SERVICE COSTING (Operating Costing)

Service costing refers to the method of costing applied to determine the cost per unit of
service rendered by the service industries or centres. Unlike a product which can be
physically seen, the service cannot be seen but only can be experienced.
Rendering service means providing place utility, time utility, value utility, etc., to the end
user. For example, transporting goods from one place to another, transporting
passengers, supplying water, electricity, providing telephone, consultancy service etc.
Service may be within the organisation. For example, services such as repairs and
maintenance, internal transport, supply of steam, administration etc. are provided to
other departments in the .same organisation. Service may be external. For example,
services provided by public utilities such as city passenger transportation, railways,
airways, water supply, electricity supply to the public at large.
Rendering service does involve cost. The activities involved, consume resources.
Expenses are incurred to provide these resources. These expenses are collected
together and expressed per unit of service. The cost so determined is recovered
through a saleable unit of service rendered. The unit of service differs from industry to
industry. Following is the illustrative list of service units used:
 IndustryService Unit
 Passenger Transport
 Goods Transport
 Electricity supply
 Water supply
 Phone
 Hospital
 Hotel lodging
 Libraries
 Banking
 General insurance
 Life Insurance
 Consultancy
 Repairs & Maintenance
 Postal Service Per Passenger per KM, or per trip
 Per ton/Quintal per KM, or per carrier, voyage etc.
 Per unit consumed
 Per 1000 gallons
 Per call made
 Per bed per day
  Per operation per patient, Per x-ray, per test etc.
 Per bed per person per day.
 Per card per two books, per year
 Per Demand draft per Rs. 1,000 Interest rate per cent.
 Per year per vehicle, premium per year etc.
 Premium per month, or per year etc.
 Per hour, or per organisation per month
 Per vehicle, per building per month etc.
 Per card, per cover, per 10 gms, per parcel, per kg, etc.

TRANSPORT COSTING
Transport is one of the important service industries. Transport costing is the method of
costing applied in transport industry to determine the cost per goods transport and
passenger transport. The unique feature of transport industry is the basis of charge to
the customer. Transport costing involves, therefore, a proper selection of basic unit of
service and attribution of cost to such unit.
Composite Unit: The cost unit in transport costing is a composite unit. For example, a
transport company, determines the cost of carrying a passenger for a distance of one
KM. Since there are two units of measurement, it is called composite unit. Similarly,
goods transport company, calculates the cost of carrying one ton of goods to a distance
of one KM. On the basis of this, if the charge is Re. 0.50 then, a passenger travelling
100 KM has to give Rs. 50 for his journey.
Sometimes the passenger transport companies fix the charges on the basis of "Stages"
or "Points." In that case, the cost unit can be a "Stage" or "Point", each consisting of
fixed number of kilometers.
Classification of Transport Cost: The operating cost of a transport company is classified
into the following three categories:
Operating/ Running/ Variable Expenses: These are the expenses which vary in
proportion to the distance covered. These expenses are incurred only when the vehicles
are run. For example, cost of fuel, lubricants, wear and tear of tyres, consumable stores,
wages of drivers, conductors and cleaners, which are based on time or distance or
contracts, depreciation based on kilometers rup, commission on takings etc.
Maintenance/Semi variable Expenses: These are expenses which vary partly to the
distance covered by vehicles. Repairs and maintenance, replacement of tyres and
tubes, overhauls, painting etc. These are neither fixed nor variable expenses.
(c) Fixed or Standing Charges: These are expenses which are incurred irrespective of
whether the vehicles are run or not. They are committed expenses for the specified
period and so have to be incurred. or example Licence, Insurance, Rent, Interest on
Capital, Salary of Manager, Administrative expenses, Monthly or weekly salaries of
drivers, conductors, cleaners etc., fixed depreciation and token' tax.
Strict compartmentalization of expenses may not be desirable in some circumstances. It
depends on nature of expense and how the same is incurred.

Collection of Cost: The Accounting section in the Administrative office of the Transport
Company is responsible for collecting cost information relating to operating
service .

Standing Charges are collected on the time basis and apportioned to each vehicleon a
suitable basis. Salary bills, rent receipt, tax receipt, insurance premium paid receipt, etc.
are the source documents.
Repairs and maintenance charges, painting overhauls collected according to Job
order numbers in the workshop, Replacement cost of tyres and tubes are recorded
on the basis of requisition and purchase receipts etc.
Operating expenses are collected on the basis of record in the "log sheets.”

Each vehicle is given a "log sheet" which contains detailed information about the
number of trips, distance covered, number of days run, number of passengers/goods
carried, tickets collected, accidents if any, repairs, services, fuel consumed, oil, grease
used etc.

When the transport service is internal within the organisation for other departments,
then the cost is apportioned among the departments on the basis of use of service, say,
percentage, or hours etc.

When the transport service is external, for the purpose of customers, then, cost
per passenger kilometer (or cost per ton kilometer) is calculated to form a basis for
charging. Operating Cost Sheet: A cost sheet is prepared with respect to each vehicle
or a group of vehicles for a specific period, say, a month, •in order to know the cost of
operating vehicle and the cost per unit. Costs are shown under there headings:
(a) Running Cost (b) Maintenance Cost (c) Standing Cost. The total of each of these
is the total operating cost

Cost Per Unit: Cost per unit may be, cost per passenger KM in case of passenger
transport or cost per ton KM in case of goods transport.
cost per passenger KM (Total Operating Cost for period)/(Effective passenger KMs for
the period )cost per ton KM (Total Operating Cost for period)/(Effective ton KMs for the
period )The numerator, i.e., total cost for the period is obtained from the operating cost
statement prepared for the period.
The denominator, i.e., Effective passenger KMs or Effective ton KMs is calculated as
below:

Passenger kms: Passenger KMs is "the product of effective kms (distance) travelled by
the vehicle during a period and the average passengers carried during that period."
Thus, it is the total KMs required to be travelled to carry each passenger to the
respective destination.

There are two parts:

(a) Distance covered: ThiS is obtained by using the following formula:

Distance travelled = Number of vehicle x Number of trips per day x 2 x

Distance each way x Number of days in the period/month.
(b) Average Passengers Carried: This is obtained by using the following formula:
Average Passengers Carried = Seating capacity of vehicle x % capacity utilised.
Effective Passengers KMs = a x b
i.e., Distance travelled x Passengers carried

A trip denotes to and fro journey, i.e., onward and return journey together is referred to
as Trip.

Ton KMs: Ton KMs is "the product of effective KMs travelled during the period and the
average weight (ton) carried during the period." Thus, it is the total KMs required to be
covered to carry each unit of weight (ton) to the respective destination. The unit of
weight can be ton, quintals, kgs, etc.

There are two parts:

Usually, carriage vehicles take full load, i.e., 100% capacity in the onward journey and
take lesser load or available load or nil, some times, in the return journey. Therefore, it
is necessary to calculate the effective ton with respect to each onward and return
journey, separately.
(a) Onward Journey:

Ton KMs = Number of vehicles X Distance onward

X Number of days X Capacity in ton
X % Capacity utilised.

(b) Return Journey:

Ton KMs = Number of vehicles x Distance return

x Number of days
x Capacity in ton x % Capacity utilised.
Total ton KMs = a + b
i.e., Onward journey + Return Journey.

Worked out Examples

(1) Vinay transport company has 4 trucks, each with capacity of 5 tons. Eachtruck
makes 6 trips a day between two places, 30 KMs apart. In the onward journey full load
of bricks and in the return journey on an average 20% of capacity is filled with
provisions. Trucks are laid down for repairs and rest, for 5 days in a month of 30 days.
Calculate the effective ton KMs.

Solution
(a) Onward Journey: Number of trucks x Distance each way x Number of trips a day
x Number of days x Full capacity.
= 4 x 30 x 6 x 25 x 5 = 90,000 ton kms ..

(b) Return Journey: 4 x 30 x 6 x 25 x 5 x 20% = 18,000 ton kms

Effective ton krns = 90,000 + 18,000 = 1,08,000 ton kms.
OR

Alternatively: Total capacity used = 5 tons + 20% of 5 tons

= 5 + 1 = 6 tons.
Effective KMs = 4 x 30 x 6 x 25 x 6 = 1,08,000 ton KMs.

(2) Vivek travels has 4 buses, operating between two cities Mysore and Bangalore
which are 140 KMs apart. Each bus makes 2 trips a day. The seating capacity is 50
seats. On an average 80% occupancy is experienced.
Calculate (a) Distance travelled (b) Average passengers carried and (c) Passengers
Kilometer for the month of July 1999 in which each bus was laid down for 6 days for
repairs .

Solution:
Distance travelled = Number of vehicles x No. of trips x 2 x Distance x No. of days

= 4 x 2 x 2 x 140 x 25 = 56,000 KMs,

A verage Passengers Carried = Seating capacity x % utilised

=50 80/(100 )=40 passenger

Passenger KMs = Distance x Passengers
= 56,000 x 40 = 22,40,000 Pas. KMs .
Number of days = 31 days in July - 6 days for repairs = 25 days.

4) X, a transporter supplies the following details in respect of a truck of 5 ton capacity:

Cost of truck Rs. 90,000
Estimated life 10 years.
Diesel oil etc. Rs. 15 per trip each way.
Repair and maintenance Rs. 500 per month.
Driver's wages Rs. 500 per month.
Cleaner's wages Rs. 250 per month.
Insurance Rs. 4,800 per annum.
Tax Rs. 2,400 per annum
General supervision charges Rs. 4,800 per annum.
The truck carries goods to and from the city covering a distance of 50 Kms. each way.
On onward trip freight is available to the extent of full capacity and on return 20% of
capacity. The truck operates on an average 25 days a month. Work out Operating Cost
per Ton Km. and rate per ton per trip that X should charge if a profit of 50% on
freightage is to be earned.

Solution
Operating Cost Sheet for the month
Particulars Amount (Rs.)
(A) Standing Cost:
Insurance Rs. 4,800 + 12 months 400
Tax Rs. 2,400 + 12 months 200
General Supervision Rs. 4,800 + 12 months 400
. . Rs. 90,000 ,,nnnn Depreciation: - Rs. 9,000 +12 months 750
Total A 1,750
(B) Maintenance Cost:
Repairs & Maintenance 500
Total B 500
Running Cost:
Diesel oil [Link]. 15 per 50 Kms.
Note : 2,500 x 15 / 50 750
Driver's wages 500
Cleaner's wages 250
Total C 1,500
Grand Total (A+B+C) 3,750

Calculation of Ton Kms:

(a) Onward Journey: 50 Kms. x 25 days x 5 tons = 6,250 [Link]
(b) Return Journey: 50 Kms. x 25 days x 5 x 20% = 1,250 [Link].
Total 7,500 [Link]

Operating cost per ton KM = Re. 0.50/[Link].

Charge per ton KM = Cost per ton Km 0.50
+ Profit 50% on Freight
or 100% of cost 0.50
Freight or Charge Re. 1,00 Per T. Km
Rate per ton per trip = Re. 1 x 100 Kms (to & fro)
= Rs. 100
Note: Total Kms run by the truck = No. of trips x 2 x distance x No. of days = 1
x2x50x25 = 2,500 kms.
[It is assumed that the truck makes only one trip a day]
(5) Karnataka transport limited owns a fleet of 10 trucks each costing Rs. 60,000. The
company has employed a Manager to whom it pays Rs. 500 p.m. An accountant who
gets Rs. 300 p.m. and a peon who gets Rs. 150 p.m. The company has got its trucks
insured at 3 % p.a. The annual tax is Rs. 1,200 per
truck. The other expenses are as follows:
Driver's Salary Rs. 400 p.m.
Cleaner's Salary Rs. 150 p.m.
Mechanic's Salary Rs. 300 p.m.
Repairs and maintenance Rs. 1,200 p.a. per truck.
Diesel consumption: 3 Kms/litre at Rs. 3.75 per litre.
The estimated life of the truck is 5 years.
Other information:
Distance travelled by each truck per day 200 kms. Normal loading capacity 100 quintals
Wastage in Loading capacity 10% Percentage of truck laid up for repair 5% Effective
days in a month 25 Calculate: (a) Cost per quintal k.m.
(b) Cost per k.m. of running a truck.
Solution
Calculation of ton kms: (for 10 trucks)
(i) Distance travelled = 10 trucks x 200 kms per day 25 days x = 95/ 100
= 47,500 kms
= 50,000 kms.
(ii) Load carried: Normal 100 quintals
- Wastage 10% (-10) quintals .-.
Net weight 90 quintals.
Total quintal = 47,500 x 90 = 42,75,[Link].

Operating Cost Sheet for the month ....

Particulars (for 10 trucks) Amount (Rs.)
(A) Standing Charges: Manager's salary 500
Accountant's salary 300
Peon's salary150
Insurance @ 3% on 60,000 x 10 = 18,000 + 2 1,500
Annual tax Rs. 1,200 x 10/ 12 1,000
Depreciation 10 X 60,000 / 5 = 1,20,000 / 12 10,000
Drivers Salary 400 p.m. x 10 4,000
Cleaners Salary 150 p.m. x 10 1,500
Mechanic's Salary 300 p.m. 300
(Note) Total (A) 19,250
(B) Maintenance Charges:
(C) Running Charges: 1,000

59,375
Diesel: 3 kms. – 1 Letter
47,500-((47,500 X 1)/3)X 3.75

Grand Total (A+B+C) 79,625

(a) Cost quintal KM = (Rs.79,625)/(42,75,000 Kms)=0.019

(b) Cost per KM= (Rs.79,625)/(47,500 Kms)=1.676

(6) BMP (Bangalore Maha Nagar Palike) arranges for the removal of garbage by means
of its own transport system, Following vehicles are maintained:
No. of vehicles Cost (Rs.)(Per vehicle) Capacity
20 4,00,000 5 Tons
30 3,50,000 4 Tons
40 3,00,000 3 Tons
50 2,50,000 2 Tons
On an average each vehicle makes 8 trips a day. The garbage is taken from all parts of
the city to 4 garbage treatment plants situated outside the city limits. The estimated
average distance from any point to garbage plant is 20 Kms. While going out each
vehicle carries only 70% of the capacity and on return journey every vehicle will be
empty. On an average 10% of the vehicle are laid down for repairs and rest. The cost
details for the month of July, 1999 are as below:
Monthly Salary of Drivers Average Rs. 4,000 per driver
Monthly Salary of Workers Average Rs 2,000 per worker (a worker for each vehicle)
Office Salary per month Rs. 2,50,000
Consumable Stores Rs. 50,000
Diesel (Mileage 4 Kms. per litre) Rs. 10 per litre.
Lubricant Rs. 10,000
Replacement of Tyres and Tubes Rs. 75,000
Miscellaneous Expenses Rs. 25,000

Miscellaneous Expenses Rs. 25,000. BMP maintains a workshop, the monthly

expenses of which are Rs. 1,20,000 and the share to garbage removal activity is 60%
and the share of other office overhead Rs. 40,000 is 50%.

Depreciation on vehicles at 5% p.a., Insurance 2% p.a. Annual tax Rs. 2,000 per
vehicle. Interest on capital total per year Rs. 1,50,000
You are required to calculate —
(a) Ton Kilometers

Solution
(a) Calculation of Kms and tonKms
Total Kms = Number of vehicles x % used x Number of trips per day x 2 x Distance
each way x Number of days 90
= (20 + 30 + 40 + 50) x -jgj x 8 x 2 x 20 x 31 = 12,49,920Kms.

Tons Carried: No of Vehicles x Capacity (Tons) = Total

20 x5 = 100
30 x4 = 120
40 x3 = 120
50 x2 = 100
Total tons 440
Capacity utilised = 440 x 70% = 308 tons
Average capacity utilised= 308 / 2 = 154 ton (To & fro)
Ton Kms = Average Capacity utilised x % used x Number of trips per day x 2 x Distance
x Number of days
= 154 x 90/ 100 x 8 x 2 x 20 x 31 = 13,74,912 ton kms.
[Note: % used refers to the number of days the vehicles are used other than when they
are laid down for repairs and rest].
Self Check Questions

(4) A private transport company has been given a route of 20 Kms long to run a bus.
The cost of the bus is Rs. 4,50,000. It is insured at 3% P.A. and the annual tax will
amount to Rs. 5,000. Garage rent is Rs. 500 P.M. Actual repairs will be Rs. 2,500 P.A.
and the bus is likely to last for 5 years.
The driver's salary will be Rs. 1,500 P.M. and the conductor's salary will be Rs. 1,200
P.M. in addition to 10% of the takings as commission to be shared equally by the driver
and the conductor.
Cost of stationery Rs. 150 P.M. Accountant's Salary Rs. 1,350 P.M. Petrol and Oil Rs.
50 per 100 Km. The bus will make 3 round trips carrying on an average 40 passengers
on each trip. The bus will run on an average 25 days in a month. Assuming 15% profit
on takings, calculate the bus fare to be charged from each passenger per KM. [Ans.
0.1717]
(5) (a) State the distinctive features of operating costing.
(b) The Union Transport Company has been given a 20 kilometer long route to ply a
van. The van costs the Company Rs. 1,00,000. It has been insured at 3% per annum.
The annual road tax amounts to Rs. 2,000. Garage rent is Rs. 400 per month. Annual
repair is estimated to cost Rs. 2,360 and the Van is likely to last for 5 years.
The salary of the driver and cleaner is R. 600 and Rs. 200 per month respectively in
addition to 10% of takings as commission to be shared equally by them. The Manager's
salary is Rs. 1,400 per month and stationery will cost Rs. 100 per month. Diesel and oil
will cost Rs. 50 per 100 kilometer. The van will make three round trips per day carrying
on an average 40 passengers in each trip. Assuming 15% profit on takings and that the
van will ply on an average 25 days in a month, prepare operating cost statement on a
full year basis and also calculate bus fare to be charged from each passenger per
kilometer.
(6) Prakash Transport Company has been given a route 20 km. long to run a bus. The
bus costs the company a sum of Rs. 50,000. It has been insured at 3% p.a. and the
annual tax will amount to Rs. 1,000. Garage rent is Rs. 100 p.m. Annual repairs will be
Rs. 1,000 and the bus is likely to last for 5 years.
The driver's salary will be Rs. 150 p.m. and the conductor's salary will be Rs. 100 p.m.
in addition to 10% taking as commission (to be shared by the driver and the conductor
equally. The cost of stationery will be Rs. 50 p.m. Manager-cum-Accountant's salary is
Rs. 350 p.m. Petrol and oil will be Rs. 25 per 100 km. The bus will make 3 round trips
carrying, on an average, 40 passengers on each trip. Assuming 15% profit on takings,
calculate the bus fare to be charged from each passenger. The bus will run on an
average 25 days in a month.

Mr. Eswar owns a bus which runs between Mysore and Bangalore and back for 10 days
in a month. The distance is 150 kms. The bus completes a trip a day. The bus goes
another 10 days towards Hassan. The distance from Mysore to Hassan in 120 kms.
This trip is also completed on the same day. For the rest 4 days, it runs in the local city.
Daily distance covered is 40 kms. Calculate the rate to be charged to earn a profit of
33l/2% of his taking. The other information is:
Particular Rs.
Cost of the Bus 3,00,000
Depreciation 20% P.A.
Salary of driver 1,750 P.M.
Salary of Conductor 1,750 P.M.
Salary of Clerk 800 P.M.
Insurance 8,400 P.A.

Diesel Consumption 8 KM/Litre @ Rs10 per litre

Token tax 3,000 P.A.
Lubricating oil50 per 100 kms.
Repairs & Maintenance • 3,000 P.M.
Permit fees 1,420 P.M.

9 Prakash Automobiles distributes its goods to regional dealers using a single Lorry.
The dealers premises are 40 kilometres away by road. The Lorry has a capacity on
return journey. The following information is available for a Four Weekly Period during
the year 1990:
Particulars Amount
Diesel consumption 8 kilometres per litre.
Diesel cost Rs. 13 per litre
Oil Rs. 100 per week
Driver's Wages Rs. 400 per week
Repairs Rs. 100 per week
Garage rent Rs. 150 per week
Cost of Lorry (Excluding Tyres) Rs. 4,50,000
Life of Lorry 80,000 Kilometers
Insurance Rs. 6,500 per annum
Cost of TyresRs. 6,250
Life of Tyres 25,000 kilometers
Estimated sale value of Lorry at end of its life Rs. 50,000
Vehicle Licence cost Rs. 1,300 per annum
Other overhead cost Rs. 41,600 per annum
The Lorry operates on a five-day week. Required:
(a) A statement to show the total cost of operating the vehicle for the four-weekly period
analysed into running costs and fixed costs.
(b) Calculate the vehicle cost per kilometre and per tonne kilometer.

(10) Mr. Jai owns fleet of taxis and the following information is available from the
records maintained by him.
Particulars Amount (Rs.)
Number of taxis 10
Cost of each taxi Rs. 20,000
Salary of manager 600 p.m.
Salary of accountant 500 p.m.
Salary of cleaner 200 p.m.
Salary of mechanic 400 p.m.
Garage rent 600 p.m.
Insurance premium 5% p.a.
Annual tax 600 per taxi
Driver's salary 200 p.m. per taxi
Annual repair1,000 per taxi
Total life of a taxi is about 2,00,000kms. A taxi runs in all 3,000 kms in a month of which
30% it runs empty. Petrol consumption is one litre for 10 kms. @ Rs. 1.80 per litre. Oil
and other sundries are Rs. 5 per 100 kms.
Calculate the cost of running a taxi per km.

(11) Mr. Jaidka owns a fleet of taxis and the following information is available from the
records maintained by him:
(i) Number of taxis 10 (vii) Garage rent Rs. 600 p.m.
(ii) Cost of each taxi 20,000 (viii) Insurance premium 5%
(hi) Salary of manager 600 p.m. (ix) Annual tax Rs. 600 per taxi
(iv) Salary of accountant 500 p.m. (x) Driver's Salary 300 p.m. per
taxi
(v) Salary of cleaner 200 p.m. (xi) Annual repairs 1,000 per taxi
(vi) Salary of mechanic 400 p.m.
Total life of a taxi is about 2,00,000kms. A taxi runs in all 3,000 kms. in a month of
which 30% it runs empty. Petrol consumption is one litre for 10 kms. @ Rs. 1.80 per
litre. Oil and other sundries are Rs. 5 per 100 kms.
Calculate the cost of running a taxi per km.