Operating Costing/ Service Costing

 The term service costing or operating costing refers to the

computation of the total operational cost incurred on each unit
of the intangible product.
 These intangible products or services can be either in the form
of internal services that are carried out by industries as
supporting activities for the manufacturing of goods.
 Or in the way of external services that are offered as a
signif ic ant product to the customers by the service sector
companies.
 Types of Service/Operating Costing

 Transport Costing;
 Power Generation and Distribution Costing;
 Boiler House Costing;
 Canteen Costing;
 Hospital Costing;
 Hotel Costing.
 Simple Cost Unit
Measuring the cost of business operations in a service industry is a complex
activity where all the cost parameters are to be considered while deciding a
suitable unit for costing.
NATURE OF SERVICE
COST UNIT
ORGANIZATION
Water Supply Per Kiloliter
Canteen Per Meal / Per Person / Per Staff

Road Maintenance Per Kilometer

Street Lighting Per Lamp / Per Point
Boiler House Per 1000 Ibs
Gas Per Cubic Meter / Per Kilogram
Private Transport Per Kilometer / Per Hour / Per Trip
/ Per Passenger
 NATURE OF SERVICE
ORGANIZATION
Composite Cost Unit
The most commonly used cost unit in service costing is the composite
cost unit. Here, the measurement of two parameters is combined to form a
single cost unit.
Following are the different types of service organizations and their
composite cost units:
COST UNIT

Hospital Per Bed-Day / Per Patient-Day

Hotel Per Room-Day / Per Room-Night / Per Bed-Day

Electricity Per Kilowatt-Hour

Entertainment in Cinema or Per Ticket-Show

Theater
Boiler House Per Cubic Centimeter-Liter

Passenger Transport Per Passenger-Kilometer / Per Passenger-Mile

Standing charges are fixed amounts that are applied to gas and electricity bills. The
standing charge helps the supplier to cover fixed costs, which include the provision
of a meter and connection to the network.

Operating costs are the ongoing expenses incurred from the normal day-to-day of
running a business. Operating costs include both costs of goods sold (COGS) and
other operating expenses—often called selling, general, and administrative (SG&A)
expenses.
 Boiler House Cost Sheet
Month................................... Total Consumption.....................
Total Steam Produced.........................
Items Total Cost per 1000
cost kgs.
(A) Fixed Overheads -Rent, rates, etc. Depreciation
of plant, Depreciation of building, Insurance;
(B) Maintenance- Meters, Furnace, Service
materials, Tools and accessories;
(C) Labor Charges -Coal handlers, Ash removers;
(D) Fuel-Fuel, Power;
E) Water Charges- Water purchased, Water
softening;
F) Supervision and other charges- Foremen,
Engineers, General labour, Cleaners.
Total
Problem 1: The following data relates to two different vehicles, Y and Z. Compute the cost per
running mile. You are to charge interest on the cost of vehicles at 5% p.a. The vehicles run 20
miles per hour on average. (Connected with labor wage)

Vehicle Y Vehicle Z
Mileage run (annual) 20000 10000
Cost of vehicle 500000 475000
Road license 20000 20000
Insurance (annual) 2200 2200
Garage rent(annual) 1000 900
Supervision and salaries(annual) 12000 12000
Driver’s wages per hour 120 120
Cost of petrol per gallon 100 100
Repairs and maintenance charge per mile 5 4
Tire allocation per mile 1 1
Miles per gallon 20miles 15miles
Estimated life of vehicles 100000 75000miles
 Statement
Y Z
Vehicle mileage run (annual)

Operating and running costs: Tk. Tk.

Petrol (100÷20), (100÷15) 5.00 6.67
Driver’s wages (120÷20) 6.00 6.00
Depreciation (500000÷100000), (475000÷75000) 5.00 6.33
Maintenance Costs:
Tire 1.00 1.00
Repair and maintenance 5.00 4.00
Fixed Costs: Annual
Y Z
Road license 20000 20000
Insurance 2200 2200
Garage rent 1000 900
Supervisor’s Salary 12000 12000
Interest on the cost of vehicles at 5% 25000 23750
Total 60200 58850 /10000
Divided by mileage run /20000 3 01 5 89
Problem 2: A practicing Chartered Accountant spends Tk. 18 per km on taxi
fare. He is considering two other alternatives-purchasing a new small car or
an old big car. The estimated cost f igures for these two alternatives are as
follows:
New Small Car Old Big Car
Purchase Price Tk.700000 Tk.400000
Sales price after 10 years Tk.300000 Tk.200000
Servicing and other f ixed expenses per Tk.15000 Tk.24000
annum
Tax and Insurance per annum Tk.35000 Tk.10000
Km run per liter 10 8

The petrol price per liter is Tk.100. His estimated annual requirement for travel
is 10000 km. You are required to find out:
a) Which of the three options will be most economical for him?
b) In case of annual travel requirements is 20000 km, what should be his
decision?
Solution: Hiring taxi Buying new Buying old
Annual running 10000 km car car
10000 km 10000 km
Hire charges @ Tk. 18 180000 - -

Annual Fixed charges:

Tax and Insurance - 35000 10000
Servicing etc. - 15000 24000
Depreciation 40000 20000
_______ 54000
90000 125000
Variable Charges: 100000 179000
Petrol () () 180000 _______
190000_____
_

Hence buying the old car would be the most economical alternative.
 Hiring taxi B u y i n g Buying old
Annual running 20000 km new car car
20000 km 20000 km
Hire charges @ Tk. 18 360000 - -

Annual Fixed charges:

Tax and Insurance - 35000 10000
Servicing etc. - 15000 24000
Depreciation 40000 20000
_______ 54000
Variable Charges: 90000 250000
Petrol 200000___ 304000
360000 ___
290000___
___
Comment: The chartered accountant should buy the new car if his annual requirement is
20000 km.
Problem 3: The following is the information given by an owner of a hotel. You are requested to
advise him on what rent should be charged from his customers per day so that he can earn 25 %
on costs other than interest.
(1) Staff salaries Tk.80,000 per annum
(2) The room attendant’s salary is Tk.2 per day. The salary is paid daily and services of room
attendant are needed only when the room is occupied. There is one room attendant for one room.
3) Lighting, heating, and power. The normal lighting expense for a room if it is occupied for the
whole month is Tk. 50. Power is used only in winter and the normal charge per month if occupied
for a room is Tk.20.
(4) Repairs to building Tk.10,000 per annum
(5) Linen etc. Tk. 4,800 per annum
(6) Sundries Tk.6,600 per annum
(7) Interior decoration and furnishing Tk. 10,000 annually
(8) Cost of building Tk. 4,00,000; rate of depreciation 5 %
(9) Other equipment Tk. 1,00,000; rate of depreciation 10 %
(10) Interest @ 5% may be charged on its investment of Tk. 5,00,000 in the building and
equipment.
(11) There are 100 rooms in the hotel and 80 % of the rooms are normally occupied in
summer and 30% are busy in winter. You may assume that summer and winter are six
months each. Normal days in a month may be assumed to be 30.
 Operating Cost Statement

Particulars Amount in Tk.

Staff Salaries………………………………………………………………………………………….. 80,000
Room attendant Salaries ( See working Note) ……………………………………….. 39,600
Lighting, heating, and power( See working Note) …………………………………. 36,600
Repairs to building …………………………………………………………………………………. 10,000
Linen etc. ………………………………………………………………………………………………… 4,800
Sundries ……………………………………………………………………………. 6,600
Interior decoration and furnishing---------------------------------------------------- 10,000
Depreciation…………………………………………………………………………………………… 30,000
Interest on investment (5% on Tk.5,00,000) 25,000
2,42,600
Add: 25 % profit on cost other than interest (See Working Note) 54,400
2,97,000
Total Cost
Room attendant Salaries
For summers - 100×80%×30×6×2 = Tk.28,800
For winter - 100×30%×6×30×2 = Tk.10,800
Total = Tk.39,600
Lighting, heating, and power
Summer - 50×6×100×80% = Tk.24,000
Winter - 50×6×100×30% = Tk. 9,000
Power - 20×6×100×30% = Tk. 3,600
Total = Tk.36,600
Depreciation
Building =Tk.20,000
Other equipment = Tk.10,000
Total = Tk. 30,000
Profit Tk. (2, 42,600-25,000)×25% = Tk. 54,400
No of Room Days
No. of Rooms x Percentage x days in a month x no. of months
Summer: 100 x 80% x 30 x 6 = 14,400
Winter: 100 x 30% x 30 x 6 = 5,400
Total room days = 19,800
Calculation of Room rent per day
Rent per room for one day = Total Cost ÷ No. of room days
= 2, 97,000 ÷ 19,800
= Tk.15 per day