Cost and Management Accounting - Operating Costing

 

Cost and Management Accounting

Operating Costing

 

Part A: Discussion of basic theories 

Part B: 7 Illustrations with solutions

Part A

Operating costing is a method of costing applied to ascertain the cost of providing or operating a service. Thus, the field of its application covers the undertakings which do not manufacture any article, but provide or operate services. Transport companies, electricity companies, hotels and resorts, tours and travels, hospitals and nursing homes, restaurants, mobile operators, internet service providers, banking companies, insurance companies, road/bridge/flyover maintenance companies, educational institutions etc. are examples of the above undertakings. A manufacturing company may maintain service departments like transport department, maintenance department, power generation unit, canteen, hospital etc. to provide services to the manufacturing, sales and welfare activities of the concern. Operating costing may also be applied in these service departments to ascertain the unit service cost.

 

Selection of cost units, where operating costing is applied, requires careful consideration, because cost unit will be different for different types of services. The following are some of the cost units selected for different types of services:

 

	Services	Cost units
1.	Passenger transport service	Passenger-kilometre
2.	Goods transport service	Tonne-kilometre
3.	Electricity supply service	Kilowatt-hour
4.	Hospitals	Patient-day
5.	Canteen service	Man-meal
6.	Hotels	Room-day

 

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

 

Because of the diverse nature of activities carried out in service undertakings, the costing system used is obviously different from that of manufacturing concerns. Let us discuss and understand the methods of computing costs in various service organisations in course of solving the following selected operating costing illustrations.

Part B

Illustration: 1

There are two warehouses for storing finished goods produced in a factory. Warehouse ‘A’ is at a distance of 10 kms and Warehouse ‘B’ is at a distance of 15 kms from the factory. A fleet of 5 tonne lorry is engaged in transporting the finished goods from the factory. The records show that the Lorries average a speed of 30 kms per hour when running and regularly take 40 minutes to load at the factory. At warehouse - A unloading takes 30 minutes per load while at warehouse - B it takes 20 minutes per load.

 

Drivers’ Wages, depreciation, insurance and taxes amount to Rs 18 per hour operated. Fuel oil, tyres, repairs and maintenance cost Rs 2.40 per kilometre. You are required to draw up a statement showing the cost per tonne kilometre of carrying the finished goods to the two warehouses.

 

Solution: 1

Illustration: 2

Janata Transport Co. has been given a route 20 km. long for running buses. The company has a fleet of 10 buses each costing Rs 50,000 and having a life of 5 years without any scrap value.

 

From the following estimated expenditure and other details calculate the bus fare to be charged from each passenger.

1	Insurance charges	3% p. a.
2	Annual tax for each bus	Rs 1,000
3	Total garage charges	Rs 1,000 p. m.
4	Driver’s salary for each bus	Rs 150 p. m.
5	Conductor’s salary for each bus	Rs 100 p. m.
6	Annual repairs to each bus	Rs 1,000
7	Total commission of drivers and conductors	10% of total takings
8	Cost of stationery	Rs 500 p. m.
9	Manager’s salary	Rs 2,000 p.m.
10	Accountant’s salary	Rs 1,500 p. m.
11	Petrol and oil	Rs 25 per 100 km

 

Each bus will make 3 round trips carrying on an average 40 passengers on each trip. The bus will run on an average for 25 days in a month. Assuming 15% profit on takings, calculate, the bus fare to be charged from each passenger.

 

Solution: 2

Illustration: 3

Union Transport Company supplies the following details in respect of a truck of 5 tonne capacity:

1	Cost of truck	Rs 90,000
2	Estimated life	10 years
3	Diesel, oil, grease	Rs 15 per trip each way
4	Repairs and maintenance	Rs 500 p. m.
5	Driver’s wages	Rs 500 p. m.
6	Cleaner’s wages	Rs 250 p. m.
7	Insurance	Rs 4,800 per year
8	Tax	Rs 2,400 per year
9	General supervision charges	Rs 4,800 per year

 

The truck carries goods to and from the city covering a distance of 50 kms each way.

On outward trip freight is available to the extent of full capacity and on return 20% of capacity.

 

Assuming that the truck runs on an average 25 days a month, work out:

(a)    Operating cost per tonne-km.

(b)    Freight per trip that the company should charge if a profit of 50% on freight is to be earned.

 

 Solution: 3

Illustration 4

XYZ Ltd. runs a holiday home. For this purpose, it has hired a building at a rent of Rs 10,000 per month along with 5% of total taking. It has three types of suites for its customers, viz., single room, double rooms and triple rooms. Following information is available:

 

Type of suite	Number	Percentage of occupancy
Single room	100	100%
Double room	50	80%
Triple room	30	60%

 

The rent of double-rooms suite is to be fixed at 2.5 times of the single-room suite and that of triple-rooms suite as twice of the double-rooms suite. The other expenses for the year 2018 are as follows:

Particulars	Rs
Staff salaries	14,25,000
Room attendants’ wages	4,50,000
Lighting, heating and power	2,15,000
Repairs and renovation	1,23,500
Laundry charges	80,500
Interior decoration	74,000
Sundries	1,53,000

 

Provide profit @ 20% on total taking and assume 360 days in a year. Calculate the rent to be charged for each type of suite.

 

Solution: 4

Illustration: 5

Angel Holiday Home runs in a small hill station with 100 single rooms. The home offers concessional rates during six off season months in a year. During this period, half of the full room rent is charged. The management’s profit margin is targeted at 20% of the room rent. The following are the cost estimates and other details for the year ending on 31st March 2018 [Assume a month as 30 days]:

(a)    Occupancy during the season is 80% while in the off- season it is 40% only.

(b)      Total investment in the home is Rs 200 lakhs of which 80% relate to buildings and balance for furniture and equipment.

(c)      Expenses:

Particulars	Rs
Staff salary (excluding room attendants)	5,50,000
Repairs to building	2,61,000
Laundry charges	80,000
Interior	1,75,000
Miscellaneous expenses	1,90,800

 

Annual depreciation is to be provided for buildings @ 5% and on furniture and equipment @ 15% on straight-line basis.

(d)      Room attendants are paid Rs 10 per room day on the basis of occupancy of the rooms in a month.

(e)      Monthly lighting charges are Rs 120 per room, except in four months in winter when it is Rs 30 per room and this cost is on the basis of full occupancy for a month.

 

You are required to work out the room rent chargeable per day both during the season and the off-season months on the basis of the foregoing information.

 

Solution: 5

Illustration: 6

Zenith Hospital runs a Critical Care Unit (CCU) in a hired building. CCU consists of 35 beds and 5 more beds can be added, if required.

Rent per month: Rs 75,000

Supervisors - 2 persons @ Rs 25,000 per month each

Nurses - 4 persons @ Rs 20,000 per month each

Ward Boys - 4 persons @ Rs 5,000 per month each

Doctors were paid Rs 250,000 per month on the basis of number of patients attended and the time spent by them.

Other expenses for the year are as follows:

1.   Repairs (fixed) – Rs 81,000

2.   Food to patients (variable) – Rs 8, 80,000

3.   Other services to patients (variable) – Rs 3,00,000

4.   Laundry charges (variable) – Rs 6,00,000

5.   Medicines (variable) – Rs 7,50,000

6.   Other fixed expenses – Rs 10, 80,000

7.    Administration expenses allocated – Rs 10,00,000

 

It was estimated that for 150 days in a year 35 beds are occupied and 25 beds are occupied for 80 days only. The hospital hired 750 beds at a charge of Rs 100 per bed per day to accommodate the flow of patients. However, this does not exceed more than 5 extra beds over and above the normal capacity of 35 beds on any day.

 

You are required to -

(a)    Calculate profit per Patient day, If the hospital recovers on an average Rs 2,000 per day from each patient; and

(b)    Find out Break-even point for the hospital.

 

Solution: 6

Illustration: 7

Manar lodging home is being run in a small hill station with 50 single rooms. The home offers concessional rates during six off- season months in a year. During this period, half of the full room rent is charged. The management’s profit margin is targeted at 20% of the room rent. The following are the cost estimates and other details for the year ending on 31st March 2016. [Assume a month to be of 30 days].

1.   Occupancy during the season is 80% while in the off- season it is 40% only.

2.   Expenses:

a. Staff salary [Excluding room attendants] Rs 2, 75,000

b. Repairs to building Rs 1, 30,500

c. Laundry and linen Rs 40,000

d. Interior and tapestry Rs 87,500

e. Sundry expenses Rs 95,400

3.   Annual depreciation is to be provided for buildings @ 5% and on furniture and equipments @ 15% on straight-line basis.

4.   Room attendants are paid Rs 5 per room day on the basis of occupancy of the rooms in a month.

5.   Monthly lighting charges are Rs 120 per room, except in four months in winter when it is Rs 30 per room and this cost is on the basis of full occupancy for a month.

6.   Total investment in the home is Rs 100 lakhs of which Rs 80 lakhs relate to buildings and balance for furniture and equipments.

 

You are required to work out the room rent chargeable per day both during the season and the off-season months on the basis of the foregoing information.

Solution: 7