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
etc.
−
Patient per day, room per day or per bed, per operation
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
(`)
Fixed cost per trip
(Driver's wages, depreciation, insurance
and taxes)
12
A: 1 hour 20 minutes @ ` 9 per hour
B: 1 hour 30 minutes @ ` 9 per hour
(Refer to working note 1)
Running and maintenance cost:
(Fuel, oil, tyres, repairs and maintenance)
24
A: 20 kms ` 1.20 per km.
___
B: 30 kms. ` 1.20 per km.
Total cost per trip
36
Cost per tonne – km
0.72
(Refer to working note 2)
(`36/50 tonnes kms)
Working notes
Mine A
1.
Total operated time taken per trip
Running time to & fro
Unloading time
Mine B
(`)
13.50
36.00
49.50
0.66
(`49.50/75 tonnes kms)
Mine B
40 minutes
60 minutes
⎛
60 min utes ⎞
⎟
⎜⎜ 20 kms. ×
30 kms ⎟⎠
⎝
10 minutes
⎛
60 min utes ⎞
⎟
⎜⎜ 30 kms. ×
30 kms ⎟⎠
⎝
10 minutes
© The Institute of Chartered Accountants of India
Operating Costing
Loading time
Total operated time
2.
30 minutes
80 minutes or
1 hour 20 minutes
50
(5 tonnes × 10 kms)
Effective tones – kms
8.3
20 minutes
90 minutes or
1 hour 30 minutes
75
(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.
`3,000 per month per cleaner
Cleaner's salary payable for all the 12 months
(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
` 16,400 per bus per annum
Repairs and Maintenance
Purchase price of the bus
` 16,50,000 each
Life of the bus
16 years
Scrap value
` 1,50,000
` 18.50 per litre
Diesel Cost
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
dropped within the range of
distance from the school
4 kms
8 kms
16 kms
Bus fee
Percentage of students
availing this facility
25% of Full
50% of Full
Full
15%
30%
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
(ii)
Per bus
per annum
(` )
Fleet of 25 buses
per annum
(` )
Running costs : (a)
Diesel
56,832
(Refer to working note 1)
Repairs & maintenance costs: (B)
16,400
Fixed charges:
Driver's salary
60,000
Cleaners salary
7,200
Licence fee, taxes etc.
2,300
Insurance
15,600
Depreciation
93,750
Total fixed charges: (C)
1,78,850
Total expenses: (A+B+C)
2,52,082
Average cost per student per month in respect of students
distance of:
14,20,800
4,10,000
15,00,000
1,80,000
57,500
3,90,000
23,43,750
44,71,250
63,02,050
coming from a
a)
4 kms. from the school
(` 2,52,082 / 354 students × 12 months)
(Refer to working note 2)
` 59.34
b)
8 kms from the school
(` 59.34 ×2)
` 118.68
c)
16 kms from the school
(` 59.34 × 4)
` 237.36
© The Institute of Chartered Accountants of India
Operating Costing
8.5
Working notes:
1.
Calculation of diesel cost per bus:
2.
No. of trips made by a bus each day
Distance travelled in one trip both ways
(16 kms × 2 trips)
Distance traveled per day by a bus
(32 kms × 4 shifts)
Distance traveled during a month
(128 kms × 24 days)
Distance traveled per year
(3,072 kms × 10 months)
No. of litres of diesel required per bus per year
(30,720 kms / 10 kms)
Cost of diesel per bus per year
(3,072 litres × ` 18.50)
Calculation of number of students per bus:
4
32 kms
128 kms
3,072 kms
30,720 kms
3,072 litres
` 56,832
Bus capacity of 2 trips
1/4th fare students
(15% × 120 students)
½ fare 30% students (equivalent to 1/4th fare students)
Full fare 55% students (equivalent to 1/4th fare students)
Total 1/4th fare students
120 students
18 students
72 students
264 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
Distance Km
No. of trips
per day
Load carried
per trip / day tonnes
1
2
3
16
40
30
4
2
3
6
9
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
Total distance
travelled
Year
Maintenance Cost
(`)
46,050
45,175
1
1,60,200
2
1,56,700
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
(Refer to working note I)
(1,34,784 kms / 4 km) × ` 10)
Oil & sundries
(1,34,784 kms/100 kms) × ` 25
Maintenance
(Refer to working note 2)
{(1,34,784 kms × 0.25P) + ` 6,000}
Drivers' salary
(` 2,000 × 12 months) × 3 trucks
Licence and taxes
Insurance 5,000
© The Institute of Chartered Accountants of India
(`)
3,36,960
33,696
39,696
72,000
15,000
Operating Costing
Depreciation
(` 2,90,000/10 years) × 3 trucks
General overhead
Total annual cost
(ii) Cost per km. run
8.7
87,000
11,084
6,00,436
Cost per kilometer run
=
Total annual cos t of vehicles
Total kilometre travelled annually
=
` 6,00,436
= ` 4.4548
1,34,784 Kms
(Refer to working note 1)
(iii) Freight rate per tonne km (to yield a profit of 10% on freight)
Cost per tonne km.
=
Total annual cos t of three vehicles
Total effective tonnes kms. per annum
(Refer to working note 1)
=
` 6,00,436
= ` 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
number
One way
distance in
kms
No. of trips
Total distance
covered in km
per day
Load carried
per trip / day in
tonnes
Total effective
tonnes km
1
2
3
Total
16
40
30
4
2
3
128
160
180
468
6
9
8
384
720
720
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
2.
Cost Accounting
Fixed and variable component of maintenance cost:
Variable maintenance cost per km
Fixed maintenance cost
=
Difference in maintenanc e cost
Difference in distance travelled
=
` 46,050 – ` 45,175
1,60,200 kms – 1,56,700 kms
=
` 0.25
= 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)
Food served on board on non-chargeable basis
` 96,000 per flight
` 125 per passenger
Commission
5% of fare applicable for all booking
Fixed cost:
Aircraft lease
Landing Charges
` 3,50,000 per flight
` 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
Commission 5%
34,560
Total variable Costs
1,42,560
Contribution per flight
5,48,640
Fixed costs: Lease
3,50,000
Crew
(ii)
8.9
72,000
4,22,000
Net income per flight
1,26,640
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
Number of Library members
Library fee per member per month
Fine for late return of books
Average No. of books returned late per month
Average No. of days each book is returned late
Number of available old books
Cost of new books
Number of books purchased per year
Cost of maintenance per old book per year
Staff details
No.
Librarian
Assistant Librarian
Clerk
01
03
01
© The Institute of Chartered Accountants of India
5,000
1,000
` 100
` 1 per book per day
500
5 days
50,000 books
` 300 per book
1,200 books
` 10
Per Employee
Salary per month (`)
10,000
7,000
4,000
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
Library fees per month
`
`
Late fees per month (500 × 5 × 1)
Total Revenue per month
`
`
Total Revenue per annum (1,02,500 × 12)
Computation of total cost
Staff details
Librarian
Assistant Librarian
Clerk
Total Staff cost per month
Total Staff cost per year (35,000 × 12)
No.
1
3
1
Salary per month
(`)
10,000
7,000
4,000
No.
50,000
Cost per book
` 10
Books maintenance cost
Total maintenance cost per annum excluding
cost of new books (4,20,000 + 5,00,000)
Cost incurred per library member per annum
(` 9,20,000/1,000)
Cost incurred per member per month on the library excluding
cost of new books (920/12)
Cost incurred per club member per annum (9,20,000/5,000)
Cost incurred per club member per month (184/12)
Net income from the library per annum
(12,30,000 – 9,20,000)
© The Institute of Chartered Accountants of India
1,000
1,00,000
2,500
1,02,500
12,30,000
Total cost
(`)
10,000
21,000
4,000
35,000
4,20,000
5,00,000
9,20,000
`
920
`
`
`
76.67
184
15.33
`
3,10,000
Operating Costing
Cost per new book
Maximum number of new books per annum (3,10,000/300)
Present number of books purchased
Excess books purchased (1200 – 1033.333)
Subsidy being given per annum
Subsidy per library member per annum (50,000/1,000)
Subsidy per club member per annum (50,000/5,000)
Comment:
8.11
300
1033.333
1200
166.6667
50,000
50
10
`
No.
No.
No.
`
`
`
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
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.
© The Institute of Chartered Accountants of India
1,53,000
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 =
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 =
Total
(ii)
36,000
32,400
1,04,400
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
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
26,41,000 + 5% on total takings
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
Cost of Diesel per litre
` 30,000
` 4,000 each driver
` 2,000 each helper
` 1,500 each labourer
` 45,000
` 24,000
` 60,000
` 35
Kilometres run per litre each vehicle
5 Km.
Lubricant, Oil etc.
` 23,500
` 1,25,000
` 90,000
` 10,000
` 5,000
` 2,00,000
Salary of 30 drivers
Wages of 25 Helpers
Wages of 20 Labourers
Consumable stores
Insurance (Annual)
Road Licence (Annual)
Cost of replacement of Tyres, Tubes, other parts etc.
Garage rent (Annual)
Transport Technical Service Charges
Electricity and Gas charges
Depreciation of vehicles
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:
Manager’s salary: ` 30,000 ×
60
100
Drivers’ Salary : ` 4,000 × 30
1,20,000
Helpers’ wages : ` 2,000 × 25
50,000
Labourer wages : ` 1,500 × 20
30,000
Insurance :
` 24,000
12
Rs` 60,000
12
Road licence :
Garage rent:
Rs` 90,000
12
2,000
5,000
7,500
Transport Technical Service Charges
10,000
Share in workshop expenses
28,000
Total (A)
B.
18,000
2,70,500
Variable Charges:
Cost of diesel
Lubricant, Oil etc.
12,60,000
23,500
Depreciation
2,00,000
Replacement of Tyres, Tubes & other parts
1,25,000
Consumable Stores
Electricity and Gas charges
45,000
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)
© The Institute of Chartered Accountants of India
1.022
Operating Costing
(ii)
8.15
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.
Workings:
` 1.363 or ` 1.36
1.
Cost of Diesel:
Distance covered by each vehicle during October, 2008 = 200 × 2 × 25 ×
90/100 = 9,000 km.
Consumption of diesel =
9,000 × 20
= 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:
` 4,000 per month
Garage rent
Annual repairs and maintenance
` 22,500each bus
` 3,000 each per month
Salaries of 5 drivers
Wages of 5 conductors
` 1,200 each per month
` 7,500 per month
Manager’s salary
` 5,000 for a quarter
Road tax, permit fee, etc.
Office expenses
` 2,000 per month
` 33
Cost of diesel per litre
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
the company wants to earn profits of 33
1
percent on taking (total receipts from passengers).
3
Answer
Operating Cost Sheet
for the year 2010- 11
(Total Passenger Km = 115,20,000)
Particulars
A.
Fixed Charges:
Garage rent (4,000 × 12)
Salary of drivers (3,000 ×5×12)
Wages of Conductors (1200×5×12)
Manager’s salary (7,500 × 12)
Road Tax, Permit fee, etc. (5,000×4)
Office expenses (2,000× 12)
3
× 5)
Insurance (6,50,000 ×
100
Total A
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Total Cost (`)
Cost per
Passenger- Km
(`)
48,000
1,80,000
72,000
90,000
20,000
24,000
97,500
5,31,500
0.046
8.18
B.
Cost Accounting
Variable Charges:
Repairs and Maintenance (22,500 ×5)
15
× 5)
Depreciation (6,50,000 ×
100
3,60,000
× Rs.33
Diesel:
6
Total B
Total Cost (A+B)
Add:
33
1
per cent Profit on takings or 50% on
3
cost
Bus fare to be charged from each passenger per
km
Working Notes:
(i)
1,12,500
4,87,500
0.010
0.042
19,80,000
0.172
25,80,000
31,11,500
0.224
0.270
15,55,750
0.135
46,67,250
0.405
Total Kilometres to be run during the year 2010-11
= 40× 2 ×3×25×12×5 = 3, 60,000 Kilometres
(ii)
Total passenger Kilometres
= 3, 60,000 × 40 ×
80
=1, 15, 20,000 Passenger km.
100
EXERCISE
Questions for Practice
1.
2.
Distinguish between Operating Costing and Operation Costing.
Answer: Refer to ‘Chapter No. 6 i.e. Method of Costing I’ of Study Material.
(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.)
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58.00 paise (Approx)
Operating Costing
3.
8.19
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:
450 per month per driver
Driver's salary
`
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
`
3,500 per bus per annum
Repairs & Maintenance
`
Purchase price of bus
1,50,000 each
`
(Life 12 years)
Scrap value
30,000
`
2.00 per litre.
Diesel cost
`
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)
4.
` 32.00
` 32.00
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.
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8.20
5.
6.
7.
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
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
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
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
Petrol cost ` 13 per litre
Oil
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8 kilometers per litre
` 100 per week
Operating Costing
Driver's wages
Repairs
Garage rent
Cost of Lorry (Excluding Tyres)
Life of Lorry 80,000 kilometres
Insurance
Cost of Tyres
Life of Tyres
Estimated sale value of Lorry at the end of its life
Vehicle Licence Cost
Other overhead cost
The Lorry operates on a five day week.
8.21
` 400 per week
` 100 per week
` 150 per week
` 4,50,000
` 6,500 per annum
` 6,250
` 25,000 kilometres
`50,000
` 1,300 per annum
` 41,600 per annum
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 (`)
Total Fixed Cost(`)
(b) Cost per Kilometre `
24,400
4,400
9
Cost per tonne Kilometre ` 1.80
8.
An article passes through five hand operations as follows:
Operation No.
1
2
3
4
5
9.
10.
Time per article
15 minutes
25 minutes
10 minutes
30 minutes
20 minutes
Grade of worker
A
B
C
D
E
Wage rate per hour
` 0.65
` 0.50
` 0.40
` 0.35
` 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
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
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
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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:
11.
Cost per absolute ton – km
` 0.20
Profit (`)
3,224
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.
12.
` 0.2471
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
Salaries of Officer and Supervisory Staff
Diesel oil and other oil
Repairs and Maintenance
Taxations, Insurance, etc.
Depreciation
Interest and other charges
(`)
2,400
1,000
4,000
800
1,600
2,600
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.
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