UNIT- 3 Operating / Service costing

     Cost Accounting has been traditionally associated with manufacturing companies. However, in the modern competitive market, cost accounting has been increasingly applied in service industries like banks, insurance companies, transportation organizations, electricity generating companies, hospitals, passenger transport and railways, hotels, road maintenance, educational institutions, road lighting, canteens, port trusts, and several other service organizations. The costing method applied in these industries is known as ‘Operating Costing’.

       According to CIMA [London] operating costing is, ‘that form of operating costing which applies where standardized services are provided either by an undertaking or by a service cost center within an undertaking’.

Nature of Operating Costing :

The main objective of operating costing is to compute the cost of the services offered by the organization. To do this, it is necessary to decide the unit of cost in such cases. The cost units vary from industry to industry. For example, in the goods transport industry, the cost per ton kilometer is to be ascertained while in the case of passenger transport, the cost per passenger kilometer is to be computed.  The next step is to collect and identify various costs under different headings.

 The headings used are, 

(a) Fixed or standing charges

 (b) Semi-fixed or maintenance charges 

(c) Variable or running charges. 

One of the important features of operating costing is that most such costs are fixed in nature. For example, in the case of passenger transport organizations, most of the costs are fixed while a few costs like diesel and oil are variable and dependent on the kilometers run. 

Because of the diverse nature of activities carried out in service undertakings, the cost system used is obviously different from that of manufacturing concern. Let us discuss the method of computing costs in various service organizations

TRANSPORT ORGANISATION

      Costing in the transport industry consists of determining the operating cost of each vehicle and applying this cost to find out the cost per unit of service rendered by a vehicle. The cost unit is selected with proper care keeping in view the needs of each concern, the weight, bulk, volume, and type of goods carried, and the distance covered in each trip. Transport undertakings include goods transport organizations as well as passenger transport organizations. The cost unit is either ton kilometer or passenger kilometer. The meaning is the cost of carrying one ton over a distance of one kilometer or the cost of carrying one passenger for a distance of one kilometer.

Collection of Costs:

      A log book is maintained for each vehicle to record details of trips made by the vehicle during a specified period of time. A log book is maintained usually on a daily basis. The details shown in the log book enable the management to make suitable allocation of vehicles, to avoid duplicate trips, or to avoid idle running capacity. The logbook also provides information relating to the fuel consumed, distance traveled, no of hours traveled, and chargeable kilometers. The logbook provides the data for proper allocation of cost and in this respect, these may be compared with the production details available in a manufacturing concern.

Classification of Costs The costs of a transport organization can be classified and accumulated under the following heads:- 

(a) Fixed or stand-by costs: These costs include garage charges, insurance, taxes, license, depreciation, wages of drivers, cleaner’s salary, and establishment cost of workshop and office. Out of the above, some of the costs are directly identifiable for each vehicle such as license fees and some are apportioned such as office expenses 

(b) Maintenance Charges: These costs are in the nature of semi-variable nature including expenditure on maintenance, repairs, tyres, tubes, and other charges. 

(c) Operating and Running costs: These costs are variable in nature, and include fuel, lubricating oil, and wages of drivers/cleaners (if paid on per trip/kilometer). These costs can be easily identifiable with each vehicle.  

Significance of Operating or Running Costs :

(i) Control of operating and running costs and avoidance of waste of fuel and other consumable material.

 (ii) Cost of running own vehicles may be compared with the hired or other forms of transport.

 (iii) Facilitates quotation of hiring rates to outside parties who ask for the transport service. (iv) If transport service is treated as a separate department or service cost center, the costs to be charged to the requesting department may be easily determined. 

(v) Suitable information is obtained for efficient routing of vehicles. 

(vi) Cost of idle vehicles and lost running time is easily obtained. 

           

   For this operating cost sheet is prepared, the proforma of which is given as follows :

  Cost per running km= Total operating cost/km run by vehicle.

(2) Hotel Costing: The hotel industry is a service industry  & covers various activities such as provision for food & accommodation & providing other comforts like recreation, business facilities, shopping areas for shopping facilities, etc. In order to provide the service hotel industry is required to incur various expenses. Expenses may be fixed / variable. Fixed expenses comprise staff salaries, repairs& renovations, interior decoration, laundry contract cost, sundries & depreciation on fixed assets. Variable expenses include lighting charges, attendant salaries & power charges, etc.
               In order to calculate the room rent to be charged per person, notional profit is added to the total operating cost & divided by the number of rooms available. The number of rooms available is calculated after taking into consideration various categories of a suite, various seasons & occupancy %. Room rents may be different during the season & off-season.

Room rent per day = Total cost / No.of rooms available.

3Q) Hospital Costing:  The main purpose of hospital costing is to ascertain the cost of providing services. There are different depts in a hospital which are generally formed on the basis of functions performed by them. The following are the main depts in a hospital :
1.O.P.D(outpatient dept)
2. wards
3. Medical service depts, such as radiotherapy, diagnostic, x-ray, pathology, etc.
4.General service depts, such as boiler-house(if any), power, heating, lighting, catering.
5. Other service depts, such as dispensary, transport, cleaning & general portering, etc.
           The cost of depts 1-4 can be determined separately while expenses relating to depts mentioned in (5) above will have to be apportioned to other depts on some suitable basis.

 Unit of Cost

 Common units of costs of various departments are as follows:

 • Out Patient – Per Out-patient 

• In-Patient – Per Room Day

 • Scanning – Per Case 

• Laundry – Per 100 items laundered 

Cost segregation 

The cost of the hospital can be divided into fixed costs and variable costs

 Fixed costs are based on timelines and irrespective of services provided. For example, Staff salaries, Depreciation on Building and Equipment, etc. 

Variable costs vary with the level of services rendered. For example, Laundry charges, Cost of food supplied to patients, Power, etc. 

4Q) Power house & Electricity costing :

  Powerhouses are engaged either in electricity generation or steam generation using the concepts of service costing i.e. ‘Power House Costing.’ A service cost statement can be prepared by identifying the costs associated with power generation or steam generation. The cost unit is different for electricity generation and steam generation. The cost unit for electricity generation organization is the cost per kilowatt-hour (kWh) – that means the cost of generating one kilowatt of power per hour. Please note that kWh is commonly known as a “Unit”. The costs are shown under the following heads:
  (i) Standing Charges or Fixed costs: These are the fixed costs that remain constant irrespective of the power or stream generated. These costs include the following: 

 Rent, Rates & Taxes

  Insurance

  Depreciation

  Salaries, if paid on Time (Monthly) basis

  Administration expenses, etc.

(ii) Variable costs or Running costs: These costs are generally associated with the power or stream generated. These costs include the following: 

 Fuel Charges

  Water Charges 

 Wages / Labour charges if paid on the basis of production

  Any other variable costs identified. 

(iii) Semi-variable costs or Maintenance costs: These costs include the following:

  Meters 

 Furnaces 

 Service materials 

 Tools, etc. 

     

The following is the operating cost sheet for the generation of electricity.

Cost P.U of electricity generated= Total operating cost / No.of units generated

Reference :
S.P.Jain-''Cost Accounting''.