Chapter – 2 OPERATING COSTING

MEANING OF OPERATING COSTING Operating or Service costing is that form of operation costing which applies where standardised services are provided either by an undertaking or by a service cost centre within an undertaking. This method may be used where service is not completely standardised, but where it is convenient to regard it as such, and to calculate average cost per period in relation to the standardised unit of measurement. Thus it is the cost of producing and maintaining a service. It is a method of costing applied to undertakings which provide service rather than production of commodities.

The service to be costed could either be: Transport service – bus transport, air transport and railways; Supply services – gas supply, electricity supply, water supply; Welfare supplies – hospitals, canteens, libraries; Municipal service – street lighting, road maintenance, etc. These services may be internally used or may be rendered to the public. In both the cases operating costs are required to be ascertained. The operating costs are generally period costs. The expenses are accumulated for a period and they are related to the quantum of service rendered during the period. In certain cases, however, the operating cost can be terminal cost.

TRANSPORT COSTING Transport industries include Air, Water, Road and Railway. Motor transport includes private cars, carriers for owners, buses, taxis, carriers, lorries etc. the objectives of motor transport costing may be as follows: To decide the price on the service offered to the customers To provide information whereby the efficiency with which the vehicles are rented may be judged; To provide an accurate basis for quotation and fixing of rates; To ensure that all journeys have been carried out in proper time, fuel consumed is not excessive and that tyres are properly maintained; To provide cost comparison between own transport and alternative, e.g hiring; To compare the cost of maintaining one group of vehicles with another group; To determine what should be charged against departments using the service To ensure that cost of maintenance and repairs is not excessive

CLASSIFICATION OF COSTS Costs are classified into the following three heads: Standing or fixed charges – These charges are incurred in spite of the kilometres run, e.g., salary of the operating manager and supervisors etc., insurance, motor vehicle tax, licence fee, garage rent, general supervision and interest on capital. Maintenance charges – These are semi-variable expenses which include expenses such as, tyres and tubes, repairs and maintenance, paintings, overhauling, etc.

Operating and running charges - These charges vary more or less in direct proportion to kilometres and include, petrol, oil, grease, etc, wages of driver, conductor, attendant etc, if payment is related to time or distance of trips, commission , and depreciation. All the variable charges of running vehicles are included in this group. Normally the life of a vehicle is given in terms of mileage to be run. Accordingly depreciation is to be allocated on the basis of kilometres run and hence should be treated as an item of variable charge. Roduces further inaccuracies in total

SERVICE COST AND MANAGEMENT DECISIONS Whenever conveyance facilities of staff or in respect of carriage of goods are to be provided, management is required to take decisions on the basis of operating costs. When the total units do not change under different alternatives, the decision will be taken on the basis of unit operating cost, i.e., lower the cost per unit the more profitable is the proposal and vice versa. When units change from alternative to alternative, the decision will be taken on the basis of total operating costs, i.e., total costs under each alternative should be considered and alternative having least cost would be more profitable and one and vice-versa.

CANTEEN COSTING These days many undertakings provide facilities of subsidised canteen to the workers. The principles of costing may be applied to this field. The main headings of expenses will be as follows: Wages and Salaries of labour, supervisors, cooks, waiters, kitchen assistants; porters etc; Provisions – meat, fish and poultry, vegetables, fruits, flour, cakes, milk and cream, tea, coffee, soft drinks and cigarettes; Services – steam, gas, electricity, power and light, water Consumable stores – table linen; cutlery, crockery, glassware, mops and washing up clothes, drying up clothes, cleaning materials, dustpans, brushes, etc; Miscellaneous overheads – rent and rates, depreciation, insurance, etc.

HOSPITAL COSTING The main purpose of hospital costing is to ascertain the cost of providing medical services. There are different departments in a hospital which are generally formed on the basis of functions performed by them. The following are the main departments in a hospital: O.P.D – Outs-patient department; Wards; Medical service department as diagnostic X-ray, radiotherapy, pathology, etc; General services department as boiler house, if any, power, heating, lighting, etc, catering, laundry, medical records, works maintenance, administration, etc Miscellaneous service departments as transport, dispensary, cleaning and general portering, etc.