Operating Costing: Definition, Classification of Operating Cost

what is operating costingOperating Costing is a method of ascertaining the costs of providing or operating a service. This method of costing is applied by those undertakings which provide services rather than the production of goods.

Such undertakings, for example, are; transport concerns, gas agencies; electricity suppliers; hospitals; theatres, etc.

Because of the varied nature of activities carried out by the service undertakings, the cost system used is different from that followed in manufacturing concerns.

Industries which are suitable or applicable for operating costing are;

  1. Transport service: Bus, taxi, truck, railways, etc.
  2. Welfare services: Canteens, hospitals, libraries.
  3. Utility suppliers: Gas, Electricity, water.
  4. Municipal services: Street lighting, road maintenance.

Classification of Operating Cost

The operating costs can be classified into three categories. For example, in the case of a transport undertaking, these three categories are as follows:

  1. Operating and running charges – It includes expenses of variable nature. For example:
    • expenses on petrol, diesel.
    • Lubricating oil, and grease, etc.
    • Wages of the driver, conductor, etc. (If payment is based on time or distance of trips).
    • The commission is taking on the bridge (Toll).
    • Depreciation (If allocated based on mileage run and treated as variable expenses).
  2. Maintenance charges – These expenses are semi-variable and include the cost of:
    • tires and tubes,
    • repairs and maintenance,
    • spares and accessories, overhaul, etc.
  3. Fixed or standing charges – These costs are fixed in nature though the operation is on standing position, which includes:
    • garage rent,
    • insurance,
    • road license,
    • depreciation,
    • interest on capital,
    • administrative overheads
    • motor vehicle tax
    • garage rent
    • general supervision
    • salary of an operating manager, supervisor, etc.

In the case of transport costing the following formulas are applicable:

  1. Run Kilometers = (No. of vehicle x Distance x NO. of Trips x Working Days)
  2. Passenger Kilometers = (No. of vehicle x Distance x NO. of Trips x Working Days x Actual Passenger Carried)
  3. Ton Kilometers = (No. of vehicle x Distance x NO. of Trips x Working Days x Goods Carried)

Unit Cost Under Operating Costing

Service NameCost Unit
1. Passenger-transport servicePassenger kilometer
2. Goods transport serviceTon kilometer
3. Electricity supplyKilowatt-hour
4. Canteen serviceMan-meal
5. HospitalPer patient bed per day
6. Educational institutionPer student
7. Private transportRunning g hour, trip, kilometer

Distinguish between Operating Costing and Operation Costing.

Operating Costing

It is a method of costing applied by undertakings that provide service rather than the 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 waterworks, electricity supply companies, canteens, hospitals, theatres, schools, etc.

Within an organization itself, certain departments to are known as service departments that provide ancillary services to the production departments.

For example, maintenance department; powerhouse; boiler house; canteen; hospital; internal transport.

Operation Costing

It represents a refinement of process costing. In this, each operation instead of each process of the stage of production is separately costed. This may offer better scope for control.

At the end of each operation, the unit operation cost may be computed by dividing the total operation cost by total output.

Format of Statement of Operating Cost

Statement of Operating Cost
For one month

Particulars$Total Cost ($)Cost per km ($)
Fixed/ standing cost
Salary of manager****
Salary of accountant****
Salary of cleaner****
Salary of mechanic****
Garage rent****
Driver’s salary****
Maintenance cost
Repair Expense****
Maintenance expense****
Tires and tubes****
Servicing and cleaning****
Store parts and components************
Operating or variable expenses
Oil and sundries****
Lubricating oil****
Cost per ton-km********

Format of Statement of Operating Cost

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