ADVANCED COST ACCOUNTING OPERATING COSTING

ON HOTEL,HOSPTAL,& TRANSPORT

REPORT SUBMITTED TO

DIRECTORATE OF DISTANCE AND CONTINUING EDUCATION

UTKAL UNIVERSITY, VANIVIHAR

BHUBANESWAR-751004

FOR THE PARTIAL FULLFILLMENT OF THE REQUIREMENTS

LEADING TO AWARD OF MASTER OF COMMERCE (ACCOUNTS)
PROJECT REPORT

SUBMITTED BY : UNDER THE GUIDANCE OF:

BANALATA SWAIN
GIRIDHARI SAHOO
ENROLLMENT NO-
1603030090900449 (ACADEMIC CONSULTANT)

ACADEMY YEAR 2016-

2018
 CERTIFICATE
Guide Name- Mr. Giridhari Sahoo

This is to certify that the project report entitled “A study on

ADVANCE COST ACCOUNTING OPERATING COSTING ON
HOTEL HOSPITAL & TRANSPORT” a bonafide presentation of
work has been prepared by MISS BANALATA SWAIN under my
supervision & guidance , for the partial fulfillment of the
requirements leading to award of MASTER OF COMMERCE
(ACCOUNTS) of DDCE,UTKAL UNIVERSITY . His field work is
satisfactory.

Signature of The Guide

DATE-
 DECLARATION

I here declare that the project entitled “A PROJECT REPORT ON ADVANCE COST
ACCOUNTING OPERATING COSTING ON HOTEL, HOSPITAL & TRANSPORT”.
Submitted to Directorate of Distance & Continuing Education,Utkal University is a record of an
original work done by me under the guidance of Mr.Giridhari Sahoo and this assignment is
submitted for the partial fulfillment of the requirement for the award of the degree Of Master of
commerce(Accounts). The research embodied in this assignment has not been submitted to any
other University or Institution for the award of any Degree or Diploma.

Signature of the student DATE-

Enrollment No-1603030090900449 PLACE-
 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 dimension in the
Completion of this project.

I would firstly thanks to the University for giving me chance to do this project.

I would like to thanks my Guidance Mr.Giridhari Sahoo for providing me the necessary facilities
required for Completion of this project.

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

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

Finally I proudly thanks my Parents and Friends for their support throughout the project
 Table Of Contents
Sr. No. Topic Page
No.
1. Objective Of Study 6

2. Introduction 7

3. Methods Of Costing 8-10

4. Operating Cost and Operating Costing 11-14

5. Examples Of Operating Costing 14-15

6. Features Of Operating Costing 16-17

7. Advantages & Disadvantages of Operating Costing 18-20

8. Users Of Operating Costing 21

9. Steps in Operating Costing 22-24

10. Operating Cost Statements Of Various Service Organization

Transport Costing 25-31

Hotel Costing 32-39

Hospital Costing 40-47

11. Findings and Suggestions 48-50

12. Conclusion 51
13. Bibliography 52
 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.
 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."
 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
 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.
 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.
 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
 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 ar e
 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
 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.
 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.
 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
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
 ADVANTAGES & DISADVANTAGES OF OPERATING COSTING
ADVANTAGES

1. Invest in more training for your employees. Wait-isn't this article about reducing
operating expenses? Well, it is. Investing in more training for employees will reduce
the number of errors that are made, which will inevitably save money for the
company. Not only that, but investing more in your employees will show them that
they are valued. In return, they will be more engaged and produce more (and better)
work.

2. Cut office supply expenses. Reducing supply expenses can significantly reduce your
operating expenses and improve your bottom line. This can be done by going from
paper to electronic whenever possible or ordering supplies in bulk in order to obtain
discounts. In addition, if you purchase all of your supplies at the same outlet, you may
be able to negotiate a better price. At the very least, shop around for lower prices and
any loyalty programs offered by potential suppliers.

3. Cut out travel and entertainment expenses. Although T & E expenses are considered a
"perk," during tough times, these are expenses a business can do without. Instead of
traveling to business meetings, hold conference calls or meetings online. Also, try not
to spend funds on company outings, meals, or other entertainment.
4. Rent or lease equipment as opposed to purchasing new equipment. Leasing business
equipment and tools preserves capital and provides flexibility. According
to Nolo.com, a legal advice website, the primary advantage of leasing business
equipment is that it allows businesses to acquire assets with minimal initial
expenditures. In addition to this, leasing offers the benefits of improved cash flow, tax
advantages, flexible terms, and the ability to easily upgrade equipment.

5. Reduce marketing and advertising expenses. Business magazine and

websiteEntrepreneur.com suggests that business owners "split advertising and
promotion costs with neighboring businesses. Jointly promote a sidewalk sale, or take
your marketing alliance further by sharing mailing lists, distribution channels and
suppliers with businesses that sell complementary goods or services." If you are
advertising via television or radio ads, look for cheaper time slots as another option.

6. Reduce your staff-well, sort of. This doesn't necessarily mean completely laying off
your workers. Instead, consider rehiring your workers on a contract basis as a
temporary employee. This could save you money on salary expenses as well as
employee benefits until the business gets back on track and is able to rehire workers
on a permanent basis.
7. Outsource administrative functions. Consider outsourcing functions such as your
accounting and payroll to help reduce your business expenses. This will give you more time
to focus on building your business and costing projects, while possibly reducing the expense
of these functions if you are able to outsource them for cheaper than performing them within
your business.

While cutting expenses may seem like something to do temporarily to maintain your
business, actually implementing these ideas when revenues are increasing will continue to
help your business generate the most profitability possible.

 DISADVANTAGES OF OPERATING COSTING :

 Start-up businesses are typically more costly and risky since there is no proven
formula.

 In order to obtain capital to fund the business, a lengthy detailed business plan must
be put together.

 All of the details of starting the business, including licenses, marketing, naming the
business, finding product sources, etc. are the responsibility of the owner
 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.
 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 kilometer
Hotel Per room day
Cinema Per seat per show
Electricity Per kilowatt hour
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
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
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.

 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
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 2017.

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.

 Solution:

Costing Club Transport Limited

January 2017

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
=22,60,000/4,46,400 5.062
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 2017:

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
 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 2017

Particulars Amount (Rs.) Amount (Rs.)

A) Standing Charges/Fixed charges

Drivers wages 1600
Repairs 400
Garage Rent 600
Insurance
500
Vehicle License Cost
Other overhead costs 100
Total 3200 6400
B) Running Charges/Variable
Expenses
Petrol consumption cost 5200
Oil 400
Depreciation on lorry 16000
Depreciation on tyres
800 22400
Total
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

= 3200 × 10+0÷2
2

= 16000 tonne kilometers

 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.

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 Housekeepingcost
unit is no. of rooms cleaned Laundry-cost unit is number of clothes washed.
 COST SHEET FORMAT OF HOTEL

Particulars Amount(Rs.) Amount(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
 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.
Solution:
Balaji Hotel Ltd .

Statement of operating cost for a year

Particulars Amount(Rs.) Amount(Rs.)

A ) Standing Charges/Fixed charges
Single room (36500 * 120) 43,80,000
Double room (7300 * 250) 18,25,000
Total 62,05,000
A ) Standing Charges/Fixed charges
Single room (36500 * 120) 64,24,000
Double room (7300 * 250) 20,44,000
Total 84,68,000
C) Total Cost 146,73,000
D) Profit 1/4th of cost 36,68,250
E) Total Revenue / Rent 183,41,250
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)
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

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 31st March 2017.

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 equipment's
.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.

.
Solution:

Statement of operating cost for a year ended 31st march 2017

Particulars Amount(Rs.) Amount(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
Equipment's 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
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% X4 = 19200

Winter 200 X 30 X 60% X4 = 14400

Rainy 200 X 30 X 30% X4 = 7200

Total =40800

Wages: 20 X 40800 = 8,16,000

Lighting : 40800 X 500÷30

Power : 14400 X 200÷30( only in winter )

 HOSPITAL COSTING
Modern day hospitals provide a variety of services to patients under one roof. It is akin to
a large service organization considering the number of personnel involved and the
capital-intensive nature of the business be it the civil structures, operation theatres and
equipment, diagnostic and therapeutic equipment, resuscitation equipment, gas lines,
surgical instruments, consumables, and so on. Moreover, it is a 24×7 operations with
people playing a vital role in the well being of the patients in the hospital.

There are various complexities that necessitate the hospital management to put in place
robust costing systems. However, traditional hospital managements have not given
serious thought to the same. The corporate world has adopted and benefited from good
costing systems, since the early 1930’s. The same holds true of modern day corporate
hospitals, who believe in providing cost effective services to patients and ensuring patient
loyalty to the healthcare provider.

Traditionally, hospitals used bed occupancy as the yardstick of measurement of

performance. With the advancements in medical technology, the average length of stay
(ALOS) is reducing and hence, bed occupancy is not the main performance measure any
longer.

The increased utilization of costly resources, e.g. equipment in operating theatres, ICUs,
Cath-Lab, Pathology Lab etc. in addition to doctors’ times are the key to success in
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 centers, which are:
 Out-patient department
 Pathology center
 Wards
 Operation theatre
 Laundry
 Kitchen
Cost sheet format for Hospitals

Particulars Amounts(Rs.) Amounts(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)

Illustration 1

Critic Care Hospital operates a fitness center to provide counseling on nutrition for major
surgery patients. Average patient will make three visits to the center. Each visit lasts 40 minutes.
The hospital has estimated following costs of operating the center:
 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?
Solution:
Statements 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

 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.3,600
Food to patients Rs. 44,000
Sanitary services Rs. 12,500
Laundry charges Rs. 28,000
Medicines Rs. 35,000
Cost of oxygen, X-ray etc. other than directly borne for
treatment of patients Rs.54,000
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 2015.

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 2,41,000
Contribution 2,58,000
 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
1,97,150
Total
Total profit 61,350

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

Where Number of patient days in 2013:

25 beds X 120 days 3000

20 beds X 80 days 1600

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

Total patient days 5000

 FINDINGS
According to the objectives of the study, various analysis and statistical
tools were used for the cost and operational analysis of the selected HOTEL,HOSPITAL&
TRANSPORT the following are to be taken as the findings of the study .

COST AND PROFIT PATTERN ANALYSIS:

The following are the findings related to the cost and profit pattern of the hotel, hospital &
transport:
Raw Material pattern
Employee cost pattern
Manufacturing expenses pattern
Depreciation cost pattern
Selling and administration cost pattern
Total cost pattern
Profit pattern
OPERATIONAL EFFICIENCY ANALYSIS:
Measuring efficiency by ratio analysis
Probabilistic Neural Network Classifier
Data Envelopment Analysis (DEA)
Canonical Correlations Analysis
 OTHER FINDINGS
Raw material constraints
Water shortage
Finances
Industrial sickness

Pollution Vs. Go-Green initiatives

Shortage of Human Resources

Per Capita Consumption of Paper

Power shortage

Obsolescence of technology

Non availability of good quality fibrous raw materials

High cost of basic inputs

Environmental issues

Competition in global market

 SUGGESTIONS

1.Reducing Operating costs by Embracing Technology.

2.Reduce Costs With Outsourcing.

3.Lower Operating Costs by Shopping Around.

4.Telecommute To Cut Down on Costs.

5.Pay Invoices Early On Time.

6.Identify Inefficiencies To Decrease Costs.

7.Cancel Unused Services.

8.Go Green To Reduce Operating Costs.

 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.

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.

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.
 Bibliography

 Advanced Cost Accounting – Manan Prakashan

 https://en.wikipedia.org/wiki/Operating_cost

 http://www.accountingtools.com/questions-and-answers/what-is-operationcosting.
html

 http://www.wisegeek.com/what-are-the-different-types-of-operating-costs.html

 https://en.wikipedia.org/wiki/Operating_cost

 http://www.investopedia.com/ask/answers/040915/what-are-different-
typesoperating-expenses.asp

 http://ehealth.eletsonline.com/2011/02/costing-system-inhospitals/#
sthash.ygy5yMoV.dpuf