Operating costing is an extension and refined form of process costing. It is also more or less very similar to single or output costing. The operating costing gives more emphasis on providing services rather than the cost of manufacturing an article. The services provided may be for sale to the general public or they may be provided within an organization.
The operating costing is also called as service costing, period costing or terminal costing. Service costing means rendering service to the public or to an organization for which cost is accumulated and calculated. Period costing means the costs data collected and calculated for a specific period. Terminal costing means a bus or truck of a transport undertaking chartered for a specific trip.
Features of Operating Costing
The basic features of operating costing are presented below.
- Uniform service is provided to all the customers.
- The costs are classified into fixed and variable.
- The fixed and variable cost classification is necessary to ascertain the cost of service and the unit cost of service.
- There is no physical stock of article if an undertaking renders a service.
- If a cost center is operating for an undertaking, there is no sale of service but render the service. In other words, if a cost center is operating for public, it sells its service to the public.
- The cost unit may be simple in certain cases or composite or compound in other cases like transport undertakings.
- Total costs are averaged over the total amount of service rendered.
- The costs are collected from the authentic documents like daily log sheet, operating cost sheet, boiler house cost sheet, canteen cost sheets etc.
- Operating cost is the cost of rendering service.
- Operating costing is the method of ascertaining costs.
- The productive enterprises can quote prices by ascertaining cost data.
Application of Operating Costing
Operating costing is applied by an organization, which provides service to the public as a whole instead of manufacturing an article, and sells the same. For example, Transport undertaking electricity, theatre, hospitals, schools and the like. Similarly, the same type of an organization or cost center renders service to production departments. For example, Electricity, powerhouse, canteen and the like.
The service cost in operating cost should be find out to understand whether an organization or cost center render services to others or sell the services to the general public. If the services are sold, the operating expenses and the extent of services rendered are taken into consideration to find out the service cost. On the other hand, if the services are sold, the service expenses should be apportioned to the production department on a suitable basis.
Generally, the basis may be the extent of service availed by the production departments. It may also become necessary to compare the cost of such a service with the cost of an outside service for deciding whether it is profitable to buy a service from outside rather than make the same available from within an organization.
How are services classified under Operating Costing?
The services may be classified into two categories under operating costing, namely
- Internal service and
- External service.
Internal service refers to rendering service to the production departments within an organization. External service refers to providing services to the general public uniformly. The object of both internal service and external service is the same.
Selection of Cost under Operating Costing
Cost is expressed in terms of the unit of service rendered. Though, operating cost is relating to units of costing the cost unit is not as tangible as a job or a contract. Any person cannot easily select a cost unit. Thus, the selection of cost unit requires more skill, technical and statistical talent on the part of the cost accountant.
The cost unit may be simple cost unit or composite cost unit. There is only one variable in the simple cost unit. For example, per bed in case of hospitals, a cup of tea or coffee in case of canteen, per room or per bed in case of lodge and the like. Two or more variables have a close relationship in the composite cost unit. Costs are collected in terms of composite cost units. For example, per tone km in case of transport (truck), per man show in case of cinema theatres, per passenger km in case of transport (passenger) and the like. Hence, the selection of suitable cost unit depends upon the nature of service.
Objectives of Operating Costing
The objectives of operating costing are listed below:
- To supply the information through which the efficiency in rendering service is improved.
- To provide a basis for fixing accurate quotation and fare.
- To ensure that the services are provided in proper time.
- To control the fuel consumption and its expenses.
- To ensure that the service equipments are properly maintained.
- To provide cost comparison between own service and alternative service i.e. hiring.
- To compare the cost of one service center with another.
- To determine the apportionment cost if the services are provided within an organization.
- To decide the price that can be charged for use of vehicle.
- To control the cost of maintenance and repairs.
- To select efficient and suitable routing of vehicles to reduce the costs to production departments that uses the service.
- To avoid the under utilization of capacity and idle time of the work force.
- To absorb the fixed costs proportionately and systematically that is allocated to the units of services.
Union Transport Company supplies the following details in respect of a truck of 5-tonne capacity:
The truck carries goods to and from city covering a distance of 50 miles each way.
While going to the city freight is available to the extent of full capacity.
Assuming that the truck runs on an average 25 days a month, work out:
(i) Operating cost per tonne-mile, and
(ii) Rate per ton per trip that the company should charge if profit of 50% on freightage is to be earned.
Operating Costing Problem 2:
The Kangaroo Transport operates a fleet of lorries. The records for lorry L-14 reveal the following information for September, 1990:
The following information is made available:
- Operating costs for the month
Petrol Rs.400, oil Rs.170, grease Rs.90, wages to driver Rs.550, wages to khalasi Rs.350.
- Maintenance costs for the month.
Repairs Rs.170, overhead Rs.60, Tyres Rs.150, Garage charges Rs.100.
- Fixed costs for the month based on the estimates for the year : Insurance Rs.50, Licence, Tax etc. Rs. 80,
Interest Rs.40, other overheads Rs.190.
- Capital costs:
Cost of acquisition Rs.54,000
Residual value at the end of 5 years life is Rs.36,000. Prepare a Cost Sheet and performance statement showing:
(a) Cost per day maintained;
(b) Cost per day operated ;
(c) Cost per kilometer;
(d) Cost per hour;
(e) Cost per commercial tonne