Description
Operating costs are the expenses which are related to the operation of a business, or to the operation of a device, component, piece of equipment or facility.
CHAPTER – 1 INTRODUCTION
1.1 INTRODUCTION
Operating Costing method is normally used in service sector. When the service is not completely standardized, it is the cost of producing and monitoring a service. It is a method of costing applied to undertakings which provide service rather than production of commodities. Service may be performed internally and externally. Services are termed as internal when they have to be performed on inter-departmental basis in factory itself e.g. Power house services, canteen service etc. Services are termed as external when they
are to be rendered to outside parties. Public utility services like transport, water supply, electricity supply, hospitals are the best example for the service costing. Thus operating costing is a method of cost accumulation which is designed to determine the cost of services. Operating costing is just a variant of unit or output costing. Operating costs are collected periodically like process cost. The cost of rendering the service for particular period is related to quantum of services rendered during the particular period to arrive at cost per unit of service rendered. So the principal of unit costing is used in operating costing. 1.2 MEANING OF OPERATING COSTING Operating costing is a method of ascertaining the cost of providing or operating a service. It is also known as service costing CIMA London, defines Operating Costing as “that form of operation costing which applies where standardized services are rendered either by an undertaking or by a service cost renter with in an undertaking”. 1.3 Cost Unit: Determining the suitable cost unit to be used for cost ascertainment is a major problem in service costing. Selection of a proper cost unit is a difficult task. A proper unit of cost must be related with reference to nature of world and the cost objectives. The cost unit related must be simple i.e. per bed in a hospital, per cup of tea sold in a canteen and per child in a school. In a certain cases a composite unit is used i.e. Passenger – Kilometer in a transport company. The following are some of example of cost units used in different organizations
Enterprises Passenger transport Goods transport Hotel Hospital Canteen Water supply Electricity
Cost per unit Kilometer Ton – Kilometer Per room per day Per bed per day Per item, per meal Per 1000 liters Per kilowatt
1.4 Collection of costing data: After determining the cost unit, the cost relating to the service is collected. The collected cost is a presented under the heads suitable for control purpose i.e. fixed expenditure and variable expenditure. The presentation of cost data under difficult categories helps to improve managerial control over cost. 1.5 Procedure (1) Determine Cost Unit: The first step in Operating Costing is the determination of the Cost Unit. This is a complex task as explained in para 1.3. (2) Ascertain Costs: The next point to be noted is that operating Costs are Period Costs. The costs of supplying the services for a period are ascertained in the following manner (taking the example of a transporter)(a) Vehicle no. : Each Vehicle is treated as a cost centre and given a specific number. all the costs are accounted against this number. a separate Account is opened to record the Costs and Income of each Vehicle. (b) Variable costs: Variable costs are the running and operating charges. These include expenses of variable Nature, e.g. petrol, disel, lubricating oil, grease etc. The Material Requisition Note and Time Sheet (or Log) bears the Vehicle No. The relevant Vehicle Account is debited with its direct material cost and direct labour cost. Direct Expenses such
as fuel are debited to the Vehicle Account on the basis of Log Book and the cash/purchase/journal vouchers. (c) Fixed Costs: Fixed Costs (Fixed Charges) include garage rent, insurance, road licence fees etc. the Fixed Charges are apportioned and absorbed by each Vehicle No. on the basis of the Overheads Absorption Rate which may be Actual or Pre- determined. the Fixed Costs attributable to the Vehicle are debited to the relevant Vehicle Account. (d) Revenue: The revenue from the Vehicle is credited to the Vehicle Account. (e) Profit or Loss: The Vehicle Account at this stage will reveal the profit or loss made on operating that vehicle the profit or loss is then transferred to the Costing Profit and Loss Account. The total Operating Cost of a period is divided by the number of Cost Units (KM/Passenger/Ton etc.) supplied during the period to arrive at the Operating Cost per Unit for that period. (3) No Stocks: In case of a service industry, there is no question of any closing stock or work- in- progress since it is not possible to store a service for future use. (4) Abnormal Costs: According to Cost Accounting Standard 5 (Transportation Costs|) , abnormal and non-recurring costs shall be directly debited to P& L A/c and shall not form part of operating costs. Examples are – penalty, detention charges, demurrage and costs related to abnormal break-down.
1.6 Distinguish between Operating Costing and Operation Costing.
Operating Costing: It is a method of costing applied by undertakings which provide service rather than 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 water works, electricity supply companies, canteens, hospitals, theatres, school etc. Within an organisation itself certain departments too are known as service departments which
provide ancillary services to the production departments. For example, maintenance department; power house; boiler house; canteen; hospital; internal transport. Operation Costing: It represent a refinement of process costing. In this each operation instead of each process of 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.
CHAPTER – 2 TYPES OF OPERATING COSTING
(A) TRANSPORT COSTING Meaning
Transport costing is method of ascertaining the cost of providing service by a transport undertaking. This includes air, water, road and railways; motor transport includes private cars, carriers for owners, buses, taxies, carrier Lorries etc. The objective of motor transport costing may be summarized as follows: ? ? ? ? ? ? To ascertain the operation cost of running a vehicle To provide and accurate basis for quotation and fixing of rates To provide cost companion between own transport and alternative e.g. hiring To compare the cost of monitoring one group of vehicle with another group To determine the cost to be changed against departments using the service To ensure the cost of maintenance and repairs is not excessive
Classification of costs:
Costs are classified into the following three heads: 1. Standing or Fixed Charges: These charges are includes whether vehicle is operating or not. Insurance, tax, depreciation and part of driver wages. Interest on capital, general supervision, and salary of operating managers is items come under the category of fixed or standing charges. 2. Maintenance charges: There are semi variable expenses in nature and include wear on tires, repairs and overheads painting etc. 3. Operating and running charges: Running costs are the cost of operations. These charges vary more or less in direct proportion to kilometers etc. These expenses are variable in nature because they are dependent on distance covered and trips made.
Though the above three classification is done, in practical it is difficult to distribute. It depends basically on the circumstances of each case e.g. if the salary paid to driver is on monthly basis then it is a fixed charged but if the same is limited to kilometer run then it is a running cost.
Collection of Cost Data:
Each vehicle is given a separate unique number and all the basic documents will contain the assigned number of the respective vehicles. A separate daily log sheet for each vehicle is maintains to record the details of trips, running time, capacity, distance cover, cost of petrol / diesel, lubricants, loading and unloading time etc on daily basis. A specimen of log sheet is given below: Daily log sheet Table Vehicle No.: ………………… Route No.:-------------Date of Purchase: ……………….. Driver: ……………… Make and Specification: …………. Time of Leaving: …… License No.: ………………… Time of Returning: ……….
Trip no.
From
To Out Collected
Packages Kilometers Out
Time In Hrs Remarks
Supplies
Worker?s time
abnormal delays
Petrol / diesel ………………Driver …………..Loading / unloading………… Oil …………………….conductor ……….Accident …………………………. Grease ……………Cleaner ………..Traffic Delays ………Others ………
Format of transport operating cost sheet: Vehicle No. : ………………….. Period …………………………….. Cost Unit: ……………………… No. of Cost units …………………. Particulars Rs. Total Rs. A. Fixed Cost (or Standing charges) 1. Road Tax 2. Insurance 3. Driver?s Salary 4. Conductor?s Salary 5. Depreciation 6. Interest on Capital 7. Garage Rent 8. Office & Administration Overheads B. Variable (Running) costs Depreciation Petrol Diesel Oil & Grease Repairs and maintenance Tyres and tubes Total operating cost xx xx xx xx xx xx xxx xx xx xx xx xx xx xxx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx Per Km Rs.
Note: Maintenance expenses can be shown separately also depends on cases. Check Your Progress: 1. Give the format of Transport Operating cost-sheet 2. give the Cost Unit of the following a) Passenger Transport b) Good Transport c) Electricity d) Hospital e) Hotel
Illustration 1: From the following information calculate fare for passenger KM.
The cost of the Bus Insurance charges Annual tax Garage rent Annual repairs Expected life of the bus Value of scrap at the end of 5 years Route distance Driver?s salary Conductor?s Salary Commission to Driver & conductor (shared equally) Stationary Manager-cum-accountant?s Salary Diesel and Oil (for 100 kms)
Rs. 450000 3 % p.a. Rs. 4500 Rs. 500 p.m. Rs. 4800 5 yrs Rs. 3000 20 km long Rs. 550 p.m. Rs. 500 p.m. 10 % of the takings Rs. 250 p.m. Rs. 1750 p.m. 125
The bus will make 3 rounds trips for carrying on the average 40 passenger?s in each trip. Assume 15 % profit on takings. The bus will work on the average 25 days in a month.
Solution: Operating Cost Statement Bus No. Capacity: 40 persons
Particulars
Per Annum Rs.
Per Annum Rs.
Per Annum Rs.
A. Standing Charges Depreciation Tax Insurance Stationery Manager?s Salary B. Maintenance Charges Garage Rent Repairs C. Operating (or) Running Charges Diesel & Oil Driver? Salary Conductor?s Salary Total Add : Commission and Profit 25/75 Fare per passenger km. 3,750 6,600 6,000 16,350 1,53,150 0.01135 0.10635 0.03545 0.1418 6,000 4,800 10,800 0.0075 84,000 4,500 13,500 3,000 21,000 1,26,000 0.0875
Working Note: (1) No. of Km run in a month : 3 x 2 x 20 x 25 = 3000 km (2) No. of passenger km per annum : 3000 x 40 x 12= 14,40,000 (3) Diesel and oil : 3000 x 125 / 100 = Rs. 3750 (4) Commission & Profits: Commission 10 % of taking + profit 15 % of Taking total = 25 % of taking so the cost Cost is only 75 %
Illustration 2: From the following data relating to two different vehicles A and B, compute cost per running mile. Particulars Milage run (annual) Cost of vehicles Road License (Annual) Immune (Annual) Garage rent (Annual) Supervision and Salaries (Annual) Driver?s wage per hour Cost of fuel per gallon Miles runs per gallon Repairs and maintenance per mile (Rs.) Tire allocation per mile Estimated life of vehicle (miles) Vehicle A 15000 Rs. 25000 750 700 600 1200 3 3 20 1.65 0.8 1,00,000 Vehicle B 6000 Rs. 15000 750 400 500 1200 3 3 15 2 0.6 75,000
Charge interest @ 5 % p.a. on cost of vehicles. The vehicles run 20 miles per hour on an average
Solution: Operating cost sheet (cost per mile)
Particulars
Vehicle A
Vehicle B
A.
Operating
and
Maintenance
Charges Depreciation A – 25000 / 100000 B – 15000 / 75000 Repairs and maintenance Tire allocation Fuel (3 / 20 miles) Driver?s wages (A – 3 / 20) (3 – 3 / 15) 1.65 0.80 0.15 0.15 3.00 B. Standing Charges A Rs. Road license Insurance Charges Supervision Interest @ 5 % p.a. 750.00 700.00 600.00 B Rs. 750.00 400.00 500.00 0.25 0.20 0.20 2.00 0.60 0.15 3.15
1200.00 1200.00 1250.00 750.00
4500.00 3600.00 Mileage run per annum Fixed standing charge per mile Operating cost per mile 15000.00 6000.00 0.30 0.60 0.30 3.30 0.60 3.75
Note: (1) Depreciation is linked with mileage so operating cost. (2) Driver wage is taken as operating since it is paid per hour.
Illustration 3: A company presently brings coal to its factory from a nearby yard and the rate paid for transportation of coal from the yard located 6 kms. Away to factory is Rs. 50 per ton. The total coal to be handled in a month is 24,000 tones. The company is considering proposal to buy its own trucks and has the option of buying either a 10 ton capacity or a 8 ton capacity trucks. The following information is available:
Particulars
10 Ton Truck
8 Ton Truck 8,50,000 5 Nil 4 48,000
Purchase Price Rs. Life (Years) Scrap value at the end f 5th year KM Per liter of diesel Repair truck (Rs.) Other fixed expenses p.a. (Rs.) Lubricants (Rs.) and sundries per 100 km and maintenance p.a. per
10,00,000 5 Nil 3 60,000
60,000 20
36,000 20
Each truck will daily make 5 trips (to and fro) on an average for 24 days in a month. Cost of diesel Rs. 15/- per liter. Salary of driver Rs. 3,000/-, p.a. month. Two drivers will be required per truck. Other staff expenses Rs. 1, 08,000 p.a. Present a comparative cost sheet on the basis of above data showing transport cost per ton of operating 10 ton and 8 ton Truck at full capacity utilization.
Solution: Comparative statement of operating cost sheet: Particulars 10 Ton Truck Fixed Charges (p.m.) Driver?s Salary (working no. 1) Staff expenses Other fixed expenses Operating & Maintenance Charges (p.m.) Depreciation (Note No. 2) Diesel Cost (Note No. 3) Lubricants & Sundries(Note No. 3) Repairs & Maintenance Total Cost (A) Tons Carried (B) Cost per ton (A/B) 3,33,333 1,44,000 5,760 1,00,000 7,17,093 24,000 29.87 3,54,167 1,35,000 7,200 1,00,000 7,58,367 24,000 31.59 12,000 9,000 5,000 15,000 9,000 3,000 8 Ton Truck
Conclusion: A comparison of cost per ton by using 10 ton trucks is more economical. The cost paid for bringing coal per ton presently viz. Rs. 50/- is the highest.
Working Note:
Particulars
10 Ton Truck
8 Ton Truck
1 Total number o trucks and drivers required Coal brought to the factory per month (5 x 24 x 10) (5 x 24 x 8) 1200 960
No. of truck required to bring24,000 24000/1200=20 24000/960=25 tons is Total number of drivers required 2 Total monthly depreciation Depreciation per truck per annum Depreciation per truck per month Total depreciation 2,00,000 1,666.66 1,70,000 14,166.66 20 x 2 = 40 25 x 2 = 50
16666.66 x 20 14166.66 x 25 = 3,33,333 = 3,54,167
3 Diesel requires Total Km run per truck p.m. (6 km x 10 trips x 24 days) Total KM run by all trucks Km per liter of diesel Diesel required liters 1440 28800 3 9600 (28800 / 3) 1440 36000 4 9000 (36000 / 4)
Illustration.4: You are required to calculate a suggested fare per passenger – Km from the following information for a mini bus. (i) (ii) (iii) (iv) Length of route 30 km Purchase price Rs. 4, 00,000. Part of above cost meet by loan, annual interest Rs. 10,000 p.a. Other annual charges: Insurance Rs. 15,000, Garage Rent Rs. 9,000, Road Taxes Rs. 3,000, Repairs and Maintenance Rs. 5,000. Administrative charges Rs. 5000. (v) Running expenses : Driver & Conductor Rs. 5000 p.m., Repairs / Replacement of tyre tube Rs. 3600 p.a. Diesel and Oil cost per Km Rs. 5/-
(vi)
Effective life of vehicle is estimated at 5 years at the end of which it will have a scrap value of Rs. 10,000.
(vii)
Mini Bus has 20 seats and is planned to make six two way trips for 25 days / p.m.
(viii)
Provide profit @ 20 % of total revenue.
Solution:
Particulars
Cost per Annum Rs.
Cost Per Month Rs.
Fixed Expenses : Insurance Garage Rent Road Tax Administrative charges Depreciation ÷ 5 years) Interest on Loan Total Running Expenses : Repairs & Maintenance Replacement of tyre tube Diesel Rs. 5/-) Driver & Conductor?s Salary Total Cost per month Add : Profit 20 % of total 5,000 61,550 15,387.50 and oil cost (9000 km x 15,000 3,600 1,250 300 45,000 10,000 1,20,000 10,000 (4,00,000–10,000 15,000 9,000 3,000 5,000 78,000
Revenue 25 % Total cost Total Revenue 76,937.50
Rate per passenger km: Rs. 36937.50 / 1, 80,000 passenger km = 0.4274305 or 0.43 paise.
Workings: Total distance travelled by mini bus in 25 days = 60 km x 6 trips x 25 days = 9000 km
Total passenger km = 9000 km x 20 seats = 1, 80,000 passengers km
Illustration 5: Mr. Sampath owns a fleet of taxies and the following information is available from the records maintained by him.
1. Number of Taxis – 10 2. Cost of each Taxi – Rs. 2,00,000 3. Salary of manager Rs. 6000 p.m. 4. Salary of Accountant Rs. 5000 p.m 5. Salary of cleaner Rs. 3000 p.m.
7. Garage Rent Rs 7000 p.m. 8. Insurance premium 5 % 9. Annual Tax Rs. 6000 per taxi 10. Drivers Salary Rs. 4000 p.m. 11. Annual Repairs Rs. 15,000 per taxi
6. Salary of Mechanic Rs. 4000 p.m.
Total life of a taxi is about 2, 00,000 kms. A taxi runs in all 3000 kms. in a month of which 25 % its runs empty. Petrol consumption is one liter for 10 kms @ Rs. 40 per liter. Oil and other sundries are Rs. 10 per 100 kms.
Calculate the cost of running a taxi per km.
Solution:
Particulars
Amount per month Rs.
Cost per Km Rs.
Fixed Expenses (for the whole fleet) Salary of manager Salary of accountant Salary of Cleaner Salary of mechanic Garage Rent Insurance premium 5 % on Rs. 2,00000 x 10 Tax 6000 x 10 / 12 Total Fixed Expenses Effective kilometer 3000x10x 75 % = 22,500 Fixed expenses per km Running expenses (per taxi) Depreciation (2,00,000÷200000 x 10 x 3000) Repairs (15,000 x 10 ÷ 12) Petrol (3000 x 40) ÷ (10 x 22500) Oil and other sundries (10 x 3000) ÷ (100(22500) Cost per km 6.03701 0.55555 0.53333 0.13333 1.33333 3.48147 6000 5000 3000 4000 7000 8333 40000 5000
(B) HOSPITAL COSTING
Hospitals comes under service sector, big companies also maintain hospitals. For costing purpose the hospital service can be divided in two following categories
(1) Outpatient department (2) Wards (3) Medical service departments such as radio therapy „X? ray etc. (4) General Services such as heating, lighting, catering laundry etc. (5) Other services such as transport, dispensary, cleaning etc.
Cost Statement: The expenses of hospital can be broadly divided into two categories i.e. (1) Capital Expenditure and (2) Maintenance Expenditure – this includes salaries and wages, provision, staff uniforms clothing, medical and surgical appliances and equipments, fuel light and power, laundry, water etc.
Format of a cost Sheet of a Hospital: Particulars A) Fixed standing charges Rent Repairs and maintenance General administrative expenses Depreciation Salaries to staff Cost of Oxygen, X ray etc. B) Running or maintenance costs Doctor?s fees Food Medicines Laundry Hire charges Total operating cost xx xx xx xx xx xx xx xx xx xx xx xx xx xx Rs. Rs.
Total Operating cost Cost per patient day = ----------------------------------No of Patient Days Illustration 1: The following information is available from a intensive care unit.
Rent (including repairs) Rs. 10000 p.m.
The unit cost consists of 25 beds and 5 more beds can be accommodate when the occasion demands. The permanent staff attached to the unit is as follows:
2 supervisors each at a salary or Rs. 2000 per month. 4 nurse each at a salary of Rs. 1500 per month. 2 ward boys each at a salary of Rs. 1000 per month. Though the unit was open for the patients all the 365 days in a year, security of accounts of 2008 revealed that only 150 days in a year the unit had the full capacity of 25 patients per day and for another 80 days it had on an average 20 beds only occupied per day. But there were occasions when the beds were full, extra beds were hired from outside at a charge of Rs. 10 per bed per day and this did not come to more than 5 beds extra above the normal capacity any one day. The total hire charges for the whole year were Rs. 4000.
The unit engaged expert doctor from outside to attend on the patients and the fees were paid on the basis of number of patients attended at time spent by them on an average worked out to Rs. 2000 per month in 2008. The other expenses for the year were as under.
Particulars Repairs and maintenance Food supplied to patients Janitor and other services for patients Laundry charges for bed linens Medicines supplied Cost of oxygen, x ray etc other than directly born for treatment of patients (Fixed) General administration charges allocated to the unit
Rs. 8,000 1,00,000 25,000 40,000 70,000 90,000
1,00,000
(1) If the unit recovered an overall amount of Rs. 200 per day on an average from each patient what is the profit per patient day made by the unit in 2008. (2) The unit wants to work out a budget for 2009, since the number of patients is very uncertain, annuity the same revenue and expenses prevail in 2009, work out the number of patient days required break-even.
Solution: Statement of cost and profit
Particulars A) B) Income received (Rs. 200 x 6150) Variable cost (per annum) Food Janitor and other services Laundry charges Medicines Doctors fees (20,000 x 12) Hire charges for extra bed (B) C) Fixed Costs Salaries Supervisor Nurses Ward boys Rent (10000 x 12) Repairs & Maintenance General administration Cost of oxygen, X ray etc. (C) Total cost (B + C) Profit
Rs.
Rs. 1,23,000
1,00,000 25,000 40,000 70,000 2,40,000 4,000 4,79,000
4,800 72,000 24,000 1,20,000 8,000 1,00,000 90,000 4,62,000 9,41,000 2,89,000
Profit per patient day = 28900/6150 = 46.91 loss Rs. 47/Working Note: Calculation of No. of patient days in 2008 25 beds x 150 days = 3750 20 beds x 80 days = 1600 Extra beds 4000 ÷ 5 = 800 6150
Breakeven point = Fixed Cost/ Income – Variable cost x income = 46200/751000 x 1230000
= Rs. 756671 (or) 756671/200 = 3783.25 patient days
Illustration 2: A hospital is run by a Company. For this purpose it has hired a building at a rent of Rs. 5,000 per month plus it would bear the repair charges also. The hospital is having 25 beds and 5 more beds can be accommodated when the need arises.
The staff of the hospital is as follows: 2 Supervisors each at a salary of Rs. 500 per month 4 Nurses each at a salary of Rs. 300 per month 2 Ward boys, each at a salary of Rs. 150 per month Although the hospital is open for patients all the 365 days in a year, records for the year 2004 disclose that only for 120 days in the year, the unit had the full capacity of 25 patients per day and when the beds were full, extra beds were hired at a charge of ` 5per bed per day and this did not come to more than 5 beds extra above the normal capacity on any one day. The total hire charges for the extra beds incurred for the whole year were Rs. 2,000. The Unit engaged expert doctors from outside to attend on the patients and the fees was paid on the basis of the number of patients attended and time spent by them which on an average worked out to Rs. 10,000 per month in 2004. The other expenses for the year were as under: Repair and Maintenance Food supplied to patients Sanitary and Other services for patients Laundry Charges Medicines supplied Rs. 3,600 Rs. 44,000 Rs. 12,500 Rs. 28,000 Rs. 35,000
Cost of oxygen, X-ray, etc. other than directly borne for treatment of patients Rs. 54,000. General Administration Charges allocated to hospital Rs. 49,550. If the hospital recovered an amount of Rs. 100 per day on an average from each patient, compute the profit per patient – day made by the hospital as per operating cost sheet for the year 2004.
Solution: Statement of Profit
Particulars Income (100 x 5,000) Less : Variable Cost Food sanitary Services Laundary Medicines Doctor's Fee (10,000 x 12) Hire Charges for Extra Bed Contribution Less : Fixed Costs Salaries [(2 x 500) +(4 x 300) + ( 2 x 150)] x 12 Rent ( 5,000 x 12 ) Repairs and Maintenance General Administration Cost of Oxygen, X- ray etc. Total
Rs.
Rs. 55,00,000
44,000 12,500 28,000 35,000 1,20,000 2,000 2,41,500 2,58,500
30,000 60,000 3,600 49,550 54,000 1,97,150 61,350
Profit per patient- day = 61,350 / 5,000 = Rs. 12.27
Note:
Number of patient- days in 2001
patient days
25 beds x 120 days 20 beds x 80 days Extra bed - days (total hire charges of extra beds/charges per bed per day = 2000/5) Total
3,000 1,600
400 5,000
Illustration: 3 Appolo Hospital runs an Intensive Care Unit in a hired building at a rent of Rs. 7,500 p.m. The hospital has undertaken to bear the cost of repairs and maintenance. The Intensive Care Unit consists of 35 beds and 5 more beds can be conveniently accommodated whenever required. The permanent staffs attached to the unit are as follows. 2 Supervisors each at a salary of Rs. 2,500 per month. 4 Nurses, each at a salary of Rs. 2,000 per month. 4 Ward boys, each at a salary of Rs. 500 per month. Though the unit was open for the patients all the 365 days in a year but it was found that only 150 days in a year, the unit had the full capacity of 35 patients per day and for another 80 days it had an average 25 bed only occupied per day. But there were occasions when the beds were full, extra beds were hired from outside at a charge of Rs. 10 per bed per day. This did not come to more than 5 beds extra above the normal capacity any one day. The total hire charges for the extra beds incurred for the whole year amounted to Rs. 7,500. The unit engaged expert doctors from outside to attend on the patients and fees were paid on the basis of the number of patients attended and time spent by them on an average worked out to Rs. 25,000 per month in the year 2003. The other expenses for the year were as under:
Repairs
and Maintenance (Fixed)
Rs. 8,100 Rs.88,000 Rs. 30,000 Rs.60,000 Rs. 75,000 Rs. 1,08,000
Food supplied to patients (Variable) Janitor and other Services for patients (Variable) Laundry Charges for their bed linen (Variable) Medicines supplied (Variable) Cost of Oxygen , X-ray, etc., other than directly borne for treatment of patients (Fixed) General Administration Charges allocated to the unit (Fixed)
Rs. 1,00,000
Solution: Calculation of No. of Patient-days: 35 beds x 150 days 25 beds x 80 days Extra bed days (Rs. 7,500 / 10) Total 5,250 2,000 750 8,000
Statement of Cost Particulars Income Received (Rs. 200 x 8,000 patient-days) Variable Costs (Marginal Costs) Per Annum : Food Janitor and other services Laundry Charges Medicines supplied Doctor?s Fees (Rs. 25,000 x 12) Hire Charges for extra-beds Contribution Fixed Costs Salaries : Supervisors (2 x 2,500 x 12) Nurses (4 x 2,000 x 12 ) Ward Boys ( 4 x 500 x 12) Rent (7,500 x 12 ) Repairs & Maintenance Cost of Oxygen etc. General Administration Profit 60,000 96,000 24,000 90,000 8,100 1,08,000 1,00,000 4,86,100 5,53,400 88,000 30,000 60,000 75,000 3,00,000 7,500 5,60,500 10,39,500 Rs. Rs. 16,00,000
Profit per Patient- day = Rs.5, 53,400 / 8,000 Patient –days = Rs. 69.175 Break-even Point = (Fixed Cost/ Contribution x Income) = (Rs. 4, 86,100 / Rs. 10, 39,500 x 16, 00,000) =Rs. 7, 48,206 Break- even Point for Patient- days = Rs. 7, 82,206 / Rs. 200 = 3,741 patient- days.
(C) HOTEL COSTING
Hotel industry is a service industry and covers various activities such as provision for food and accommodation. It also provides other comforts like recreations, business facilities, shopping areas etc. The expenses incurred in a hotel are fixed or variable. Fixed expenses comprises of staff salaries, repairs, interior decoration, laundry contract cost, sundries and depreciation on fixed assets. The variable expenses incurred are lighting, attendants? salaries, power etc. To find out room rent to be charged from customers a notional profit is added with the cost and divided by the number of rooms available. The number of rooms available is calculated after for considering availability of suits and occupancy. Rooms rent may be different from season to season. Sometime besides accommodation they also provide food. Then the cost of meals, other direct and indirect costs are considered to work out the costs to be charged from customers.
Operating cost sheet of a Hotel:
Particulars A) Fixed Charge Salaries to Staff Repairs and Renovation Depreciation Interior decoration Sundries Laundry contract cost Rent B) Running charges (Variable cost) Power Attendant salaries Total Operating Cost No. of Room Days Cost per Room Days
Rs.
Rs.
xx xx xx xx xx xx xx xx
xx xx xx xx xx xx
Illustration 1: A company runs a holiday home for this purpose it hired a building at a rent of Rs. 10,000 per month along with 5% of total takings. It has three types of suites for its customer?s viz. single room, double room and triple rooms. Following information is given:
Types of suite Single rooms Double rooms Triple rooms
Number 100 50 30
Occupancy percentage 100 % 80 % 60 %
The rent of double room?s suite is to be fixed at 2.5 times of the single room and that of triple rooms at twice of the double room suite. The other expenses for the year 2009 are as follows:
Particulars Staff salaries Room attendants wages Lighting heating and powers Repairs and renovations Laundry charges Interior decoration Sundries
Rs. 14,25,000 4,50,000 2,15,000 1,23,500 80,500 74,000 1,53,000
Provide profit @ 20 % on total takings and assume 360 days in a year. You are required to calculate the rent to be charged for each type of suite
Solution: Calculation of room occupancy
Type of suite
Number
Occupancy %
No. of days in a year
Room occupancy days 36000 14400 6480
Single Room Double Room Triple Room
100 50 30
100 80 60
360 360 360
Calculation of equalant single room suits occupancy 36,000 x 1 + 14400 x 2.5 + 6480 x 5 = 104400 Calculation of Total Cost:
Particulars Staff salaries Room attendant wages Lighting heating and power Repair and renovation Laundry charges Interior decoration Sundries Total cost excluding building rent Building rent = 10000 x 12 + 5% of taking Total cost Profit 20 % of takings Total takings
Rs. 14,25,000 4,50,000 2,15,000 1,23,500 80,500 74,000 1,53,000 25,21,000 2,96,066 28,17,066 7,04,267 35,21,333
Rent for a single room = 3521333 ÷ 104400 = Rs. 33.73 Rent for a double room = 33.73 x 2.5 = Rs. 84.325 Rent for a triple room = 84.325 x 2 = Rs. 168.65
Illustration 2: A lodging home is being run in a small hill station with 50 single rooms. The home offers concessional rate during six off season months in a year. During this period, half of the full room rent is charged. The management profit margin is targeted at 20% of the room rent. The following are the cost estimates and other details for the year ending 31st March, 1996 (assume a month to be of 30 days) (a) Occupancy during the season is 80%, while in the off season is 40% only. (b) Expenses: (i) Staff Salary (excluding room attendants) Rs. 2, 75,000 (ii) Repairs to buildings Rs. 1, 30,000 (iii) Laundry and linen Rs. 40,000 (iv) Interior and tapestry Rs. 87,500 (v) Sundry expenses Rs. 95,400 (c) Annual depreciation is to be provided for building at 5% and on furniture and equipments at 15% on straight line basis. (d) Room attendants are paid Rs. 5/- per room-day on the basis of occupancy of the rooms in a month. (e) Monthly lighting charges are Rs. 120 per room, expect in four months of winter when it is Rs. 30 per room and this cost is on the basis of full occupancy for a month and (f) Total investments in the home are Rs. 100 lakhs of which Rs. 80 lakhs relate to buildings and balance for furniture and equipments.
You are required to work out the room rent chargeable per day both during the season and the off-season months, on the basis of the foregoing information.
Solution: Total estimated costs for the year ending 31.03.1996
Particulars
Total Rs.
Per room day (Rs.)
Salary Repairs Laundry and linen Interior decoration Depreciation: Building 5% on 80 lakhs Furniture 15 % on 20 lakhs Miscellaneous expenses Attendant?s salary Lighting charges Total cost Rs. 4,00,000 3,00,000
2,75,000 1,30,000 40,000 87,500
7,00,000 95,400 54,000* 36,000** 14,18,400 / 9000 *** full room days 157.6
Add : Profit margin at 20% on rent or 25% of cost
197.00
During season room rent is Rs. 197 and during off-season room rent is Rs. 98.50 * Attendant? salary For 10,800 room days @ Rs. 5 per day = Rs. 54,000 ** Total light bill Light bill during 8 months at Rs. 120 per month or 120 ÷ 30 = Rs. 4 Per room day. Light bill during 4 months of winter at Rs. 30 per month or 30 ÷ 30 = Re. 1 per Room day.
Total light bill for full one year
Particulars During season @ Rs. 4 for 7,200 days During 2 months of off-season @ Rs. 4 for 1,200 days (2 ÷ 6 x 3,600) During 4 months of winter at Re. 1 For 2,400 days (4 ÷ 6 x 3,600) Total
Rs. 28,800 4,800
2,400
36,000
*** Number of room days in a year:
Seasons occupancy for 6 months@80% (50 x 0.8 x 6 x 30) room days Off season?s occupancy for 6 months @ 40 % (50 x 0.4 x 6 x 30) Total room days during the Year
7,200 3,600
10,800
Total full room days in terms of rate Season Off Season (in terms of 50 % rate on 3,600 days) Total Full room days
7,200
1,800 9,000 (per annum)
Illustration 3: Elegant Hotel has a capacity of 100 single rooms and 20 double rooms. It has a sports centre with a swimming pool which is also used by persons other than residents of the hotel. The hotel has a shopping arcade at the basement and a specialty restaurant at the roof top. The following information is available: (1) Average occupancy : 75 % for 365 days of the year (2) Current costs are :
Variable cost Single room Double room 400 500
Fixed cost 200 250
(3) Average sales per day of restaurant Rs. 1, 00,000; contribution is at 30 %. Fixed cost Rs. 10, 00,000 per annum. (4) The sports centre / swimming pool is likely to be used by 50 non –residents daily; average contribution per day per nonresident is estimated at Rs. 50; fixed cost is Rs. 5,00,000 per annum. (5) Average contribution per month from the shopping arcade is Rs. 50,000; fixed cost is Rs. 6, 00,000 per annum. You are required to find out: (a) Rent chargeable for single and double room per day, so that there is a margin of safety of 20 % on hire of rooms and that the rent for a double room should be kept at 120 % of a Single room.
(b) Evaluate the profitability of restaurant, sports centre and shopping arcade separately.
Solution: (a) Statement for calculating the rent chargeable for single and double room per day.
Particulars
Occupancy days Variable in a year Refer to working note (1) cost Rs /Days (2)
Fixed cost Rs / Days (3)
Total variable cost 4 = (1) x(2)
Total fixed cost (Rs.) 5=(1)x(3)
Total cost (Rs.) 6 = (4) x (5)
Single room Double room
27,375
400
200 1,09,50,000
54,75,000 1,64,25,000
5,475
500
250
27,37,500
13,68,750
41,06,250
Add : 20 % margin of safety on hire of room or 25 % of total cost
51,32,812
Total amount of room rent to be received 2,56,64,062
Rent per day of single room 9in Rs.) 756 (approx) (Refer to working note 2) (Rs. 2, 56, 64,062 / 33,945) Rent per day of double room (in Rs.) 907 (approx) (Rs. 756 x 1.2 times)
b) Profitability of restaurant Total sales per annum 365 days x Rs. 1,00,000 Contribution per annum (30 % of Total Sales) : (A) Fixed cost per annum : (B) Profit [ (A) – (B)] Profitability of sports centre : Contribution of sports centre per day : (50 persons x Rs. 50) Total contribution per annum (Rs. 2,500 x 365 days) : (A) Fixed cost per annum : (B) Profit : [(A) – (B)]
Rs. 3,65,00,000
1,09,50,000 10,00,000 99,50,000 Rs. 2,500
9,12,500
5,00,000 4,12,500
Profitability of shopping arcade : Contribution per annum (Rs. 50,000 x 12 months) Less : Fixed Cost Profit
Rs. 6,00,000 6,00,000 Nil
Working Note: 1. Single room occupancy days in a year = 100 room x 365 days x 75 % = 27,375 2. Double room occupancy days in a year = 20 rooms x 365 days x 75 % = 5,475 3. In terms of single room total room occupancy days in a year = 27,375 + 1.20 % x 5,475 = 27,375 + 6,570 = 33,945
Illustration 4:
Following are the information given by an owner of a hotel. You are requested to advice him that what rent should be charge from his customers per day so that he is able to ear 25 % on cost other than interest. 1) Staff salaries Rs. 80,000 per annum 2) Room attendant?s salary Rs. 2 per day. The salary is paid on daily basis 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 expenses for a room if it is occupied for the whole month is Rs. 50. Power is used only in winter and normal charge per month if occupied for a room is Rs. 20. 4) Repairs to building Rs. 10,000 per annum 5) Linen etc. Rs. 4,800 per annum 6) Sundries Rs. 6,600 per annum 7) Interior decoration and furnishing Rs. 10,000 annually 8) Cost of building Rs. 4,00,000; rate of depreciation 5 % 9) Other equipments Rs. 1,00,000; rate of depreciation 10 % 10) Interest @ 5% may be charged on its investment of Rs. 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 % of the rooms are busy in winter. You may assume that period of summer and winter is six month each. Normal days in a month may be assumed to be 30.
Solution: Operating cost sheet Rent per day Particulars Rs. Per annum Rs. 1. Staff salaries Room attendant?s salaries Summer 2 x (100 x 80 ÷ 100) x 30 x 6 Winter 2 x (100 x 30 ÷ 100) x 30 x 6 Lighting, heating and power Summer 50 x 6 x (100 x 80 ÷ 100) Winter 50 x 6 x 100 x (30 ÷ 100) Power 20 x 6 x 100 x (30 ÷ 100) Repairs to building Linen etc. Sundries Interior decoration and furnishing Depreciation : Building Other equipments Interest on investment (5% on Rs. 5,00,000) Add : 25 % profit on cost other than interest Rs. 2,42,600 – Rs. 25,000 interest = Rs. 2,17,600 Rs. 2,17,600 x 25 ÷ 100 Total cost 54,400 2,97,000 20,000 10,000 30,000 25,000 2,42,600 24,000 9,000 3,600 36,600 10,000 4,800 6,600 10,000 28,800 10,800 39,600 80,000
Rent per room for one day = Total Cost ÷ No. of room days = 2, 97,000 ÷ 19,800 = Rs. 15 per day Working Notes: Calculation of room days No. of Rooms x Percentage x days in a month x no. of months Summer: 100 x (80 ÷100) x 30 x 6 80 x 30 x 6 = 14,400
Winter: 100 x (30 ÷ 100) x 30 x 6 30 x 300 x 6 = 5,400 Total room days = 19,800
Illustration 5:
From the following information relating to a Hotel, calculate the room rent to be charged to give a profit of 25% on cost excluding interest charged on Loan for the year ended 31st March, 2008: 1. Salaries of office staff Rs. 50,000 per month. 2. Wages of the room attendant: Rs. 20 per day per room when the room is occupied. 3. lighting, Heating and Power : a) The normal lighting expenses for a room for the full month is Rs. 500, when occupied. b) Power is used only in winter and the charges are 200 for a room, when occupied. 4. Repairs to Beds and other furniture: Rs. 30,000 per annum. 5. Repairs to Hotel building: Rs. 50,000 per annum. 6. Licence fees: Rs. 12,400 per annum. 7. Sundries: ` 10,000 per month. 8. Interior decoration and furnishing: Rs. 1, 00,000 per annum. 9. Depreciation @ 5% p.a. is to be charged on Building costing 20, 00,000/- and @ 10% p.a. on Equipments. 10. There are 200 rooms in the Hotel, 80% of the rooms are generally occupied in summer, 60% in winter and 30% in rainy season. The period of summer, winter and rainy season may be considered to be of 4 months in each case. A month may be assumed of 30 days of an average.
Solution: Operating cost statement
Particulars office staff salaries (50000x12) Room Attendant wages (WN1) Lighting and Heating (WN 2) Power (WN 3) Repairs to beds and other furniture Repairs to Building Licence fee Sundries (10,000x12) Interior Decoration and furnishing Depreciation Building @5% Equipment @10% Total Cost Add : Profit 25% of Cost(Excluding interest on loan) Total Earnings
Rs.
Rs. 6,00,000 8,16,000 6,80,000 96,000 30,000 50,000 12,400 1,20,000 1,00,000
1,00,000 5,00,000 1,50,000 26,54,400 6,63,600
33,18,000
Room rent to be charged: Per day = 33, 18,000 / 40,800 = Rs. 81.32 Working Notes: (a) Lighting and Heating: Summer 500x 4 months x200 x 80% Winter 500x 4 months x 200 x 60% Rainy 500x 4 months x 200 x 30% 3,20,000 2,40,000 1,20,000 6,80,000
(b)
Power 200 x 4 months x 200 x 60%
96,000
(c) Room Days Summer 200x 4 months x 30 days x 80% Winter 200x 4 months x 30 days x 60% Rainy 200x 4 months x 30 days x 30% Total Rooms Days 19, 200 14,400 7,200 40,800
CHAPTER – 3 CONCLUSION
Operating costs are the expenses which are related to the operation of a business, or to the operation of a device, component, and piece of equipment or facility. For a commercial enterprise, operating costs fall into two broad categories:
?
fixed costs, which are the same whether the operation is closed or running at 100% capacity
?
variable costs, which may increase depending on whether more production is done, and how it is done (producing 100 items of product might require 10 days of normal time or take 7 days if overtime is used. It may be more or less expensive to use overtime production depending on whether faster production means the product can be more profitable).
Thus operating costing is useful in determining the actual cost in various industries.
CHAPTER – 4 BIBLIOGRAPHY
Websites:
? www.icai.com ? en.wikipedia.org ? www.investopedia.com ? www.qfinance.com
Books:
? Advance Cost Accounting – Ainapure ? Cost Accounting – P C Tulsian ? Cost Accounting – S C Chand ? Cost Accounting - by Alok Agarwal & Mridu Agarwal
doc_485914212.docx
Operating costs are the expenses which are related to the operation of a business, or to the operation of a device, component, piece of equipment or facility.
CHAPTER – 1 INTRODUCTION
1.1 INTRODUCTION
Operating Costing method is normally used in service sector. When the service is not completely standardized, it is the cost of producing and monitoring a service. It is a method of costing applied to undertakings which provide service rather than production of commodities. Service may be performed internally and externally. Services are termed as internal when they have to be performed on inter-departmental basis in factory itself e.g. Power house services, canteen service etc. Services are termed as external when they
are to be rendered to outside parties. Public utility services like transport, water supply, electricity supply, hospitals are the best example for the service costing. Thus operating costing is a method of cost accumulation which is designed to determine the cost of services. Operating costing is just a variant of unit or output costing. Operating costs are collected periodically like process cost. The cost of rendering the service for particular period is related to quantum of services rendered during the particular period to arrive at cost per unit of service rendered. So the principal of unit costing is used in operating costing. 1.2 MEANING OF OPERATING COSTING Operating costing is a method of ascertaining the cost of providing or operating a service. It is also known as service costing CIMA London, defines Operating Costing as “that form of operation costing which applies where standardized services are rendered either by an undertaking or by a service cost renter with in an undertaking”. 1.3 Cost Unit: Determining the suitable cost unit to be used for cost ascertainment is a major problem in service costing. Selection of a proper cost unit is a difficult task. A proper unit of cost must be related with reference to nature of world and the cost objectives. The cost unit related must be simple i.e. per bed in a hospital, per cup of tea sold in a canteen and per child in a school. In a certain cases a composite unit is used i.e. Passenger – Kilometer in a transport company. The following are some of example of cost units used in different organizations
Enterprises Passenger transport Goods transport Hotel Hospital Canteen Water supply Electricity
Cost per unit Kilometer Ton – Kilometer Per room per day Per bed per day Per item, per meal Per 1000 liters Per kilowatt
1.4 Collection of costing data: After determining the cost unit, the cost relating to the service is collected. The collected cost is a presented under the heads suitable for control purpose i.e. fixed expenditure and variable expenditure. The presentation of cost data under difficult categories helps to improve managerial control over cost. 1.5 Procedure (1) Determine Cost Unit: The first step in Operating Costing is the determination of the Cost Unit. This is a complex task as explained in para 1.3. (2) Ascertain Costs: The next point to be noted is that operating Costs are Period Costs. The costs of supplying the services for a period are ascertained in the following manner (taking the example of a transporter)(a) Vehicle no. : Each Vehicle is treated as a cost centre and given a specific number. all the costs are accounted against this number. a separate Account is opened to record the Costs and Income of each Vehicle. (b) Variable costs: Variable costs are the running and operating charges. These include expenses of variable Nature, e.g. petrol, disel, lubricating oil, grease etc. The Material Requisition Note and Time Sheet (or Log) bears the Vehicle No. The relevant Vehicle Account is debited with its direct material cost and direct labour cost. Direct Expenses such
as fuel are debited to the Vehicle Account on the basis of Log Book and the cash/purchase/journal vouchers. (c) Fixed Costs: Fixed Costs (Fixed Charges) include garage rent, insurance, road licence fees etc. the Fixed Charges are apportioned and absorbed by each Vehicle No. on the basis of the Overheads Absorption Rate which may be Actual or Pre- determined. the Fixed Costs attributable to the Vehicle are debited to the relevant Vehicle Account. (d) Revenue: The revenue from the Vehicle is credited to the Vehicle Account. (e) Profit or Loss: The Vehicle Account at this stage will reveal the profit or loss made on operating that vehicle the profit or loss is then transferred to the Costing Profit and Loss Account. The total Operating Cost of a period is divided by the number of Cost Units (KM/Passenger/Ton etc.) supplied during the period to arrive at the Operating Cost per Unit for that period. (3) No Stocks: In case of a service industry, there is no question of any closing stock or work- in- progress since it is not possible to store a service for future use. (4) Abnormal Costs: According to Cost Accounting Standard 5 (Transportation Costs|) , abnormal and non-recurring costs shall be directly debited to P& L A/c and shall not form part of operating costs. Examples are – penalty, detention charges, demurrage and costs related to abnormal break-down.
1.6 Distinguish between Operating Costing and Operation Costing.
Operating Costing: It is a method of costing applied by undertakings which provide service rather than 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 water works, electricity supply companies, canteens, hospitals, theatres, school etc. Within an organisation itself certain departments too are known as service departments which
provide ancillary services to the production departments. For example, maintenance department; power house; boiler house; canteen; hospital; internal transport. Operation Costing: It represent a refinement of process costing. In this each operation instead of each process of 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.
CHAPTER – 2 TYPES OF OPERATING COSTING
(A) TRANSPORT COSTING Meaning
Transport costing is method of ascertaining the cost of providing service by a transport undertaking. This includes air, water, road and railways; motor transport includes private cars, carriers for owners, buses, taxies, carrier Lorries etc. The objective of motor transport costing may be summarized as follows: ? ? ? ? ? ? To ascertain the operation cost of running a vehicle To provide and accurate basis for quotation and fixing of rates To provide cost companion between own transport and alternative e.g. hiring To compare the cost of monitoring one group of vehicle with another group To determine the cost to be changed against departments using the service To ensure the cost of maintenance and repairs is not excessive
Classification of costs:
Costs are classified into the following three heads: 1. Standing or Fixed Charges: These charges are includes whether vehicle is operating or not. Insurance, tax, depreciation and part of driver wages. Interest on capital, general supervision, and salary of operating managers is items come under the category of fixed or standing charges. 2. Maintenance charges: There are semi variable expenses in nature and include wear on tires, repairs and overheads painting etc. 3. Operating and running charges: Running costs are the cost of operations. These charges vary more or less in direct proportion to kilometers etc. These expenses are variable in nature because they are dependent on distance covered and trips made.
Though the above three classification is done, in practical it is difficult to distribute. It depends basically on the circumstances of each case e.g. if the salary paid to driver is on monthly basis then it is a fixed charged but if the same is limited to kilometer run then it is a running cost.
Collection of Cost Data:
Each vehicle is given a separate unique number and all the basic documents will contain the assigned number of the respective vehicles. A separate daily log sheet for each vehicle is maintains to record the details of trips, running time, capacity, distance cover, cost of petrol / diesel, lubricants, loading and unloading time etc on daily basis. A specimen of log sheet is given below: Daily log sheet Table Vehicle No.: ………………… Route No.:-------------Date of Purchase: ……………….. Driver: ……………… Make and Specification: …………. Time of Leaving: …… License No.: ………………… Time of Returning: ……….
Trip no.
From
To Out Collected
Packages Kilometers Out
Time In Hrs Remarks
Supplies
Worker?s time
abnormal delays
Petrol / diesel ………………Driver …………..Loading / unloading………… Oil …………………….conductor ……….Accident …………………………. Grease ……………Cleaner ………..Traffic Delays ………Others ………
Format of transport operating cost sheet: Vehicle No. : ………………….. Period …………………………….. Cost Unit: ……………………… No. of Cost units …………………. Particulars Rs. Total Rs. A. Fixed Cost (or Standing charges) 1. Road Tax 2. Insurance 3. Driver?s Salary 4. Conductor?s Salary 5. Depreciation 6. Interest on Capital 7. Garage Rent 8. Office & Administration Overheads B. Variable (Running) costs Depreciation Petrol Diesel Oil & Grease Repairs and maintenance Tyres and tubes Total operating cost xx xx xx xx xx xx xxx xx xx xx xx xx xx xxx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx Per Km Rs.
Note: Maintenance expenses can be shown separately also depends on cases. Check Your Progress: 1. Give the format of Transport Operating cost-sheet 2. give the Cost Unit of the following a) Passenger Transport b) Good Transport c) Electricity d) Hospital e) Hotel
Illustration 1: From the following information calculate fare for passenger KM.
The cost of the Bus Insurance charges Annual tax Garage rent Annual repairs Expected life of the bus Value of scrap at the end of 5 years Route distance Driver?s salary Conductor?s Salary Commission to Driver & conductor (shared equally) Stationary Manager-cum-accountant?s Salary Diesel and Oil (for 100 kms)
Rs. 450000 3 % p.a. Rs. 4500 Rs. 500 p.m. Rs. 4800 5 yrs Rs. 3000 20 km long Rs. 550 p.m. Rs. 500 p.m. 10 % of the takings Rs. 250 p.m. Rs. 1750 p.m. 125
The bus will make 3 rounds trips for carrying on the average 40 passenger?s in each trip. Assume 15 % profit on takings. The bus will work on the average 25 days in a month.
Solution: Operating Cost Statement Bus No. Capacity: 40 persons
Particulars
Per Annum Rs.
Per Annum Rs.
Per Annum Rs.
A. Standing Charges Depreciation Tax Insurance Stationery Manager?s Salary B. Maintenance Charges Garage Rent Repairs C. Operating (or) Running Charges Diesel & Oil Driver? Salary Conductor?s Salary Total Add : Commission and Profit 25/75 Fare per passenger km. 3,750 6,600 6,000 16,350 1,53,150 0.01135 0.10635 0.03545 0.1418 6,000 4,800 10,800 0.0075 84,000 4,500 13,500 3,000 21,000 1,26,000 0.0875
Working Note: (1) No. of Km run in a month : 3 x 2 x 20 x 25 = 3000 km (2) No. of passenger km per annum : 3000 x 40 x 12= 14,40,000 (3) Diesel and oil : 3000 x 125 / 100 = Rs. 3750 (4) Commission & Profits: Commission 10 % of taking + profit 15 % of Taking total = 25 % of taking so the cost Cost is only 75 %
Illustration 2: From the following data relating to two different vehicles A and B, compute cost per running mile. Particulars Milage run (annual) Cost of vehicles Road License (Annual) Immune (Annual) Garage rent (Annual) Supervision and Salaries (Annual) Driver?s wage per hour Cost of fuel per gallon Miles runs per gallon Repairs and maintenance per mile (Rs.) Tire allocation per mile Estimated life of vehicle (miles) Vehicle A 15000 Rs. 25000 750 700 600 1200 3 3 20 1.65 0.8 1,00,000 Vehicle B 6000 Rs. 15000 750 400 500 1200 3 3 15 2 0.6 75,000
Charge interest @ 5 % p.a. on cost of vehicles. The vehicles run 20 miles per hour on an average
Solution: Operating cost sheet (cost per mile)
Particulars
Vehicle A
Vehicle B
A.
Operating
and
Maintenance
Charges Depreciation A – 25000 / 100000 B – 15000 / 75000 Repairs and maintenance Tire allocation Fuel (3 / 20 miles) Driver?s wages (A – 3 / 20) (3 – 3 / 15) 1.65 0.80 0.15 0.15 3.00 B. Standing Charges A Rs. Road license Insurance Charges Supervision Interest @ 5 % p.a. 750.00 700.00 600.00 B Rs. 750.00 400.00 500.00 0.25 0.20 0.20 2.00 0.60 0.15 3.15
1200.00 1200.00 1250.00 750.00
4500.00 3600.00 Mileage run per annum Fixed standing charge per mile Operating cost per mile 15000.00 6000.00 0.30 0.60 0.30 3.30 0.60 3.75
Note: (1) Depreciation is linked with mileage so operating cost. (2) Driver wage is taken as operating since it is paid per hour.
Illustration 3: A company presently brings coal to its factory from a nearby yard and the rate paid for transportation of coal from the yard located 6 kms. Away to factory is Rs. 50 per ton. The total coal to be handled in a month is 24,000 tones. The company is considering proposal to buy its own trucks and has the option of buying either a 10 ton capacity or a 8 ton capacity trucks. The following information is available:
Particulars
10 Ton Truck
8 Ton Truck 8,50,000 5 Nil 4 48,000
Purchase Price Rs. Life (Years) Scrap value at the end f 5th year KM Per liter of diesel Repair truck (Rs.) Other fixed expenses p.a. (Rs.) Lubricants (Rs.) and sundries per 100 km and maintenance p.a. per
10,00,000 5 Nil 3 60,000
60,000 20
36,000 20
Each truck will daily make 5 trips (to and fro) on an average for 24 days in a month. Cost of diesel Rs. 15/- per liter. Salary of driver Rs. 3,000/-, p.a. month. Two drivers will be required per truck. Other staff expenses Rs. 1, 08,000 p.a. Present a comparative cost sheet on the basis of above data showing transport cost per ton of operating 10 ton and 8 ton Truck at full capacity utilization.
Solution: Comparative statement of operating cost sheet: Particulars 10 Ton Truck Fixed Charges (p.m.) Driver?s Salary (working no. 1) Staff expenses Other fixed expenses Operating & Maintenance Charges (p.m.) Depreciation (Note No. 2) Diesel Cost (Note No. 3) Lubricants & Sundries(Note No. 3) Repairs & Maintenance Total Cost (A) Tons Carried (B) Cost per ton (A/B) 3,33,333 1,44,000 5,760 1,00,000 7,17,093 24,000 29.87 3,54,167 1,35,000 7,200 1,00,000 7,58,367 24,000 31.59 12,000 9,000 5,000 15,000 9,000 3,000 8 Ton Truck
Conclusion: A comparison of cost per ton by using 10 ton trucks is more economical. The cost paid for bringing coal per ton presently viz. Rs. 50/- is the highest.
Working Note:
Particulars
10 Ton Truck
8 Ton Truck
1 Total number o trucks and drivers required Coal brought to the factory per month (5 x 24 x 10) (5 x 24 x 8) 1200 960
No. of truck required to bring24,000 24000/1200=20 24000/960=25 tons is Total number of drivers required 2 Total monthly depreciation Depreciation per truck per annum Depreciation per truck per month Total depreciation 2,00,000 1,666.66 1,70,000 14,166.66 20 x 2 = 40 25 x 2 = 50
16666.66 x 20 14166.66 x 25 = 3,33,333 = 3,54,167
3 Diesel requires Total Km run per truck p.m. (6 km x 10 trips x 24 days) Total KM run by all trucks Km per liter of diesel Diesel required liters 1440 28800 3 9600 (28800 / 3) 1440 36000 4 9000 (36000 / 4)
Illustration.4: You are required to calculate a suggested fare per passenger – Km from the following information for a mini bus. (i) (ii) (iii) (iv) Length of route 30 km Purchase price Rs. 4, 00,000. Part of above cost meet by loan, annual interest Rs. 10,000 p.a. Other annual charges: Insurance Rs. 15,000, Garage Rent Rs. 9,000, Road Taxes Rs. 3,000, Repairs and Maintenance Rs. 5,000. Administrative charges Rs. 5000. (v) Running expenses : Driver & Conductor Rs. 5000 p.m., Repairs / Replacement of tyre tube Rs. 3600 p.a. Diesel and Oil cost per Km Rs. 5/-
(vi)
Effective life of vehicle is estimated at 5 years at the end of which it will have a scrap value of Rs. 10,000.
(vii)
Mini Bus has 20 seats and is planned to make six two way trips for 25 days / p.m.
(viii)
Provide profit @ 20 % of total revenue.
Solution:
Particulars
Cost per Annum Rs.
Cost Per Month Rs.
Fixed Expenses : Insurance Garage Rent Road Tax Administrative charges Depreciation ÷ 5 years) Interest on Loan Total Running Expenses : Repairs & Maintenance Replacement of tyre tube Diesel Rs. 5/-) Driver & Conductor?s Salary Total Cost per month Add : Profit 20 % of total 5,000 61,550 15,387.50 and oil cost (9000 km x 15,000 3,600 1,250 300 45,000 10,000 1,20,000 10,000 (4,00,000–10,000 15,000 9,000 3,000 5,000 78,000
Revenue 25 % Total cost Total Revenue 76,937.50
Rate per passenger km: Rs. 36937.50 / 1, 80,000 passenger km = 0.4274305 or 0.43 paise.
Workings: Total distance travelled by mini bus in 25 days = 60 km x 6 trips x 25 days = 9000 km
Total passenger km = 9000 km x 20 seats = 1, 80,000 passengers km
Illustration 5: Mr. Sampath owns a fleet of taxies and the following information is available from the records maintained by him.
1. Number of Taxis – 10 2. Cost of each Taxi – Rs. 2,00,000 3. Salary of manager Rs. 6000 p.m. 4. Salary of Accountant Rs. 5000 p.m 5. Salary of cleaner Rs. 3000 p.m.
7. Garage Rent Rs 7000 p.m. 8. Insurance premium 5 % 9. Annual Tax Rs. 6000 per taxi 10. Drivers Salary Rs. 4000 p.m. 11. Annual Repairs Rs. 15,000 per taxi
6. Salary of Mechanic Rs. 4000 p.m.
Total life of a taxi is about 2, 00,000 kms. A taxi runs in all 3000 kms. in a month of which 25 % its runs empty. Petrol consumption is one liter for 10 kms @ Rs. 40 per liter. Oil and other sundries are Rs. 10 per 100 kms.
Calculate the cost of running a taxi per km.
Solution:
Particulars
Amount per month Rs.
Cost per Km Rs.
Fixed Expenses (for the whole fleet) Salary of manager Salary of accountant Salary of Cleaner Salary of mechanic Garage Rent Insurance premium 5 % on Rs. 2,00000 x 10 Tax 6000 x 10 / 12 Total Fixed Expenses Effective kilometer 3000x10x 75 % = 22,500 Fixed expenses per km Running expenses (per taxi) Depreciation (2,00,000÷200000 x 10 x 3000) Repairs (15,000 x 10 ÷ 12) Petrol (3000 x 40) ÷ (10 x 22500) Oil and other sundries (10 x 3000) ÷ (100(22500) Cost per km 6.03701 0.55555 0.53333 0.13333 1.33333 3.48147 6000 5000 3000 4000 7000 8333 40000 5000
(B) HOSPITAL COSTING
Hospitals comes under service sector, big companies also maintain hospitals. For costing purpose the hospital service can be divided in two following categories
(1) Outpatient department (2) Wards (3) Medical service departments such as radio therapy „X? ray etc. (4) General Services such as heating, lighting, catering laundry etc. (5) Other services such as transport, dispensary, cleaning etc.
Cost Statement: The expenses of hospital can be broadly divided into two categories i.e. (1) Capital Expenditure and (2) Maintenance Expenditure – this includes salaries and wages, provision, staff uniforms clothing, medical and surgical appliances and equipments, fuel light and power, laundry, water etc.
Format of a cost Sheet of a Hospital: Particulars A) Fixed standing charges Rent Repairs and maintenance General administrative expenses Depreciation Salaries to staff Cost of Oxygen, X ray etc. B) Running or maintenance costs Doctor?s fees Food Medicines Laundry Hire charges Total operating cost xx xx xx xx xx xx xx xx xx xx xx xx xx xx Rs. Rs.
Total Operating cost Cost per patient day = ----------------------------------No of Patient Days Illustration 1: The following information is available from a intensive care unit.
Rent (including repairs) Rs. 10000 p.m.
The unit cost consists of 25 beds and 5 more beds can be accommodate when the occasion demands. The permanent staff attached to the unit is as follows:
2 supervisors each at a salary or Rs. 2000 per month. 4 nurse each at a salary of Rs. 1500 per month. 2 ward boys each at a salary of Rs. 1000 per month. Though the unit was open for the patients all the 365 days in a year, security of accounts of 2008 revealed that only 150 days in a year the unit had the full capacity of 25 patients per day and for another 80 days it had on an average 20 beds only occupied per day. But there were occasions when the beds were full, extra beds were hired from outside at a charge of Rs. 10 per bed per day and this did not come to more than 5 beds extra above the normal capacity any one day. The total hire charges for the whole year were Rs. 4000.
The unit engaged expert doctor from outside to attend on the patients and the fees were paid on the basis of number of patients attended at time spent by them on an average worked out to Rs. 2000 per month in 2008. The other expenses for the year were as under.
Particulars Repairs and maintenance Food supplied to patients Janitor and other services for patients Laundry charges for bed linens Medicines supplied Cost of oxygen, x ray etc other than directly born for treatment of patients (Fixed) General administration charges allocated to the unit
Rs. 8,000 1,00,000 25,000 40,000 70,000 90,000
1,00,000
(1) If the unit recovered an overall amount of Rs. 200 per day on an average from each patient what is the profit per patient day made by the unit in 2008. (2) The unit wants to work out a budget for 2009, since the number of patients is very uncertain, annuity the same revenue and expenses prevail in 2009, work out the number of patient days required break-even.
Solution: Statement of cost and profit
Particulars A) B) Income received (Rs. 200 x 6150) Variable cost (per annum) Food Janitor and other services Laundry charges Medicines Doctors fees (20,000 x 12) Hire charges for extra bed (B) C) Fixed Costs Salaries Supervisor Nurses Ward boys Rent (10000 x 12) Repairs & Maintenance General administration Cost of oxygen, X ray etc. (C) Total cost (B + C) Profit
Rs.
Rs. 1,23,000
1,00,000 25,000 40,000 70,000 2,40,000 4,000 4,79,000
4,800 72,000 24,000 1,20,000 8,000 1,00,000 90,000 4,62,000 9,41,000 2,89,000
Profit per patient day = 28900/6150 = 46.91 loss Rs. 47/Working Note: Calculation of No. of patient days in 2008 25 beds x 150 days = 3750 20 beds x 80 days = 1600 Extra beds 4000 ÷ 5 = 800 6150
Breakeven point = Fixed Cost/ Income – Variable cost x income = 46200/751000 x 1230000
= Rs. 756671 (or) 756671/200 = 3783.25 patient days
Illustration 2: A hospital is run by a Company. For this purpose it has hired a building at a rent of Rs. 5,000 per month plus it would bear the repair charges also. The hospital is having 25 beds and 5 more beds can be accommodated when the need arises.
The staff of the hospital is as follows: 2 Supervisors each at a salary of Rs. 500 per month 4 Nurses each at a salary of Rs. 300 per month 2 Ward boys, each at a salary of Rs. 150 per month Although the hospital is open for patients all the 365 days in a year, records for the year 2004 disclose that only for 120 days in the year, the unit had the full capacity of 25 patients per day and when the beds were full, extra beds were hired at a charge of ` 5per bed per day and this did not come to more than 5 beds extra above the normal capacity on any one day. The total hire charges for the extra beds incurred for the whole year were Rs. 2,000. The Unit engaged expert doctors from outside to attend on the patients and the fees was paid on the basis of the number of patients attended and time spent by them which on an average worked out to Rs. 10,000 per month in 2004. The other expenses for the year were as under: Repair and Maintenance Food supplied to patients Sanitary and Other services for patients Laundry Charges Medicines supplied Rs. 3,600 Rs. 44,000 Rs. 12,500 Rs. 28,000 Rs. 35,000
Cost of oxygen, X-ray, etc. other than directly borne for treatment of patients Rs. 54,000. General Administration Charges allocated to hospital Rs. 49,550. If the hospital recovered an amount of Rs. 100 per day on an average from each patient, compute the profit per patient – day made by the hospital as per operating cost sheet for the year 2004.
Solution: Statement of Profit
Particulars Income (100 x 5,000) Less : Variable Cost Food sanitary Services Laundary Medicines Doctor's Fee (10,000 x 12) Hire Charges for Extra Bed Contribution Less : Fixed Costs Salaries [(2 x 500) +(4 x 300) + ( 2 x 150)] x 12 Rent ( 5,000 x 12 ) Repairs and Maintenance General Administration Cost of Oxygen, X- ray etc. Total
Rs.
Rs. 55,00,000
44,000 12,500 28,000 35,000 1,20,000 2,000 2,41,500 2,58,500
30,000 60,000 3,600 49,550 54,000 1,97,150 61,350
Profit per patient- day = 61,350 / 5,000 = Rs. 12.27
Note:
Number of patient- days in 2001
patient days
25 beds x 120 days 20 beds x 80 days Extra bed - days (total hire charges of extra beds/charges per bed per day = 2000/5) Total
3,000 1,600
400 5,000
Illustration: 3 Appolo Hospital runs an Intensive Care Unit in a hired building at a rent of Rs. 7,500 p.m. The hospital has undertaken to bear the cost of repairs and maintenance. The Intensive Care Unit consists of 35 beds and 5 more beds can be conveniently accommodated whenever required. The permanent staffs attached to the unit are as follows. 2 Supervisors each at a salary of Rs. 2,500 per month. 4 Nurses, each at a salary of Rs. 2,000 per month. 4 Ward boys, each at a salary of Rs. 500 per month. Though the unit was open for the patients all the 365 days in a year but it was found that only 150 days in a year, the unit had the full capacity of 35 patients per day and for another 80 days it had an average 25 bed only occupied per day. But there were occasions when the beds were full, extra beds were hired from outside at a charge of Rs. 10 per bed per day. This did not come to more than 5 beds extra above the normal capacity any one day. The total hire charges for the extra beds incurred for the whole year amounted to Rs. 7,500. The unit engaged expert doctors from outside to attend on the patients and fees were paid on the basis of the number of patients attended and time spent by them on an average worked out to Rs. 25,000 per month in the year 2003. The other expenses for the year were as under:
Repairs
and Maintenance (Fixed)
Rs. 8,100 Rs.88,000 Rs. 30,000 Rs.60,000 Rs. 75,000 Rs. 1,08,000
Food supplied to patients (Variable) Janitor and other Services for patients (Variable) Laundry Charges for their bed linen (Variable) Medicines supplied (Variable) Cost of Oxygen , X-ray, etc., other than directly borne for treatment of patients (Fixed) General Administration Charges allocated to the unit (Fixed)
Rs. 1,00,000
Solution: Calculation of No. of Patient-days: 35 beds x 150 days 25 beds x 80 days Extra bed days (Rs. 7,500 / 10) Total 5,250 2,000 750 8,000
Statement of Cost Particulars Income Received (Rs. 200 x 8,000 patient-days) Variable Costs (Marginal Costs) Per Annum : Food Janitor and other services Laundry Charges Medicines supplied Doctor?s Fees (Rs. 25,000 x 12) Hire Charges for extra-beds Contribution Fixed Costs Salaries : Supervisors (2 x 2,500 x 12) Nurses (4 x 2,000 x 12 ) Ward Boys ( 4 x 500 x 12) Rent (7,500 x 12 ) Repairs & Maintenance Cost of Oxygen etc. General Administration Profit 60,000 96,000 24,000 90,000 8,100 1,08,000 1,00,000 4,86,100 5,53,400 88,000 30,000 60,000 75,000 3,00,000 7,500 5,60,500 10,39,500 Rs. Rs. 16,00,000
Profit per Patient- day = Rs.5, 53,400 / 8,000 Patient –days = Rs. 69.175 Break-even Point = (Fixed Cost/ Contribution x Income) = (Rs. 4, 86,100 / Rs. 10, 39,500 x 16, 00,000) =Rs. 7, 48,206 Break- even Point for Patient- days = Rs. 7, 82,206 / Rs. 200 = 3,741 patient- days.
(C) HOTEL COSTING
Hotel industry is a service industry and covers various activities such as provision for food and accommodation. It also provides other comforts like recreations, business facilities, shopping areas etc. The expenses incurred in a hotel are fixed or variable. Fixed expenses comprises of staff salaries, repairs, interior decoration, laundry contract cost, sundries and depreciation on fixed assets. The variable expenses incurred are lighting, attendants? salaries, power etc. To find out room rent to be charged from customers a notional profit is added with the cost and divided by the number of rooms available. The number of rooms available is calculated after for considering availability of suits and occupancy. Rooms rent may be different from season to season. Sometime besides accommodation they also provide food. Then the cost of meals, other direct and indirect costs are considered to work out the costs to be charged from customers.
Operating cost sheet of a Hotel:
Particulars A) Fixed Charge Salaries to Staff Repairs and Renovation Depreciation Interior decoration Sundries Laundry contract cost Rent B) Running charges (Variable cost) Power Attendant salaries Total Operating Cost No. of Room Days Cost per Room Days
Rs.
Rs.
xx xx xx xx xx xx xx xx
xx xx xx xx xx xx
Illustration 1: A company runs a holiday home for this purpose it hired a building at a rent of Rs. 10,000 per month along with 5% of total takings. It has three types of suites for its customer?s viz. single room, double room and triple rooms. Following information is given:
Types of suite Single rooms Double rooms Triple rooms
Number 100 50 30
Occupancy percentage 100 % 80 % 60 %
The rent of double room?s suite is to be fixed at 2.5 times of the single room and that of triple rooms at twice of the double room suite. The other expenses for the year 2009 are as follows:
Particulars Staff salaries Room attendants wages Lighting heating and powers Repairs and renovations Laundry charges Interior decoration Sundries
Rs. 14,25,000 4,50,000 2,15,000 1,23,500 80,500 74,000 1,53,000
Provide profit @ 20 % on total takings and assume 360 days in a year. You are required to calculate the rent to be charged for each type of suite
Solution: Calculation of room occupancy
Type of suite
Number
Occupancy %
No. of days in a year
Room occupancy days 36000 14400 6480
Single Room Double Room Triple Room
100 50 30
100 80 60
360 360 360
Calculation of equalant single room suits occupancy 36,000 x 1 + 14400 x 2.5 + 6480 x 5 = 104400 Calculation of Total Cost:
Particulars Staff salaries Room attendant wages Lighting heating and power Repair and renovation Laundry charges Interior decoration Sundries Total cost excluding building rent Building rent = 10000 x 12 + 5% of taking Total cost Profit 20 % of takings Total takings
Rs. 14,25,000 4,50,000 2,15,000 1,23,500 80,500 74,000 1,53,000 25,21,000 2,96,066 28,17,066 7,04,267 35,21,333
Rent for a single room = 3521333 ÷ 104400 = Rs. 33.73 Rent for a double room = 33.73 x 2.5 = Rs. 84.325 Rent for a triple room = 84.325 x 2 = Rs. 168.65
Illustration 2: A lodging home is being run in a small hill station with 50 single rooms. The home offers concessional rate during six off season months in a year. During this period, half of the full room rent is charged. The management profit margin is targeted at 20% of the room rent. The following are the cost estimates and other details for the year ending 31st March, 1996 (assume a month to be of 30 days) (a) Occupancy during the season is 80%, while in the off season is 40% only. (b) Expenses: (i) Staff Salary (excluding room attendants) Rs. 2, 75,000 (ii) Repairs to buildings Rs. 1, 30,000 (iii) Laundry and linen Rs. 40,000 (iv) Interior and tapestry Rs. 87,500 (v) Sundry expenses Rs. 95,400 (c) Annual depreciation is to be provided for building at 5% and on furniture and equipments at 15% on straight line basis. (d) Room attendants are paid Rs. 5/- per room-day on the basis of occupancy of the rooms in a month. (e) Monthly lighting charges are Rs. 120 per room, expect in four months of winter when it is Rs. 30 per room and this cost is on the basis of full occupancy for a month and (f) Total investments in the home are Rs. 100 lakhs of which Rs. 80 lakhs relate to buildings and balance for furniture and equipments.
You are required to work out the room rent chargeable per day both during the season and the off-season months, on the basis of the foregoing information.
Solution: Total estimated costs for the year ending 31.03.1996
Particulars
Total Rs.
Per room day (Rs.)
Salary Repairs Laundry and linen Interior decoration Depreciation: Building 5% on 80 lakhs Furniture 15 % on 20 lakhs Miscellaneous expenses Attendant?s salary Lighting charges Total cost Rs. 4,00,000 3,00,000
2,75,000 1,30,000 40,000 87,500
7,00,000 95,400 54,000* 36,000** 14,18,400 / 9000 *** full room days 157.6
Add : Profit margin at 20% on rent or 25% of cost
197.00
During season room rent is Rs. 197 and during off-season room rent is Rs. 98.50 * Attendant? salary For 10,800 room days @ Rs. 5 per day = Rs. 54,000 ** Total light bill Light bill during 8 months at Rs. 120 per month or 120 ÷ 30 = Rs. 4 Per room day. Light bill during 4 months of winter at Rs. 30 per month or 30 ÷ 30 = Re. 1 per Room day.
Total light bill for full one year
Particulars During season @ Rs. 4 for 7,200 days During 2 months of off-season @ Rs. 4 for 1,200 days (2 ÷ 6 x 3,600) During 4 months of winter at Re. 1 For 2,400 days (4 ÷ 6 x 3,600) Total
Rs. 28,800 4,800
2,400
36,000
*** Number of room days in a year:
Seasons occupancy for 6 months@80% (50 x 0.8 x 6 x 30) room days Off season?s occupancy for 6 months @ 40 % (50 x 0.4 x 6 x 30) Total room days during the Year
7,200 3,600
10,800
Total full room days in terms of rate Season Off Season (in terms of 50 % rate on 3,600 days) Total Full room days
7,200
1,800 9,000 (per annum)
Illustration 3: Elegant Hotel has a capacity of 100 single rooms and 20 double rooms. It has a sports centre with a swimming pool which is also used by persons other than residents of the hotel. The hotel has a shopping arcade at the basement and a specialty restaurant at the roof top. The following information is available: (1) Average occupancy : 75 % for 365 days of the year (2) Current costs are :
Variable cost Single room Double room 400 500
Fixed cost 200 250
(3) Average sales per day of restaurant Rs. 1, 00,000; contribution is at 30 %. Fixed cost Rs. 10, 00,000 per annum. (4) The sports centre / swimming pool is likely to be used by 50 non –residents daily; average contribution per day per nonresident is estimated at Rs. 50; fixed cost is Rs. 5,00,000 per annum. (5) Average contribution per month from the shopping arcade is Rs. 50,000; fixed cost is Rs. 6, 00,000 per annum. You are required to find out: (a) Rent chargeable for single and double room per day, so that there is a margin of safety of 20 % on hire of rooms and that the rent for a double room should be kept at 120 % of a Single room.
(b) Evaluate the profitability of restaurant, sports centre and shopping arcade separately.
Solution: (a) Statement for calculating the rent chargeable for single and double room per day.
Particulars
Occupancy days Variable in a year Refer to working note (1) cost Rs /Days (2)
Fixed cost Rs / Days (3)
Total variable cost 4 = (1) x(2)
Total fixed cost (Rs.) 5=(1)x(3)
Total cost (Rs.) 6 = (4) x (5)
Single room Double room
27,375
400
200 1,09,50,000
54,75,000 1,64,25,000
5,475
500
250
27,37,500
13,68,750
41,06,250
Add : 20 % margin of safety on hire of room or 25 % of total cost
51,32,812
Total amount of room rent to be received 2,56,64,062
Rent per day of single room 9in Rs.) 756 (approx) (Refer to working note 2) (Rs. 2, 56, 64,062 / 33,945) Rent per day of double room (in Rs.) 907 (approx) (Rs. 756 x 1.2 times)
b) Profitability of restaurant Total sales per annum 365 days x Rs. 1,00,000 Contribution per annum (30 % of Total Sales) : (A) Fixed cost per annum : (B) Profit [ (A) – (B)] Profitability of sports centre : Contribution of sports centre per day : (50 persons x Rs. 50) Total contribution per annum (Rs. 2,500 x 365 days) : (A) Fixed cost per annum : (B) Profit : [(A) – (B)]
Rs. 3,65,00,000
1,09,50,000 10,00,000 99,50,000 Rs. 2,500
9,12,500
5,00,000 4,12,500
Profitability of shopping arcade : Contribution per annum (Rs. 50,000 x 12 months) Less : Fixed Cost Profit
Rs. 6,00,000 6,00,000 Nil
Working Note: 1. Single room occupancy days in a year = 100 room x 365 days x 75 % = 27,375 2. Double room occupancy days in a year = 20 rooms x 365 days x 75 % = 5,475 3. In terms of single room total room occupancy days in a year = 27,375 + 1.20 % x 5,475 = 27,375 + 6,570 = 33,945
Illustration 4:
Following are the information given by an owner of a hotel. You are requested to advice him that what rent should be charge from his customers per day so that he is able to ear 25 % on cost other than interest. 1) Staff salaries Rs. 80,000 per annum 2) Room attendant?s salary Rs. 2 per day. The salary is paid on daily basis 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 expenses for a room if it is occupied for the whole month is Rs. 50. Power is used only in winter and normal charge per month if occupied for a room is Rs. 20. 4) Repairs to building Rs. 10,000 per annum 5) Linen etc. Rs. 4,800 per annum 6) Sundries Rs. 6,600 per annum 7) Interior decoration and furnishing Rs. 10,000 annually 8) Cost of building Rs. 4,00,000; rate of depreciation 5 % 9) Other equipments Rs. 1,00,000; rate of depreciation 10 % 10) Interest @ 5% may be charged on its investment of Rs. 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 % of the rooms are busy in winter. You may assume that period of summer and winter is six month each. Normal days in a month may be assumed to be 30.
Solution: Operating cost sheet Rent per day Particulars Rs. Per annum Rs. 1. Staff salaries Room attendant?s salaries Summer 2 x (100 x 80 ÷ 100) x 30 x 6 Winter 2 x (100 x 30 ÷ 100) x 30 x 6 Lighting, heating and power Summer 50 x 6 x (100 x 80 ÷ 100) Winter 50 x 6 x 100 x (30 ÷ 100) Power 20 x 6 x 100 x (30 ÷ 100) Repairs to building Linen etc. Sundries Interior decoration and furnishing Depreciation : Building Other equipments Interest on investment (5% on Rs. 5,00,000) Add : 25 % profit on cost other than interest Rs. 2,42,600 – Rs. 25,000 interest = Rs. 2,17,600 Rs. 2,17,600 x 25 ÷ 100 Total cost 54,400 2,97,000 20,000 10,000 30,000 25,000 2,42,600 24,000 9,000 3,600 36,600 10,000 4,800 6,600 10,000 28,800 10,800 39,600 80,000
Rent per room for one day = Total Cost ÷ No. of room days = 2, 97,000 ÷ 19,800 = Rs. 15 per day Working Notes: Calculation of room days No. of Rooms x Percentage x days in a month x no. of months Summer: 100 x (80 ÷100) x 30 x 6 80 x 30 x 6 = 14,400
Winter: 100 x (30 ÷ 100) x 30 x 6 30 x 300 x 6 = 5,400 Total room days = 19,800
Illustration 5:
From the following information relating to a Hotel, calculate the room rent to be charged to give a profit of 25% on cost excluding interest charged on Loan for the year ended 31st March, 2008: 1. Salaries of office staff Rs. 50,000 per month. 2. Wages of the room attendant: Rs. 20 per day per room when the room is occupied. 3. lighting, Heating and Power : a) The normal lighting expenses for a room for the full month is Rs. 500, when occupied. b) Power is used only in winter and the charges are 200 for a room, when occupied. 4. Repairs to Beds and other furniture: Rs. 30,000 per annum. 5. Repairs to Hotel building: Rs. 50,000 per annum. 6. Licence fees: Rs. 12,400 per annum. 7. Sundries: ` 10,000 per month. 8. Interior decoration and furnishing: Rs. 1, 00,000 per annum. 9. Depreciation @ 5% p.a. is to be charged on Building costing 20, 00,000/- and @ 10% p.a. on Equipments. 10. There are 200 rooms in the Hotel, 80% of the rooms are generally occupied in summer, 60% in winter and 30% in rainy season. The period of summer, winter and rainy season may be considered to be of 4 months in each case. A month may be assumed of 30 days of an average.
Solution: Operating cost statement
Particulars office staff salaries (50000x12) Room Attendant wages (WN1) Lighting and Heating (WN 2) Power (WN 3) Repairs to beds and other furniture Repairs to Building Licence fee Sundries (10,000x12) Interior Decoration and furnishing Depreciation Building @5% Equipment @10% Total Cost Add : Profit 25% of Cost(Excluding interest on loan) Total Earnings
Rs.
Rs. 6,00,000 8,16,000 6,80,000 96,000 30,000 50,000 12,400 1,20,000 1,00,000
1,00,000 5,00,000 1,50,000 26,54,400 6,63,600
33,18,000
Room rent to be charged: Per day = 33, 18,000 / 40,800 = Rs. 81.32 Working Notes: (a) Lighting and Heating: Summer 500x 4 months x200 x 80% Winter 500x 4 months x 200 x 60% Rainy 500x 4 months x 200 x 30% 3,20,000 2,40,000 1,20,000 6,80,000
(b)
Power 200 x 4 months x 200 x 60%
96,000
(c) Room Days Summer 200x 4 months x 30 days x 80% Winter 200x 4 months x 30 days x 60% Rainy 200x 4 months x 30 days x 30% Total Rooms Days 19, 200 14,400 7,200 40,800
CHAPTER – 3 CONCLUSION
Operating costs are the expenses which are related to the operation of a business, or to the operation of a device, component, and piece of equipment or facility. For a commercial enterprise, operating costs fall into two broad categories:
?
fixed costs, which are the same whether the operation is closed or running at 100% capacity
?
variable costs, which may increase depending on whether more production is done, and how it is done (producing 100 items of product might require 10 days of normal time or take 7 days if overtime is used. It may be more or less expensive to use overtime production depending on whether faster production means the product can be more profitable).
Thus operating costing is useful in determining the actual cost in various industries.
CHAPTER – 4 BIBLIOGRAPHY
Websites:
? www.icai.com ? en.wikipedia.org ? www.investopedia.com ? www.qfinance.com
Books:
? Advance Cost Accounting – Ainapure ? Cost Accounting – P C Tulsian ? Cost Accounting – S C Chand ? Cost Accounting - by Alok Agarwal & Mridu Agarwal
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