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OPERATING COSTING
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INTRODUCTIONOperating Costing method is normally used in service sector.
When the service is not completely standardized, it is the cost ofproducing and monitoring a service. It is a method of costing
applied to undertakings which provide service rather than
production of commodities. Service may be performed internally
and externally. Services are termed as internal when they have to
be performed on inter-departmental basis in factory itself e.g.
Power house services, canteen service etc.
Services are termed as external when they are to be rendered
to outside parties. Public utility services like transport, water
supply, electricity supply, hospitals are the best example for
the service costing. Thus operating costing is a method of cost
accumulation which is designed to determine the cost of services.
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MEANING OF OPERATING COSTING
Operating costing is a method of ascertaining the cost ofproviding or operating a service. It is also known as service
costing
CIMA London, defines Operating Costing as that form of
operation costing which applies where standardized servicesare rendered either by an undertaking or by a service cost
renter with in an undertaking.
Steps involved in Operating costing
Selection of cost unit
Collection of Costing Data
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Cost Unit:
Determining the suitable cost unit to be used for cost ascertainment is a
major problem in service costing. Selection of a proper cost unit is a
difficult task. A proper unit of cost must be related with reference to
nature of world and the cost objectives.The cost unit related must be simple i.e. per bed in a hospital, per
cup of tea sold in a canteen and per child in a school. In a certain
cases a composite unit is used i.e. Passenger Kilometer in a
transport company. The following are some of example of cost unitsused in different organizations
Enterprises Cost per unit
Passenger transport Kilometer
Goods transport Ton Kilometer
Hotel Per room per day
Hospital Per bed per day
Canteen Per item, per meal
Water supply Per 1000 liters
Electricity Per kilowatt
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Collection of costing data:
After determining the cost unit, the cost relating to the
service is collected. The collected cost is a presented
under the heads suitable for control purpose i.e. fixed
expenditure and variable expenditure. The presentation
of cost data under difficult categories
helps to improve managerial control over cost.
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TRANSPORT COSTING
Transport costing is method of ascertaining the cost of providing service
by a transport undertaking. This includes air, water, road and railways;motor transport includes private cars, carriers for owners, buses, taxies,
carrier Lorries etc. The objective of motor transport costing may be
summarized as follows:
To ascertain the operation cost of running a vehicle
To provide and accurate basis for quotation and fixing of rates
To provide cost companion between own transport and alternative
e.g. hiring
To compare the cost of monitoring one group of vehicle with
another group To determine the cost to be charged against departments using
the service
To ensure the cost of maintenance and repairs is not excessive
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Particulars Rs. Total Rs. Per Km Rs.
A. Fixed Cost (or Standing charges)
1. Road Tax
2. Insurance
3. Drivers Salary4. Conductors Salary
5. Depreciation
6. Interest on Capital
7. Garage Rent
8. Office & Administration Overheads
XX
XX
XXXX
XX
XX
XX
XX XX
XX
XX
XXXX
XX
XX
XX
XX XX
B. Variable (Running) costs
1.Depreciation
2. Petrol Diesel
3. Oil & Grease4. Repairs and maintenance
5. Tyres and tubes
XX
XX
XXXX
XX
XX
XX
XX
XXXX
XX
XX
Total operating cost XXXX XXXX
Note: Maintenance expenses can be shown separately also depends on cases.
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Tulsian passenger transport company provides you the following information:
No. of buses 5
Normal % of vehicles laid up for
repair 5%
Cost of each bus Rs.3,00,000 no. of round trips per day 3
Estimated life 5 years Distance of route
Repairs & maintenance Rs.7,285 p.m. per bus working days in a month 25
Driver's Salary Rs.800 p.m.per bus Manager's salary Rs. 1,000 p.m.
Conductor's salary Rs.600 p.m.per bus Accountant's salary Rs. 500 p.m.
Garage rent Rs. 6,000 p.a. Peon's salary Rs. 250 p.m.
Insurance 2% p.a. Cleaner's salary 100 p.m.
Taxes Rs. 6,000 p.a. Mechanic's salary Rs. 300 p.m.
Road licenceRs. 600 p.a.per bus Cost of tickets
Rs. 10 per 1000
passenger km
Interest 8% p.a. Office Rent Rs. 250 p.m.
Km per litre of fuel 20 km Office routine expenses Rs. 500 p.m.
Cost of fuel Rs. 300 per 10 litres Cost of each tyre Rs. 3,000Total Capacity 40 passengers Tyres to be replaced per bus 1 p.m.
Average capacity which is
used 90%
Notes: (i) Commission @ 10 % of the taking is to be paid to conductor.
(ii) Profit @ 20% on taking is desired by the owner.
Required- Calculate: a. Cost per month b. Cost per day c. Cost per trip d. Cost per km e. Cost
per passenger km f. Bus fare to be charged from each passenger
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HOSPITAL COSTING
Hospitals comes under service sector, big companies also
maintain hospitals. For costing purpose the hospital service
can be divided in two following categories
(1) Outpatient department(2) Wards
(3) Medical service departments such as radio therapy X ray
etc.
(4) General Services such as heating, lighting, catering laundryetc.
(5) Other services such as transport, dispensary, cleaning etc.
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Format of a cost Sheet of a Hospital
Particulars Rs. Rs.
A) Fixed standing charges
1. Rent , Repairs and maintenance
2. General administrative expenses3. Depreciation
4. Salaries to staff
5. Cost of Oxygen, X ray etc
XX
XXXX
XX
XX
XXXX
B) Running or maintenance costs
1. Doctors fees
2. Food
3. Medicines
4. Laundry
5. Hire charges
XX
XX
XX
XX
XX
XXXX
Total operating cost XXXX
Cost per patient day = Total Operating cost/No of Patient Days
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A public health centre runs an intensive medical care unit. For this purpose, it has hired
a building at a rent of Rs. 5,250 p.m. with the understanding that it would bear the repairs and
maintenance charges also.
The unit consists of 25 beds but 5 more beds can be comfortably accommodated when the occasion
demands. The permanent staff attached to the unit is as follows:
2 supervisors, each at a salary of Rs. 2,500 p.m.
4 nurses, each at a salary of Rs. 1,500 p.m.2 ward boys, each at a salary of Rs. 750 p.m.
Though the unit remains open for the patients all the 365 days in a year , it has full capacity of 25 patients
per day only for 120 days. For 245 days it has on average 20 beds occupied per day. But there were
occasions when the beds are full and extra beds are hired from outside at a charge of Rs. 10 per bed per
day. However , this does not come to more than 5 extra beds above the normal capacity on any one day.
The total hire charges for the extra beds incurred for the whole year amount to Rs. 5,000.
The unit has engaged expert doctors from outside to attend patients. The fees are paid on the basis of thenumber of patients attended and time spent by them. On an average it works out to Rs. 33,500 p.m.
The other expenses for the year are as under:
Repairs & maintenance 7,200 Medicines supplied 64,000
food supplied to patients 88,000 Cost of oxygen, X-rays 1,08,000
Janitor & other services 25,000 General administration charges 99,000
Laundry charges 28,000
Required: 1. If the unit recovered an over-all average amount of Rs. 150 per patient per day, what is the
profit made by unit.
2. The unit wants to work on a budget for the next year, but the number of patients requiring intensive
medical care is a very uncertain factor.
Assuming that the same revenue and expenses will prevail next year also, work out no. of patient-days
required by the of break-even.
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HOTEL COSTING
Hotel industry is a service industry and covers various activities
such as provision for food and accommodation. It also provides
other comforts like recreations, business facilities, shopping areasetc. The expenses incurred in a hotel are fixed or variable. Fixed
expenses comprises of staff salaries, repairs, interior decoration,
laundry contract cost and depreciation on fixed assets. The
variable expenses incurred are lighting, attendants salaries, poweretc. To find out room rent to be charged from customers a notional
profit is added with the cost and divided by the number of rooms
available. The number of rooms available is calculated after for
considering availability of suits and occupancy.
Rooms rent may be different from season to season. Sometime
besides accommodation they also provide food. Then the cost of
meals, other direct and indirect costs are considered to work out
the costs to be charged from customers.
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Particulars Rs. Rs.
A) Fixed Charge
1. Salaries to Staff
2. Repairs and Renovation
3. Depreciation
4. Interior decoration
5. Lighting, heating & power
6. Laundry contract cost7. License fee
XX
XX
XX
XX
XX
XXXX
XXXX
B) Running charges (Variable cost)
1. Cost of free tea, coffee, meal, breakfast
2. Laundry cost of bed sheets & towel
XX
XXXXXX
Total Operating Cost XXXX
Operating cost sheet of a Hotel
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From the following information relating to a hotel, calculate the room rent to be charged
to give a profit of 25% on cost excluding interest
a. Salaries of staff: Rs. 1,02,200 p.a.
b. Wages of the room attendant : Rs. 4 per day
c. There is a room attendant for each room. He is paid wages only when the room is
occupied.
d. Lighting, Heating and power
The normal lighting expenses for each room for the whole month is Rs. 100 when
occupied.
Power is used only in winter and the charges are Rs. 40 p.m. for a room, when
occupied.e. Repairs to buildings: Rs. 10,000 p.a.
f. License etc : Rs. 4,800 p.a.
g. Sundries: Rs. 6,600 p.a.
h. Interior decoration and furnishing: Rs. 10,000 p.a.
i. Depreciation @ 5% is to be charged @ 20% on investment in buildings costing Rs.4,00,000 and 10% on equipments.
j. Interest to be charged @ 20% on investment in buildings and equipments
amounting to Rs. 5,00,000.
k. There are 100 rooms in hotel 80% of the rooms are generally occupied in summer
and 30% in winter. The period of summer winter may be considered to be of 6
month in each case: a month can be assumed of 30 days.
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Canteen Costing
Canteen costing is a method of ascertaining the cost of
providing meals or dishes of different types. The objectives
of canteen costing is to ascertain the cost of producing
meals and to fix the rates of meals.
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Format of Canteen Operating Cost Sheet
Particulars Total (Rs) Per Unit (Rs)
(A) Provisions:
1. Wheat flour
2. Bread3. Vegetable & Milk
4. Cold drinks, Tea & coffee
XX
XXXX
XX
XX
XXXX
XX
Wages & Salaries of Staff XX XX
(B) Services:
1. Gas & Water2. Power & Lighting
XXXX
XXXX
(C) Consumable stores:
1. Crockery and Glassware
2. Cleaning materials
XX
XX
XX
XX
(D) Miscellaneous:1. Rent & Insurance
2. Depreciation
XX
XX
XX
XX
(E) Total XX XX
(F) Profit XX XX
(G) Sales XX XX
f f f
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From the following data for the month of April 2011, calculate cost
per meal for the canteen Run by joint councils of workers and
management of Ratex Ltd:
1. Purchases for the month of April
Meat 50 kgs @ Rs. 15 per kg Eggs 36 dozens @ Rs. 5 per dozen
Vegetables Rs. 300
Bread etc Rs. 400
Rice Rs. 6002. Wages and Salaries
2 Cooks @ Rs. 400 p.m. each
1 Manager who is paid Rs. 50 p.m. as allowance ( because he
is already an employee)
3. Consumable stores Rs. 5,000 p.a.
4. Gas & Electricity Rs. 200 p.m.
5. Overheads allocated to the canteen Rs. 1,200 p.a.
6. Company subsidy Rs. 2,000 p.a.
7. No. of meals served in the month of April: 2000
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Electricity Generation Costing
Power houses engaged in electricity generation orsteam generation use Power House Costing.
Operating cost statement can be prepared by
identifying the costs associated with the powergeneration or steam generation. Cost unit is different
for electricity generation and steam generation. For
electricity generation, cost unit is cost per kilowatt-hour while for steam it is lb.
S i f l t i it ti ti
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Specimen of electricity generation costing
Power House Cost Sheet
XYZ Ltd. October 2007
Total Steam Produced:
Total Steam Produced: Electricity Generated:
Particulars Amount
Cost per
unit [lbs] Rs.
Total Cost
Rs.
A] Fixed Charges
Rent, Rates, Taxes
Insurance
DepreciationSalaries
XX
XX
XXXX
XX
XX
XXXX
B] Fuel Charges XX XX
C] Maintenance Charges
Meters
FurnacesService materials
Tools etc.
XX
XXXX
XX
XX
XXXX
XX
D] Water Charges XX XX
E] Wages/Labour Charges XX XX
G] Total Charges XX XX
Y t d t C t Sh t h i th t f
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You are requested to prepare a Cost Sheet showing the cost of
generation of power per kilo Watt-Hours (kWH).
Total Units Generated 15,00,000 kWH p.a.
Rs.
Operating Labour 16,500 p.a.
Plant Supervision 5,250 p.a
Lubricant and Supplies 10,500 p.a.
Repairs & Maintenance 21,000p.a.Administrative overheads 9,000 p.a.
Capital Cost 1,50,000
Coal consumed per kWH is 1.5 lbs and cost of coal delivered tothe power station is Rs. 33.06 per metric ton. Depreciation rate
chargeable is 4% p.a. and interest on capital is to be taken @7%.
Take 1 metric ton = 2205 lbs.