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1. INTRODUCTION
It 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 organisation itself certain departments too are known as service departments which
provide ancillary services to the production departments. E.g
Maintenance department,
The information concerning the business enterprise is very helpful to the management to
control it in an efficiently way. As the other branches like financial accountancy and
management accountancy, the cost accountancy also serves the important information to the
management regarding the operating efficiency of the business. It becomes very easy for
management to lay down management policies, to guide management decisions or evaluate
operating management performance with the information provided by cost accounting.
The term operation in business terminology refers to an activity of the business. It is very
important to study the operations of the business in detail because depends on the operations,
which it performs. The management should always concentrate on the efficiency of the
operation and also the costs associated to the operations. It is very important to control the
costs associated to the operations for the enterprises like manufacturing companies,
companies engaged in the process of extraction of materials from earth like, coal mines etc.
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Generally, the above mentioned business enterprises depend on the operation that it has to be
performed in to produce in to produce the final output. The costs associated with such
operations are generally higher. These costs are called as operating costs.
The costs, which are incurred to perform the operation of the enterprise, are called as
operating costs. These costs are to be accounted for in order to arrive at the total costs of
operation or process, which helps in determining the price of the final product
Cost accounting is the classifying, recording and appropriate allocation of expenditure for
the determination of the costs of products or services, and to the presentation of suitably;
arranged data for the purposes of control and guidance of management.
It includes the ascertainment of the costs of every process, operation, services or contrast as
may be appropriate. It deals with the cost of production, selling and distribution. It thus, the
provision of such analysis and classification of expenditure as will enable the total cost of any
particular unit of production to be ascertained with reasonable degree of accuracy and at the
same time to disclose exactly how such total cost is constituted (i.e. the value of material
used, the amount of labour and other expenses incurred) so as to control and reduce the cost.
Operating Costs are the costs incurred by undertakings which do not manufacture any
product but provide a service. Such undertakings for example are Transport concerns, Gas
agencies; Electricity Undertakings; Hospitals; Theatres etc. Because of the varied nature of
activities carried out by the service undertakings, the cost system used is obviously different
from that followed in manufacturing concerns.
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It guides for future production polices. It explains the cost incurred and there by
provides data on the basis of which production can be appropriately planned.
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It is defined as the refinement of process costing. It is concerned with the
determination of the cost of each operation rather than the process. In those
industries where a process consists of distinct operations, the method of costing
applied or used is called operation costing. 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. The two
costing methods included under this head are process costing and service
costing.
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Non-overhead costs are incremental costs, such as the cost of raw materials used in the goods
a business sells.
Operating Cost is calculated by Cost of goods sold + Operating Expenses. Operating
Expenses consist of:
Administrative and office expenses like rent, salaries, to staff, insurance, directors
fees etc.
In 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
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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, per se). In 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.
Equipment operating costs may include:
Advertising
Raw materials
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Maintenance of equipment
Insurance premium
Depreciation of equipment and eventual replacement costs (unless the facility has no
moving parts it probably will wear out eventually)
Damage due to uninsured losses, accident, sabotage, negligence, terrorism and routine
wear and tear.
Income taxes
A solar panel placed on one's home for use in generating electric power generally has
only capital costs; once it's running there are no personnel costs, utility costs or
depreciation and it uses no extra land (that wasn't already part of the place where it is
located) so it has no real operating costs; however there may need to be taken into
account costs of replacement if damaged.
An automobile or any other item purchased for personal use has no salary cost
because the owner does not charge themselves for operating the device.
An item which is leased may have some or all of these costs included as part of the
purchase price.
It might be questionable to assert that the cost of ten extra people on the sales force are an
incremental cost or an overhead cost, since the wages for these people are both overhead and
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incremental. The staffs needed to keep the shop operational are mostly considered as
overhead.
The undertaking which adopts service costing does not produce any tangible goods.
These undertakings render unique services to their customers.
The expenses are divided into fixed and variable cost. Such a classification is
necessary to ascertain the cost of service and the unit cost of service.
The cost unit may be simple or composite. The examples of simple cost units are cost
per unit in electricity supply, cost per litre in water supply, cost per meal in canteen
etc. Similarly cost per passenger kilometres in transport cost per patient-day in
hospital, costs per room-day in hotel etc. are the examples of composite cost unit.
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Documents like the daily log sheet, cost sheet etc. are used for the collection of cost
data.
Transport
Hotel
College/Schools
Hospitals
Electricity
Kilowatt-hours
Swimming pool
Canteen
Total cost
Cost per km
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Road tax
Garage rent
Drivers wages
Attendant-cum-cleaners wages
Salaries and wages of other staff
Total
B
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Hotel industry
Hospital industry &
Transport industry
9. TRANSPORTATION INDUSTRY
Price, cost and investment issues in transportation garner intense interest. This is certainly to
be expected from a sector that has been subject to continued public intervention since the
nineteenth century. While arguments of market failure, where the private sector would not
provide the socially optimal amount of transportation service, have previously been used to
justify the economic regulations which characterized the airline, bus, trucking, and rail
industries, it is now generally agreed, and supported by empirical evidence, that the move to a
deregulated system, in which the structure and conduct of the different modes are a result of
the interplay of market forces occurring within and between modes, will result in greater
efficiency and service.
Many factors have led to a reexamination of where, and in which mode, transportation
investments should take place. First and perhaps most importantly, is the general
move to place traditional government activities in a market setting. The privatization
and corporatization of roadways and parts of the aviation systems are good examples
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of this phenomenon. Second, there is now a continual and increasing fiscal pressure
exerted on all parts of the economy as the nation reduces the proportion of the
economys resources which are appropriated by government. Third, there is increasing
pressure to fully reflect the environmental, noise, congestion, and safety costs in
prices paid by transportation system users. Finally, there is an avid interest in the
prospect of new modes like high speed rail (HSR) to relieve airport congestion and
improve in environmental quality. Such a major investment decision ought not to be
made without understanding the full cost implications of a technology or investment
compared to alternatives
There are many types of costs. Key terms and brief definitions are below.
Variable costs: The costs which change as output levels are changed. The
classification of costs as variable or fixed is a function of both the length of the time
horizon and the extent of indivisibility over the range of output considered.
Marginal (or incremental) cost: The derivative (difference) of Total Cost with respect
to a change in output.
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Social cost: The cost the society incurs when its resources are used to produce a given
commodity, taking into accounts the external costs and benefits.
Private cost: The cost a producer incurs in getting the resources used in production
Sunk costs: These are costs that were incurred in the past. Sunk costs are irrelevant
for decisions, because they cannot be changed.
Indivisible costs: Do not vary continuously with different levels of output or must
expenditures, but be made in discrete "lumps". Indivisible costs are usually variable
for larger but not for smaller changes in output
Escapable costs (or Avoidable costs): A cost which can be avoided by curtailing
production. There are both escapable fixed costs and escapable variable costs. The
scalability of costs depends on the time horizon and indivisibility of the costs, and on
the opportunity costs of assets in question
The production of transport services in most modes involves joint and common costs.
A joint cost occurs when the production of one good inevitably results in the
production of another good in some fixed proportion. For example, consider a rail line
running only from point A to point B. The movement of a train from A to B will result
in a return movement from B to A. Since the trip from A to B inevitably results in the
costs of the return trip, joint costs arise. Some of the costs are not traceable to the
production of a specific trip, so it is not possible to fully allocate all costs nor to
identify separate marginal costs for each of the joint products. For example, it is not
possible to identify a marginal cost for an i to j trip and a separate marginal cost for a
to 1 trip. Only the marginal cost of the round trip, what is produced, is identifiable.
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Common costs arise when the facilities used to produce one transport service are also
used to produce other transport services (e.g. when track or terminals used to produce
freight services is also used for passenger services). The production of a unit of
freight transportation does not, however, automatically lead to the production of
passenger services. Thus, unlike joint costs, the use of transport facilities to produce
one good does not inevitably lead to the production of some other transport service
since output proportions can be varied. The question arises whether or not the
presence of joint and common costs will prevent the market mechanism from
generating efficient prices. Substantial literature in transport economics has clearly
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shown that conditions of joint, common or non-allocable costs will not preclude
economically efficient pricing.
10.
To successfully complete this step by step guide and the online pricing tool you need to have
the following information readily available:- 1. TOUR OR ACCOMMODATION DETAILS
You will need to provide information about your business, such as the different tour types you
offer and the number of passengers or how many different room types you have. 2. DAILY
COSTS (FIXED) You need to determine the fixed costs associated with operating your
business, such as fuel, labour etc... 3. DAILY COSTS (VARIABLE) You need to determine
the costs associated with taking passengers on tour or letting out rooms, such as meals, third
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party activities, linen and room cleaning 4. ANNUAL BUSINESS COSTS (FIXED) You
need to calculate the total costs associated with operating your business. These costs occur
whether you have tours operating or not, this is why they are called fixed. For example costs
that are fixed include insurance, marketing, lease payments, bank fees, accounting fees,
salaries etc... 5. AVERAGE CAPACITY If you have been trading for a number of years you
should know your average capacity. If you are new to the industry you will have to estimate
your future capacity based on factors such as visitation to the region, competitor analysis and
customer feedback.
NOTES _______________________
STEP 1 CAPACITY
To be able to effectively price your tourism product you need to identify some basic factors
about your business, such as how often you run a tour or how many rooms you have. Fill in
your answers to the questions below about the MAXIMUM CAPCITY for your business.
TOUR OPERATOR
-how many types of tours are available?
NAME OF
MAXIMUM NUMBER OF
MAXIMUM NUMBER OF
DIFFERENT TOURS
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PER YEAR
ACCOMODATION PROVIDER
How many different types of room you have available?
NAME OF DIFFERENT ROOMS
AVERAGE NUMBER OF
AVERAGE NUMBER OF
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TOURS
ACCOMMODATION PROVIDER
If you have been trading for a number of years you should know your average occupancy
rate. If you are new to the industry it can be difficult to estimate your predicted occupancy.
Use the Tourism WA Quarterly Tourism Snapshots to get the average occupancy rates for
your region
NAME OF BUSINESS
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Example cost
Fixed
Variable
You will now need to determine your own fixed and variable costs. If you have been in
business for a while you should know your figures, if your business is new you will need to
obtain quotes and give rough estimates.
Use the tables on the next page to enter all your fixed and variable costs for each tour or room
type and then when you are ready enter the details into the Tourism BOOST online pricing
tool to help you determine your final pricing results.
Amount
Notes
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HOW
MUCH
DO
YOUR
TOURS
OR
ACCOMMODATION
BUSINESS ACTIVITY
PERCENTAGE
OF BUSINESS
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100%
100%
Type of business
Bus/coach transport
Caravan parks and camping grounds
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20%
22%
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Gift shop
Guest house operation
Restaurant operation
Travel agency service
14%
23%
14%
25%
Mark-up or profit is the most dynamic element of your pricing; you can return to this step
later in the online guide and alter the mark up percentage to see how it affects your pricing.
Based on the percentages listed above you should be calculating your figures using a mark-up
of somewhere between 14% to 25%.
STEP 6 - COMMISSION
Some tourism operators believe they save money by not paying commission to third-party
sellers. But, here's another way to look at it - what do you lose by not paying commission?
CONSIDER THESE SIMPLE QUESTIONS...
1 Is your website ranking highly and are you generating great international bookings directly?
2. Are you consistently full and happy with the way your business is performing?
Answered YES to both these questions?
Congratulations! Maybe you don't need to branch into the tourism distribution channels as
you seem to be doing very well on your own.
Answered NO?
Maybe another sales avenue could be beneficial to you. Retail Travel Agents, Tour
Wholesalers and Inbound Tour Operators can open up new markets for you in a very cost
effective way. But they also need to be paid.
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Commission is usually the major source of revenue for retail travel agents, wholesalers,
inbound operators and visitor centres. Tourism operators need to understand how
commissions are divided between the different levels of sellers and allow for the payment of
commission in their prices.
Tourism operators do find it difficult to justify the commission required by some agents, yet
the costs in accessing these markets are generally beyond the reach of small operators. For
example, it can cost up to $10,000 to attend just one international tourism trade show.
You need to weigh it up - Do you want to open up new markets?
YES? Then the most cost effective way to do this is through the commission structure.
10%-20%
Tour wholesalers
25%-30%
25%-30%
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business against the unknowns such as a downturn in the market, or loss of a major thirdparty seller.
It is a good idea to spread your sales through avenues such as wholesalers, inbound tour
operators, direct bookings, retail agents and Visitor Centres.
Direct sales will give you instant money and help your cash flow. Tour wholesalers
sometimes take four to eight weeks to pay an invoice which may impact on your cash flow.
CALCULATING THE RIGHT COMMISSION FOR MY PRICING
To ensure you price your business consistently you need to calculate the AVERAGE
commission level you will be paying to third party sellers such as Inbound Tour Operators,
Tour Wholesalers and Visitor Centres. Also factor in direct sales that do not incur any
commission. You can then input this percentage into the Tourism BOOST online pricing tool.
For example, if 80% of your sales come directly and only 20% through third party sellers you
need to calculate the commission percentage accordingly.
11.
Mr. Sanjay owns a fleet of taxis and the following information is available from the records
maintained by him.
Number of taxis
Cost of each Taxi
Salary to Manager
Salary to Accountant
Salary to Cleaner
Salary to Mechanic
Garage Rent
Annual Tax
Drivers Salary
Annual Repairs
Insurance Premium
25
10
Rs. 54,600
Rs. 700 p.m
Rs. 500 p.m
Rs. 200 p.m
Rs. 400 p.m
Rs. 600 p.m
Rs. 900 per taxi
Rs. 350 per taxi
Rs. 1,000 per taxi
5% p.a
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Total life of a taxi is about 2,00,000 kms. A taxi runs 3,000 kms in a month and 30% of this
distance is run without any passengers. Petrol consumption is one litre for every 10 kms @
Rs. 4.41 per litre. Oil and sundry expenses are Rs. 10.50 per 100 kms.
Calculate the cost of running a taxi per effective km.
Solution
Statement Showing Total Operating Cost
Cost Sheet
Step
A
Costs
FIXED CHARGES
Rs.
60.00
227.50
75.00
Depreciation
26
819.00
70.00
50.00
Drivers Salary
350.00
20.00
40.00
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83.33
1,323.00
315.00
(A + B)
3,432.83
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of service ultimately given. It also indicates the change in the cost structure due to change in
the operating level.
In transport undertakings most of the statistical data required for cost finding and cost control
purposes are obtained from Daily Log Report. All repairing and maintenance work are
recorded on repair tickets and are then costed. In order to prepare a Transport Cost Sheet for a
transport undertaking the costs may be subdivided as under:-
a) Wages and running costs: - These include cost of petrol, oil, grease, wages of assistants
and drivers, etc.
b) Maintenance charges: - These include repairs and overhauling of vehicles, garage
charges, tyres, etc.
c) Fixed charges: - These fixed expenses include insurance, license, depreciation, etc.
The statistical data regarding costs, maintenance and performance are helpful in preparing a
performance in respect of each vehicle.
In order to compare the operating efficiency for each period, the total costs thus arrived at are
divided by the bases such as number of hours or days, number of kilometres run, number of
commercial ton-kilometres, etc. Costs per unit thus obtained are compared with the past
result. A monthly Vehicle Cost Sheet and Performance Statement are generally used in many
transport undertakings.
Cost control is always possible by means of comparison of actual performance with the
budgeted performance. Various control measures, viz., securing the optimum use of vehicles,
regular maintenance as a planned operation, avoidance of loading and unloading delays
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goods
to
customers
becomes
part
of
distribution
overhead.
Generally, commercial ton-km, is obtained by multiplying the total tonnage carried by the
kilometres travelled and dividing the product by two. This is done where the vehicles return
empty as is found in most cases.
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Number of vehicles:
The company has owned as well as dedicated trucks and trailers.
Owned Vehicles
8 HCVs- Heavy Commercial Vehicles
4 Trailers
Dedicated Vehicles
25 LCVs- Light Commercial Vehicles
Dedicated Vehicles are delivery trucks, which are made according to certain specifications,
operated under the name of another company for which they give a minimum amount of
business and certain running costs are borne by that company.
The company has its LCVs dedicated to ELBEE Delivery Services. They are used for
delivering goods given by ELBEE. The driver charges and maintenance charges are borne by
Adhunik Transport. Other expenses are borne by Elbee. The advantage to Elbee is that its
capital is not blocked. The advantage to the company is that it does not have to look for
customers and keeps getting a minimum amount of business.
No. of Employees:
The Company has on an average 8 office staff members per branch. There are 30 staff
members in the head office in Mumbai. The salaries of these employees vary from Rs. 2,000Rs. 10,000 depending upon the nature of the job they do.
Measurement of Materials is done in tons.
COSTS:
FIXED COSTS
Salaries
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54,00,000
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Insurance
8,00,000
1,00,000
Administrative Overheads
2,11,00,000
Taxes
Depreciation
30,00,000
Interests
34,00,000
TOTAL
3,38,00,000
VARIABLE COSTS
10,000
LCV
6,000
TRAILERS
15,000
Wages
Drivers
2,000
Cleaners
1,200
Transit Expenses
500-1,500
TOTAL
35,000 approx
Notes:
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13.
FINDINGS
After studying the topic in depth and data collection from a firm following are the findings
from the project
As the subject, important features and advantages of cost accounting are studied and
of operation
Operating Costs are the costs incurred by undertakings which do not manufacture any
Finally , the cost details of adhunik transport organisation limited are provided
herewith which will help us to know more about operating costing
14.
BIBLIOGRAPHY
http://www.businessdictionary.com/definition/operatingcost.html#ixzz2uvBn7sy2
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http://www.mbajunction.com/career/transport_service.htm
http://www.wonderwebs.com/Portals/46/Content/Documents/Secured/Bankabl
e%20Feasibility%20Study/17%20-%20Section%2015%20-%20Operating
%20-%20Cost.pdf
http://nexus.umn.edu/papers/truckoperatingcosts.pdf
http://costingclub.com/article-details/Operating-Costing-format-for-TransportCompany/132#sthash.WMlndW6e.dpuf
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