8

Operating Costing

BASIC CONCEPTS AND FORMULAE

Basic Concepts
1. Operating Costing: It is a method of ascertaining costs of providing or operating a
service. This method of costing is applied by those undertakings which provide
services rather than production of commodities.
2. Cost units:
Transport service − Passenger km., quintal km., or tonne km.
Supply service − Kw hr., Cubic metre, per kg., per litre.
Hospital − Patient per day, room per day or per bed, per operation
etc.
Canteen − Per item, per meal etc.
Cinema − Per ticket.
Composite units i.e. tonnes kms., quintal kms. etc. may be computed in two ways.
3.. Multiple Costing: It refers to the method of costing followed by a business wherein
a large variety of articles are produced, each differing from the other both in regard
to material required and process of manufacture. In such cases, cost of each article
is computed separately by using, generally, two or more methods of costing.
Basic Formulas
1. Absolute (weighted average) tonnes-kms:
Absolute tonnes-kms., are the sum total of tonnes-kms., arrived at by multiplying
various distances by respective load quantities carried.
2. Commercial (simple average) tonnes-kms :
Commercial tonnes-kms., are arrived at by multiplying total distance kms., by
average load quantity.

© The Institute of Chartered Accountants of India

 8.2 Cost Accounting

Question 1
A Mineral is transported from two mines – 'A' and 'B' and unloaded at plots in a Railway
Station. Mine A is at a distance of 10 kms, and B is at a distance of 15 kms. from railhead
plots. A fleet of lorries of 5 tonne carrying capacity is used for the transport of mineral from the
mines. Records reveal that the lorries average a speed of 30 kms. per hour, when running and
regularly take 10 minutes to unload at the railhead. At mine 'A' loading time averages 30
minutes per load while at mine 'B' loading time averages 20 minutes per load.
Drivers' wages, depreciation, insurance and taxes are found to cost ` 9 per hour operated.
Fuel, oil, tyres, repairs and maintenance cost ` 1.20 per km.
Draw up a statement, showing the cost per tonne-kilometer of carrying mineral from each
mine.
Answer
Statement showing the cost per tonne-kilometer of
carrying mineral from each mine
Mine A Mine B
(`) (`)
Fixed cost per trip
(Driver's wages, depreciation, insurance
and taxes)
A: 1 hour 20 minutes @ ` 9 per hour 12
B: 1 hour 30 minutes @ ` 9 per hour 13.50
(Refer to working note 1)
Running and maintenance cost:
(Fuel, oil, tyres, repairs and maintenance)
A: 20 kms ` 1.20 per km. 24
B: 30 kms. ` 1.20 per km. ___ 36.00
Total cost per trip 36 49.50
Cost per tonne – km 0.72 0.66
(Refer to working note 2) (`36/50 tonnes kms) (`49.50/75 tonnes kms)
Working notes
Mine A Mine B
1. Total operated time taken per trip
Running time to & fro 40 minutes 60 minutes
⎛ 60 min utes ⎞ ⎛ 60 min utes ⎞
⎜⎜ 20 kms. × ⎟ ⎜⎜ 30 kms. × ⎟
⎝ 30 kms ⎟⎠ ⎝ 30 kms ⎟⎠
Unloading time 10 minutes 10 minutes

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 Operating Costing 8.3

Loading time 30 minutes 20 minutes

Total operated time 80 minutes or 90 minutes or
1 hour 20 minutes 1 hour 30 minutes
2. Effective tones – kms 50 75
(5 tonnes × 10 kms) (5 tonnes × 15 kms.)
Question 2
EPS is a Public School having 25 buses each plying in different directions for the transport of
its school students. In view of large number of students availing of the bus service, the buses
work two shifts daily both in the morning and in the afternoon. The buses are garaged in the
school. The workload of the students has been so arranged that in the morning, the first trip
picks up senior students and the second trip plying an hour later picks up junior students.
Similarly, in the afternoon, the first trip takes the junior students and an hour later the second
trip takes the senior students home.
The distance travelled by each bus, one way is 16 kms. The school works 24 days in a month
and remains closed for vacation in May and June. The bus fee, however, is payable by the
students for all the 12 months in a year.
The details of expenses for the year 2003-2004 are as under:
Driver's salary – payable for all the 12 in month. ` 5,000 per month per drive.
Cleaner's salary payable for all the 12 months `3,000 per month per cleaner
(one cleaner has been employed for every five buses).
Licence Fees, Taxes etc. ` 2,300 per bus per annum
Insurance Premium ` 15,600 per bus per annum
Repairs and Maintenance ` 16,400 per bus per annum
Purchase price of the bus ` 16,50,000 each
Life of the bus 16 years
Scrap value ` 1,50,000
Diesel Cost ` 18.50 per litre
Each bus gives an average of 10 kms per litre of diesel. The seating capacity of each bus is
60 students. The seating capacity is fully occupied during the whole year.
The school follows differential bus fees based on distance traveled as under:
Students picked up and Bus fee Percentage of students
dropped within the range of availing this facility
distance from the school
4 kms 25% of Full 15%
8 kms 50% of Full 30%
16 kms Full 55%

© The Institute of Chartered Accountants of India

 8.4 Cost Accounting

Ignore interest. Since the bus fees has to be based on average cost, you are required to
(i) Prepare a statement showing the expenses of operating a single bus and the fleet of 25
buses for a year.
(ii) Work out average cost per student per month in respect of:
(a) Students coming from a distance of upto 4 kms from the school.
(b) Students coming from a distance of upto 8 kms from the school; and
(c) Students coming from a distance of upto 16 kms from the school
Answer
(a) (i) EPS Public School
Statement showing the expenses of operating a single bus and
the fleet of 25 buses for a year
Particulars Per bus Fleet of 25 buses
per annum per annum
(` ) (` )
Running costs : (a)
Diesel 56,832 14,20,800
(Refer to working note 1)
Repairs & maintenance costs: (B) 16,400 4,10,000
Fixed charges:
Driver's salary 60,000 15,00,000
Cleaners salary 7,200 1,80,000
Licence fee, taxes etc. 2,300 57,500
Insurance 15,600 3,90,000
Depreciation 93,750 23,43,750
Total fixed charges: (C) 1,78,850 44,71,250
Total expenses: (A+B+C) 2,52,082 63,02,050
(ii) Average cost per student per month in respect of students coming from a
distance of:
a) 4 kms. from the school ` 59.34
(` 2,52,082 / 354 students × 12 months)
(Refer to working note 2)
b) 8 kms from the school ` 118.68
(` 59.34 ×2)
c) 16 kms from the school ` 237.36
(` 59.34 × 4)

© The Institute of Chartered Accountants of India

 Operating Costing 8.5

Working notes:
1. Calculation of diesel cost per bus:
No. of trips made by a bus each day 4
Distance travelled in one trip both ways 32 kms
(16 kms × 2 trips)
Distance traveled per day by a bus 128 kms
(32 kms × 4 shifts)
Distance traveled during a month 3,072 kms
(128 kms × 24 days)
Distance traveled per year 30,720 kms
(3,072 kms × 10 months)
No. of litres of diesel required per bus per year 3,072 litres
(30,720 kms / 10 kms)
Cost of diesel per bus per year ` 56,832
(3,072 litres × ` 18.50)
2. Calculation of number of students per bus:
Bus capacity of 2 trips 120 students
1/4th fare students 18 students
(15% × 120 students)
½ fare 30% students (equivalent to 1/4th fare students) 72 students
Full fare 55% students (equivalent to 1/4th fare students) 264 students
Total 1/4th fare students 354 students
Question 3
A transport company has a fleet of three trucks of 10 tonnes capacity each plying in different
directions for transport of customer's goods. The trucks run loaded with goods and return
empty. The distance travelled, number of trips made and the load carried per day by each
truck are as under:
Truck No. One way No. of trips Load carried
Distance Km per day per trip / day tonnes
1 16 4 6
2 40 2 9
3 30 3 8
The analysis of maintenance cost and the total distance travelled during the last two years is as
under

© The Institute of Chartered Accountants of India

 8.6 Cost Accounting

Year Total distance Maintenance Cost

travelled (`)
1 1,60,200 46,050
2 1,56,700 45,175
The following are the details of expenses for the year under review:
Diesel : ` 10 per litre. Each litre gives 4 km per litre of
diesel on an average.
Driver's salary : ` 2,000 per month
Licence and taxes : ` 5,000 per annum per truck
Insurance : ` 5,000 per annum for all the three vehicles.
Purchase Price per truck : ` 3,00,000 Life 10 years. Scrap value at the end of
life is ` 10,000.
Oil and sundries : ` 25 per 100 km run.
General Overhead : ` 11,084 per annum
The vehicles operate 24 days per month on an average.
Required
(i) Prepare an Annual Cost Statement covering the fleet of three vehicles.
(ii) Calculate the cost per km. run.
(iii) Determine the freight rate per tonne km. to yield a profit of 10% on freight
Answer
(i) Annual Cost Statement of three vehicles
(`)
Diesel 3,36,960
(Refer to working note I)
(1,34,784 kms / 4 km) × ` 10)
Oil & sundries 33,696
(1,34,784 kms/100 kms) × ` 25
Maintenance 39,696
(Refer to working note 2)
{(1,34,784 kms × 0.25P) + ` 6,000}
Drivers' salary 72,000
(` 2,000 × 12 months) × 3 trucks
Licence and taxes 15,000
Insurance 5,000

© The Institute of Chartered Accountants of India

 Operating Costing 8.7

Depreciation 87,000
(` 2,90,000/10 years) × 3 trucks
General overhead 11,084
Total annual cost 6,00,436
(ii) Cost per km. run
Total annual cos t of vehicles
Cost per kilometer run =
Total kilometre travelled annually

(Refer to working note 1)

` 6,00,436
= = ` 4.4548
1,34,784 Kms

(iii) Freight rate per tonne km (to yield a profit of 10% on freight)
Total annual cos t of three vehicles
Cost per tonne km. =
Total effective tonnes kms. per annum

` 6,00,436
(Refer to working note 1) = = ` 1.143
5,25,312 kms

Freight rate per tonne km. = ` 1.27

⎛ ` 1.143 ⎞
⎜ 9 ⎟ × 10
⎝ ⎠
Working notes:
1. Total kilometre travelled and tonnes kilometre (load carried) by three trucks in one year
Truck One way No. of trips Total distance Load carried Total effective
number distance in covered in km per trip / day in tonnes km
kms per day tonnes
1 16 4 128 6 384
2 40 2 160 9 720
3 30 3 180 8 720
Total 468 1824
Total kilometre travelled by three trucks in one year 1,34,784
(468 kms × 24 days × 12 months)
Total effective tonnes kilometre of load carried by three trucks during one year 5,25,312
(1,824 tonnes km × 24 days × 12 months)

© The Institute of Chartered Accountants of India

 8.8 Cost Accounting

2. Fixed and variable component of maintenance cost:

Difference in maintenanc e cost
Variable maintenance cost per km =
Difference in distance travelled

` 46,050 – ` 45,175
=
1,60,200 kms – 1,56,700 kms
= ` 0.25
Fixed maintenance cost = Total maintenance cost–Variable maintenance cost
= ` 46,050 – 1,60,200 kms × 0.25
= ` 6,000
Question 4
In order to develop tourism, ABCL airline has been given permit to operate three flights in a
week between X and Y cities (both side). The airline operates a single aircraft of 160 seats
capacity. The normal occupancy is estimated at 60% throughout the year of 52 weeks. The
one-way fare is ` 7,200. The cost of operation of flights are:
Fuel cost (variable) ` 96,000 per flight
Food served on board on non-chargeable basis ` 125 per passenger
Commission 5% of fare applicable for all booking
Fixed cost:
Aircraft lease ` 3,50,000 per flight
Landing Charges ` 72,000 per flight
Required:
(i) Calculate the net operating income per flight.
(ii) The airline expects that its occupancy will increase to 108 passengers per flight if the fare is
reduced to ` 6,720. Advise whether this proposal should be implemented or not.
Answer
No. of passengers 160×60/100 = 96
(`) (`)
(i) Fare collection 96×7,200 6,91,200
Variable costs:
Fuel 96,000
Food 96×125 12,000

© The Institute of Chartered Accountants of India

 Operating Costing 8.9

Commission 5% 34,560
Total variable Costs 1,42,560
Contribution per flight 5,48,640
Fixed costs: Lease 3,50,000
Crew 72,000 4,22,000
Net income per flight 1,26,640
(ii) Fare collection 108×6,720 7,25,760
Variable costs:
Fuel 96,000
Food 108×125 13,500
Commission @ 5% 36,288
Contribution 5,79,972
There is an increase in contribution by ` 31,332. Hence the proposal is acceptable
Question 5
A Club runs a library for its members. As part of club policy, an annual subsidy of upto ` 5 per
member including cost of books may be given from the general funds of the club. The
management of the club has provided the following figures for its library department.
Number of Club members 5,000
Number of Library members 1,000
Library fee per member per month ` 100
Fine for late return of books ` 1 per book per day
Average No. of books returned late per month 500
Average No. of days each book is returned late 5 days
Number of available old books 50,000 books
Cost of new books ` 300 per book
Number of books purchased per year 1,200 books
Cost of maintenance per old book per year ` 10

Staff details No. Per Employee

Salary per month (`)
Librarian 01 10,000
Assistant Librarian 03 7,000
Clerk 01 4,000

© The Institute of Chartered Accountants of India

 8.10 Cost Accounting

You are required to calculate:

(i) the cost of maintaining the library per year excluding the cost of new books;
(ii) the cost incurred per member per month on the library excluding cost of new books; and
(iii) the net income from the library per year.
If the club follows a policy that all new books must be purchased out of library revenue
(a) What is the maximum number of books that can be purchased per year and (b) How
many excess books are being purchased by the library per year?
Also, comment on the subsidy policy of the club.
Answer
Computation of total revenue
No. of library members No 1,000
Library fees per month ` 1,00,000
Late fees per month (500 × 5 × 1) ` 2,500
Total Revenue per month ` 1,02,500
Total Revenue per annum (1,02,500 × 12) ` 12,30,000
Computation of total cost
Staff details No. Salary per month Total cost
(`) (`)
Librarian 1 10,000 10,000
Assistant Librarian 3 7,000 21,000
Clerk 1 4,000 4,000
Total Staff cost per month 35,000
Total Staff cost per year (35,000 × 12) 4,20,000
No. Cost per book
Books maintenance cost 50,000 ` 10 5,00,000
Total maintenance cost per annum excluding
cost of new books (4,20,000 + 5,00,000) 9,20,000
Cost incurred per library member per annum
(` 9,20,000/1,000) ` 920
Cost incurred per member per month on the library excluding
cost of new books (920/12) ` 76.67
Cost incurred per club member per annum (9,20,000/5,000) ` 184
Cost incurred per club member per month (184/12) ` 15.33
Net income from the library per annum
(12,30,000 – 9,20,000) ` 3,10,000

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 Operating Costing 8.11

Cost per new book ` 300

Maximum number of new books per annum (3,10,000/300) No. 1033.333
Present number of books purchased No. 1200
Excess books purchased (1200 – 1033.333) No. 166.6667
Subsidy being given per annum ` 50,000
Subsidy per library member per annum (50,000/1,000) ` 50
Subsidy per club member per annum (50,000/5,000) ` 10
Comment:
The club is exceeding its subsidy target to members by ` 45 (` 50 – 5) per library member
and ` 5 (` 10 – 5) per club member.
Question 6
A company runs a holiday home. For this purpose, it has hired a building at a rent of ` 10,000
per month alongwith 5% of total taking. It has three types of suites for its customers, viz.,
single room, double rooms and triple rooms.
Following information is given:
Type of suite Number Occupancy percentage
Single room 100 100%
Double rooms 50 80%
Triple rooms 30 60%
The rent of double rooms suite is to be fixed at 2.5 times of the single room suite and that of
triple rooms suite as twice of the double rooms suite.
The other expenses for the year 2006 are as follows:
(`)
Staff salaries 14,25,000
Room attendants’ wages 4,50,000
Lighting, heating and power 2,15,000
Repairs and renovation 1,23,500
Laundry charges 80,500
Interior decoration 74,000
Sundries 1,53,000
Provide profit @ 20% on total taking and assume 360 days in a year.
You are required to calculate the rent to be charged for each type of suite.

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 8.12 Cost Accounting

Answer
(i) Total equivalent single room suites
Nature of suite Occupancy Equivalent single room
suites
Single room suites 100 × 360 × 100% = 36,000 36,000 × 1 = 36,000
Double rooms suites 50 × 360 × 80% = 14,400 14,400 × 2.5 = 36,000
Triple rooms suites 30 × 360 × 60% = 6,480 6,480 × 5 = 32,400
Total 1,04,400
(ii) Statement of total cost:
(`)
Staff salaries 14,25,000
Room attendant’s wages 4,50,000
Lighting, heating and power 2,15,000
Repairs and renovation 1,23,500
Laundry charges 80,500
Interior decoration 74,000
Sundries 1,53,000
25,21,000
Building rent 10,000 × 12 + 5% on total taking 1,20,000
+ 5% on takings
Total cost 26,41,000 + 5% on total takings
Profit is 20% of total takings
∴ Total takings = ` 26,41,000 + 25% of total takings
Let x be rent for single room suite
Then 1,04,400 x = 26,41,000 + 25% of (1,04,400 x)
or 1,04,400 x = 26,41,000 + 26,100 x
or 78,300 x = 26,41,000
or x = 33.73
(ii) Rent to be charged for single room suite = ` 33.73
Rent for double rooms suites ` 33.73 × 2.5 = ` 84.325
Rent for triple rooms suites ` 33.73 × 5 = ` 168.65

© The Institute of Chartered Accountants of India

 Operating Costing 8.13

Question 7
(a) A transport company has 20 vehicles, which capacities are as follows:
No. of Vehicles Capacity per vehicle
5 9 tonne
6 12 tonne
7 15 tonne
2 20 tonne
The company provides the goods transport service between stations ‘A’ to station ‘B’.
Distance between these stations is 200 kilometres. Each vehicle makes one round trip
per day an average. Vehicles are loaded with an average of 90 per cent of capacity at
the time of departure from station ‘A’ to station ‘B’ and at the time of return back loaded
with 70 per cent of capacity. 10 per cent of vehicles are laid up for repairs every day.
The following information are related to the month of October, 2008:
Salary of Transport Manager ` 30,000
Salary of 30 drivers ` 4,000 each driver
Wages of 25 Helpers ` 2,000 each helper
Wages of 20 Labourers ` 1,500 each labourer
Consumable stores ` 45,000
Insurance (Annual) ` 24,000
Road Licence (Annual) ` 60,000
Cost of Diesel per litre ` 35
Kilometres run per litre each vehicle 5 Km.
Lubricant, Oil etc. ` 23,500
Cost of replacement of Tyres, Tubes, other parts etc. ` 1,25,000
Garage rent (Annual) ` 90,000
Transport Technical Service Charges ` 10,000
Electricity and Gas charges ` 5,000
Depreciation of vehicles ` 2,00,000
There is a workshop attached to transport department which repairs these vehicles and
other vehicles also. 40 per cent of transport manager’s salary is debited to the workshop.
The transport department is charged ` 28,000 for the service rendered by the workshop
during October, 2008. During the month of October, 2008 operation was 25 days.
You are required:
(i) Calculate per ton-km operating cost.

© The Institute of Chartered Accountants of India

 8.14 Cost Accounting

(ii) Find out the freight to be charged per ton-km, if the company earned a profit of 25
per cent on freight.
Answer
(a) (i) Operating Cost Sheet
for the month of October, 2008
Particulars Amount
(` )
A. Fixed Charges:
60 18,000
Manager’s salary: ` 30,000 ×
100
Drivers’ Salary : ` 4,000 × 30 1,20,000
Helpers’ wages : ` 2,000 × 25 50,000
Labourer wages : ` 1,500 × 20 30,000
` 24,000 2,000
Insurance :
12
Rs` 60,000 5,000
Road licence :
12
Rs` 90,000 7,500
Garage rent:
12
Transport Technical Service Charges 10,000
Share in workshop expenses 28,000
Total (A) 2,70,500
B. Variable Charges:
Cost of diesel 12,60,000
Lubricant, Oil etc. 23,500
Depreciation 2,00,000
Replacement of Tyres, Tubes & other parts 1,25,000
Consumable Stores 45,000
Electricity and Gas charges 5,000
Total (B) 16,58,500
C. Total Cost (A + B) 19,29,000
D. Total Ton-Kms. 18,86,400
E. Cost per ton-km. (C/D) 1.022

© The Institute of Chartered Accountants of India

 Operating Costing 8.15

(ii) Calculation of Chargeable Freight

Cost per ton-km. ` 1.022
Add: Profit @ 25% on freight or 33⅓% on cost ` 0.341
Chargeable freight per ton-km. ` 1.363 or ` 1.36
Workings:
1. Cost of Diesel:
Distance covered by each vehicle during October, 2008 = 200 × 2 × 25 ×
90/100 = 9,000 km.
9,000 × 20
Consumption of diesel = = 36,000 litres.
5
Cost of diesel = 36,000 × ` 35 = ` 12,60,000.
2. Calculation of total ton-km:
Total Ton-Km. = Total Capacity × Distance covered by each vehicle × Average
Capacity Utilisation ratio.

= [(5 × 9) + (6 × 12) + (7 × 15) + (2 × 20)]× 9,000 × (90% + 70% )

2
= (45 + 72 + 105 + 40) × 9,000 × 80%
= 262 × 9,000 × 80%.
= 18,86,400 ton-km.
Question 8
Calculate total passenger kilometres from the following information:
Number of buses 6, number of days operating in a month 25, trips made by each bus per day
8, distance covered 20 kilometres (one side), capacity of bus 40 passengers, normally 80% of
capacity utilization.
Answer
Calculation of passenger kilometers:
6 × 25 × 8 × 2 × 20 × 40 × 80% = 15,36,000 passenger kms.
Question 9
A lorry starts with a load of 24 tonnes of goods from station A. It unloads 10 tonnes at station
B and rest of goods at station C. It reaches back directly to station A after getting reloaded
with 18 tonnes of goods at station C. The distance between A to B, B to C and then from C to

© The Institute of Chartered Accountants of India

 8.16 Cost Accounting

A are 270 kms, 150 kms and 325 kms respectively. Compute ‘Absolute tonnes kms’ and
‘Commercial tones-kms’.
Answer
Absolute tonnes kms
= tonnes (unit of weight) ×Km (Unit of distance)
= 24 tonnes × 270 kms
+ 14 tonnes × 150 kms
+ 18 tonnes × 325 kms
= 6480 + 2100 + 5850
= 14430 tonnes kms
Commercial Tonnes kms
= Average load × total kms travelled
⎛ 24 + 14 + 18 ⎞
=⎜ ⎟ tonnes × 745 kms
⎝ 3 ⎠
= 13906.67 Tonnes km
Question 10
Explain briefly, what do you understand by Operating Costing. How are composite units
computed?
Answer
Operating Costing: It is method of ascertaining costs of providing or operating a service. This
method of costing is applied by those undertakings which provide services rather than
production of commodities. This method of costing is used by transport companies, gas and
water works departments, electricity supply companies, canteens, hospitals, theatres, schools
etc.
Composite units may be computed in two ways:
(a) Absolute (weighted average) tones kms, quintal kms etc.
(b) Commercial (simple average) tones kms, quintal kms etc.
Absolute tonnes-kms are the sum total of tonnes kms arrived at by multiplying various
distances by respective load quantities carried.
Commercial tonnes-kms, are arrived at by multiplying total distance kms, by average load
quantity.

© The Institute of Chartered Accountants of India

 Operating Costing 8.17

Question 11
A transport company has been given a 40 kilometre long route to run 5 buses. The cost of
each bus is ` 6,50,000. The buses will make 3 round trips per day carrying on an average 80
percent passengers of their seating capacity. The seating capacity of each but is 40
passengers. The buses will run on an average 25 days in a month. The other information for
the year 2010-11 are given below:
Garage rent ` 4,000 per month
Annual repairs and maintenance ` 22,500each bus
Salaries of 5 drivers ` 3,000 each per month
Wages of 5 conductors ` 1,200 each per month
Manager’s salary ` 7,500 per month
Road tax, permit fee, etc. ` 5,000 for a quarter
Office expenses ` 2,000 per month
Cost of diesel per litre ` 33
Kilometre run per litre for each but 6 kilometres
Annual depreciation 15% of cost
Annual Insurance 3% of cost
You are required to calculate the bus fare to be charged from each passenger per kilometre, if
1
the company wants to earn profits of 33 percent on taking (total receipts from passengers).
3
Answer
Operating Cost Sheet
for the year 2010- 11
(Total Passenger Km = 115,20,000)
Particulars Total Cost (`) Cost per
Passenger- Km
(`)
A. Fixed Charges:
Garage rent (4,000 × 12) 48,000
Salary of drivers (3,000 ×5×12) 1,80,000
Wages of Conductors (1200×5×12) 72,000
Manager’s salary (7,500 × 12) 90,000
Road Tax, Permit fee, etc. (5,000×4) 20,000
Office expenses (2,000× 12) 24,000
3 97,500
Insurance (6,50,000 × × 5)
100
Total A 5,31,500 0.046

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 8.18 Cost Accounting

B. Variable Charges:
Repairs and Maintenance (22,500 ×5) 1,12,500 0.010
15 4,87,500 0.042
Depreciation (6,50,000 × × 5)
100
3,60,000 19,80,000 0.172
Diesel: × Rs.33
6
Total B 25,80,000 0.224
Total Cost (A+B) 31,11,500 0.270
1
Add: 33 per cent Profit on takings or 50% on 15,55,750 0.135
3
cost
Bus fare to be charged from each passenger per 46,67,250 0.405
km
Working Notes:
(i) Total Kilometres to be run during the year 2010-11
= 40× 2 ×3×25×12×5 = 3, 60,000 Kilometres
(ii) Total passenger Kilometres
80
= 3, 60,000 × 40 × =1, 15, 20,000 Passenger km.
100

EXERCISE

Questions for Practice

1. Distinguish between Operating Costing and Operation Costing.
Answer: Refer to ‘Chapter No. 6 i.e. Method of Costing I’ of Study Material.
2. (a) What do you understand by Operating Costs? Describe its essential features and state where it can
be usefully implemented.
(b) A chemical factory runs its boiler on furnace oil obtained from Indian Oil and Bharat Petroleum, whose
depots are situated at a distance of 12 and 8 miles from the factory site. Transportation of Furnace
Oil is made by the Company's own tank lorries of 5 tons capacity each. Onward trips are made only
on full load and the lorries return empty. The filling-in time takes an average 40 minutes for Indian Oil
and 30 minutes for Bharat Petroleum. But the emptying time in the factory is only 40 minutes for all.
From the record available it is seen that the average speed of the company's lorries works out to 24
miles per hour. The varying operating charges average 60 paise per mile covered and fixed charges
give an incidence of ` 7.50 per hour of operation. Calculate the cost per ton mile for each source.
Answer: (a) Refer to ‘Chapter No. 6 i.e. Method of Costing I’ of Study Material.
(b) Indian Oil Bharat Petroleum
Cost per ton mile 53 paise (Approx.) 58.00 paise (Approx)

© The Institute of Chartered Accountants of India

 Operating Costing 8.19

3. SMC is a public school having five buses each plying in different directions for the transport of its school
students. In view of a large number of students availing of the bus service, the buses work two shifts daily
both in the morning and in the afternoon. The buses are garaged in the school. The work-load of the
students has been so arranged that in the morning the first trip picks up the senior students and the second
trip plying an hour later picks up the junior students. Similarly in the afternoon the first trip drops the junior
students and an hour later the second trip takes the senior students home.
The distance travelled by each bus one way in 8 kms. The school works 25 days in a month and remains
closed for vacation in May, June and December. Bus fee, however, is payable by the students for all the 12
months of the year.
The details of expenses for a year are as under:
Driver's salary ` 450 per month per driver
Cleaner's salary ` 350 per month
(Salary payable for 12 months)
(One cleaner employed for all the five buses)
License fee, taxes etc. ` 860 per bus per annum
Insurance ` 1,000 per bus per annum
Repairs & Maintenance ` 3,500 per bus per annum
Purchase price of bus ` 1,50,000 each
(Life 12 years)
Scrap value ` 30,000
Diesel cost ` 2.00 per litre.
Each bus gives an average mileage of 4 kms per litre of diesel.
Seating capacity of each bus is 50 students.
The seating capacity is fully occupied during the whole year.
Students picked up and dropped within a range upto 4 kms. of distance from the school are charged half
fare and fifty percent of the students travelling in each trip are in this category. Ignore interest. Since the
charges are to be based on average cost, you are required to:
(i) Prepare a statement showing the expenses of operating a single bus and the fleet of five buses for a
year.
(ii) Work out the average cost per student per month in respect of
(A) Students coming from a distance of upto 4 kms. from the school and
(B) Students coming from a distance beyond 4 kms. from the school
Answer: Per Bus Per Annum Fleet of 5 buses p.a.
Total Cost (`) 28800 144000

Cost per student (full fee) ` 32.00 ` 32.00

4. SHANKAR has been promised a contract to run a tourist car on a 20 km. long route for the chief executive
of a multinational firm. He buys a car costing ` 1,50,000. The annual cost of insurance and taxes are `
4,500 and ` 900 respectively. He has to pay ` 500 per month for a garage where he keeps the car when it
is not in use. The annual repair costs are estimated at ` 4,000. The car is estimated to have a life of 10
years at the end of which the scrap value is likely to be ` 50,000.
He hires a driver who is to be paid ` 300 per month plus 10% of the takings as commission. Other incidental
expenses are estimated at ` 200 per month.

© The Institute of Chartered Accountants of India

 8.20 Cost Accounting

Petrol and oil will cost ` 100 per 100 kms. The car will make 4 round trips each day. Assuming that a profit
of 15% on takings is desired and that the car will be on the road for 25 days on an average per month, what
should he charge per round-trip?
Answer: charge per round trip ` 88.22
5. The Union Transport Company has been given a twenty kilometer long route to play a bus. The bus costs
the company ` 1,00,000. It has been insured at 3% per annum. The annual road tax amounts to ` 2,000.
Garage rent is ` 400 per month. Annual repair is estimated to cost ` 2,360 and the bus is likely to last for
five years.
The salary of the driver and the conductor is `600 and ` 200 per month respectively in addition to 10% of
takings as commission to be shared equally by them. The manager's salary is `1,400 per month and
stationery will cost ` 100 per month. Petrol and oil cost ` 50 per 100 kilometers. The bus will make three
round trips per day carrying on an average 40 passengers in each trip. Assuming 15% profit on takings and
that the bus will ply on an average 25 days in a month, prepare operating cost statement on a full year basis
and also calculate the bus fare to be charged from each passenger per kilometer.
Answer: Rate to be charged per kilometer from each passenger 7.2 Paise
6. A company is considering three alternative proposals for conveyance facilities for its sales personnel who
have to do considerable travelling, approximately 20,000 kilometers every year. The proposals are as
follows:
(i) Purchase and maintain of its own fleet of cars. The average cost of a car is ` 1,00,000.
(ii) Allow the executive to use his own car and reimburse expenses at the rate of ` 1.60 paise per
kilometre and also bear insurance costs.
(iii) Hire cars from an agency at ` 20,000 per year per car. The Company will have to bear costs of petrol,
taxes and tyres.
The following further details are available:
Petrol ` 0.60 per km.
Repairs and maintenance ` 0.20 P per km.
Tyre rs. 0.12 P per km.
Insurance ` 1,200 per car per annum.
Taxes ` 800 per car per annum.
Life of the car: 5 years with annual mileage of 20,000 kms.
Resale value : ` 20,000 at the end of the fifth year.
Work out the relative costs of three proposals and rank them.
Answer: I II III
Cost for 2,000 Kms. `36,400 ` 33,200 ` 35,200
Ranking of alternative proposals III I II
7. Prakash Automobiles distributes its goods to a regional dealer using a single Lorry. The dealer's premises
are 40 kilometres away by road. The lorry has a capacity of 10 tonnes and makes the journey twice a day
fully loaded on the outward journeys and empty on return journeys. The following information is available for
a Four Weekly period during the year 1990:–
Petrol consumption 8 kilometers per litre
Petrol cost ` 13 per litre
Oil ` 100 per week

© The Institute of Chartered Accountants of India

 Operating Costing 8.21

Driver's wages ` 400 per week

Repairs ` 100 per week
Garage rent ` 150 per week
Cost of Lorry (Excluding Tyres) ` 4,50,000
Life of Lorry 80,000 kilometres
Insurance ` 6,500 per annum
Cost of Tyres ` 6,250
Life of Tyres ` 25,000 kilometres
Estimated sale value of Lorry at the end of its life `50,000
Vehicle Licence Cost ` 1,300 per annum
Other overhead cost ` 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 kilometer and per tonne kilometer.
Answer: (a) Total running cost (`) 24,400
Total Fixed Cost(`) 4,400
(b) Cost per Kilometre ` 9
Cost per tonne Kilometre ` 1.80
8. An article passes through five hand operations as follows:
Operation No. Time per article Grade of worker Wage rate per hour
1 15 minutes A ` 0.65
2 25 minutes B ` 0.50
3 10 minutes C ` 0.40
4 30 minutes D ` 0.35
5 20 minutes E ` 0.30
The factory works 40 hours a week and the production target is 600 dozens per week. Prepare a statement
showing for each operation and in total the number of operators required, the labour cost per dozen and the
total labour cost per week to produce the total targeted output.
Answer: Total number of operators required 300
Labour cost of 600 dozens per week ` 5130
Labour cost per dozen ` 8.55
9. A truck starts with a load of 10 tonnes of goods from station P. It unloads 4 tonnes at station Q and rest of
the goods at station R. It reaches back directly to station P after getting reloaded with 8 tonnes of goods at
station R. The distances between P to Q, Q to R and then from R to P are 40 kms, 60 kms, and 80 kms,
respectively. Compute 'Absolute tonne-km' and 'Commercial tonne-km'.
Answer: Absolute tonnes-kms 1,400 tonnes – kms.
Commercial tonnes-kms 1,440 tonnes-kms
10. Global Transport Ltd. charges ` 90 per ton for its 6 tons truck lorry load from city 'A' to city 'B'. The charges
for the return journey are `84 per ton. No concession or reduction in these rates is made for any delivery of

© The Institute of Chartered Accountants of India

 8.22 Cost Accounting

goods at intermediate station 'C'. In January 1997 the truck made 12 outward journeys for city 'B' with full
load out of which 2 tones were unloaded twice in the way of city 'C'. The truck carried a load of 8 tons in its
return journey for 5 times but once caught by police and `1,200 was paid as fine. For the remaining trips the
truck carried full load out of which all the goods on load were unloaded once at city 'C'. The distance from
city 'A' to city 'C' and city 'B' are 140 kms and 300 kms respectively. Annual fixed costs and maintenance
charges are ` 60,000 and ` 12,000 respectively Running charges spent during January, 1997 are ` 2,944.
You are required to find out the cost per absolute ton-kilometre and the profit for January, 1997
Answer: Cost per absolute ton – km ` 0.20
Profit (`) 3,224
11. A transport service company is running five buses between two towns which are 50 kms apart. Seating capacity of
each bus is 50 passengers. The following particulars were obtained from their books for April, 1998:
(`)
Wages of drivers, conductors and cleaners 24,000
Salaries of office staff 10,000
Diesel oil and other oil 35,000
Repairs and Maintenance 8,000
Taxation, Insurance etc. 16,000
Depreciation 26,000
Interest and other expenses 20,000
1,39,000
Actually, passengers carried were 75 percent of seating capacity. All buses ran on all days of the month.
Each bus has made one round trip per day.
Find out the cost per passenger km.
Answer: Cost per passenger Km. ` 0.2471
12. A transport Service Company is running 4 buses between towns which are 50 kms. apart. Seating capacity
of each bus is 40 passengers. The following particulars were obtained from their books for April 2006,
(`)
Wages of Drivers, Conductors and Cleaners 2,400
Salaries of Officer and Supervisory Staff 1,000
Diesel oil and other oil 4,000
Repairs and Maintenance 800
Taxations, Insurance, etc. 1,600
Depreciation 2,600
Interest and other charges 2,000
14,400
Actual passengers carried were 75% of the seating capacity. All the buses run on all the days of the month.
Each bus made one round trip per day. Find out the costs per passenger-km.
Answer: ` 351.85.

© The Institute of Chartered Accountants of India