,

11

Operating Costing or Service Costing

The role of service sector in the national economy has become significant nowadays. The term “service” is being used extensively under different contexts. It means services rendered by various departments within the organization or organizations providing services to outside firms, viz. personnel, maintenance, canteen, hospitals, boiler house, captive power units, hotels, road maintenance, water supply, transport—goods and passengers—educational institutions, firms—law, accounting and management consultancy—electricity companies and computer services department. Such service organizations render a variety of services. Each is unique in its inherent characteristic features. This chapter explains in detail computing the cost of rendering a service and its implications for management.

11.1 MEANING OF OPERATING COSTING OR SERVICE 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.

11.2 FEATURES OF SERVICE 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.

11.3 USERS OF SERVICE COSTING

Operating costing is widely used by (i) service organizations and (ii) departments within organizations rendering services to other departments.

1. Service organizations: 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.
2. 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.

11.4 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:

Types of Services Organizations/Departments	Cost Unit
1. Good transport (public carriers, trucks, good trains, etc)	per tonne-km or quintal-km
2. Passenger transportation (bus, railway)	per passenger-km
3. Power generation and distribution (electricity boards)	per kilowatt hour
4. Hospitals	per patient-bed day, per operation
5. Hotels	per room per day bed nights, etc.
6. Canteens	per number of staff, per meals served, etc.
7. Water supply	per kilolitres
8. Boiler houses	per kg of steam supplied
9. Road maintenance	per km of road maintained
10. Captive power generation unit	per kilowatt hours
11. Consulting firms	per client hours
12. Computer department	per computer time provided to user departments
13. Machinery maintenance	per maintenance hours spent in user departments

Illustration 11.1

Model: Cost per unit

Following are the details regarding transportation of goods by a transport company.

Date	Quantity in Quintal	Distance in km
1 January 2010	50	100
3 January 2010	10	200
5 January 2010	30	150
7 January 2010	25	300

If the total cost is Rs. 38,000, compute cost per quintal-km.

Solution

Step 1: Total quintal/km is to be calculated as follows:

 

	50 quintal × 100 km	=	5,000
	10 quintal × 200 km	=	2,000
	30 quintal × 150 km	=	4,500
	25 quintal × 300 km	=	7,500
	Total quintal/km	=

Step 2: Cost per quintal-km is calculated as follows:

Illustration 11.2

Model: Absolute tonne-km and commercial tonne-km

Important note

1. When absolute tonne-km is calculated, the travel between any two stations is treated individually.
2. When commercial tonne-km is calculated, the trip is treated as a whole.

A truck starts with a load of 12 tonnes of goods from station X. It unloads 4 tonnes at station Y and rest of the goods at station Z. It reaches back directly to station X after getting reloaded with tonnes of goods at station Z. The distance from X to Y, Y to Z and Z to X are 50 km, 100 km and 120 km, respectively. Compute absolute tonne-km and commercial tonne-km.

 

[B.Com. (Hons), Delhi; C.A. (Inter). Modified]

Solution

CASE 1: Absolute tonne-km

NOTE: Travel between any two stations is to be treated separately.

 

CASE 2: Commercial tonne-km

NOTE: Trip is treated as a whole.

 

Illustration 11.3

Model: Computation of cost per commercial tonne-km

A transport company maintains a fleet of lorries for carrying goods from Chennai to Trichy, 300 km off. Each lorry, which operates 20 days on an average in a month, starts every day from Chennai with a load of 10 tonnes and returns from Trichy with a load of 8 tonnes. Calculate the total commercial tonne-km and cost per commercial tonne-km. The total monthly charge for a lorry is Rs. 1,62,000. What rate per tonne should the company charge if it plans to earn a gross profit of 25 per cent on the freightage?

 

[B.Com. (Hons), Delhi. Modified]

Solution

First, commercial tonne-km has to be ascertained.

Step 1: Commercial tonne-km = Average load × tonne-km travelled

Step 2: Total cost = Rs. 1,62,000

Step 3: Cost per commercial tonne-km

Step 3: Freight rate per tonne-km (25 per cent on freightage)

11.5 COST ANALYSIS

The costs incurred in departments rendering services or service organizations are grouped under the following heads:

1. Fixed or standard charges
2. Semi-fixed or maintenance charges
3. 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.

Determination of cost per unit serves the following purposes:

1. It is used for price fixation.
2. It is used for cost control.

Operating cost statements of various departments rendering services or service organizations.

11.6 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.

11.6.1 Objectives of Motor Transport Costing

1. Analysis of operating costs, namely, wages, full cost, insurance, repairs and maintenance.
2. Control of operating and running costs and avoidance of waste of fuel and other consumable material.
3. Comparison of cost of running and maintenance of different vehicles.
4. Assignment of costs to services provided by each vehicle.
5. To quote hiring rates.
6. To compute cost of idle vehicle and lost running time.
7. Collection and analysis of cost for cost control.
8. Cost comparison and analysis for decision-making process.

11.6.2 Collection of Cost Data

Costs are collected under the following heads:

1. Standing charges or fixed costs:
   1. Salary and wages
   2. Insurance premium
   3. Road tax and permit fee
   4. Interest on capital
   5. Garage costs
   6. Administrative expenses
   7. Wages of drivers and conductors
   8. Rent, rates and taxes
   9. Depreciation
2. Running costs or variable costs:
   1. Lubricating oil
   2. Grease
   3. Cost of petrol/diesel
3. Maintenance charges:
   1. Spares
   2. Tyres and tubes cost
   3. Painting expenses
   4. Overhauling of vehicles
   5. Cost of repairs
   6. Cleaner wages
   7. Hire charges for vehicles

Fixed charges are incurred irrespective of the distance travelled by the vehicles. These expenses are not to be apportioned to individual journeys

Running costs are incurred only when vehicles are running. These are variable costs. The variance is directly proportional to the distance travelled by the vehicles. These expenses are expressed as cost per km. Maintenance charges are semi-variable expenses. They are incurred for repairs and maintenance of vehicles.

11.6.3 Records

In transport costing, accumulation and control of costs are obtained through a daily log sheet and operating cost sheet.

11.6.3.1 Log Sheet

A daily log sheet is a document containing particulars relating to each journey. This is to be prepared for each vehicle. This is to be filled by the concerned driver of the vehicle. The log book is useful for the management to make proper allocation of vehicles to avoid idle running capacity. These log books provide the necessary data for suitable allocation of costs.

11.6.3.2 Performance Statement

The operating cost sheet or cost statement is to be prepared for each vehicle on a monthly basis. The operating cost sheet acts as a control instrument. The total cost and cost per unit may be compared with past figures, and performance may be evaluated with the performance statement—to be prepared separately.

The specimens of cost summary (monthly cost sheet) and performance statement (report) are depicted as follows:

 

Vehicle No. Distance Travelled (km)	Capacity: Tonnes Hauled	Month (tonne-km)
Monthly Cost	Total Rs.	Per Tonne/km
(a) Operating and running charges (cost): Petrol/diesel Lubricating Oil Grease Wages of driver (variable) Depreciation Sundries Sub-Total
(b) Maintenance charges (cost): Tyres and tubes Spares Repairs Overhauling Hire charges for vehicles Sundries Sub-Total
(c) Fixed Charges: Insurance premium Road tax Rents and taxes Garage rent Interest on capital Others Sub-total Total Costs

Illustration 11.4

Model: Transport costing—computation of operating cost per tonne-km

From the following data, relating to a good transport company VRS Transport Co. Ltd, calculate the cost per tonne-km.

	Rs.
Driver’s salary	10,000
Garage mechanic salary	5,000
Manager’s salary	15,000
Garage rent	3,000
Accountant’s salary	12,000
Insurance premium	2,000
Cleaners salary	3,000
Administration overhead	5,000
Depreciation	25,000
Road tax and permit fee	1,000
Interest	6,000
Petrol and diesel consumed	5,000
Tyres and tubes	4,000
Lubrication and sundries	1,000
Spares	2,000
Repairs and maintenance	3,000
Hire charges	2,000

The trucks ran 1,000 km during the year ended 31 March 2010, and the quantity of goods carried is 100 tonnes.

Solution

First, total tonne-km has to be calculated as follows:

 

	Total tonne-km	=	1,000 km × 100 tonnes
		=	1,00,000 tonne-km

Then, operating cost sheet has to be prepared as follows:

 

Vehicle No. Distance Travelled km: 1,000 tonnes Hauled: 100		Year ended: 31 March tonne-km: 1,00,000
	Total Rs.	Per tonne/km Rs.
Step A: Operating and Running Cost
(i) Petrol/diesel	5,000
(ii) Lubrication and sundries	1,000
Sub-total	6,000	0.060
Step B: Maintenance Cost
(i) Tyres and tables	4,000
(ii) Spares	2,000
(iii) Repairs and maintenance	3,000
(iii) Garage mechanic’s salary	5,000
(iv) Hire charges	2,000
(v) Cleaner’s salary	3,000
Sub-total	19,000	0.190
Step C: Fixed Cost/Standing Charges
(i) *Depreciation	25,000
(ii) Insurance premium	2,000
(iii) Driver’s salary	10,000
(iv) Garage rent	3,000
(v) Manager’s salary	15,000
(vi) Road tax and permit fee	1,000
(vii) Interest	6,000
(viii) Administrative overhead	5,000
(ix) Accountants salary	12,000
Sub-total	79,000	0.790
Step D:
Total Costs (Add: Step A + Step B + Step C)	1,04,000	1.040

Illustration 11.5

Model: Transport costing computation of cost per passenger-km

The following data relate to a passenger transport company Raj Travels for June. You are required to calculate the cost per passenger-km.

	Rs.
Manager’s salary	25,000
Driver’s wages	9,000
Cleaner’s wages	3,000
Garage mechanic’s salary	5,000
Garage rent	3,000
Insurance premium	2,600
Road tax and permit fee	1,400
Depreciation	6,000
Diesel	7,000
Lubricating oil and sundries	1,000
Spares	750
Tyres and tubes	4,250

The company runs two buses and each of them can accommodate 50 passengers. The buses run between two towns, and the distance between them is 200 km. The number of days on which the buses had run during the month is 30 and each bus made one round trip daily. On an average, the sealing capacity utilized was 75 per cent.

Solution

1. Total distance run during the month of June:

         = 2 buses × 200 km × 2 (up and down) × 30 days

         = 24,000 km

    

2. Total passenger-km during June:

         = 24,000 km × 50 passengers × 75 per cent capacity

         = 9,00,000 passenger-km

Vehicle No. Distance Travelled (km)	Capacity: 50	Month: June Passenger-km: 9,00,000
	Total Rs.	Per passenger-km Rs.
Step A: Monthly Cost
Operating and running cost:
(i) Petrol/diesel	7,000
(ii) Lubricating oil and sundries	1,000
Sub-Total	8,000	0.0009
Step B: Maintenance Cost:
(i) Tyres and tubes	4,250
(ii) Spares	750
(iii) Garage mechanic’s salary	5,000
(iv) Cleaner’s wages	3,000
Sub-total	13,000	0.0014
Step C: Fixed Cost/Standing Charges:
(i) Depreciation	6,000
(ii) Insurance premium	2,600
(iii) Driver’s wages	9,000
(iv) Garage rent	3,000
(v) Road tax and permit fee	1,400
(vi) Manager’s salary	25,000
Sub-total	47,000	0.0052
Step D: Total Costs	68,000	0.0075

Illustration 11.6

The following were the expenses incurred by a company in operating one lorry (for the conveyance of raw materials) and a bus (for the conveyance of staff) during a month:

Monthly Costs	Lorry	Bus
Driver’s Salary	7,000	8,000
Cleaner’s Wages	2,000	2,000
Diesel	8,000	7,000
Oil	700	500
Repairs	2,300	2,500
Depreciation	6,000	7,000
General garage overhead	4,000	3,000
Road tax	1,000	1,000
Other overhead expenses	2,000	3,000

The above-mentioned vehicles carried the following raw materials and passengers during the month.

 

Respective distance covered during the same period

 

You are required to prepare an operating cost for the month.

Solution

Calculation of unit of cost

     Lorry: 5000 km × 100 tonnes = 5,00,000 tonne-km

     Bus: 50 passengers × 2000 km = 1,00,000 passenger-km

NOTE: As distance travelled is given in the question, it is multiplied with raw materials (tonne) and number of passengers directly.

 

Particulars	Lorry Rs.	Bus Rs.
Step A: Fixed Expenses:
(i) Driver’s salary	7,000	8,000
(ii) Cleaner’s sages	2,000	2,000
(iii) Garage overhead	4,000	3,000
(iv) Road tax	1,000	1,000
(v) Other overhead expenses	2,000	3,000
Sub-total	16,000	17,000
Step B: Variable Expenses:
(i) *Depreciation	6,000	7,000
(ii) Repairs	2,300	2,500
(iii) Diesel	8,000	7,000
(iv) Oil	700	500
Sub-Total	17,000	17,000
Step C: Total Costs	33,000	34,000
Tonne-km (lorry)/passenger-km (bus)	5,00,000	1,00,000
Per tonne-km(lorry)/per passenger-km (bus)	0.066	0.340

NOTE:

1. All expenses are classified into fixed and variable.
2. Unit cost for lorry is tonne-km
3. Unit cost for bus is passenger-km.

[Students are asked to put a note for depreciation. But it is often classified as variable expenses.]

Illustration 11.7

A factory which uses a large amount of coal is situated between two collieries A and B the former being 10 km and the latter 15 km from the factory. A fleet of lorries of 10 tonne carrying capacity are used for collection of coal from the pitheads. The lorries give an average speed of 20 km per hour when running and regularly take 10 minutes in the factory premises to unload. At colliery A, loading time averages 20 minutes per load, and at colliery B, 30 minutes per load.

Driver’s wages, licences, insurance, depreciation, garage and similar charges are noticed to cost Rs. 10 per hour operated.

Fuel, oil, tyres, repairs and similar charges are noticed to cost Rs. 1 per km run.

Draw up a statement showing the cost per tonne-km of carrying coal from each colliery. If the coal is of equal quality and price at pithead, from which colliery should the purchases be made?

 

[C.A. (Inter). Modified]

Solution

Basic calculations:

1. Time taken per trip: Colliery A:
   1. To and fro travelling distance: 10 km + 10 km : 20 km
      Speed: 20 km/hour
      ∴ Time: 1 hour or 60 minutes
   2. Loading time: 20 minutes
   3. Unloading time: 10 minutes
      Total time:1 hour 30 minutes
2. For Colliery B:
   1. To and fro: 15 km + 15 km: 30 km
      Speed: 20 km/hour
      ∴ Time: 1 hour 30 minutes
   2. Loading time: 30 minutes
   3. Unloading time: 10 minutes
      Total: 2 hours 10 minutes

	Colliery A	Colliery B
Step 1. Time taken per trip	1 hour 30 minutes	2 hours 10 minutes
Step 2. Fixed Cost per Trip @ Rs. 10 per hour)	Rs. 15.00	Rs. 21.67
Step 3. Running Cost per Trip @ Rs. 1 per km)	Rs. 20.00	Rs. 30.00
Step 4. Total Cost	Rs. 35.00	Rs. 51.67
Step 5. Tonne-km	Rs. 100	Rs. 150
Step 6. Cost per tonne-km	Rs. 0.35	Rs. 0.345
Step 7. Cost per tonne	Rs. 3.50	Rs. 5.167

Though the cost per tonne-km is slightly lower in the case of colliery B, colliery A is to be preferred due to short distance and lower cost per tonne, i.e. only Rs. 3.50 compared to that of Rs. 5.167 for B.

Illustration 11.8

From the following data relating to two vehicles X and Y, you are required to compute the cost per running km:

	Vehicle X	Vehicle Y
Km run (annual)	10,000	6,000
Cost of vehicle	Rs. 1,00,000	Rs. 80,000
Road licence (annual)	Rs. 1,000	Rs. 1,000
Insurance (annual)	Rs. 800	Rs. 600
Garage rent (annual)	Rs. 700	Rs. 400
Supervision salary	Rs. 2,000	Rs. 2,000
Driver’s wages per hour	Rs. 6	Rs. 6
Cost of fuel per hour	6	6
Km run per litre	20 km	15 km
Repairs and maintenance per km	Rs. 2.00	Rs. 2.50
Tyre allocation per km	Rs. 1.00	Rs. 0.80
Estimated life of vehicles	1,00,000 km	80,000 km

Charge interest@5 per cent p.a. on cost of vehicles. The vehicles run 20 km on an average.

 

Particulars	Vehicle X Rs.	Vehicle Y Rs.
Step A: Fixed Costs per annum:
(i) Road licence	1,000	1,000
(ii) Garage rent	700	400
(iii) Insurance	800	600
(iv) Supervision salary	2,000	2,000
(v) Interest @ 5% p.a.	5,000	4,000
(vi) Total fixed costs per annum	9,500	8,000
(vii) Kilometres run per annum	10,000	6,000
Fixed cost per km (vi ÷ vii)	0.95	1.33
Step B: Running cost per km:
(i) Driver’s wages (Rs. 6 per hour for 20 km Rs. 6 20)	0.30	0.30
(ii) Fuel cost per km	0.30	0.40
(iii) Repairs and maintenance	2.00	2.50
(iv) Tyre allocation	1.00	0.80
(v) Depreciation (cost ÷ estimated life)	1.00	1.00
Total running cost per km	4.60	3.00
Step C: (A + B) Total cost per running km	5.55	4.33

11.7 BOILER HOUSE COSTING

11.7.1 Boiler House Engaging in Steam Production

It is treated as a separate service cost centre. Operating costing is applied in boiler house undertakings (organizations). Boiler house is a service department providing services to production departments.

11.7.2 Collection of Cost Data

In large industrial concerns, the costing department collects costs for the generation and utilization of steam. The collection of costs is done under the following headings:

1. Fuel: Fuel oil, coal, etc.
2. Labour: Coal handlers, stokers, ash removers.
3. Supervision: supervisor’s salary, foreman’s salary, proportionate salary of works/factory managers.
4. Maintenance: Repairs and maintenance of plant and equipment.
5. Water: Cost, softening expenses.
6. Fixed overhead: Depreciation, rent, rates and taxes, insurance premium, interest on capital.

11.7.3 Cost Unit

Cost unit is “kilograms of steam”. It is usually expressed in terms of per 1,000 kg of steam.

Specimen of operating cost (boiler house) is shown here:

Generally, cost of producing the steam and the costs of generating the electricity are combined together and power house costing statement is prepared. The unit of cost for production of steam, as already explained, is “per kilogram” and for generation of electricity is “per kilowatt”. A composite unit of cost shall be used—“kilowatt hour”. In addition to cost of producing steam, cost of generating electricity is to be ascertained.

Illustration 11.9

Model: Power house costing

From the following data compute the cost per unit of electricity produced:

	Rs.
Coal	15,000
Water	500
Wages for coal handling	1,000
Wages for stocking	1,500
Repairs and maintenance of boiler house	1,000
Lubricating oil	500
Depreciation of boiler house	1,500
Supervisory labour	2,000
Steam used for generation of power	25,000 kg
Total steam produced	30,000 kg

The expenses incurred in power house are as follows:

	Rs.
Wages for operators	1,500
Depreciation of generator	1,500
Repairs	1,000
Supervision charges	2,000
Electricity generated	20,000 units

Solution

Cost per unit of steam is calculated and then cost per unit of electricity generated is ascertained as follows:

11.8 HOSPITAL COSTING

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:

1. Out-patient department
2. Pathology centre
3. Wards
4. Operation theatre
5. Laundry
6. Kitchen

Cost is collected for each such cost centres, and the cost per unit of output is ascertained with respect to each cost centre. Costs are classified into fixed and variable for preparing operating cost sheet

Cost unit: Different cost centres have different cost units to measure the output. Cost-output relationship and all other relevant factors will have to be considered to select a cost unit. The following cost units are used generally:

1. “Bed-days” for in-patients department (Ward)
2. “No. of patients”—for out-patients department
3. “In-patient day”—for kitchen
4. “Per-operation”—for operation theatre
   or
   Cost per standard operation

Illustration 11.10

Model: Operating cost sheet of the hospital

You are provided the following data relating to Karpagam Hospital for the year ended 31 December 2009. You are required to compute the cost per patient day:

	Rs.
Salaries to staff	50,000
Rent of premises	10,000
Repairs and maintenance	2,000
General administration expenses	6,000
Cost of oxygen, X-ray film, etc.	5,000
Depreciation	12,000
Doctors fees	50,000
Food	30,000
Medicines	20,000
Diagnostic services	15,000
Laundry	1,500
Hire charges for extra beds	2,000

The hospital has 50 beds. It has run at full capacity for 180 days. For 45 days, only 20 beds were occupied. At times when all the beds were full, extra beds had been hired at Rs. 20 per day.

Solution

Step 1: Cost unit—Patient days—has to be calculated as follows:

	Patient Days
(i) Full capacity – 180 days × 50 beds	9,000
(ii) Partial capacity – 45 days × 20 beds 900	9,00
(iii) Extra bed days:	100
(iv) ∴No. of patient days (Step i + Step ii + Step iii)	10,000

Next, operating cost sheet has to be prepared as follows:

Step 2: Operating Cost Sheet for the year ended 31st December 2009

Karpagam Hospital
	No. of Patient Days: 10,000
Particulars	Total Cost Rs.	Cost Per Patient Day Rs.
Step A: Fixed Costs
1 Salaries to staff	50,000
2 Premises rent	10,000
3 Repairs and maintenance	2,000
4 General administrative expenses	6,000
5 Cost of oxygen, etc.	5,000
6 Depreciation	12,000
7 Sub-total	85,000	8.50
Step B: Variable Costs
1 Doctor’s fees	50,000
2 Food	30,000
3 Medicines	20,000
4 Diagnostic services	15,000
5 Laundry	1,500
6 Hire charges for extra beds	2,000
7 Sub-total	1,18,500	11.85
Step C: Total Cost (Step A + Step B)	2,03,500	20.35

11.9 STAFF CANTEEN COSTING

Most of the factories have canteens for staff. They are subsidized either partly or wholly. It is manned by a supervisor who is responsible for running it. The supervisor is accountable to the works manager or personnel manager. The major accounting headings are (i) provisions, (ii) services, (iii) labour, (iv) consumable stores and (v) miscellaneous overheads. Cost per meal can be calculated on the number of meals served; for other items such as snacks, on the number of snacks served, and tea/ coffee: no. of tea or coffee served.

A specimen of operating cost statement for a canteen is shown as follows:

Illustration 11.11

Model: Operating cost sheet of a canteen From the following data relating to a staff canteen for the year ended 31 March 2010, compute the cost per meal served:

	Rs.
Meat purchased	4,000
Fish purchased	1,500
Eggs purchased	500
Vegetables purchased	1,000
Bakery items purchased	700
Fruits purchased	500
Milk	800
Beverages	1,000
Supervisor’s salary	5,000
Cooks salary	5,000
Helper’s salary	1,500
Cleaner’s salary	1,000
Crockery and cutlery purchased	500
Consumable stores purchased	500
Gas	800
Premises rent	2,200
Repairs and maintenance	1,000
Other administrative expenses	1,000
Number of meals served during the period	1,000
Subsidy received from the company Rs.	15,000

Solution

Operating Cost Sheet
	Year Ended: 31 March 2010 No. of Meals Served: 1,000
Particulars	Total Cost Rs.	Cost per Meal Rs.
Step A: Salaries and Wages
1 Supervisor’s salary	5,000
2 Cook’s salary	5,000
3 Helper’s salary	1,500
4 Cleaner’s salary	1,000
5 Sub-total	12,500	12.50
Step B: Provisions
1 Meat	4,000
2 Fish	1,500
3 Eggs	500
4 Vegetables	1,000
5 Bakery Items	700
6 Fruits	500
7 Milk	800
8 Beverages	1,000
9 Sub-total	10,000	10.00
Step C: Consumable Stores
1 Crockery and cutlery	500
2 Consumable stores	500
	1,000	1.00
Step D: Services:
1 Gas	800
Sub-total	800	0.80
Step E: Miscellaneous Overheads
1 Premises rent	2,200
2 Repairs and maintenance	1,000
3 Other administrative expenses	1,000
Sub-total	4,200	4.20
Step F: Total Cost	28,500	28.50
Step G: Less: Subsidy received from the company	15,000	15.00
Step H: Net (Step F - Step G)	13,500	13.50

11.10 FOR PROFESSIONAL COURSES

Illustration 11.12

Model: Transport costing

Mr Harry is a travelling inspector for the Environment Protection Agency. He used his own car and the agency reimburses him at Rs. 1.80 per km. Mr Harry claims he needs Rs. 2.20 per km just to break-even. A scrutiny of his expenses by the agency reveals the following:

	Rs.
Oil change every 4,800 km	120
Maintenance (other than oil) every 9,600 km	1,800
Yearly insurance (comprehensive with accident benefits)	4,000
Cost of car, with an average residual value of Rs. 60,000 and with a useful life of 3 years	1,08,000

Petrol is Rs. 5 a litre and Harry gets 8 km a litre in his car. When Harry is on the road, he averages 192 km a day. He works 5 days in a week, has 10 vacations in a year, besides six holidays and spends 15 working days a month, in the office.

You are required to determine

1. An equitable rate of reimbursement based on the schedule he presently follows
2. The number of km a year he would have to travel to break-even at the current rate of reimbursement

[I.C.W.A. (Inter)]

Solution

Basic calculations

Step 1. Distance travelled in 1 year:

 

Total no. of days in a year:		365 days
Less: (i) Vacation:	10 days
(ii) Holidays:	6 days
(iii) Weekly off days	104 days
(52 × 2 days/week):
(iv) Days spent in his office	180 days	300 days
(15 days/month × 12 months)		_____
∴ Actual no. of days travelled in a year		65 days

 

Total distance travelled in one year	=	Actual no. of days travelled × Distance travelled per day
	=	65 days × 192 km
	=	12,480 km

Step 2: Depreciation:

 

Price of car	=	Rs. 1,08,000
Less: Residual value	=	Rs. 60,000
Depreciation per year	=
	=	Rs. 16,000

Step 3: Fixed costs per year:

 

Depreciation	=	Rs. 16,000
Insurance Premium	=	Rs. 4,000
		Rs. 20,000

Step 4: Maintenance

Step 5: Oil

Step 6: Petrol

Step 7: Variable operating cost per km:

1. Maintenance
2. Oil
3. Petrol

Now, cost sheet has to be prepared as follows:

Step 8:

Cost Sheet
Vehicle No.	Distance Travelled: 12,480 km
Particulars	Total Cost Rs.	Cost Per km Rs.
1 Maintenance (Ref: Basic calculation – 4)	2,340
2 Oil (Ref: Basic calculation – 5)	312
3 Petrol (Ref: Basic calculation – 6)	7,800
4 Insurance (Given)	4,000
5 Depreciation (Ref: Basic calculation – 2)	16,000
6 Total Cost (Add Steps 1 to 5)	30,452	2.44
7 Rs. 2.44 per km is the equitable rate of reimbursement. (Rs. 30,452 ÷ 12,480 km)

Step 9:

(b) Determination of break-even point

	Rs.	Rs.
Step 1: Amount of Reimbursement per km		1.8000
Step 2: Less: Variable operating cost per km
(i) Maintenance (basic calculation 7(a))	0.1875
(ii) Oil (basic calculation 7(b))	0.0250
(iii) Petrol (basic calculation 7(c))	0.6250	0.8375
Step 3: Contribution per km (Step 1 – Step 2)		0.9625

Step 4: Break-even point

Illustration 11.13

Model: Transport costing performance statement

RBS Transport Ltd operates a fleet of lorries. The records for a lorry reveal the following information for November 2009:

 

	Days maintained	30
	Days operated	25
	Days idle	5
	Total hours operated	300
	Total km covered	5,000

Total tonnage 400 (8 tonnes load per trip—return journey empty)

The following further information is made available:

1. Operating costs for the month:

     Diesel, Rs. 1,800; Oil, Rs. 200; Grease, Rs. 100; Wages to driver, Rs. 2,000; Wages to khalasi, Rs. 900

    

2. Maintenance costs for the month:

     Repairs, Rs. 500; Overhead, Rs. 100; Tyres, Rs. 3,500; Garage charges, Rs. 900

    

3. Fixed cost for the month based on the estimates for the year:

     Insurance, Rs. 200; Licence, tax, Rs. 100; Interest, Rs. 300; Other overheads, Rs. 400

    

4. Capital cost:

    Cost of acquisition : Rs. 2,00,000

    Residual value at the end of 10 years : Rs. 80,000

    

You are required to prepare a cost sheet and performance statement showing:

1. Cost per day maintained
2. Cost per day operated
3. Cost per day kilometre
4. Cost per commercial tonne-km

[I.C.W.A. (Inter). Modified]

Solution

Basic calculation

1. Commercial tonne – km per month:

         = 100 km × 8 tonnes × 25 days

         = 20,000 tonne-km

    

2. Depreciation per month:
   

Cost Sheet
Vehicle No:	Month: November Distance travelled: 20,000 km
Monthly charges	Rs.	Rs.
Step A: Wages and running costs
Diesel	1,800
Oil	200
Grease	100
Wages to driver	2,000
Wages to khalasi	900
Sub-total		5,000
Step B: Maintenance Charges
Repairs	500
Overhead	100
Tyres	3,500
Garage charges	900
Sub-total		5,000
Step C: Fixed charges
Insurance	200
Licence, tax	100
Interest	300
Other overheads	400
Depreciation	1,000
Sub-total		2,000
Step D: Total Cost (Step A + Step B + Step C)		12,000

Illustration 11.14

Model: Transport costing ascertainment of cost per trip

Mr Raj has been promised a contract to run a cab service on a 25-km-long route for the chief executive of a multinational firm. He buys a car costing Rs. 3,00,000. The annual cost of insurance and taxes are Rs. 9,000 and Rs. 1,000, respectively. He has to pay Rs. 1,000 per month where he keeps the car when it is not in use. The annual repair costs are estimated at Rs. 5,000. The car is estimated to have a life of 10 years at the end of which the scrap value is likely to be Rs. 60,000.

He hires a driver who is to be paid Rs. 500 per month plus 10 per cent of the takings as commission. Other incidental expenses are estimated at Rs. 250 per month.

Fuel will cost Rs. 200 per 100 km. The car will make four round trips each day. Assuming that a profit of 20 per cent on takings is desired and that the car will be on the road for 25 days on an average per month, what should be the charge per round trip?

 

[C.A. (Inter). Modified]

Solution

Operating Cost Statement
Vehicle No.	Distance travelled = 25 km × 2 × 4 × 25 days         = 5,000 km
Particulars	Per Year Rs.	Per Month Rs.
Step A: Standing Expenses
Insurance	9,000
Taxes	1,000
Garage (Rs. 1,000 × 12)	12,000
Annual repairs	5,000
Driver’s salary (Rs. 500 × 12)	6,000
Incidental expenses (Rs. 250 × 12)	3,000
Sub-total	36,000	3,000
Step B: Running Expenses
		2,000
		10,000
*3 Commission (Do workings and then transfer the figure)		2,142.86
*2 Profit (Do workings and then transfer the figure)		4,285.71
		21,428.57

Workings:

1. Computation of total takings:

   Let the total takings per month be x (assumed)

   Driver’s commission is 10 per cent of x = x

   Profit = 20 per cent of x = x

   Total takings per month = Total cost + Driver’s commission + Profit

   x = Rs. 15,000 (Rs. 3,000 + Rs. 2,000 + Rs. 10,000)
   
2. Profit =
3. Commission =
4. Charge per round trip:

    

   Total number of round trips per month	=	4 round trips × 25 days
   	=	100 round trips
   Charge per round trip	=
   	=	Rs. 214.2857
   	=	Rs. 214.29

Illustration 11.15

Model: Hospital costing

VRV is a small hospital consisting of 30 beds. It is possible to accommodate 10 more beds as and when required.

The permanent staff on the rolls are:

 

Two supervisors, each drawing a salary of Rs.	4,000 p.m.
Four nurses, each drawing a salary of Rs.	2,000 p.m.
Four ward boys, each drawing a salary of Rs.	1,000 p.m.

A scrutiny of accounts in the year 2009 shows that during the year the hospital had run at full capacity (i.e., 30 patient beds per day) for 150 days and at 10 patient beds for 50 days.

The hospital had the practice of engaging doctors from outside to attend to the patients. The fees amounted to Rs. 20,000 p.m. and was based on the patients attended and the time devoted to them.

The following are the other expenses incurred during the year:

	Rs.
Rent of premises	80,000
Repairs and maintenance	5,000
Laundry charges	20,000
Junior Doctors and other services	28,000
General Administration charges	40,000
Food given to Patients	82,000
Cost of oxygen, X-ray, etc.	35,000
Medicines supplied	80,000

You are required to:

1. Calculate the profit or loss per patient day made by the hospital, if it charged Rs. 180 per day on an average from each patient;
2. Compute the number of patient days that is required by the unit to break-even in the year 2010 assuming that there is no change in the expenses and revenues

[I.C.W.A. (Inter). Modified]

Solution

No. of patient days is to be calculated as follows:

          30 beds × 150 days = 4,500 Patient days

          10 beds × 50 days = 500 Patient days

          Total patient days = 5,000

 

Operating Cost Sheet
		No. of Patient Days: 5,000
	Particulars	Amount Rs.
Step A:	Variable costs
	Laundry charges	20,000
	Junior doctors and other services	28,000
	Food for patients	82,000
	Medicines	80,000
	Doctors fees	2,40,000
	Sub-total	4,50,000
Step B:	Fixed Costs
	Supervisors (2 No. × Rs. 4,000 p.m – 12 months)	96,000
	Nurses (4 No. × Rs. 2,000 p.m – 12 months)	96,000
	Ward Boys (4 No. × Rs. 1,000 p.m – 12 months)	48,00
	Rent	80,0000
	Repairs and maintenance	5,000
	General administration charges	40,000
	Cost of oxygen, X-ray, etc.	35,000
	Sub-total	4,00,000
Step C:	Total operating cost (Step A + Step B)	8,50,000
Step D:	No. of patient days	5,000
Step E:	Cost per patient day (Step C – Step D)	170

Particulars	TotalRs.	Per Patient Day Rs.
Income from patients (5,000 days × Rs. 180)	9,00,000	180.00
Less: Operating cost (Ref: Cost sheet – Step C)	8,50,000	170.00
Profit	50,000	10,00

	Rs.
Step 1: Income per patient day	180
Step 2: Less: Variant cost per day:	90
Step 3: Contribution per patient day (Step 1 – Step 2)	90
Step 4: Break-even point

Illustration 11.16

Model: Power house costing

An iron and steel works which generates its own power for the purpose of using the same for running the factory gives the following information:

1. Coal consumed 500 quintal @ Rs. 24 per quintal
   Oil 15 quintal @ Rs. 1,000 per quintal
   Water 1,00,000 litres @ Rs. 2 per 1,000 litres
2. Cost of steam boiler Rs. 60,000, which has a residual value of Rs. 12,000 and a life of 10 years
3. Salaries and wages for generating plant:
   Three skilled workers @ Rs. 1,000 p.m.
   Three unskilled workers @ Rs. 500 p.m
4. Generating plant cost Rs. 1,50,000; Depreciation as 10 per cent
5. Share of administrative charges Rs. 2,050 p.m
6. Salaries and wages for the boiler house:
   Five men @ Rs. 600 p.m.
   Four women @ Rs. 600 p.m
7. Repairs and maintenance of steam boiler and generating plant Rs. 1,000 p.m.
8. No. of units generated 1,50,000
9. Sale of ash Rs. 300
10. of units generated were used by generating department itself
    

You are required to calculate cost per unit of electricity generated.

 

[C. S. (Inter). Adopted]

Solution

 

Particulars	Rs.	Rs. Per Month
(a) Coal 500 quintal × Rs. 24	12,000
Oil 15 quintal × Rs. 1,000	15,000
Water 1,00,000 litres @ Rs. 2 per 1,000 litres	200
Depreciation:	400
Less: Sale of ash	300	27,300
(b) Salaries and Wages
(i) Boiler house:	3,000
Five men @ Rs. 600 p.m	2,400
Four women @ Rs. 600 p.m
(ii) Generating plant:	3,000
Three skilled workers @ Rs. 1,000 p.m	1,500	9,900
Three unskilled workers @ Rs. 500 p.m
(c) Repairs and Maintenance		1,000
(d) Depreciation an Generation Plant:		1,250
(e) Share of Administration Charges		1,050
Total Cost of Generation		40,500
* Add: Cost of electricity used in generation		4,500
(see: workings at the end)
Calculation of cost per unit of electricity generated:		45,000

Electricity consumed by iron and steel works:

* Cost of electricity used in generation is calculated as follows:

   Let x be the cost of electricity used and

   y be the total cost of generation (assumption)

   Then,

11.11 OPERATION COSTING

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.
• When a series of operations are involved in the process of converting raw materials into the finished production, rejections (or loss) may occur at the end of each operation.
• Cumulative effect of such loss or rejection has to be taken into account to determine cost, for which final out is taken as 100 units.
• Computation involves working back from the final output to the initial input required.

This is explained by the following illustration:

Illustration 11.17

An article undergoes three successive operations from raw material to finished product. The following information is available from the production record of December 2009:

Find out what should be the input in the first operation innumber of pieces to obtain a finished product of 100 pieces after the last operation.

Calculate the cost of raw materials required to produce one piece of finished product from the following particulars:

 

Solution

Step 1: Find the percentage of rejection in each operation.

1. Operation No. 1:
2. Operation No. 2:
3. Operation No. 3:

Step 2: Find out input in the first operation.

For this, we have to proceed from the last operation:

1. Let the final output be taken as 100 pieces, i.e. in the last operation No. 3.
2. Refer (iii) in step (1): We get loss of 20 per cent that means 20 pieces were rejected. Then, input will be 100 + 20 = 120 pieces.
3. These 120 pieces will be the output of operation No. 2. Now, refer (ii) in step (1): We get 10 per cent loss for 120 pieces 10 per cent will be 12 pieces.
   ∴ Input will be 120 + 12 =132 pieces.
4. These 132 pieces will be the output of operation no. 1. Now, refer (i) in step (1), we get 50 per cent loss for 132 pieces, 50 per cent will be 66 pieces.
   ∴ Input will be 132 + 66 = 198 pieces.

Step 3: The net result arrived in Step 2 shows that for 198 pieces input in operation No. 1 – i.e. the first operation, 100 pieces will be the output at the end of third operation.

Refer the problem:

Weight of finished unit = 100 gms per piece that means, a finished good of 100 gms (per piece), the required input raw material = 198 gms.

Step 4: Raw material cost per finished good (unit)

Step 5:

Illustration 11.18

Model: Conversion cost per unit

Iron rods weighing 5000 kg, to be converted into window bars, have gone through the following operations. Show the cost of input and output of each operation if the cost of iron rods is Rs. 20 per kg.

 

Overheads are at 50 per cent of labour. What is the conversion cost of each operation, per unit of output?

Solution

• As input and output are given, loss can be directly found out.
• Total cost of output is calculated by adding labour and overhead costs with material cost.
• From this cost of input is deducted to arrive at conversion cost.
• From this conversion cost per unit is determined.

Operating costing or service costing: It refers to the cost procedure used for determining the cost per unit or service.

Features of service costing: (i) classification of costs into variable and fixed (ii) periodical ascertainment of costs (iii) easy valuation of WIP (iv) many stages and processes (v) service organisations do not produce tangible products (vi) cost unit differs.

Types of service organisations and respective cost units-refer the table in the text. Absolute Tonne-kms & commercial Tonne-kms Ref: Illustration 2. Motor transport costing; features, Log sheet, performance statement proformas and method of maintaining (recording) are explained refer: Text and Illustration No. 4 to Illustration 8. Boiler House Costing: Boiler house is engaged in steam production. Collection of costing is done under the heads: (i) fuel (ii) labour (iii) supervision (iv) maintenance (v) water and fixed overhead. Power house costing is explained in Illustration No 9.

Staff canteen costing: Operating cost sheet of a canteen is explained in Illustration 11.

Hospital costing: Operating cost sheet of a hospital is explained in Illustration No. 10.

Operation costing: It is a refinement of process costing. A process consists of several operations and each such operation is costed separately. It involves the determination of unit operation cost by each operation, which is also termed as conversion cost.

Calculation of the cost of raw material required to produce one piece of finished product is explained in Illustration No. 17.

Conversion cost of each operation-explained by way of Illustration No. 18.

Operating Cost: Cost of (operating) providing a service.

Operating Costing: A costing method for computation of cost of a unit of service.

QUESTION BANK

 

I. State whether the following statements or true (or) false

1. Operating costing and service costing are synonymous terms.
2. There is no difference between process costing and operation costing.
3. Under service costing, for a variety of services, the same accounting treatment is required.
4. It is not possible to define a common cost unit for all types of services, under service costing method.
5. Manpower cost incurred is much higher in service organizations.
6. Service organizations produce tangible goods.
7. Under service costing, costs are classified into fixed and variable.
8. The main object underlying in the preparation of operating cost statement is to ascertain the cost per unit of services rendered.
9. Operating costing is more suitable for manufacturing industries.
10. In operating costing, running charges are fully variable in nature.

Answers:

 

1. True	2. False	3. False	4. True
5. True	6. False	7. True	8. True
9. False	10. True

 

II. Fill in the blanks with suitable word(s)

1. As service organizations provide a variety of services, it is difficult to define _____.
2. Service organizations do not produce _____.
3. Under operation costing, costs are divided into_____ and _____.
4. The _____ cost is affected, when additional service is provided.
5. The cost unit for hotel industry is _____.
6. The cost unit is passenger transport industry is _____.
7. Service organizations are in general _____ intensive.
8. The costs incurred in service organizations are grouped under two heads (i) _____ and (ii) standing charges.
9. Standing charges denote _____ costs.
10. The cost unit in hospitals is _____.

Answers:

1. cost unit
2. tangible goods
3. fixed; variable
4. variable
5. bed nights
6. passenger/kilometre
7. labour
8. running expenses
9. fixed
10. patient-day

III. Multiple choice questions: choose the correct answer

1. Service costing/operating costing is used in
   1. departments/organizations rendering services
   2. manufacturing industries
   3. chemical industries
   4. textile industries
2. Composite unit is distinctive feature of
   1. job costing
   2. operating costing
   3. batch costing
   4. contract costing
3. Which one of the following features is service costing?
   1. work undertaken is of long duration
   2. unique nature of work
   3. classification of costs into fixed and variable
   4. All of these
4. Operating costing is ascertained by preparing
   1. a statement or cost sheet
   2. profit and loss a/c
   3. trial balance
   4. balance sheet
5. The best method of costing in respect of hotels and hospitals is
   1. process costing
   2. service costing
   3. contract costing
   4. back flush costing
6. Running charges are
   1. fixed
   2. semi-variable
   3. variable
   4. all of these

Answers:

 

1. (a)	2. (b)	3. (c)	4. (a)	5. (b)
6. (c)

1. Define operating costing.
2. Operation costing is preferably called service costing. Why?
3. Name the industries/organizations suitable for using operation costing.
4. What is meant by operating cost unit?
5. What are single units? What are composite units? Give suitable examples for each.
6. What do you mean by running charges?
7. What is meant by standing charges? Give examples.
8. What is meant by operation costing?
9. Is there any difference between running kilometre and passenger-kilometre? Substantiate with reasons for your answer.
10. What are the advantages of operating costing?
11. What are the limitations of operating costing?

1. What is operating costing? What are its characteristics? How does it differ from all other methods of costing?
2. Explain the various types of services for which operating costing may be used.
3. Describe the importance of cost unit in operating costing with adequate illustrations.
4. Enumerate the advantages and disadvantages of operating costing.
5. What is a department operating statement? Prepare such a statement to indicate the efficiency of the use of each element of cost.
6. What are the objectives of transport costing? What are its merits?
7. 1. What statistics should a transport operating company keep in respect of each vehicle to get correct operational and maintenance cost?
   2. Draw up a proforma cost sheet for such a company showing distinctly the operational and maintenance costs
8. Your company employs three different types of transport vehicles in bringing into the factory heavy steel bars and delivering to customers finished tubes and fabricated tube products. Detail the procedures necessary to install satisfactory costing arrangements for the transport and suggest control measures which might be introduced.
9. Draw up a proforma cost statement for a canteen.
10. Draw up a proforma cost statement for a hospital.

 

[Model: Computation of cost units]

1. A transport company is operating two city buses between two places which are 30 km. apart. Seating capacity of each bus is 50 passengers; the buses carry 120 per cent of the seating capacity. Both the buses are operated on all the days of the month of June. Each bus made four round trips per day. Compute the total running km and total passenger km for the month.

[Ans: Total running km: 14,400

        Passengers km: 8,64,000]

2. Mr Dev owns a lorry of 6 tonnes capacity. During a month, it went on trips 20 days covering on average 200 km each day. 40 per cent of the time it ran empty. It carried an average load of 80 per cent of capacity during the period. Find out the total tonne-km for the month.

[Ans: 11,520 tonne-km]

3. A lorry starts with a load of 20 tonnes of goods from Station A. It unloads 8 tonnes at Station B and rest of the goods at Station C. It reaches back directly after getting reloaded units 16 tonnes of goods to Station C. The distances from A to B, B to C and C to A are 80 km, 120 km and 160 km, respectively. Compute absolute tonne-km and commercial tonne-km.

[Ans: Absolute tonne-km: 5,600

        Commercial tonne-km: 5,760]

4. Calculate the total room days:

1. Single rooms     20
2. Double rooms     30
3. Occupancy ratio:

    

   	During summer	30 weeks
   	Single	100 per cent
   	Double	90 per cent
   	During winter	22 weeks

   Single room and double room 50 per cent

4. For the purpose fixing rentals with regard to the space and facilities, the double room shall be regarded 1 1/2 of the single room.

[Karnataka University]

[Ans: Total room-days 2,530]

[Model: Cost per running km/mile]

5. From the following data, find the cost per km of a vehicle:

	Rs.
Value of vehicle	15,000
Road licence for the year	500
Insurance charge for the year	100
Garage rent per year	600
Driver’s wage per month	200
Cost of petrol per litre	0.80
Kilometres per litre	8
Proportionate charge for tyre	0.20
and maintenance per km
Estimated life	1,50,000 km
Estimated annual kilometreage	6,000 km

Ignore interest on capital

 

[Madras University; Several times. Modified]

[Ans: Cost per kilometre of vehicle: Rs. 1.00]

6. From the following particulars, calculate the cost of running a taxi per kilometre.

 

No. of taxis	10
Cost of each taxi	Rs. 2,00,000
Salary of manager	Rs. 6,000 p.m.
Salary of accountant	Rs. 5,000 p.m.
Salary of mechanic	Rs. 4,000 p.m.
Salary of cleaner	Rs. 2,000 p.m.
Garage rent	Rs. 6,000 p.m.
Insurance premium	5 per cent p.a.
Annual tax	Rs. 6,000 per taxi
Driver’s salary	Rs. 2,000 p.m.
Annual repairs	Rs. 10,000 per taxi

Total life of a taxi is about 2,00,000 km. A taxi runs in all 3,000 km in a month of which 30 per cent it runs empty. Petrol consumption is one litre for 10 km @ Rs. 18 per litre. Oil and other sundries are Rs. 50 per 100 km.

 

[Madras Universiy]

[Ans: Effective running km per month per taxi: 2,100

        Total cost per taxi per month: Rs. 16,366

        Cost per running km = Rs. 7.79]

7. A road transport company which keeps a fleet of lorries shows the following information:

 

Kilometres run in April	Rs. 30,000
Wages for April	Rs. 2,000
Petrol, oil, etc. for April	Rs. 4,000
Original cost of vehicles	Rs. 1,00,000

Depreciation to be allowed at 25 per cent p.a. on original cost

 

Repairs for the month of April	Rs. 6,000
Garage rent for April	Rs. 1,000
Licence, insurance for the year	Rs. 6,000

Prepare operating cost sheet for April showing the fixed cost variable and total cost per running kilometre.

[Ans: Fixed cost, Rs. 5,583; per running km, Rs. 0.1861,

        Variable cost, Rs. 10,000; per running km, Rs. 0.3333,

        Total cost, Rs. 15,583; per running km, Rs. 0.5194]

[Model: Cost per passenger/km/mile]

8. A transport company is running four buses between two towns which are 50 km apart. Seating capacity of each bus is 40 passengers. The following particulars were obtained from the company’s books for a particular month (30 days):

 

	Rs.
Wages of drivers and conductors	2,400
Salaries to office staff	1,000
Diesel and other oils	4,000
Repairs and maintenance	800
Taxes and insurance	1,600
Depreciation	2,600
Interest and other charges	2,000
	14,400

Actual passengers carried were 75 per cent of the seating capacity. All the four buses run on all days of the month. Each bus made one round trip per day. Find out the cost per passenger km.

 

[Madras University 2006]

[Ans: Passenger km for the months—3,60,000

        Cost of passenger km = Rs. 0.0389]

9. A transport company runs a bus of passenger capacity between two towns which are 50 km apart, making two round trips every day.

During a year of 300 effective days, the following expenses were incurred. Average occupancy of bus seats was ⅔.

 

	Rs.
Depreciation p.a.	20,000
Administration charges p.a.	20,000
Repairs and maintenance per km	0–20
Tyres and spares per km	0–10
Fuel cost for the year	80,000
Road licence and insurance p.a.	12,000
Sundry expenses	10,000

The profit charged was 20 per cent on the cost (excluding driver and conductor commission).

Driver and conductor commission (shared equally) was 4 per cent on collections.

Find out the fare payable by a passenger who travels one town to another.

[Ans: Cost per passenger km, Re 0.08; fare per passenger km, Re 0.10; fare:

 

Rs. 5
Total passenger km:	20,00,000 p.a.
Running km p.a.:	60,000
Total annual cost excluding	Rs. 1,60,000
commission –
Commission:	Rs. 8,000
Profit –	Rs. 32,000]

[Model: Cost per tonne/km or mile]

10. From the following information, compute the cost of running the tempo per tonne-km:

 

	Rs.
Cost of vehicle	1,50,000
Road licence fee p.a.	750
Supervisor’s salary p.a.	26,500
Driver’s wage per hour	40
Repairs and maintenance per km	0.20
cost of fuel per litre	9
Tyre depreciation per km	0.80
Garage rent p.a.	3,600
Insurance p.a.	500
Km running per litre	5
Km run during the year	6,000
Estimated life of the vehicle	75,000 km
Tonnes per km (average)	5

Charge interest @ 10 per cent p.a. on the cost of vehicle. The vehicle runs 20 km per hour on an average.

 

[Sri Sathya Sai University]

[Ans: Cost per tonne-km:	Rs. 2.905
Running tonne-km:	30,000]

11. From the following data relating to vehicle A, compute the cost per running tonne-km:

 

Kilometres run (annual)	15,000
Tonnes per km (average)	6
	Rs.
Cost of vehicle	2,50,000
Road licence (annual)	800
Insurance (annual)	700
Garage rent (annual)	1,300
Supervision and salaries p.a.	2,700
Driver’s wages per hour	4
Cost of fuel per litre	6
Km run per litre	20
Tyre allocation per km	1
Repairs and maintenance per km	2

Estimated life of vehicles 1,00,000 km

Charge interest @ 5 per cent per annum on cost of vehicle.

The vehicle runs 20 km per hour on an average

 

[Periyar University and Madras University]

[Ans: Cost per running tonne-km: Rs. 1.20

        Total tonne-km p.a.: 90,000]

12. A transport company operates two trucks. Following are the data regarding the monthly cost of operating them:

 

	Trucks
	A Rs.	B Rs.
Driver’s salary	250	275
Cleaner’s wages	150	160
Petrol	300	350
Mobile oil	25	30
Garage rent	125	125
Taxes and insurance	50	50
Depreciation	560	620
Supervision	100	100
Repairs	120	140
Overheads	40	40

The two trucks carried 150 tonnes of goods each during the month of November 2004. The distance covered were 3,500 km and 5,000 km, respectively.

Prepare an operating cost sheet for November 2004 from the given data.

 

[Mysore University]

 

[Ans: Tonne-km per month:	Truck A –5,25,000
	Truck B – 7,50,000
Cost per tonne-km	Truck A – Re 0.33
	Truck B – Re 0.25]

[Model: Comprehensive costs]

13. From the following data relating to a truck for the month of June, compute comprehensive costs for each category of cost:

Days of actual running in the month: 25

Actual distance covered: 4,000 km

Distance travelled with load: 3000 km

No. of trips made: Two trips per day

Weight totally carried: 5 tonnes per trip

Total standing charges: Rs. 22,500

Total maintenance charges: Rs. 7,500

Total running charges: Rs. 15,000

[Ans: (comprehensive cost denotes cost expressed in all possible units)

1. Total operating cost: Rs. 45,000
2. Per day:
3. Per day run:
4. Per trip:
5. Per running km:
6. Per effective run:
7. Per tonne-km:

[Model: Quotations and journey contracts]

14. A vehicle costs Rs. 15,600 and its life is 5 years, after which its residual value is estimated at Rs. 600. Standing charges per annum are: Insurance Rs. 850, Licence Rs. 750 and Administrative overhead Rs. 2,280. The company’s contribution towards National Insurance Scheme is Rs. 10 per week. The driver is paid Rs. 50 per week of 44 hours, and he is entitled to a fortnight’s paid holiday per annum. For each night spent away from home, the driver is paid an allowance of Rs. 10. Repairs over the life of the vehicle are estimated at Rs. 5,000. Fuel cost Rs. 20 per litre. The estimated consumption of fuel is 20 km per litre. The cost of lubricant is Rs. 1,500 p.a. Estimated kilometreage is 30,000 per year. A set of tyre costs Rs. 1,600 and their expected kilometreage is 16,000. It is estimated that the vehicle will run for 220 days p.a. and depreciation is regarded as a running cost.

You are required to

1. Calculate operating cost per kilometre
2. Prepare a quotation for a journey of 100 km and return by adding 10 per cent profit on cost. There is no return load and the journey takes two days

[Ans: Operating cost per km Rs. 1.51

        Quotation for the journey Rs. 362.60]

[Model: Transport cost decisions – alternative choices]

15. A practising chartered accountant now spends Re 0.90 per km on taxi fares for his client’s work. He is considering two alternatives, the purchase of new small car or an old big car. The estimated cost figures are as follows:

	New Small Car Rs.	Old Big Car Rs.
Purchase price	35,000	20,000
Sale value after 5 years	19,000	12,000
Repairs and servicing p.a.	1,000	1,200
Taxes and insurance	1,700	700
Premium
Petrol consumption per	10 km	7 km
litre
Petrol per litre	3.50	3.50

His estimated travelling p.a. is 10,000 km at present. Which of these three alternatives will be cheaper? If his practice expands and he has to travel 19,000 km per annum, what should be his decision? At how many kilometres per annum will the cost of the two cars break-even?

[Ans: At 10,000 km: small car: Rs. 9,400;

        big car: Rs. 8,500 Taxi Rs. 9,000

        ∴ Old big car is cheaper among the three alternatives.

        At 19,000 km: small car – Rs. 12,550; big car

        Rs. 13,000; Taxi – Rs. 17,100 ∴ New small car is cheaper.

        Break-even distance = 16,000 km]

[Model: Costing for cinema theatres]

16. The data given relates to RAJ Cinema for the year:

 

	Rs.
Salaries per month:
1 Manager	9,000
10 Gate keepers	1,500
2 Operators	2,000
4 Clerks	2,500
Power and oil	33,200
Stationery	20,400
Advertisement expenses	1,66,000
Administration expenses	30,000
Hire for print	3,00,000
Miscellaneous expenses	13,000

The premises are valued at Rs. 12,00,000 and its estimated life is 12 years. Projector and other equipment cost Rs. 6,40,000 on which 10 per cent depreciation is to be changed. Daily three shows are run throughout the year. Total capacity is 1,000 seats which are divided into three classes are as follows:

 

	Balcony	200 seats
	First class	300 seats
	Second class	500 seats

Ascertain cost per man-show assuming that

1. 10 per cent of the total seats remain vacant
2. Weightage to be given to three classes in the ratio of 3:2:1

Determine the rates for each class if the management expects 33 ⅓ per cent return on gross proceeds. Ignore entertainment taxes.

[Ans: Total cost per year, Rs. 11,82,600;

        Total man shows, Rs. 16,75,350;

        Cost per man-show, 0.71;

        Rate per man-show, Rs. 1.06;

        Rate: Balcony, Rs. 3.18;

        First class, Rs. 2.12;

        Second class, Rs. 1.06]

[Model: Power house costing]

17. From the following particulars, prepare operating cost sheet:

 

Total units generated	20,00,000 kWh
Operating labour	Rs. 50,000
Repairs	Rs. 50,000
Lubricants	Rs. 40,000
Plant supervision	Rs. 30,000
Administration overheads	Rs. 20,000

Coal consumed per kWh.: 2.5 kg at Re 0.02 per kg

Depreciation at 5 per cent on capital cost of Rs. 20,00,000 p.a.

 

[Madras University]

[Ans: Cost per kWh: Re 0.195]

[Model: Costing for lodging houses]

18. From the following data, find out the cost per room-day and the charge to the customers, if the profit required is 20 per cent on cost.

Room accommodation available:

 

Each double room is equal to two single rooms. Average occupancy throughout the year of 360 days is 75 per cent.

The costs are as follows:

 

	Rs.
Depreciation of premises	5,00,000
Depreciation of furniture	6,00,000
Opening stock of linen	10,00,000
Purchases of linen	5,00,000
Closing stock of linen	7,50,000
Salaries of staff	5,00,000
Sundry charges	3,50,000

[Ans: Room days: 54,000

        Cost per room day : Rs. 50

        Cost per single room: Rs. 60

        Cost per double room: Rs. 120]

[Model: Operation costing ]

19. A customer orders for 5625 iron castings. The work has to go through three operations A, B and C. The normal loss expected in each operation is A: , B: and C: on the input.

If the purchase price of each unit of input is Rs. 10, find out how much the customer should be charged for material cost.

[Ans: Rs. 90,000]

20. An article passes through five hand operations as follows:

The factory works 40 hours a week and the production target is 600 dozens per week. Prepare a statement showing for each operation and in total the no. of operations required, the labour cost per dozen and the total labour cost per week to produce the total targeted output.

[Model: Transport costing]

21. A chemical company runs its boiler on furnace oil obtained from Indian Oil and Bharat Petroleum whose depots are situated at a distance of 12 km and 8 km from the factory site. Transportation of furnace oil is made by the company – s own tank lorries of 5 tonne capacity each. Onward trips are made only on full load and the lorries return empty. The filling in time takes an average 40 minutes for Indian Oil and 30 minutes for Bharat Petroleum. But the emptying time in the factory is 40 minutes for all. From the records available, it is seen that the average speed of the company’s lorries works out to 24 km per hour. The varying operation charges average 60 paise per km covered and fixed charges give an incidence of Rs. 7.50 per hour operation. Calculate the cost per tonne-km from each source.

[C.A. (Inter)]

[Ans: Cost per tonne-km : Indian Oil, Re 0.53,

        Bharat Petroleum, Re 0.58]

[Model: Transport costing]

22. VRV is a public school having five buses each plying in different directions for the transport of its school students. In view of a large number of students availing of the bus service, the buses work two shifts daily, both in the morning and in the afternoon. The buses are garaged in the school. The work load of the students has been so arranged that in the morning the first trip picks up senior students and the second trip plying an hour late picks up junior students. Similarly, in the afternoon, the first trip drops the junior students and an hour late the second trip takes the senior students home.

The distance travelled by each bus one way is 8 km. The school works 25 days in a month and remains closed for vacation in May, June and December. Bus fee, however, is payable by the students for all the 12 months in a year.

The details of expenses for a year are as follows:

 

Driver’s salary	Rs. 450 p.m. per driver
Cleaner’s salary	Rs. 350 p.m. per cleane

(salary payable for all 12 months) (one driver, per bus and one cleaner for all five buses)

 

Licence fees, taxes, etc.	Rs. 860 per bus p.a.
Insurance	Rs. 1,000 per bus p.a.
Repairs and maintenance	Rs. 3,500 per bus p.a.
Purchase price of the bus	Rs. 1,50,000 each
Life	12 years
Scrap value	Rs. 30,000
CNG cost	Rs. 2 per kg

Each bus gives an average mileage of 4 km per kg of CNG. The seating capacity of each bus is 50 students.

Students picked up and dropped within a range of up to 4 km of distance from the school are charged half-fare and 50 per cent of the students travelling in each trip are of this category. Ignore interest. Since the charges are to be based on average cost, you are required to

1. Prepare a statement showing expenses operating a expenses operating a single bus and the fleet of five buses for a year
2. Work out the average cost per student per month with respect to:
   1. Students coming from a distance of up to 4 km from school
   2. Students coming from a distance beyond 4 km from the school

[C.A. (Inter). Modified]

[Ans:

1. Cost per year for each bus: Rs. 28,800
2. 1. Average cost per student per month (up to 4 km distance): Rs. 16
   2. Average cost per student p.m. (beyond 4 km): Rs. 32

[Model: Transport costing]

23. A transport company has been given a route 40 km long to run a bus. The bus costs the company the sum of Rs. 1,00,000. It has been insured at 3 per cent per annum and the annual tax will amount to Rs. 2,000. Garage rent is Rs. 200 p.m. Annual repairs will be Rs. 2,000 and the bus is likely to last for 5 years.

The driver’s salary will be Rs. 300 p.m., and the conductor’s salary will be Rs. 200 p.m. in addition to 10 per cent of takings as commission (to be shared by the driver and conductor equally)

Cost of stationery will be Rs. 100 p.m. Manager cum accountant salary is Rs. 700 p.m.

Petrol and oil will be Rs. 50 per 100 km. The bus will take three up and down trips carrying on an average 40 passengers on each trip. Assuming 15 per cent profit on takings, calculate the bus fare to be charged from each passenger. The bus will run on an average of 25 days in a month.

 

[(I.C.W.A. (Inter)]

[Ans: Rs. 1.50 per passenger]

[Model: Transport costing]

24. Sai Travels owns a bus and operates a tourist service on daily basis. The bus starts from New city to Rest village and returns back to New city the same day. Distance between New city and Rest village is 250 km. This trip operates for 10 days in a month. The bus also plies for another 10 days between New city and Shivapur and returns back to New city the same day; distance between these two places is 200 km. The bus makes local sightseeing trips for 5 days in a month covering a total distance of 60 km. The following data are given:

 

Cost of bus	Rs. 3,50,000
Depreciation	25 per cent
Driver’s salary	Rs. 1,200 p.m.
Conductor’s salary	Rs. 1,000 p.m.
Part-time clerk’s salary	Rs. 400 p.m.
Insurance	Rs. 1,800 p.a.

Diesel consumption 4 km per litre at Rs. 8 per litre

 

Token tax	Rs. 2,400 p.a.
Permit fee	Rs. 1,000 p.m.

Lubricant oil Rs. 100 for every 200 km

 

Repairs and maintenance	Rs. 1,500 p.m.
Normal capacity	50 passengers

While plying to and from Rest village, the bus occupies 90 per cent of the capacity and 80 per cent when it plies between New city to Shivapur (both ways). In the city, the bus runs full capacity. Passenger tax is 20 per cent of net takings of the travels firm. Calculate the rate to be charged to Rest village and Shivapur from New city, per passenger, if the profit required to be earned is 33 per cent of net takings of the firm.

 

[(I.C.W.A. (Inter)]

[Ans: Total effective passenger kilometres, 4,00,000;

        Total km, 9,300; Total operating cost, Rs. 35,992 p.m.;

        Profit, Rs. 17,727; Passenger tax, Rs. 10,774;

        Total takings, Rs. 64,463; Rate per passenger km

        Rs. 0.16; Charges per passenger: From New city to Rest village,

        Rs. 40.25; From New city to Shivapur,

        Rs. 32.20]

[Model: Transport costing]

25. Mr Harry is a travelling inspector for the Environment Protection Agency. He uses his own car and the agency reimburses him at Rs. 1.80 per km. Mr Harry claims that he needs Rs. 2.20 per km just to breakeven. A scrutiny of his expenses by the agency reveals the following:

 

	Rs.
Oil change every 4,800 km	120
Maintenance (other than oil)	1,800
every 9,600 km
Yearly insurance (comprehensive	4,000
with accident benefits)
Cost of car, with an average	1,08,000
residual value of Rs. 60,000 and
with a useful life of 3 years

Petrol is Rs. 5 a litre and Harry gets 8 km a litre in his car. When Harry is on the road, he averages 192 km a day. He works 5 days in a week, has 10 vacations in a year, besides 6 holidays, and spends 15 working days a month in the office. You are required to determine

1. An equitable rate of reimbursement on the basis of schedule he presently follows and
2. The number of kilometres a year he would have to travel to break-even at the current rate of reimbursement

[(I.C.W.A. (Inter)]

[Ans: Cost per km, Rs. 2–44;

        Contribution per km, Rs. 0-9625;

        Break-even point, 20,779 km p.a.]

[Model: Transport costing]

26. A company is considering three alternative proposals for conveyance facilities for its sales personnel who have to do considerable travelling, approximately 20,000 kilometres every year. The proposals are as follows:

1. Purchase and maintain its own fleet of cars. The average cost of a car is Rs. 1,00,000.
2. Allow the executive to use his own car and reimburse expenses at the rate of Rs. 1.60 per km and also bear insurance cost.
3. Hire cars from an agency at Rs. 20,000 per year per car. The company will have to bear the cost of petrol, taxes and tyres.

The following further details are available:

 

Petrol	Rs. 0.60 per km
Repairs and maintenance	Rs. 0.20 per km
Tyre	Rs. 0.12 per km
Insurance	Rs. 1,200 per car p.a.
Taxes	Rs. 800 per car p.a.
Life of car	5 years units annual mileage of 20,000 km

Resale value is Rs. 20,000 at the end of the fifth year. Work out the relative costs of the three proposals and rank them

 

[C.A. (Inter)]

[Ans: Alternative 1: Cost per km Rs. 1.82 – Rank III

         Alternative 2: Cost per km Rs. 1.66 – Rank I

         Alternative 3: Cost per km Rs. 1.76 – Rank II

The company may allow its executive to use his own car and reimburse his expenses—Alternative 2]

[Model: Hotel costing]

27.

1. The Holiday Hotel has 40 bedrooms with a maximum capacity of 490 sleeper nights per week. Average capacity is 60 per cent throughout the year. Meals provided to guests have been costed and the average food cost per person per day is as follows:

    

   	Rs.
   Breakfast	3.60
   Lunch	11.00
   Dinner	13.40

   Direct wages and staff meals per week are as follows:

    

   	Rs.
   Restaurants and kitchens	3,430
   Housekeeping	1,952
   General	1,760

   Direct expenses per annum are Rs. 45,760 for housekeeping and Rs. 52,000 for the restaurant. Indirect expenses amount to Rs. 3,41,120. Which should be apportioned on the basis of floor area? The floor areas are:

    

   	Square metres
   Bedrooms	3,600
   Restaurant	1,200
   Service area	600

   A net profit of 10 per cent each must be made on restaurant takings and accommodation takings.

   You are required to calculate what inclusive terms per person should be charged per day. Show the split between meals and accommodation charges.

2. There is also a proposal to take on hire adjoining building and convert it into a pastry shop. The annual cost estimates are:

    

   	Rs.
   Rates and taxes	12,000
   Wages	54,000
   Replacement of utensils	2,400
   Depreciation of fixed assets	3,000
   Fuel cost	10 per cent of the cost of pastries.

   Sales are expected to average Rs. 1,50,000 p.a., the monthly figures varying according to seasons. Prices shown on the tags are arrived at by marking up the costs by 150 per cent. Calculate the estimated annual profit. Also draw an estimate of cost and profit for the first month when the sales are expected to be Rs. 15,000.

[(I.C.W.A. (Inter)]

[Ans:

1. 1. Meals charges, Rs. 60.36 for each sleeper night;
   2. Accommodation charges, Rs. 29.74 for each sleeper night.
2. Rs. 1,500]

[Model: Hospital costing]

28. KGMC is a small hospital consisting of 20 beds. It is possible to accommodate more beds as and when required. The permanent staff members on the rolls are:

Two supervisors each drawing a salary of Rs. 1,000 p.m.

Four nurses each drawing a salary of Rs. 500 p.m.

Four ward boys each drawing a salary of Rs. 250 p.m.

A scrutiny of accounts in the year 2000 shows that during the year the hospital had run at full capacity (i.e. 20 patients per day) for 150 days and at 10 patient beds for 50 days. The hospital had the practice of engaging doctors from outside to attend to the patients. The fees amounted to Rs. 9,000 per month and were based on the patients attended and the time devoted to them.

The following are the other expenses incurred during the year.

 

	Rs.
Rent of premises	60,000
Repairs and maintenance	4,000
Laundry charges	12,000
Junior and other services	10,000
General administration charges	36,000
Food given to patients	48,000
Cost of oxygen, X-ray, etc.	24,000
Medicines supplied	32,000

1. Calculate the profit or loss per patient day made by the hospital if the hospital charged Rs. 120 per day on an average from each patient.
2. Compute the number of patient days that is required by the unit to break-even in year 2001 assuming that there is no change in the expenses and revenues

[(I.C.W.A. (Inter)]

[Ans:

1. Profit per patient day: Rs. 7.43
2. No. of patient days to break-even: 4,089]

[Model: Power house costing]

29. A manufacturing firm facing a shortage of electric power supply from the state electricity board has set up its own power generation plant for efficient running of its production units in the factory. The following information has been taken from the records in connection with the generation of power for a month:

1. No. of units generated was 10,00,000 for the month of which 10 per cent was utilized by the generation department.
2. Computation data of materials, etc. for the month:
   1. Coal consumed 300 MTS at Rs. 3,600 per MT
   2. Oil consumed 4.5 MTS at Rs. 40,000 per MT
   3. Cost of water extraction and treatment of 6 lakh litres at Rs. 1.25 a litre
3. Steam boiler costs Rs. 20 lakhs with a residual value of Rs. 2 lakhs after a life of 10 years
4. Salaries and wages per month:
   1. For staff of generating plant:
      1. 100 skilled workers at Rs. 3,000 p.m
      2. 150 helpers at Rs. 1,500 p.m
   2. For staff of boiler house:
      1. 60 category A workers at Rs. 1,500 p.m
      2. 100 category B workers at Rs. 1,100 p.m
5. Cost of generating plant: Rs. 36 lakhs with no residual value. Depreciation at 10 per cent on straight line basis is to be charged.
6. Repairs and maintenance of generating plant and boiler Rs. 50,000 p.m.
7. Share of administrative charges Rs. 40,000 p.m.
8. Share value of ash disposed off Rs. 15,000 p.m.

Calculate the per-unit cost of electricity generated, using a cost sheet format.

 

[(I.C.W.A. (Inter)]

[Ans: Rs. 3.48 per unit]

[Model: Operation costing—conversion cost]

30. Iron rods weighing 1,000 kg, to be converted into window bars, have gone through the following operation. Show the cost of input and output of each operation if the cost of iron rods is Rs. 10 per kg.

Overheads are as 40 per cent of labour

What is the conversion cost of each operation, per unit of output?

[Ans: Conversion cost per unit: Cutting – Rs. 0-88

        Shaping – Rs. 0-93

        Finishing – Rs. 1-50]