66,000

3. Room Days
a. Summer: 100 rooms x 80% x 6 months x 30 days = 14,400
b. Winter: 100 rooms x 30% x 6 months x 30 days = 5,400
Total No. Of Room Days at the hotel in the year = 19800

We have thus seen an example of cost sheet of Hotel as per the provisions of CAS which
require clear demarcation of fixed and variable costs, among other requirements.

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ILLUSTRATIVE EXAMPLE COST SHEET OF HOSPITAL AS PER COST
ACCOUNTING STANDARDS

Background
A Hospital is run by a Company. For this purpose it has hired a building at a rent of Rs.
5000/month plus it would bear repair charges also.

The hospital is having 25 beds and 5 more beds can be accommodated when the need
arises.

The staff of the hospital is as follows:

1. 2nos. Supervisors each at a salary of Rs. 500 per month

2. 4nos. Nurses each at a salary of Rs. 300 per month
3. 2nos. Ward boys, each at a salary of Rs. 150 per month

Although the hospital is open for patients all 365 days a year, records of the year 2004
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 an average of 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 the 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:

1. Repair and Maintenance : Rs. 3600

2. Food Supplied to Patients: Rs. 44000
3. Sanitary and Other Services for Patients: Rs. 12500
4. Laundry Charges: Rs. 28000
5. Medicine Supplied: Rs. 35000

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

General administration charges allocated to hospital 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 2004.

Page | 25
Solution

HOSPITAL COST SHEET FOR 1 Year

Bed Capacity: 25 (+5 subject to extra charge)

Days Operated: 365 days a year

STEP COSTS Total Cost

A. FIXED COST
Salary to Staff [(2x500) + (4x300) + (9x150)] x 12 30,000
Rent (5000x12) 60,000
Repairs & Maintenance 3,600
General Administration 49,550
Cost of Oxygen, X Ray etc 54,000

Total Fixed Cost 1,97,150

B. VARIABLE COSTS
Food 44,000
Sanitary Services 12,500
Laundry 28,000
Medicines 35,000
Doctors’ Fees (10000x12) 1,20,000
Hire Charges for Extra Bed 2,0000

Total Variable Cost 2,41,500

C. Total Cost (A+B) 4,38,650

D. Add: Profit (balancing figure)
61,350
G. Total Revenue (100 x 5000) 5,00,000

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Profit per patient day = 61350/5000 = Rs. 12.27

Note 1: Number of Patient Days

Beds Days Patient Days (Beds x

Days)
25 120 3,000
20 80 1,600
Extra Bed Days (total hire chgs/charge per day per bed 400
(2000/5)
Total 5,000

It is assumed in the solution given above that the cost of sanitary and other services is
variable on the presumption that they are related to no. of patient-days. On the other
hand, cost of oxygen, X-Rays etc have been taken as fixed cost since it has been stated
that this cost is other than costs directly borne for treatment of patients.

Page | 27
CONCLUSION

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 organisation 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.

Operating Costs are the costs incurred by undertakings which do not manufacture any
product but provide a service. Such undertakings for example are — Transport
concerns,Gas agencies; Electricity Undertakings; Hospitals; Theatres etc. Because of the
varied nature of activities carried out by the service undertakings, the cost system used is
obviously different from that followed in manufacturing concerns.

The essential features of operating costs are as follows:

 The operating costs can be classified under three categories. For example in the
case of transport undertaking these three categories are as follows:
(a) Operating and running charges. It includes expenses of variable nature. For
example expenses on petrol, diesel, lubricating oil, and grease etc.
(b) Maintenance charges. These expenses are of semi-variable nature and includes
the cost of tyres and tubes, repairs and maintenance, spares and accessories,
overhaul, etc.
(c) Fixed or standing charges. These includes garage rent, insurance, road licence,
depreciation, interest on capital, salary of operating manager, etc.
 The cost unit used is a double unit like passenger-mile; Kilowatt-hour, etc.

Page | 28
It can be implemented in all firms of transport, airlines, bus-service, etc., and by all firms
of Distribution Undertakings.

Through this study we have also understood the basic format of cost sheets prepared for
hospitals, transport companies and hotels under Operating Costing and as per the
provisions of Cost Accounting Standards issued. The same has been dealt with by
showing illustrative examples of each industry type followed by clear working of the
solution to the illustration.

Thus, we have concluded our study of Operating Costing.

Page | 29
BIBLIOGRAPHY/WEBLIOGRAPHY
1. -Ainapure, Varsha M. Dr, Advanced Cost Accounting M.Com. Part-I (Sem I &
II), Manan Prakashan
2. Tulsian, P.C. Dr, Tulsian’s Cost Accountancy for CA-PCC/IPCC, S.Chand
Publications
3. The ICAI, Cost Accounting & Financial Management PART 1: Cost Accounting
4. http://my.safaribooksonline.com/book/accounting/9788131774991/chapter-
11dot-operating-costing-or-service-costing/sub11_1_xhtml
5. http://www.icai.org/resource_file/19072comp_sugans_pe2_costacc_cp9.pdf
6. http://www.businessdictionary.com/definition/operating-cost.html

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