Unit 3: Service Costing (Operating Costing)
Meaning
This costing method is used to ascertain the cost of rendering a unit of service. Operating
costing is used by undertakings which do not manufacture but render service.
Definition
According to CIMA It applies where standardized services are rendered either by an undertaking or by a
service cost center with in an undertaking.
The following are the examples of undertakings using operating costing method of ascertainment of cost.
(d) Transport Service- Roadways, Railways, Shipping, and Airways.
(e) Public Utility Service- Gas, Electricity, Water supply, hospitals.
(f) Catering Establishment- Hotels, Canteen.
Operating costing is similar to unit costing method. Cost of rendering a unit of service
can be ascertained by the preparation of a Cost Sheet.
The cost of operating is enumerated for a period say monthly, quarterly etc. They are
related to the service rendered during that period.
The build-up of cost depends upon whether only the service is rendered or whether
the service is first produced and then rendered. For example; in case of electric supply
company, electricity is first generated and then distributed.
The cost is build-up of –
1. Fixed Cost or standing charges.
2. Semi-fixed
3. Variable or Running or Operating charges
Characteristics of service or operating costing
1. Services are unique and Standardised type.
2. Large capital is invested
3. Less working capital required
4. Distinction between fixed and variable cost is of particular importance.
Cost Units
The selection of a suitable cost unit ( unit of service) is very important. The cost units may be of the
following two types:
(1) Simple cost unit: A few examples are given below:
1. Transport - Per kilometre or per mile
2. Water works - Per 1,000 litres
3. Municipality - Per km of road maintained
4. Canteen - Per meal or per dish
(2) Composite cost unit: In service undertakings, generally a composite cost unit is used. In this type, two
units are rolled into one. For example, in a transport company, weight of goods as well as distance
covered should be taken into account in evolving a cost unit, i.e., a tonne-kilometre, which means 1 tonne
of goods transported to 1 km. Other examples are:
1. Transport - Per passenger-km or Per tonne-km
2. Hospital - Per bed per day
3.Hotel - Per Room per day
4. Cinema - Per seat per show (or per man show)
5. Electricity - Per kilowatt hour (kWh)
Transport Costing
Transport undertakings provides transport services and methods of ascertaining cost in these undertakings
is known as transport costing.
Objectives
1. To know operating cost of running a vehicle per kilometre.
2. To fix the rates of cartage of goods or passenger.
3. To decide the hire charges were vehicles are given on hire.
4. To compare the cost of own vehicles or other mode.
5. To determine the cost to be charged to departments which use internal transport facilities.
Daily Log sheet
It is a record which is generally maintained by the driver of the vehicle on daily basis. The details of
journeys, running time, capacity, distance covered , cost of petrol/diesel , lubricants, accidents, loading &
unloading time etc are to be maintained in this record.
Procedures:
1. Determination of Cost units
2. Compilation of cost ( Fixed, semi fixed and variable)
3. Determination of cost per unit of services
Hospital Costing
All organizational units must provide medical services to the existing employees of an organization. The
medical services are provided on the basis of functions performed, although the main function of a hospital
is to provide medical service. Each department has a separate cost unit and cost of service of each
department is ascertained independently of the other. However, costs of medical services are apportioned
to administration, dispensary, transport etc. on most equitable basis.
Costing for educational institutions
Educational institutions like schools, colleges, technical institutes for education and training, are run to
impart education and training to students. The objective of running these institutions may be ‘Not-for
profit’ or ‘For profit’. Like other business entities, cost and management accounting is also inevitable for
this sector. The source of income of an institute may be classified on the basis of recurrence as follows:
One-time fees such as Admission fee, Development fee, Annual fee etc.
Recurring fees i.e. Tuition fee, laboratory, computer and internet fee, library fee, training fee, amenities
fee, sports fee, extracurricular activities fee etc.
Other indirect incomes like transport, hostel, mess and canteen for the students and staff are provided by
the educational institutions normally on no profit no loss basis.
Service industry Unit of cost (examples)
Passenger- km., (In public transportation) Quintal- km., or Ton- km. (In
Transport Services
goods carriage)
Electricity Supply service Kilowatt- hour (kWh)
Hospital Patient per day, room per day or per bed, per operation etc.
Canteen Per item, per meal etc.
Cinema Per ticket.
Hotels Guest Days or Room Days
Bank or Financial Per transaction, per services (e.g. per letter of credit, per application, per
Institutions project etc.)
Educational Institutes Per course, per student, per batch, per lecture etc.
IT & ITES Cost per project, per module etc.
Insurance Per policy, Per claim, Per TPA etc.
Format of Transportation Costing
Specimen of Operating cost sheet
Vehicle Number period
Cost unit No of cost units
Per Km (Rs)
Total (Rs)
Fixed Cost ( Standing charges )
Garage rent XXX XXX
Road tax XXX XXX
Insurance XXX XXX
Manager's salary XXX XXX
Office expenses XXX XXX
Interest on capital XXX XXX
Driver's wages XXX XXX
Total (A) XXX XXX
Variable Cost ( Running Charges)
Depreciation XXX XXX
Petrol & Diesel XXX XXX
Lubricant oil XXX XXX
Repairs & Maintenance XXX XXX
Tyres & Tubes XXX XXX
Total (A) XXX XXX
Grand Total ( A +B) XXX XXX
Calculation of passenger Kilometer
Passenger Km = No of buses or trucks X Distance X Capacity X % of carrying X No. of
days
