MANAGEMENT ACCOUNTING

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SEMESTER IV[2023-24] UNIT 2-3
CMA NIHAR NAIK

CONTENTS

CHAPTER 1 ACTIVITY BASED COSTING PAGE No. 02

CHAPTER 2 SERVICE COSTING PAGE No. 08

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 CHAPTER – 1 : ACTIVITY BASED COSTING
The direct costs, which mainly include materials and labour, are chargeable to the end
products without difficulty and are thus convenient to handle. It is the indirect costs, also
known as overhead, which create problems for the cost accountant in determining the
accurate product costs. In this computer age of advancing technologies and automation,
the importance of indirect costs in the manufacturing operations is increasing and direct
costs are being relegated to the background. In order to determine the total cost of an end
product, under the traditional approach, the indirect costs are allocated and apportioned.
Activity based costing is an upcoming and more refined approach for charging
indirect costs to products and computing more accurate product costs.
1. Traditional Approach:
Traditionally, indirect costs are distributed to end products on the assumption that
products consume resources in proportion to the production volumes. Distribution of
overhead cost by traditional approach was explained in Chapter on Overhead Cost. The
main steps in this approach are:
First, allocation and apportionment of overhead to various production departments and
service departments.
Second, apportionment of service departments’ overhead to production departments.
Third, absorption of production departments overhead by the end products.
In this traditional approach, overhead are absorbed on the basis of machine hours or
labour hours or direct wages, etc.
Traditional system of charging indirect costs was designed when direct costs were
dominant part of processing costs and overhead were insignificant and thus any
distortions in costs due to, inappropriate distribution of overhead were not significant. But
now a days overhead have assumed greater importance and there is a need for a more
sophisticated system for accounting of overhead.

2. Problem of Under costing and Overcosting

When a company produces a variety of products or services which place varying demands
on resources, traditional costing uses an average overhead rate for all activities (like
labour hour rate or machine hour rate) to allocate costs to cost objects i.e., products or
services. Such a costing approach that uses broad averages for charging overhead
uniformly to products or services is known as cast smoothing or peanut butler costing.
Cost smoothing leads to undercosting of certain products and overcosting of other
products. Where one product is undercosted, it results in other product being overcosted
because total amount overhead remain unchanged, this is known as product cost cross-
subsidization.
However, the fact is that various cost objects (products of service) consume resources in a
non-uniform way. The need to measure more accurately how different products services
use-company resources has led to The development of a more refined costing system
known as activity based costing. By defining activities and identifying the cost of
performing each activity, the activity based costing system provides a better and more
logical distribution of overhead resulting in accurate costing.

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3. ACTIVICITY BASED COSTING APPROACH:
Activity based costing (ABC) is a new and scientific approach developed by Cooper and
Kalpan (1988) for assigning overhead to end products, jobs and processes. It aims to
rectify the problem of inaccurate cost information due to selection of wrong bases of
indirect cost apportionment. In the words of Cooper and Kalpan, “ABC systems
calculate the costs of individual activities and assign costs to cost objects such as
product and services on the basis of activities undertaken to produce each
product or service.”
In this system, overheads are assigned to activities or grouped into cost pools before they
are charged to cost objects, i.e., jobs or products. According to C.I.M.A., London, activity
based costing is “cost attribution to cost units on the basis of benefits received from
indirect activities, i.e., ordering, setting up, assuring quality, etc.”
Activity based costing is not an alternative to job costing or process costing Rather
it is a modern tool of charging overhead costs in which costs are first traced to activities
and then to products or jobs. Its main focus is on activities performed in the production of
goods or services. Thus activities become the focal points for cost computation. Costs are
charged to products or services based on individual products’ consumption of each
activity. It recognizes that jobs, products, services etc. do not directly consume resources
but consume activities, which consume resources. In brief, in activity based costing,
overheads are first assigned to activities and then absorbed by cost objects on the basis
of activities consumed by these cost objects.
3. Terms used in ABC
In order to understand ABC, one should be familiar with the meaning of the following
terms:
Activity: An activity may be defined as a particular task or unit of work with a specific
purpose. Examples of activities are - placing of a purchase order, setting up of a machine,
after sales service, etc.
Cost object: It is an item for which cost measurement is required. For example, a product,
a service, a job or a customer etc. are cost objects.
Cost driver: It is a factor that causes a change in the cost of an activity. Cost driver is of
two types-resource cost driver and activity cost driver as given below:
Resource, cost driver: It is a measure of the quantity of resource consumed by an
activity. For example, number of purchase orders placed will determine the cost of
purchasing the materials. Similarly, the number of times machines are set up will
determine the cost of setting up of machines. Resource cost driver is used to assign the
cost of a resource to an activity or cost pool.
Activity cost driver: It is a measure of the frequency and intensity of demand placed on
the activities by cost objects. It is used for assigning activity costs to cost objects
consuming the activity.
Some cost driver selection:
Activity Cost Driver
Machine set-up Number of production runs
Purchase materials Number of orders placed
Material handling Number of parts
Inspection Inspection per unit
Quality testing Hours of test time

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 Receiving material Number of receiving orders
Packing Number of receiving orders
Store delivery Number of packing orders
Example of cost drivers for various business functions Are as follows:
Production Number of units, Number of set-ups.
Marketing Number of sales personnel, Number of sales order
Customer service Number of service calls. Number of products
Serviced, Hours spend on servicing products.
4 . Steps in Activity Based Costing
The different steps or stages in ABC system can be given as follows:
1. Identify the different activities within the organization: The main activities, which
are being performed in the organization, have to be identified. Usually the number of
activities over cost centers in ABC will be much more as compared to traditional
overhead system. The exact number will depend on how the management
subdivides the organizations activities.
2. Creation of cost pool Relating the overhead to the activities: After identifying the
organizations activities, the various items of overhead are related to activities both
support and primary, that caused them. As a result of relating the items of overhead to
various activities, cost pool or cost buckets are created.
3. Determining the activity cost drivers: The determination of the activity cost drivers
is done in order to relate the overhead collected in cost pools to the cost objects of
products. It is done on the basis of the factor that drives the consumption of the
activities.
4. Calculating the activity cost driver rates: The activity cost rates for each activity are
calculated in the way in which overhead-absorption rates would be calculated under
the traditional system. It can be presented as follows:
Activity cost driver rate= Total Cost of Activity/Cost Driver
These activity cost driver rates are to be used for ascertaining the amount of overhead
chargeable to various cost objects or products.
5. Computing the total cost of products or cost objects: The total costs of the
products shall be computed by adding all direct and indirect costs assigned to them.
The amount of overhead chargeable to a product or cost object shall be calculated by
multiplying the activity cost drivers rates by different amounts of each activity that
each product or other cost object consumes.
5. Advantages of Activity Based Costing
ABC is being implemented by a growing number of companies around the world. It has
primarily developed on account of the limitations of traditional system of charging
overhead. Its main advantages are the following:
1. Accurate and reliable. ABC is a more accurate and reliable system of ascertaining
product costs as it is based on cause and effect relationship in cost incurrence.
2. Better pricing decision It overcomes the problem of undercosting and overcosting
as a result of which management is able to make more judicious selling price
decisions based on accurate costs:
3. Realistic approach. Distribution of overhead based on activities is an objective and
realistic approach. As against this, traditional method of overhead costing uses more
arbitrary bases of apportionment of overhead and is a subjective approach.

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 4. Control of costs. ABC produces more meaningful information regarding cost
behaviour and enables management to control many fixed overhead by exercising
more control over those activities which cause these fixed overhead.
5. Greater cost efficiency. ABC helps to identify those activities which are unnecessary
and may be weeded out and thus achieving greater cost efficiency.
6. Useful cost driver rates. ABC helps, through its cost driver rates, in the modification
of existing products and also in the development of new products

EXAMPLES
1. X Ltd. produces 800 units each of its product A and B. The Labour time per unit is 20 hour
and 30 hours respectively. The overhead incurred during the period amounted to Rs.
18,00,000. The company uses Traditional Costing and overhead are levied at a rate per
labour hour. Determine overhead absorption rate and also calculate overhead chargeable to
product A.

2. TCH Ltd. Has been using a costing system that allocates all factory overhead costs to
products based on 350 per cent of direct labour cost. The company has just decided to use
activity based cost system that traces indirect costs to products based on consumption of
major activities as indicated below.

Activity Annual cost driver Cost(Rs.) Product cost driver

quantity Consumption
Machining 20,000 hours 5,00,000 800 hours
Set up 10,000 hours 1,00,000 100 hours
Production order 2,000 orders 2,00,000 12 orders
Material handling 1,000 requisitions 20,000 5 requisitions
Parts administration 12,000 parts 4,80,000 18 parts

You are required to compare the total annual costs of the product using both the
traditional volume based and new ABC system.

3. A company manufacturing two products furnishes the following data for a year
Product Annual Total Machine Total number of Total number of
output Hours Purchase orders Set-ups
(units)
A 5,000 20,000 160 20
B 60,000 1,20,000 384 44
The annual overheads are as under:
Volume related activity costs 5,50,000
Set-up related costs 8,20,000
Purchase related costs 6,18,000
You are required to calculate the cost per unit of each product A and B based on:
(a) Traditional method of charging overheads
(b) Activity based costing method

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 4. The budgeted overheads and cost driver volumes of ABC Ltd are as follows:
Cost pool Budgeted Cost driver Budgeted
Overhead (Rs.) volume
Material procurement 5,83,000 No. of orders 1,100
Material handling 2,51,600 No. of movements 680
Set-up 4,16,000 No. of set-ups 520
Maintenance 9,66,000 Maintenance hours 8,400
Quality control 1,75,500 No. of inspections 900
Machinery 7,20,000 No. of machine hours 24,000
The company has produced a batch of 5,000 components of product CORE its
material cost was Rs. 3 per unit and labour cost was Rs. 5 The usage activities of the
side batch are as follows:
Material orders 26 Maintenance hours 690
Material movements 18 Inspection 28
Set-up 25 Machine hours 1,800
Required: (a) Calculate cost driver rates that are used for tracing appropriate amount of
overheads to the batch. (b) Ascertain the cost of batch of components using ABC.
[Ans. Total cost Rs. 219250]
5. The budgeted overheads and cost driver volumes of ABC Ltd are as follows:
Cost pool Budgeted Cost driver Budgeted
Overhead (Rs.) volume
Material procurement 15,60,000 No. of orders 780
Set-up 6,50,000 No. of set-ups 650
Quality control 6,40,000 No. of inspections 16,000
Machinery 22,50,000 No. of machine hours 30,000
The company has produced a batch of 1,500 components of product HIG FAN its
material cost was Rs. 450 per unit and labour cost was Rs. 150 per unit. The usage
activities of the side batch are as follows:
Material orders 325 Inspection 7,500
Set-up 250 Machine hours 325
You Required to Calculate total cost and cost per unit of Product under Activity Based
costing and Traditional Costing System. [April 2018, Marks 15]

6. Pavan Ltd. Produces and sells two products namely product – Simple Calculator & Product-
Scientific Calculator. Company provides the following information for the year 2022-2023.
Particulars Simple Scientific
No. of units produced 1,000 500
Direct Materials (per unit) Rs.180 Rs.240
Direct labour @ the rate Rs.40 per hour (per unit) Rs.120 Rs.160
Machine hour (per unit) 2 Hrs. 6 Hrs.
Total Overheads for the year are:
Running and Maintenance: Rs.5,00,000,
Quality Inspection: Rs.7,50,000,
Material Procurement: Rs.2,50,000.
Company follows Traditional Costing System and charges overheads based Direct Labour
Hours Management is in the consideration to apply Activity Based Costing System to have
idea for accurate cost per unit. For this purpose, on the basis of detailed
study, management identified following cost drivers:

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 Cost Driver
Running & Maintenance Machine Hours
Quality Inspection No. of Units
Material Procurement Value of Materials
Prepare comparative cost statement under TCS and ABC System.
7. Sky Ltd. Produces and sells two products namely Moon and Star. Company provides
the following Information for the year 2023
Particulars Moon Star
No. of units produced 10,000 5,000
Direct Material Cost (Rs.) 5,00,000 2,00,000
Direct Labour Cost (Rs.) 3,00,000 1,00,000
Machine hour (per unit) 5 4
Number of setups 30 20
Number of Order 30 10
Number of Movement 20 10
Company follows Traditional Costing System and charged overheads based on Machine
hours. Management requests you to apply Activity Based Costing System to have idea for
accurate cost per unit. For this purpose, on the basis of detail study, management
identified following Activity and Cost Driver:

Activity Cost Driver Cost (Rs.)

Material Receipt and Storage No. of Movement 75,000
Material Procurement No. of Order 2,80,000
Machine Setup No. of Setup 3,45,000
Running and Maintenance Machine Hours 14,00,000
Total 21,00,000
You are required to calculate the cost per unit of each product under Traditional
Costing System and Activity Based Costing System.
[Ans. TCS :Moon Rs. 23,00,000; Star Rs. 9,00,000;ABC : Moon Rs. 22,67,000; star Rs. 9,33,000]
8. Shiva Ltd. Produces and sells two products namely P1 and P2. Company provides
the following Information for the year 2023 [April 2019, Marks 15]
Particulars P1 P2
No. of units produced 1,500 2,000
Direct Material Cost (Rs.) 1,40,000 1,30,000
Direct Labour Cost (Rs.) 60,000 70,000
Machine hour (per unit) 60,000 40,000
Number of setups 15 20
Number of Order 60 40
Company follows Traditional Costing System and charged overheads based on Machine
hours. Management requests you to apply Activity Based Costing System to have idea for
accurate cost per unit. For this purpose, on the basis of detail study, management
identified following Activity and Cost Driver:
Activity Cost Driver Cost (Rs.)
Running and maintenance Machine Hours 12,00,000
Material Procurement No. of Order 10,00,000
Machine Setup No. of Setup 7,00,000
Total 29,00,000
You are required to calculate the cost per unit of each product under Traditional
Costing System and Activity Based Costing System.

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 SERVICE COSTING
1 MEANING :
Operating Costing is a method of costing of ascertaining cost of undertaking which do not
produce products but which render services. Operating costing is also known as service
costing. Operating cost is the cost of rendering services. It is the cost of producing and
maintaining a service. Industries using operating costing do not produce tangible products,
but useful service is rendered. For example, transport services, utility services like hospitals,
canteens etc. distribution services like supply of electricity, gas etc. The costs incurred to
render services is called operating costs. The object of operating costing is to ascertain the
operating cost.

2 SERVICE USING OPERATING COSTING :

No. Services Type of Services

1. Transport Services Bus, Railway, Tramways, Air-ways, Shipping etc.

2. Supply Services Electricity, Steam, Water, Gas etc..
3. Boarding and Lodging Services Hostels, Hotels, Lodges, Restaurants, Cafeteria,
Canteens etc.
4. Welfare Services Hospitals, Schools, Colleges, Libraries,
Cinemas etc..
5. Municipal Services Road Maintenance, Street Light etc.
In some services organizations, service may be first produced and then supplied. For
example, an electricity supply undertaking may generate as well as supply electricity. Thus
operating costing may also have an element of production.
3. COST UNIT IN SERVICES UNDERTAKING:
Cost unit in service undertaking is generally a composite unit consisting of quantity,
distance or period depending on the nature of services. The cost unit applicable to various
services undertakings is given below.
No. Services Single Cost Unit Composite Cost
Units
1. Transport Services Per Kilometer Per Passenger-
Per Tonne Kilometer
Per Passenger Per Tonne- Kilometer

2. Supply Services (Electricity) Per Kilowatt, Per Kilowatt-Hour or

Per Hour (KWH)
3. Boarding/ lodging (Canteen) Per cup of tea, Per Per Cup Person Per
meal, Per person Meal-Person
4. Welfare Services (Hospitals) Per Patient, Per Patient, Day/Week
Per Day Per Bed Per-Patient-
Per Bed Bed
5. Welfare Services (College) Per Student, Per Student-Term Per
Welfare Services (Cinema) Per Term Per Man, Man-Show
Per Show
6. Boiler House Per-House, Per Per House, Per Cubic
cubic meter Meter

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 4 COMPOSITE COST UNIT :
The concept of composite cost unit is more relevant in those services in which the same
service is utilised by two or more persons at the same time. For example, in bus service, a
number of persons travel in the same bus at the same time, In this case, total composite
units passenger-kilometers will be arrived at by multiplying the number of passengers in the
bus and distance travelled. However, if the whole is hired by one party then the cost unit may
be only kilometer or a trip.
Similarly, in truck service, a truck may carry different quantities of goods to more than one
place. In this case, total composite units, tonne-kilometers will be composite by multiplying
the weights of goods by the distance for which goods are to be carried.
5 TRANSPORT COSTING:
Transport is one of the services performed by railways, roadways, steamers, goods carriers
etc. Such business adopted operating costing for the purpose of finding the total cost of
each vehicle and then applying it to the unit cost. The cost information helps in charging for
the services provided to the customers. It also helps in making comparison among the
vehicles and alternative modes of transport. In transport costing all costs are classified
under the following three heads:
1. Operating and Running Charges which are mostly variable in nature.
2. Standing Charges which are usually fixed in nature and
3. Maintenance Charges which are semi-variable in nature.

1. Operating and Running Charges : Variable Cost :

These are expenses which are very essential for operating the vehicles. They are incurred
on the actual running of the Vehicles. These expenses are zero when the vehicles are off
the road. These expenses vary with the operation in the same direction and more or less in
the same proportion. Hence these expenses are variable in nature. The examples of these
expenses are as follows;
(a) Petrol and Diesel
(b) Oil and Grease
(c) Wages of Driver, Conductor etc. (if paid on the basis of trip or distance covered.)
(d) Depreciation. (if it is allocated on the basis of mileage run or trip)
2. Standing Charges : Fixed Cost:
These expenses are to be incurred whether the vehicle operates or not. These expenses go
on accumulating as the time passes. The vehicle may be idle, but even Then its expenses
have to be met. These are more or less Fixed in nature. The examples of these expenses
are as follows:
(a) Road License fees.
(b) Insurance Premium and Motor Vehicle Taxes.
(c) Wages of Driver, Conductor etc. (if payment is made on monthly basis)
(d) Depreciation. (if it is allocated on the basis of Affluxion of time).
(e) Interest on Capital
(f) Garage Rent
(g) General Administration and Supervision Charges.

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3. Maintenance Charges: Semi-Variable Cost :
These expenses are incurred on the repairs and maintenance of vehicles to keep them in
good condition. They are semi-variable in nature. The examples of these expenses are
as follows:
(a) Tyres and Tubes
(b) Painting
(c) Spares and Accessories
(d) Repairs and Overhauling
(e) Hire of spare vehicles when the firm’s own are under repair.
Note: Often information about semi-variable costs is not available (in the questions). In
that case, costs are shown under two heads only, i.e. Fixed and Variable. All costs other
than variable costs are generally accumulated under fixed costs.
6 COMPOSITE COST UNITS FOR TRANSPORT UNDERTAKINGS:
Since the operating costs are influenced by two important variables viz. distance and
number of passengers or the weight of goods carried, it is advisable to use a composite
cost unit transport undertakings. Therefore either the passenger-kilometer is used
depending on the nature of the transport undertaking whether it is a passenger
undertaking or goods transport undertaking.
7. COST ASCERTAINMENT:
A separate cost sheet for each vehicle is maintained by the cost accounting department.
The specimen of a Cost Sheet prepared in transport undertakings is given below.
Guru Motor Transport Ltd.
Operating Cost Sheet for the Month of………..
Vehicle No…… No. of Trips…. Distance Travelled….. Carrying Capacity….
Particulars Rs. Rs.
A. Standing Charges : Fixed Cost:
Salary :
- Manager
- Accountant
- Driver (if paid on monthly basis).
- Cleaner (if paid on monthly basis)
- Attendant (if paid on monthly basis)
Road License Fees
Insurance Premium
Motor Vehicle Taxes
Depreciation (if it is allocated on the basis of Affluxion of time)
Interest on Capital
Garage Rent
Supervision Charges
General Administration Charges.

Total A

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 B. Operating and Running Expenses : Variable Cost:
Wages :
Driver (if paid on Kilometer or Trip basis)
Cleaner (if paid on Kilometer or Trip basis)
Attendant (if paid on Kilometer or Trip basis)
Petrol & Diesel
Oil and Grease
Depreciation (if it is allocated on the basis of mileage run or trips).
Total B
C. Maintenance Expenses: Semi-Variable Cost:
Tyres and Tubes
Painting
Spares and Accessories
Repairs and Overhauling
Hire of spare vehicles when the firm’s own are under repairs.
Total C
Total Operating Cost: (A +B+C)

8. COLLECTION OF COSTS :
Like job or contract costing each vehicle is given a distinct number. All the basic documents
of that vehicle will contain the number. The driver has a separate Daily Report or Log Book
for each vehicle. It will give performance statistics of each vehicle. It will be helpful for the
ascertainment of cost control. All the details of the cost incurred in the course of the day can
be known from the log book. The first part of the log book gives the full description of the
vehicle, its purchase and other control costs and the standing charged to be incurred. The
second part furnished the cost of maintaining the services and the third part gives the
essential information for the consumption and control of the operating cost.

Log Book
Vehicle Number : Date :
Name of Driver : Time Left Garage :
Route Number : Time Returned :
Trip Record
Trip From To Tonnes or Packages Miles Time
No. Out Collected at end Out In
route
1
2
3
Totals
Suppliers : Worker’s Time : Exceptional
Petrol : Driver : Delays:
Oil : Assistant Loading Delays :
Grease : Cleaners Traffic Delays
etc. Mechanics : Accidents

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 EXAMPLES
EX-1 A goods transport company furnishes the following details in respect of a 10 ton capacity
lorry.
a. A lorry carries goods to and from the city covering a distance of 80 kms each way.
b. On onward trip freight is available for full capacity (i.e. 10 tonnes) and on Inward trip,
freight is available only up to the extent of 40% of the capacity (i.e. 4 tonnes)
c. Lorry runs on an average 3 round trips a day and 30 days a month.
From the above information compute the total tonne-kilometer per month.
(Ans.: TKM 1,00,800)
EX-2 A passenger vehicles runs between two cities covering a distance of 105 kms each way.
The vehicle makes three round trips daily carrying on an average 50 passengers. Assuming
that the vehicle is operated every day determine the passenger kilometer per day and per
month. (Ans.: PKM: Per day 31,500; Per Month 9,45,000)

EX-3 A transport company runs 4 buses between two towns which are 50 kilometers apart. All
the 4 buses run on 25 days in a month and each bus make two round trips per day. The
seating capacity of each bus is 50 passengers (100% capacity) and actual passengers
carried are 80% of the seating capacity. Calculate the total kilometers and total passenger
kilometers. (Ans.: PKM 8,00,000)

EX-4 A truck starts with a load of 10 tonnes of goods from station A. It unloads 4 tonnes at
station B and rest of goods at station C. It reaches back directly to station A after getting
reloaded with 8 tonnes of goods at station C. The distance between A to B and B to C and
C to A are 40 kms.. 60 kms. and 80 kms. Respectively. Calculate absolute tonne
kilometers. (Ans. :TKM 1,400)

EX-5 A transport service company is running 10 buses between two towns which are 30 kms.
Apart. Seating capacity of each bus is 50 passengers. Actually, passengers carried were
80% of the Seating capacity. All buses ran on all 30 days of the month. Each bus made
made one round trip per day. Calculate Passenger Kms for the month.
(TPKM 7,20,000)
EX-6 From the following data, calculate operating cost per km. of a vehicle. Value of vehicle
Rs.45,000, Road license fee for the year Rs.1,000, Insurance charges per year Rs 300,
Garage rent per year Rs.800, Drivers wages per month Rs.1,200, Cost of diesel per litre
Rs.20, kms. Per litre 8, proportionate charge of tyre and maintenance per km. Rs.2,
estimated life of vehicle 10 years, estimated annual usage (running) 30,000 kms.
(Ans.: PKM ;FC 21,000 :VC 75,000; SVC 60,000; Per KM 5.2)

EX-7 Vadodara Transport Co. operating a ten tonnes carrying capacity truck, carrying goods to
and from the city, covering a distance of 50 kms, each way. On outward trips, freight is
available to the extent of full capacity and on return 20% of the capacity. Assuming the
truck runs on an average of 25 days a month, calculate tonne-kms. Per month.
(TTKM 15,000)

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EX-8 Suman transport supplies the following details in respect of truck of 5 tonne capacity:
Cost of Truck : Rs.6,75,000
Estimated life : 10 Years
Scrap value of truck after 10 years : Rs.36,000
Diesel, Oil, grease Rs.112.50 per trip each way
Repairs & Maintenance : Rs.3,750 p.m.
Driver’s wages : Rs.3750 p.m.
Cleaner’s wages : Rs.1,875p.m.
Insurance : Rs.23,100p.a
R.T.O. Tax : Rs.12,000 p.a.
General Supervision charges : Rs.36,000 p.a.
Depreciation method adopted S.L.M.
The truck makes one trip daily and carries goods to and from the city covering a
distance of 25 kms. Each way.
On the 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 truck per month and per tonne-km.
(b) Rate per tonne per trip that the company should charge if a profit of 50% on
freight charges is to be earned.
(Ans. TKM = 3,750; Total cost = Rs. 26,250, Cost per PKM Rs. 7)
EX-9 SHIVA Transport Ltd. Supplies the following information in respect of a truck of 5 tonnes
capacity
1. Cost of Truck (Estimated Life 5 years) : Rs.18,00,000
2. Repairs and Maintenance : Rs.30.000 per month
3. Diesel, Oil and Grease. : Rs 200 per trip each way
4. Driver’s Salary : Rs.5,000 per month
5. Cleaner’s Salary : Rs.3,000 per month
6. Motor Vehicle Tax : Rs. 48.000 per year
7. Insurance : Rs.96,000 per year
8. General Supervision Charges : Rs.96,000 per year
9. Tyre cost : Rs.14,500 per month
The truck carries goods to and from the city covering a distance of 50 kms. On each
way. While going to the city, freight is available to the extent of full capacity and on
return, 20% of the capacity. Assuming that the truck runs on an average 25 days a
month, find out the operating cost per tonne kilometer and Freight per Tonne –
kilometer to be charged, if the rate of profit is 50% on freight is to be earned.
(Ans. TKM = 7,500; Total cost = Rs. 1,12,500, Cost per PKM Rs. 15)

EX-10 The princy Transport Ltd. Has been given a 20 kms. Long route to run a bus. The
bus costs Rs. 60,000 and has been insured at 5% p.a. The bus is likely to last for 5
years. Annual taxes amount to Rs 3,000. Garage rent is Rs.100 p.m. Driver’s and
Conductor’s salary will be Rs.3,000 and Rs 1,800 p.m. respectively. Manager’s salary is
Rs.4,000 p.m. Cost of stationery will be Rs.1,600 p.m.

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 Cost of petrol and oil is estimated to be Rs.7.800 p.m. Expenditure on repairs is
estimated to be Rs.2,400 p.a. The bus will make 3 trips a day carrying on an
average 40 passengers on each trip.
Assuming 25% profit on operating cost. Calculate the bus fare to be charged from
each passenger. The bus runs on an average 25 days in a month.
(Ans.: PKM 1,20,000:FC 12,000;VC 7,800; SVC 200; Per PKM 0.21)

EX-11 MIHIR has two vehicles A and B. The cost of vehicles is Rs. 5,00,000 and Rs.
3,50,000 respectively. The estimated life of the vehicles is 2,50,000 miles of Vehicle A
and 2,00,000 miles of Vehicle B. During the year the mileage run by Vehicle A is
15,000 miles while Vehicle B is 6,000 miles. The miles run per litre are 6 in case of
Vehicle A and 5 in case of Vehicle B.
Particulars Vehicle -A Vehicle -B
Road License Fees p.a. 15,400 7,500
Supervisor’s Salary p.a. 18,000 16,000
Garage Rent p.a. 9,600 7,200
Insurance premium p.a.. 12,000 10,800
Repairs and Maintenance per mile 2.00 1.50
Cost of fuel is Rs. 60 per litre, Tyre cost is Re. 1 per mile and Driver’s Salary is Rs. is
20 per hour Charge interest @ 10% on cost of vehicles. Vehicles run 20 miles per
hour on average.
Calculate :
1. The cost of running per mile vehicles A and B for the year 2021.
2. If the hire charges are Rs. 25 per mile for vehicles A and Rs. 35 per mile for
vehicles B., find out the expected profit for the year 2022
(Ans.: A: Rs 3,45,000; B: Rs. 1,80,000; Profit Rs.60,000)
Ex-12 Ayush has two vehicles A and B. The cost of vehicles is Rs. 25,000 and Rs.
15,000 respectively. The estimated life of the vehicles is 1,00,000 miles of Vehicle A
and 75,000 miles of Vehicle B. During the year the mileage run by Vehicle A is
15,000 miles while Vehicle B is 6,000 miles. The miles run per litre are 6 in case of
Vehicle A and 5 in case of Vehicle B.
Particulars Vehicle -A Vehicle -B
Road License Fees p.a. 750 750
Supervisor’s Salary p.a. 1800 1,200
Garage Rent p.a. 1,600 550
Insurance premium p.a. 850 500
Interest @ 10% on cost of the vehicles --- ---
Repairs and Maintenance per mile 1.50 2.00
Cost of Fuel per litre 1.50 1.50
Tyre cost per mile 1.00 0.80
Driver’s Salary per hour 4.00 4.00
Vehicles run 20 miles per hour on an average.
Calculate : 1. The cost of running each Vehicle per mile and
2. If the hire charges are Rs. 5 Per mile, find expected profit for the year.
(Ans.: A: Rs 55,500; B: Rs. 25,500; Profit Rs. 24,000)

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 EX-13 Atul has started transport business with a fleet of 10 Taxies. The various expenses
incurred by him are given below.
Particulars Rs.
Salary-Office Staff p.m. 1,500
Salary-Garage Staff p.m. 2,000
Salary-Driver per taxi p.m. 900
Rent-Garage p.m. 1,000
Road Tax p.m. 2,000
Insurance Premium @ 4% on cost p.a. --
Cost of each taxi 75,000
The life of each taxi is 3,00,000 kilometers and at the end of which it is estimated to
be sold at Rs.15,000. A taxi runs on an average 4,000 kilometers per month. Petrol
consumption is 20 kilometers per litre. The cost of petrol is Rs.20 per litre. Oil and other
sundry expenses amount to Rs 10 per 100 kilometers
Calculate : 1. The cost of running per taxi per kilometer and
2. If the hire charges are Rs.2.50 per kilometer, find out the profit Atul may
expect to make in the first year of operation.
(Ans.: FC 1,800;VC 5,200; SVC Nil; Per taxi per km 1.75; Expected Profit Rs.3,60,000)
EX-14 MAA Ltd., is considering three alternative proposals for conveyance facility for its Sales
Manager who has to do considerable travelling, approximately 20,000 kms. every year.
The proposals are as follows :
(i) Purchase and maintain its own New Small Car or Old Bigger Car
(ii) Hire Car from an agency at Rs. 9.25 per kilometer.
The following further details are available:
Particulars Small Car Old Big Car
Purchase Price 2,50,000 2,00,000
Scrap Value after 8 years 40,000 20,000
Repairs and Maintenance p.a. 20,000 33,500
Taxes and Insurance p.a. 9,750 4,000
The petrol consumption per litre for New Small Car is 16 km, and Old Bigger Car is10/km
Petrol Price is Rs.60 per Litre. Work out the relative costs of three proposals and rank them.
EX-15 Ashok transport Company runs four buses between two towns which are 50 miles
apart The seating capacity of each bus is 40 passengers. The following particulars were
obtained from its Books for January, 2023..
Particulars Rs.
Interest and other charges 2,000
Depreciation 2,600
Diesel Oil and other oils 4,000
Taxation and Insurance 1,600
Repairs and Maintenance 800
Wages of drivers, conductors and Cleaners (based on mileage) 2,400
Salaries of Office and Supervisory staff 1,000
Total 14,400
Actual passengers carried were 75% of the seating capacity. All the four buses run on
all of the month. Each bus made one round trip per day. From the above particulars.
(a) Calculate passenger mile.
(b) Prepare operating cost sheet showing cost per passenger mile
(Ans.: PKM 3,72,000:FC 7,200;VC 6,400; SVC 800)

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EX-16 The following data relates to vehicle A. Compute the cost per ton km.
Km. run (Annual) 15,000
Ton per km (average) 6 tones
Cost of vehicle Rs. 2,50.000
Road License (Annual) Rs.800
Insurance (Annual) Rs.700
Garage Rent (Annual) Rs.1,300
Sundry expenses/supervision charges Rs.2,700
Driver’s wages per hour Rs.4
Kms run per liter 20 Km.
Repairs & Maintenance per Km Rs. 2
Cost of fuel per liter Rs. 6
Tyre allocation per Km Re. 1
Estimated life of vehicle 1,00,000 Km.
Charge interest @ 5% p.a. The vehicle runs 20 Km. per hour on an average.
(Ans.: TKM = 90,000; FC18,000 ; VC 45,000;SVC 45,000; Cost per tonne km. = Rs. 1.20)
EX-17 From the following particulars relating to a four wheeler tempo, you are required to
compute the cost per km.
Value of tempo Rs. 1,90,000
Estimated life of tempo 2,00,000 kms
Estimated annual [Link] 20,000 kms.
No. of kms, per litre of petrol 5 kms.
Driver’s salary per month Rs. 3,750
Cost of petrol per litre Rs. 21.25
Repairs & maintenance per kms. Rs. 3.75
Tyre allocation per kms. Rs. 1.75
Annual Expenses :
Road license fee Rs. 4,800
Insurance 3% on the capital value
Garage rent Rs. 7,500
Supervision, etc Rs. 18,000
You are required to charge interest @ 10% p.a. on the cost of the vehicle and assume
that Rs 15,000may be realised as scrap value of the tempo after its service life is over.
Ans. :FC 1,00,000;VC1,10,000; SVC 1,02,500)

EX-18 A Transport co. is running Five Buses between Two Towns which are 60 kms. Apart.
Seating capacity of each bus is 40 passengers. Following are the details of cost
incurred during April, 2021.
Fixed cost - Rs.4,05,000
Variable cost - Rs.1,35,000
All the buses run on all the days of the month with 75% of Seating Capacity Each
bus made. One round trip each day.
Find out : (i) Total passenger – kms. And
(ii) Cost per passenger – km. (TPKM 5,40,000; Cost Rs.1)

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