Operating Costing

Introduction
Operating cost is defined as the cost of rendering or

providing a service. Service costing. CIMA (Charted institute of Management Accountant) - Operating costing as the cost of specific services and functions, e.g. maintenance, personnel, canteen, etc. These may be referred to as service centers, departments, or functions.

Operating Costing
Companies belonging to the service sectors like

transport companies, hospitals, electricity and gas companies, hotels and restaurants, water supply and road maintenance companies are some of the enterprises where operating costing is applicable.

Characteristics
It is a system of costing employed to find the cost of

rendering a service. Under this system, costs are accumulated under suitable headings and are expressed in terms of the unit of services rendered. Unlike in other methods of costing, selection of cost unit is difficult in operating costing. Operating costs are mostly period costs. This system requires a more detailed but simpler statistical data for proper costing

Features
Classification of costs into variable and fixed
Ascertainment of costs is done periodically Stages and processes involved in conversion of basic

materials No difficulty in valuation of work in progress Accurate estimation of cost is difficult

Cost Unit
The selection of a unit of cost in case of operating

costing is a difficult job. It depends upon the nature of business. There can be two types of unit cost:
Simple

the unit of cost is quite clear, e.g. per bed in case of a hospital

Composite.

more than one unit is combined together

Industry and Corresponding Cost units

Industry Transport Hospitals Electricity supply Canteens Hotels Cinemas Water Supply Cost Unit Passenger Kms Patient-bed, Patient-day, Per operation KWh Meals served, cups of tea sold Room days Man show Per 1000 Gallons

Classification Of Expenses
Expenses are generally classified into following three

categories
Fixed cost or standing charges Variable cost or running charges Semi Variable or maintenance charges

Classification of Expenses
Motor Transport Costing
Boiler Costing or Power House Costing Canteen Costing Hospital Costing

Motor transport costing

log book
Fixed cost Fixed costs include garage charges,

insurance, taxes, license, time-based depreciation, wages of drivers and cleaners, establishment cost of workshops, general service cost, etc. Such costs are incurred irrespective of the run of a vehicle.

Motor transport costing

Semi-variable costs Such costs are of semi-variable in

nature. They include expenditure on repairs, maintenance, tyres, tubes, accessories, and spares. Variable costs These costs are of variable nature. The extent of such costs depends on the trips made and the distance run by the vehicle. These costs include cost of fuel (petrol or diesel oil), lubricating oil, depreciation based on run, wages of driver and cleaner, etc. Running cost can be suitably allocated to each vehicle.

Boiler costing or Power House Costing

The main heads of expenditure for a boiler house are as

follows:

Water: Cost of supply, purification and softening Indirect materials: Service materials and small tools Fuel: Coal or oil Labour: Wages of coal handlers, stockers and ash removers Supervision: Wages of foremen and salary of works manager Maintenance: Furnace repairs, renewal of fire bars, Replacement of fire iron, etc. Overhead costs: Rent, rates, depreciation, insurance and interest on capital

Canteen costing
The objectives of canteen or hotel costing are: Ascertainment of cost per unit Cost analysis for decision-making Inter-firm comparisons Collection and analysis of cost for cost control Total operation of a hotel is divided into a number of

cost centres.
Restaurant Housekeeping Laundry

Canteen costing
The important heads of expenditure is as follows: Provisions: Vegetables, fruits, meat, flour, milk, oil, sugar, cream, tea, coffee, soft drinks, etc. Labour: Salary of cooks, waitresses, kitchen assistants, supervisors, and porters Service: Steam, gas, electricity, power and light, water Consumable stores: Cutlery, crockery, glassware, table linen, washing up clothes, drying up clothes, cleaning materials, dustpans, brushes, etc. Miscellaneous overheads: Rent, rates, depreciation, insurance, etc. Credit: Charges of meals, tea, and other sales

Hospital costing
The hospital services can be divided into following

categories:
Outpatient department Wards Medical service departments, such as Radiotherapy,

Diagnostic

X-ray, and Pathology, etc.

General services, such as boiler house, power, heating,

lighting, catering, laundering, medical records, and administration Other service departments, such as dispensary, transport, clearing, etc.

Hospital costing
Following units can be used for this purpose:

Outpatients Wards Radiotherapy Diagnostic X-ray

Per outpatient visit Per outpatient registration Per patient-day or week Per surgical case Per course of treatment Per day Per 100 units