UNIT 3

OPERATING COSTING

3.1 Introduction

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.

3.2 Meaning of Operating Costing

Operating costing is a process and technique of accumulating and ascertainment of cost for providing a standardized service to the public or to an undertaking.

Definition of Operating Costing

ICMA, London,

Operating costing is that form of operation costing which applies where standardized services are provided either by an undertaking or by a service cost center within an undertaking.

Wheldon,

Operating costing is actually unit costing as applied to the costing of services.

3.3 Features of Operating Costing

The basic features of operating costing are presented below.

1. Uniform service is provided to all the customers.

2. The costs are classified into fixed and variable.

3. The fixed and variable cost classification is necessary to ascertain the cost of service and the unit cost of service.

4. There is no physical stock of article if an undertaking renders a service.

5. 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.

6. The cost unit may be simple in certain cases or composite or compound in other cases like transport undertakings.

7. Total costs are averaged over the total amount of service rendered.

8. The costs are collected from the authentic documents like daily log sheet, operating cost sheet, boiler house cost sheet, canteen cost sheets etc.

9. Operating cost is the cost of rendering service.

10. Operating costing is the method of ascertaining costs.

11. The productive enterprises can quote prices by ascertaining cost data.

3.4 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.

3.5 How are services classified under Operating Costing?

The services may be classified into two categories under operating costing, namely

1. Internal service and
2. 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.

3.6 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.

The following table gives a clear picture on the cost unit along with the nature of service of the undertaking.

In case rail transport, more number of cost centers are functioning since the rail transport has more number of and complicated activities. For example, repairs and maintenance, routes, stations, go downs, yards, wagons, engines and the like. There is no method of costing except operating costing applicable to rail transport.

3.7 Objectives of Operating Costing

The objectives of operating costing are listed below:

1. To supply the information through which the efficiency in rendering service is improved.
2. To provide a basis for fixing accurate quotation and fare.
3. To ensure that the services are provided in proper time.
4. To control the fuel consumption and its expenses.
5. To ensure that the service equipments are properly maintained.
6. To provide cost comparison between own service and alternative service i.e. hiring.
7. To compare the cost of one service center with another.
8. To determine the apportionment cost if the services are provided within an organization.
9. To decide the price that can be charged for use of vehicle.
10. To control the cost of maintenance and repairs.
11. To select efficient and suitable routing of vehicles to reduce the costs to production departments that uses the service.
12. To avoid the under utilization of capacity and idle time of the work force.
13. To absorb the fixed costs proportionately and systematically that is allocated to the units of services.

3.8 Cost Unit

Determining the suitable cost unit to be used for cost ascertainment is a major problem in service costing. Selection of a proper cost unit is a difficult task. A proper unit of cost must be related with reference to nature of world and the cost objectives. The cost unit related must be simple i.e. per bed in a hospital, per cup of tea sold in a canteen and per child in a school. In a certain cases a composite unit is used i.e. Passenger – Kilometer in a transport company. The following are some of example of cost units used in different organizations

Enterprises    Cost per unit

Passenger transport   Kilometer

Goods transport   Ton – Kilometer

Hotel     Per room per day

Hospital    Per bed per day

Canteen    Per item, per meal

Water supply    Per 1000 liters

Electricity    Per kilowatt

3.9 Collection of Costing Data

After determining the cost unit, the cost relating to the service is collected. The collected cost is a presented under the heads suitable for control purpose i.e. fixed expenditure and variable expenditure. The presentation of cost data under difficult categories helps to improve managerial control over cost.