7/25/2019 CA Project (2)

1/21

1

INTRODUCTION

Operating costsare the expenseswhich are related to the operation of a

business, or to the operation of a device, component and piece of equipment or

facility. They are the cost of resources used by an organization just to maintain

its existence.

Operating costs fall under the two broad categories i.e. fixed cost and

variable costs. Operating Cost is calculated by Cost of goods sold Operating

!xpenses. Operating !xpenses consist of"

#dministrative and office expenses li$e rent, salaries, to staff, insurance,

director%s fees etc.

&elling and distribution expenses li$e advertisement, salaries of salesmen.

't includes all operating cost such as salary, rent, stationery, furniture etc.

'n the case of a device, component, piece of equipment or facility (for the

rest of this article, all of these items will be referred to in general as

equipment), it is the regular, usual and customary recurring costs of operating

the equipment. This does not include the capital cost of constructing or

purchasing the equipment (depending on whether it is made by the owner or

was purchased as a constructed system).

Operating costs are incurred by all equipment * unless the equipment

has no cost to operate, requires no personnel or space and never wears out (any

examples+ perhaps intangibles, though not equipment). 'n some cases,

equipment may appear to have low or no operating cost because either the cost

is not recognized or is being absorbed in whole or part by the cost of something

else.

http://en.wikipedia.org/wiki/Capital_costhttp://en.wikipedia.org/wiki/Capital_cost

7/25/2019 CA Project (2)

2/21

2

!quipment operating costs may include"

&alariesor agesof personnel

#dvertising

-aw materials

icense or equivalent fees (such as Corporation yearly registration fees)

imposed by a government

-eal estate expenses, including

o -entor easepayments

o Office space rent

o furniture and equipment

o investment value of the funds used to purchase the land, if it is

owned instead of rented or leased

o property taxes and equivalent assessments

o Operations taxes, such as fees assessed on transportation carriers

for use of highways

/uel costs such as power for operations, fuel for production

0ublic 1tilities such as telephone service, 'nternetconnectivity, etc.

2aintenance of equipment

http://en.wikipedia.org/wiki/Salaryhttp://en.wikipedia.org/wiki/Wagehttp://en.wikipedia.org/wiki/Advertisinghttp://en.wikipedia.org/wiki/Rentinghttp://en.wikipedia.org/wiki/Leasehttp://en.wikipedia.org/wiki/Salaryhttp://en.wikipedia.org/wiki/Wagehttp://en.wikipedia.org/wiki/Advertisinghttp://en.wikipedia.org/wiki/Rentinghttp://en.wikipedia.org/wiki/Lease

7/25/2019 CA Project (2)

3/21

3

Office supplies and consumables

'nsurance premium

3epreciation of equipment and eventual replacement costs (unless the

facility has no moving parts it probably will wear out eventually)

3amage due to uninsured losses, accident, sabotage, negligence,

terrorismand routine wear and tear.

Taxes on production or operation (such as subsidence fees imposed on oil

wells)

'ncome taxes

&ome of these are not applicable in all instances. /or example,

# solar panel placed on one4s home for use in generating electric power

generally has only capital costs5 once it4s running there are no personnel

costs, utility costs or depreciation and it uses no extra land (that wasn4t

already part of the place where it is located) so it has no real operating

costs5 however there may need to be ta$en into account costs of

replacement if damaged.

#n automobile or any other item purchased for personal use has no salary

cost because the owner does not charge themselves for operating the

device.

#n item which is leasedmay have some or all of these costs included as

part of the purchase price.

http://en.wikipedia.org/wiki/Accidenthttp://en.wikipedia.org/wiki/Sabotagehttp://en.wikipedia.org/wiki/Negligencehttp://en.wikipedia.org/wiki/Terrorismhttp://en.wikipedia.org/wiki/Wear_and_tearhttp://en.wikipedia.org/wiki/Leasehttp://en.wikipedia.org/wiki/Accidenthttp://en.wikipedia.org/wiki/Sabotagehttp://en.wikipedia.org/wiki/Negligencehttp://en.wikipedia.org/wiki/Terrorismhttp://en.wikipedia.org/wiki/Wear_and_tearhttp://en.wikipedia.org/wiki/Lease

7/25/2019 CA Project (2)

4/21

4

MEANING

Operating costing is the method used to ascertain the cost of providing a

service such as transport, hotel, hospital, gas or electricity. Operating costs

denotes the costs of providing a service as opposed to cost of manufacturing a

product. 't is also termed as 6&ervice Costing7. 'C2# has defined operating

costing as that form of operation costing which applies when standardized

services are provided either by an undertaking or by a service cost centre within

an undertaking. Cost #ccounting &tandard 8 9 by 'C# defines :Operating

Cost% 6as the cost incurred in conducting a business activity. Operating costs

refer to the cost of underta$ings, which do not manufacture any product but

which provide services7.

APPLICATION

7/25/2019 CA Project (2)

5/21

5

Operating costing is employed in different types of service industries such as

; Transport services e.g. Truc$ operator, -oad Transport, -ailways, #ir;line

etc.

; 2unicipal services li$e -oad maintenance,

7/25/2019 CA Project (2)

6/21

6

b. Commercial (simple average)" (e.g.) tonne ?m82ultiplying total

distance by average load quantity.

+! The selection of cost unit in the case of operating costing is a difficult

job. 't depends upon the nature of business.

COST UNIT

/or ascertaining costs, it is necessary to decide suitable cost units for each

type of service industry. @asically, operating costing is a type of 0rocess

Costing. Thus it uses the methods of 0rocess Costing when ascertaining the

cost of supply of electricity, steam etc. =owever, sometimes operating costing

may adopt a particular job as a unit of cost for example when costing a

particular trip by a bus so as to quote the charges. 'n such cases operating

costing uses the methods of job costing by treating a specific trip as a separate

job. # cost unit under operating costing may be of two types;

a. &imple cost unit

b. Composite cost unit

/ollowing is the list of different cost units used in different types of service

enterprises;

SER%ICE INDUSTRIES SIMPLE COST UNIT

0assenger Transport

7/25/2019 CA Project (2)

7/21

7

&team, gas

=ospital

ibrary

0er ?.

7/25/2019 CA Project (2)

8/21

8

absorption rate which may be actual or pre;determined. The fixed

costs attributable to the vehicle are debited to the relevant vehicle

account.

#! Re(enue" The revenue from the vehicle is credited to the vehicleaccount.

e! Pro.it or Loss" The vehicle account at this stage will reveal the profit

and loss made on operating that vehicle. The profit or loss is then

transferred to the costing profit and loss account. The total operating

cost of a period is divided by the number of cost units

(?2ApassengerAton etc.) supplied during the period to arrive at the

operating cost per unit for that period.

)! No stoc/s" 'n case of a service industry, there is no question of any

closing stoc$ or wor$; in;progress since it is not possible to store a

service for future use.

*! A$norma& Costs" #ccording to Cost #ccounting &tandard D

(Transportation Costs), abnormal and non;recurring costs shall be directly

debited to 0 E #Ac and shall not from part of operating costs. !xamples

are; penalty, detention charges, demurrage and costs related to abnormal

brea$ down.

7/25/2019 CA Project (2)

9/21

9

STATISTICS

C#;D by 'C# also states that proper records shall be maintained to

determine the actual operating cost of vehicles showing details of various

elements of cost, such as salaries and wages of driver, cleaner and others, cost

of fuel, lubricants, grease, amortized cost of tyres and batteries, repairs andmaintenance, depreciation of vehicles, distance covered and trips made, goods

hauled and transported.

Two basic documents are normally maintained for collection of cost and

operational details i.e. log boo$ and 3aily operation schedule. &ame as job is

assigned a distinct number in job costing method, each vehicle is provided with

a log boo$ or log sheet, which contains all information for operation and cost

control, of one particular vehicle.

LOG 0OO1

ehicle no.

icense no.

-oute no.

3ate"

Time left garage"

Time returned"

Trip recor#

Trip

no!

From To

Pac/age 2eig-t

1ms!

Time

Out Co&&ecte

# onroute

Out In 3ours ta/en

&upplies" FFFFF..

0etrol" FFFFFF..

Oil" FFFFFFF...

7/25/2019 CA Project (2)

10/21

10

!tc." FFFFFFF...

2ost of the details required for controlling the vehicles are available from the

log boo$. # daily operation schedule has to be maintained by firms operating afleet of vehicles, so as to $eep control over utilization of each vehicle,

minimizing vehicle idle hours, and also, $eeping repairs cost under control. #

system of 6requisition of vehicles7 may also be introduced for proper

authorization for use of vehicles. &imilarly, major repairs should be underta$en

after obtaining authorization for the same.

FORMAT OF COST S3EET 4TRANSPORTER5 6

0ASED ON CAS7+

Cost S-eet .or 8mont-9:ear;

!='C! GO.

C#--'#

icense fee, permit fee and taxes

3epreciation

Other fixed cost (specify)

%ARIA0LE COST

&alaries and wages of drivers, cleaners andother operating staff

/uel and lubricants

Consumables

#mortized cost of tyre, tube and battery

&pares

-epairs and maintenance

KK

KK

KK

KK KK

KK

KK

KK

KK

KK

KK

KK

KK

7/25/2019 CA Project (2)

11/21

11

C!

D!

E!

Other variable cost(specify)

TOTAL OPERATION COSTS 4A=05

PROFIT9LOSS

RE%ENUE 4TA1INGS5

KK

KK

KK

The above cost sheet is as prescribed in cost accounting standard ;D by 'C#

which is mandatory w.e.f. 9;L;>M9M. C#&;D is mandatory for cost audits under

the companies act and for computing transport cost under the !xcise act. The

above cost classification is different from the traditional cost classification. 'n

most cases, the final unit cost remains the same, even if the classification vide

C#&;D is different.

Notes,

! Fi"e# costsare costs of owing the vehicles. These must be paid whether

the vehicle runs or not. These also include officeAadministrative

overheads.

%aria$&e costsare incurred to actually run a vehicle. These vary with the

operations; the more a vehicle runs, the higher are the variable costs.

'! E..ecti(e /i&ometresN -un load N Ione way trip ($m.) trips per day

days operatedJIcarriage capacityusage rateJ

>.9. 'n case of passenger transport, carriage capacity is in terms of

seats5 and cost unit is effective $ilometres per passenger.

7/25/2019 CA Project (2)

12/21

12

>.>. 'n case of goods transport, carriage capacity is in terms of Tonnes5

and cost unit is effective $ilometres per Tonne.

)! Cost per /i&ometreN operation cost A effective $ilometres

*! Re(enue 8or ta/ings > cost = pro.it; per /i&ometreN Ta$ings A effective

$ilometre

+! Tari.. to $e c-arge# per /i&ometre N Ta$ings per effective $m. A

3istance of trip

?! Specia& points" cost of battery, tyres and tubes shall be amortized over its

useful life.

T3E COSTS OF OPERATING TRUC1S

Our methodology for determining truc$;operating costs differs

substantially from that for passenger vehicles because there are very different

types of information available. hen loo$ing atcars, there are many third party

sources that estimate operating costs and resale values of different models, as a

service to potential buyers. Go similar service exists for truc$s. This is probably

because buyers of truc$s are more $nowledgeable about their purchases, and

hence have less use for such services. &ince they are using truc$s for a specific

purpose, they tend to buy the same type of truc$ over and over, and hence have

a good understanding of costs and resale values.

The result of this lac$ of third party cost estimates is that Truc$

operators must develop estimates of truc$ costs more from research sources,

which will in general be aimed at purposes slightly different than ours. That is,

7/25/2019 CA Project (2)

13/21

13

they may include some fixed costs, or some costs that may vary with the

number of trips but not with the number of miles driven.

hile there are obviously many different sizes and types of truc$s, they

estimate a single composite value to account for all of them. This was done for

two reasons. /irst, analysts will typically not have detailed counts of different

types of truc$s. &econd, and more importantly, we could not establish robust

estimates of the costs of operating different types of truc$s. The available

sources tend to focus either on long;haul tractor;trailer combination truc$s, or

on 6all7 commercial truc$s5 there does not seem to be much information on

how types of truc$s differ from each other.

The lac$ of information on the costs of different truc$ types is especially

problematic given that they are interested in a specific type of cost, namely

operating the truc$ on a highway under varying start;stop and pavement

roughness conditions. =owever, available estimates of operating costs tend to

focus on the 6typical7 environment for a truc$ type, which may be very

different from this. /or example, truc$s used in construction and for deliveries

operate mostly in extreme conditions5 on a highway they may cost less, but no

one has had reason to figure this out. #nd ultimately they don%t have that much

precision available on the costs of combination truc$s, which are the type that

they $now the most about. &o to be conservative, they derive a consensus

operating cost and assume that this cost applies to all truc$ types.

7/25/2019 CA Project (2)

14/21

14

Roa# Transport Operations

8Ascertaining Cost o. Roa# transport o. ser(ice

(e-ic&e;

Fie, Transport

Su$7.ie, Commercia& Roa# Transport

Purpose, 0eople credited with this unit standard are

able to identify the variable and fixed cost

components of a vehicle used in a road

transport operation and develop a costing

system for a road transport service vehicle.

Specia& notes, De.initions

# road transport operation may form part of

a road transport organization or it may

constitute a complete organization5 Vehicle

may be a single vehicle or a combination

vehicle.

7/25/2019 CA Project (2)

15/21

15

E&ements an# Per.ormance Criteria,

E&ement

'dentify the variable and fixed cost components of a vehicle used in

a road transport operation.

-ange" includes but is not limited to 8 -oad 1ser Charges, fuel,

wages and salaries, tyres, repairs and maintenance (both

scheduled and unexpected), depreciation and interest,

overheads, insurance.

Per.ormance criteria

Costs identified are consistent with historical data andAor industry survey.

E&ement '

3evelop a costing system for a road transport service vehicle.

-ange" per $ilometer, per hour, per day, per month.

Per.ormance criteria

Costing system reflects the aggregation of identified cost components.

-ange" fixed costs, running or standing costs, variable costs.

Gote"

Costing system includes a process for the review of the costing

constants and the updating of data.

Costing system is evaluated on two assignments, one biased for

time, one biased for distance.

Calculations are chec$ed and accurate.

7/25/2019 CA Project (2)

16/21

16

CASE STUD@ 6 TRANSPORT INDUSTR@

Mamta Transport ser(ice 8transport contractors;

Supp&iers o. a&& t:pes o. (e-ic&es

O2ner 6 Mr! An/us- 1! Langa#e

A##ress, C-ec/ na/a tempo o2nerBs association near Mo#e&&a

mi&& 2ag&e c-ec/ na/a t-ane 6 * ?*!

3istor:

The owner, 2r. #n$ush ?. angade started business with one truc$

in 9PP> for -s. >, DM,MMM. =e bought additional truc$ for -s. >, PM,MMM in 9PPD

and in 9PPP for -s. Q, QM,MMM. Then due to some business crisesAlosses, he sold

all Q truc$s for -s. 9,LM,MMM, -s. 9,LD,MMM and -s, >,MM,MMM respectively.

hen he recovered his losses and came into stable position, he

again started business in >MML by purchasing one new truc$ costing

-s. L, DM,MMM having capacity of >.D tonnes and in >MMR he made addition of

new truc$ having capacity of D tonne for -s. P, MM,MMM.

7/25/2019 CA Project (2)

17/21

17

At present

#t present, his business is running on > truc$s which are purchased

on >MML and >MMR respectively and have estimated life of 9M years. @oth the

truc$s are of T#T# Company and used for goods transport as .D tonnes

>M days

9

9M $ms

M3 * DS '

D tonnes

>M days

9

R $ms

STE

P

PARTICULARS TRUC1 I TRUC1 II

A! FILMM

LRMMM

QMMMM

RDMM

>>MMM

>MMM

9MMM

>LMM

7/25/2019 CA Project (2)

18/21

18

0!

C!

D!

E!

TOTAL FI

7/25/2019 CA Project (2)

19/21

19

CONCLUSION

e conclude that operating costing is technique and process by which

one can ascertain the cost of rendering services. @ut such variable or standing

costs could also change after the project is over, again because either the

length or the operating conditions, especially speed, might have changed for

certain trips.

7/25/2019 CA Project (2)

20/21

20

0I0LIOGRAP3@

COST ACCOUNTING $: Ainapure

HE0LIOGRAP3@

-ttp,99en!2i/ipe#ia!org92i/i9operatingcost

-ttp,99222!tec-no&og:e(a&uation!com9searc-9.or9in#ian7truc/s7

operatingcosts

7/25/2019 CA Project (2)

21/21

21