INTRODUCTION TO OPERATING COSTING

Operating costing is a method of costing applied by undertakings

which provide service rather than production of commodities. Like unit

costing and process costing, operating costing is thus a form of operation

costing.

The emphasis under operating costing is on the ascertainment of cost

of rendering services rather than on the cost of manufacturing a product. It is

applied by transport companies, gas and water works, electricity supply

companies, canteens, hospitals, theatres, school etc. Within an organization

itself certain departments too are known as service departments which

provide ancillary services to the production departments. For example:

maintenance department; power house; boiler house; canteen; hospital;

internal transport.

Operation costing offers better scope for control. It facilitates the

computation of unit operation cost at the end of each operation by dividing

the total operation cost by total input units. It is the category of the basic

costing method, applicable, where standardized goods or services result from

a sequence of repetitive and more or less continuous operations, or processes

to which costs are charged before being averaged over the units produced

during the period. The two costing methods included under this head are

process costing and service costing.

1

CIMA has defined ‘Operating Costing’ “As that form of operation

costing which applies when standardized services are provided either y an

undertaking or by a service cost center within an undertaking”.

Cost Accounting Standard – 1 by ICWA defines ‘Operating Cost’ “As

the cost incurred in conducting a business activity. Operating costs refer to

the cost of undertakings, which do not manufacture any product but which

provide services”.  

Because of the varied nature of activities carried out by the service

undertaking, the cost system used is obviously different from that followed

in manufacturing concerns.

The essential features of operating costs are as follows:

1. The operating costs can be classified under three categories. For

example in the case of transport undertaking these three categories are

as follows:

Operating and running charges: It includes expenses of variable

nature. For example expenses on petrol, diesel, lubricating oil, and

grease etc.

Maintenance charges: These expenses are of semi-variable nature

and include the cost of tyres and tubes, repairs and maintenance,

spares and accessories, overhaul, etc.

Fixed or standing charges: These includes garage rent, insurance,

road license, depreciation, interest on capital, salary of operating

manager, etc.

2

2. The cost unit used is a double unit like passenger-mile; Kilowatt-hour,

etc. It can be implemented in all firms of transport, airlines, bus-service, etc.,

and by all firms of Distribution Undertakings.

APPLICATION OF OPERATING COSTING

1. Transport Service: Under this method of costing, the operating cost

of each vehicle is determined. The common unit of service is tonne

kilometer in case of goods transport, and passenger kilometer in case

of passenger transport. Examples of transport service are Truck

operators, road transport, Railways, Airlines, etc.

2. Supply service: It includes services like electricity, steam, gas, water,

etc. where steam is used for the purpose of generating electricity, it is

possible to compute the cost of electricity generated by aggregating

the steam production costs with other related cost of electricity

generation. A cost unit is generally in terms of kilograms.

3. Welfare Services: It includes services like canteen, hospital, library,

etc. Hotels, restaurants employ operating costing. The total operation

of a hotel can be divided into number of cost centers like Restaurant,

Housekeeping, Laundry, etc. The cost unit is generally in terms of per

meal/ dish.

3

COST UNIT:

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

type of service industry. Basically, Operating Costing is a type of Process

Costing. Thus it uses the methods of Process Costing when ascertaining the

cost of supply of electricity, steam etc. However, sometimes Operating

Costing may adopt a particular Job as a unit of costs as for example when

costing a particular trip by a bus so as to quote the charges. In such cases

Operating Costing uses the methods of Job Costing by treating a specific trip

as a separate job. A cost unit under operating costing may be of two types –

a. Simple cost unit; or

b. Composite cost unit.

Following is the list of different cost units used in different types of service

enterprises –

Service Industries Simple Cost Unit

Passenger Transport Per Kilometer

Goods Transport Per Kilometer

Road Maintenance Per K.M. of Road maintained

Water Supply Per Kilo Liter of Water Supplied

Canteen Per Meal / Dish

4

Service Industries Composite Cost Unit

Passenger Transport Per Passenger - K.M.

Goods Transport Per Ton - K.M.

Electricity Per Kilowatt – Hour

Steam, Gas Per K.G. / Cubic Ft.

Hospital Per Patient – Day

Library Per Member – Book

Thus, it can be seen that in Operating Costing, in most cases the cost unit is

a compound unit. It refers to both the Quantum of Service and Period of

Service. Thus a transporter charges for carrying so much weight (tons) for so

much distance (Km); an electricity company charges one for use of both the

Quantum (Kilowatt) and the Period (Hours); and so on.

5

TRANSPORT COSTING:

Transport operating costs refer to costs that vary with vehicle usage,

including fuel, tires, maintenance, repairs, and mileage-dependent

depreciation costs (Booz Allen & Hamilton, 1999). Projects that alter

vehicle miles traveled, traffic speed and delay, roadway surfaces, or roadway

geometry may affect travelers' vehicle operating costs, which should be

considered in a benefit-cost analysis.

Vehicle ownership costs refer to fixed costs that are not directly affected by

vehicle mileage, including time-dependent depreciation, insurance and

registration fees, financing, and residential parking.

Projects that change per capita vehicle ownership rates, such as significant

changes in the quality of alternative modes and land use accessibility, may

affect vehicle ownership costs, which should be considered in benefit-cost

analysis.

Estimate changes in total vehicle miles traveled along a corridor.

Estimate changes in vehicle travel speeds and delay due to road and

traffic conditions.

Estimate fuel consumption rates, fuel prices, and non-fuel-related

operating costs.

Calculate total changes in vehicle operating costs.

6

For improvements to ride quality, such as pothole repairs and curve or

grade reductions, estimate effects on vehicle wear.

Estimate changes in per capita vehicle ownership in an area.

Estimate average vehicle ownership costs.

Calculate total changes in vehicle ownership costs.

COST SHEET for (Month/Year)

STEP COSTS Rs. Rs.

7

A.

B

C.D.E.

FIXED COSTInsurance                                           ………….License fee, Permit fee and Taxes     ………..... Depreciation                                      ………….Other Fixed costs (specify)                …………

                                             VARIABLE COSTSalaries and Wages of Drivers, Cleaners & other Operating Staff                                   …………Fuel and Lubricants                            ………..Consumables                                      …………Amortization Cost of Tyre ,Tube & Battery Laundry                                              …………Spares     ………...Repairs & Maintainable                    …………Other Variable Cost (specify)             ………...TOTAL OPERATING COST[A+B]PROFIT/LOSSREVENUE [TAKINGS]

xxxxxxxx

xxxxxx

xxxxxxxx

XX

XXXXXXXX

VEHICAL NO                                                                             XXX

     CARRAIGE CAPACITY [Seats or Tonnes]                               XXX

     DAYS OPERATED                                                                    XXX

Illustrations 1:

1. From the following information calculate total kms and total

passengers Kms

8

No. of Buses=6

Days Operated in the month=25

Trips mage by each bus = 4

Distance of route 20 Kms (one way)

Capacity of Bus = 40 passengers

Normal passenger travelling 90% of capacity.

SOLUTION:

Total Kms covered = Run

Distance * Two ways * No. of trips * No. of days * No. of buses

20 Kms * 2 * 4 *25 * 6 = 24000 Kms

Total passenger-Kms. Covered = Run * Load

Load = Maximum capacity* Used capacity

       = 40 * 90%   = 36

9

Total Passenger Kms Covered = 24000*36

                                                = 864000

Illustrations 2:

A mineral is transported from two mines – A and B and uploaded at plots in

a Railway station. Mine A is at a distance of 10kms, and B is at a distance of

15kms. From railhead plots. A fleet of lorries of 5 tonne carrying capacity is

used for the transport of mineral from the mines. Records reveal that the

lorries average a speed of 30kms per hour , when running and regularly take

10 minutes to unload at the railhead. At mine “A” loading time averages 30

minutes per load while at mine “B” loading time averages 20 minutes per

load.

Drivers’ wages, depreciation, insurance and taxes are found to coat Rs9 per

hour operated. Fuel, oil, tyres, repairs and maintainance cost Rs 1.20 per

Km.

Draw up a statement, showing the cost per tone- kilometer of carrying

mineral from each mine.

Assuming the quality and other aspects pertaining to material is same in both

the mines, where should the material be purchased?

Solution

1.                                                                 Operating analysis

Particulars A B

10

I. Total kms operated

II. Total operating time

a. Time from plot to mine

(10*60/30) , (15*60/30)

b. Loading time

b. Time from mine to plot

(10*60/30) , (15*60/30)

d. Unloading time

III. Effective tone kilometer

(5*10km) , (5*15km)

20km

20mins

30mins

20mins

10mins

80mins

50tonn-km

30km

30mins

20mins

30mins

10mins

90mins

75tonn-km

2. Statement showing the cost per tone –kilometer of carrying

Mineral from each mine

Costs Mine A Mine B

(Drivers wages , depreciation , insurance &

taxes)

A: 1hour 20minutes @ Rs9 per hour

B: 1hour 30minutes @ Rs9 per hour

(refer to working note 1)

12

13.50

11

(Fuel, oil , tyres , repairs and maintainance)

A: 20kms @ Rs1.20 per km

B: 30kms @ Rs1.20 per km

Total cost per trip

24

36

36.00

49.50

Cost per ton-km

= Total cost / Total ton-km

A = 36/50 = Rs 0.72

B = 49.5/ 75 = Rs 0.66

cost per tone

= Total cost \ Total tones

A= 36/5 = Rs 7.2

B = 49.5/5 = Rs 9.9

Since the cost per tone is the lowest in case material is procure from mine A

it will be considered

Illustrations3:

A truck starts with a load of 10 tonnes of goods from station P. It unloads 4

tonnes at station Q and rest of the goods at station R. It reaches back directly

to station P after getting reloaded with 8 tonnes of goods at station R. The

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distance between P to Q to R and then R to P is 40 Kms, 60 Kms and 80

Kms respectively. Compute

1. Absolute Tonnes-Kilometers

2. Commercial Tonnes-Kilometers

Solution:

Absolute Tonnes- Kilometer                                      

                                                                                         Q

                                                                   40km                            60km

                                                                 P                                              R

                                          80km

= (10 tonnes*40km) + (6 tonnes*60km)

+ (8 tonnes*80 kms)

= 1400

Commercial Tonnes Kilometer

= Average Load * Kilometers Travelled

= 10 + 6 + 8/3 Tonnes * 180 km

= 1440 Tonnes – Kms

13

HOTEL COSTING:

Hotel and lodges, providing daily accommodation facility to general public,

have mushroomed all over the country due to the impetus provide by

modern civilization to ‘travel’ both on personal and commercial work.

The Operating Costing is applied in lodging houses in order to find out the

cost of accommodation provided.

14

The convenient form measuring the accommodation facility is in terms of

‘Room day’.

Cost per room day means the cost of maintaining one room in usable

condition for one day when occupied.

When different classes of rooms are provided, they can be expressed in term

of a single class with the help of weights based on appropriate width.

While determining the cost per room day, factors such as room

accommodation available, whether cubicles or dormitories, number of

persons lodging, facilities provided to the lodgers, etc. are to be taken into

account.

Most of the costs in the lodging houses are fixed in nature like depreciation,

staff salaries, maintenance, etc.

Hence, the distinctions between fixed and operating charges are rarely

observed. In case the customers are provided food and drinks along with

accommodation facility, a separate charge may be levied from them.

The cost per room day is arrived at by dividing the total cost with the

number of room day.

Some amount of profit is added to the cost per room per day to determine

charge per room day.

Once the charge per room day is determined, the same is to be multiplied

with the assigned weights to arrive at the rate to be charged for different

classes of room per day.

Hotels, restaurants employ operating costing. The total operation of a hotel

is divided into number of cost centers.

Restaurant-cost unit is number of meals served

Housekeeping-cost unit is no. of rooms cleaned

15

Laundry-cost unit is number of clothes washed.

The important heads of expenditure is:

Provisions: Vegetables, fruits, meat. Flour, milk, oil, sugar

Labor: Salary of cooks, kitchen assistance, supervisors

Service: steam, gas, electricity, power and light

Consumable stores: crockery, glassware

Misc. overheads: Rent, rates, depreciation, insurance

Credit: Charges of meals. Tea and other sales.

COST SHEET FOR THE YEAR/MONTH

Step Costs Rs Rs

Salaries to staff

Room attendant wages

Repairs and renovation

Lighting and heating

Power

XX

XX

XX

XX

XX

16

Linen

Interior decoration

Sundries

Depreciation

-Buildings

-Furniture & fixtures

-Air-conditioners

Premises rent

Other Administration Expenses

Interest on investment

total operating cost (1)

no. of room days(2)

cost per room day (1+2)

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

Illustration1:

A hotel has a capacity of 100 single rooms and 20 double rooms. The

average occupancy of both single and double rooms is expected to be 80%

throughout the year of 365 days. The rent for double room has been fixed at

125% of the rent of a single room. The costs are as under:

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Variable costs: single room Rs 220 each per day

                        Double rooms Rs 350 each per day

Fixed costs     : single rooms Rs 120 each per day

                      : Double rooms Rs 250 each per day

Calculate the rent chargeable for single and double rooms per day in such a

way that the hotel earns a profit of 20% on hire charges of rooms.

Solution:

Single rooms = 100 * 365 * 80/100 = 28200 Room days

Double rooms = 20 * 365 * 80/100 = 5840 Room days

18

a.                            Computation of Total Cost

Steps Costs Amt AmtA

B

CD

E

Variable Costs

Single Rooms ( 29200 room days * rs 220)Double Rooms ( 5840 room days * rs 350 )Fixed CostsSingle Rooms ( 29200 room days * rs 120)Double Rooms ( 5840 room days * rs 250 )

Total CostsProfit of 20% on Revenue(i.e. of 25% on Costs 13432000 * 25% )

Total Revenue

64240002044000

35040001460000

3358000

8468000

496400013432000

16790000

b. Room wise Rent

Single Rooms (29200*1)                                                             29200

Double Rooms (5840*1.25)                                                          7300

Notional Single Rooms/day                                                         36500

Rent per day per single room = 16790000/ 36500 = Rs 460

19

Rent per day per double room = Rs 460 * 1.25 = Rs 575

Illustration 2:

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 charged

on loan for the year ended 31st March, 2008:

1. Salaries of office staff Rs 50,000 per month.

2. Wages of the room attendant: Rs 20 per day per room when the

room is occupied.

3. Light, heating and power:

a. The normal lighting expenses for a room for the full month is Rs

500, when occupied.

b. Power is used only in winter and charges are Rs 200 for a room,

when occupied.

4. Repair to bed and other furniture: Rs 30,000 per annum.

4. Repair to Hotel building: Rs 50,000 per annum.

4. License fees: Rs 12,400 per annum.

4. Sundries: Rs 10,000 per annum.

4. Interior decoration and furniture: Rs 1, 00,000 per annum.

4. Depreciation @ 5% p.a. is to be charged on building costing Rs

20,000 and @ 10% p.a. on equipments.

4. There are 200 rooms in the Hotel, 80% of the rooms are generally

occupied in summer, 60% in winter, 30% in rainy season.

20

The period of summer, winter and rainy season may be considered to be

of 4 months in each case. A month may be assumed as 30 days of an

average.

SOLUTION:

Operating Cost Statement

Particular Rs p.a. Rs p.a.

Office staff salaries (50,000 × 12) 6,00,000

21

Room attendant wages (WN – 1)

Lighting and Heating (WN – 2)

Power (WN – 3)

Repair to bed and other furniture

Repair to building

License fee

Sundries (10,000 × 12)

Interior decoration and furnishing

Depreciation:

                    Building @ 5%

                    Equipment @10%

Total Cost

Add: Profit 25% of Cost (Excluding interest on

loan)

Total Earnings

1,00,000

5,00,000

8,16,000

6,80,000

96,000

30,000

50,000

12,400

1,20,000

1,00,000

1,50,000

26,54,400

6,63,600

33,18,000

HOSPITAL COSTING:

22

A concern of most countries is health sector resources: the sources of

finance for health services, the ability to maintain past funding levels,

resource allocation patterns, and the efficiency of health services delivery.

The hospitals of these countries are an important element of the concern

about health resources because they are the largest and most costly

operational unit of these health systems and account for a large portion of

the health sector's financial, human, and capital resources. In aggregate

terms,

hospitals utilize nearly half of the total national expenditure for the

health sector;

hospitals commonly account for 50 to 80 percent of government

recurrent health sector expenditure:

hospitals use a large proportion of the most highly trained health

personnel

A hospital is engaged in providing various types of medical services to the

patients.

Hospital costing is applied to decide the cost of these services. A hospital

may have following departments for providing various types of services:

1. Outdoor Patient Department. (O.P.D)

2. Indoor Patient Department (Medical Wards).

23

3. Medical Services Department:

X – Ray Department,

Scanning Centre,

Pathology Laboratory,

Sonography Department.

4. General Services Departments:

Bolier House,

Power House,

Catering department,

Laundry Room,

Administrative Department,

5. Miscellaneous Services Departments:

Transport Department,

Dispensary Department,

General Porting Department.

UNIT OF COST:

The common units of costs of various departments in a hospital are as

follows:

24

Department Unit of Cost

1. Outdoor Patient Department Per out-patient

2. Indoor Patient Department per Room-day

3. X – Ray Department Per 100 units

4. Scanning centre per case

5. Pathology Laboratory per 100 Requests

6. Laundry Department Per 100 items laundered

7. Catering Department Per Patient per week

The cost of hospital is divided into fixed and variable costs. Fixed costs

include staff salaries, depreciations of building, rent of building whereas

variable cost include light and power, water, laundry charges, food

supplied to patients etc.

Why are hospital costs important?

25

Hospital cost information is derived by relating the inputs of resources in

monetary terms to the outputs of services provided by the hospital. Cost

information is part of the basic information needed by managers and policy

makers for making decisions about how to improve the performance of a

hospital, where to allocate the resources within or among hospitals, or to

compare the performance of different hospitals to one another. Some of the

Basic reasons for wanting cost information are to improve efficiency,

increase effectiveness, enhance sustainability, and improve quality.

How does one do a hospital costing exercise?

The process of determining the costs of a hospital involves six steps:

1. Defining the major and relevant activity areas of the hospital.

2. Gathering information on the services provided or the output of the

hospital.

3. Determining the labor and other recurrent costs.

4. Ascertaining the capital costs of the hospital.

5. Allocating indirect costs.

6. Reviewing and using the hospital cost summary.

COST SHEET FOR MONTH/YEAR

26

A.

B

C.

D.

E.

FIXED STANDING COSTS

Salaries to staff                                         ………….

Premises Rent                                           ………….

Repairs and maintenance                          ………….

General administration Expenses              .…………

Cost of Oxygen, X-Ray, etc.                     .…………

Depreciation              .………..

                                             

RUNNING OR VARIABLE COSTS

Doctor’s fees                                               …………

Food                                                            …………

Medicines                                                    …………

Diagnostic Services                                     …………

Laundry                                                       .………..

Hire charges for Extra Beds              .……….

                       

TOTAL OPERATING COST

NO. OF PATIENTS DAYS

COST PER PATIENT DAY (C)+(D)

xx

xx

xx

xx

xx

xx

xx

xx

xx

xx

xx

xx

XX

XX

XX

XX

XX

                                    Illustration 1:

27

Apollo Hospital runs an Intensive Care Unit in a hired building at a rent of

Rs. 7500 p.m. The Hospital has undertaken to bear the cost of repairs and

maintenance.

The Intensive Care Unit consists of 35 beds and 5 more beds can be

conveniently accommodated whenever required. The permanent staff

attached to the unit is as follows:

2 Supervisors, each at a salary of Rs. 2500 p.m., 4 Nurses each at a salary of

Rs. 2000 p.m., 4 Ward boys each at a salary of Rs.500 p.m.

Though the unit was open for the patients all the 365 days in a year but it

was found that only 150 days in a year, the unit has the full capacity of 35

patients per day and for another 80 days it had on an average 25 beds only

occupied per day. But there were occasions when the beds were full, extra

beds were hired from outside at a charge of Rs. 10 per bed per day. This did

not come to more than 5 beds extra above the normal capacity any one day.

The total hire charges for the extra beds incurred for the whole year

amounted to Rs. 7500.

The unit engaged expert doctors from outside to attend on the patients and

fees were paid on the basis of the number of patients attended and time spent

by them on an average worked out to Rs.25000 per month in the year 2003.

The other expenses for the year were as under:

28

Repairs and Maintenance (Fixed)                                                Rs. 8100

Food supplied to patients (Variable)                                           Rs. 88000

Janitor and Others Services for patients (Variable)                     Rs. 30000

Laundry Charges for their bed linen (Variable)                            Rs.60000

Medicines supplied (Variable)                                                      Rs. 75000

Cost Oxygen, X – Ray, etc., other

Than directly borne for treatment of patients (Fixed)                          Rs.

108000                                                   

General Administration Charges allocated

To the unit (Fixed)                                                                                Rs.

100000

1. Calculate the profit per patient day made by the unit in the year 2003

if the unit recovered on the overall amount of Rs. 200 per day on an average

from each patient.

2. The unit wants to work on a budget for the year 2004, but the number

of patients requiring intensive care is a very uncertain factory.

Assuming that same revenue and expenses prevail in 2004 in the first

instance, work out the number of patient’s days required by the unit to

break-even.

29

SOLUTIONS:

Calculation of No. of Patients days:

35 beds * 150 days = 5250

25 beds * 80 days = 2000

Extra bed days 7500 / 10 = 750

8000

STATEMENT OF COST

Particulars Rs Rs

1. Income Received (Rs. 200 * 8000 Patient days) 1600000

2. Variable Costs (Marginal Costs) Per Annum:

Food 88000

Janitor charges 30000

Laundry Charges 60000

Medicines supplied 75000

Doctors Fees (25000 *12) 300000

Hire Charges for extra beds 7500 560500

Contribution 1039500

3. Fixed costs

a. Salaries:

Supervisors (2 * 2500 * 12) 60000

30

Nurses (4 * 2000 *12)

Ward Boys (4 * 500 * 12)

96000

24000

b. Rent (7500 *12) 90000

c. Repairs and Maintenance 8100

d. Cost and oxygen etc. 108000

e. General Administration 100000 486100

553400

Profit per Patient-day = 553400 / 8000 patients’ days

             = Rs. 69.175

Break – even Point =

Fixed Cost / Contribution * Income

486100 / 1039500 * 1600000

= Rs. 748206

Break-even Point for Patient-days = 782206 / 200

= 3741 patients-days.

Illustration 2:

31

Care Hospital operates a fitness center to provide counseling on nutrition,

exercise and health care for major surgery patients after their release from

the hospital. Average patient will make three visits to the center. Each visit

lasts 40 minutes.

The hospital has estimated the following costs of operating the center:

Particulars Amt

Occupancy costs per month

Clerical costs per month

Other costs per month

Medication charges per patient

Records charge per patient

Staffing cost per visit

Computer record update per visit

18000

12000

4000

44

16

9

3

Hospital expects to have an average of 500 visits per month. What should be

the amount charged to each patient in order to cover the above costs?

Solution:

32

Particulars Amt

Indirect cost per month

Occupancy

Clerical

Other costs

A. Indirect costs per visit ( 34000/500)

Staffing cost per visit

Computer record update per visit

Total costs per visit

Visits per patient

B. Total cost per patient

Records charge per patient

Medication change per patient

C. Total average cost per patient

C. Or per patient  (60+80) per visit

18000

12000

4000

3400

68

9

3____

80

3____

240

16

44____

300

CONCLUSION

33

Operating costs are expenses that relate to a buisness’ operations. It can also

refer to the costs of operating a specific device or branch of a corporation.

These costs usually fall into two categories, called fixed costs and variable

costs, and a business may have more of one type than the other.

Fixed operating costs are expenses that tend to remain the same whether the

business or device is inactive or operating at full capacity. Examples of such

expenses include employee salaries and machinery leasing fees. Salaries

must be differentiated from hourly wages in this regard.

Flexible expenditures are known as variable operating costs. These expenses

fluctuate based on a variety of factors. Money dispensed on hourly wages,

for example, can be adjusted by varying the amount of time recipients are

engaged in labor.

Operating costs are not unique to any country, although actual expenses may

vary from one country to another or even from one location to another.

Within an industry, it is very possible for expenses to vary. It is, however,

difficult to find a business that does not have any of these costs. Even

Internet businesses, in which the costs of operations can often be reduced, it

is almost impossible to completely eliminate them.

Process costing method is applicable where goods or services result from a

sequence of continuous or repetitive operations or processes and products

are identical and cannot be segregated. Costs are charged to processes and

averaged over the units produced during the period.

Single or output costing is used when the production is uniform and identical

and a single article is produced. The total production cost is divided by the

number of units produced to get unit or output cost. Examples are mining,

breweries, brick making, etc.

34

Operation costing refers to the methods where each operation in each stage

of production or process is separately costed. Thereafter, the cost of finished

unit is determined. This is suitable to industries dealing with mass

production of repetitive nature for example, motor cars, cycles, toys, etc.

Expenses associated with administering a business on a day to day basis.

Operating costs include both fixed costs and variable costs. Fixed costs, such

as overhead, remain the same regardless of the number of products

produced; variable costs, such as materials, can vary according to how much

product is produced.

Businesses have to keep track of both operating costs and costs associated

with non-operating activities, such as interest expenses on a loan. Both costs

are accounted for differently in a company's books, allowing analysts to see

how costs are associated with revenue-generating activities and whether or

not the business can be run more efficiently.

35

BIBLIOGRAPHY

www.google.com

www.wikipedia.com

Advanced Cost Accounting – Manan Prakashan

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