Introduction, Meaning, Features, application of Operating Costing

Operating costing is an extension and refined form of process costing. It is also more or less very similar to single or output costing. The operating costing gives more emphasis on providing services rather than the cost of manufacturing an article. The services provided may be for sale to the general public or they may be provided within an organization.

Features:

• Documents like the daily log sheet, operating cost sheet, boiler house cost sheet, canteen cost sheet etc. are used for the collection of cost data.
• Uniformity of service to all the customers.
• Intangible products: Service organizations do not produce tangible goods. On the other hand, they are engaged in providing services to the public.
• It can be applied to the services within the organisation as well as extending services to the community at large.
• Total costs are averaged over the total amount of service rendered.
• The cost unit may be simple in certain cases, and composite or compound in other cases like transport undertakings.
• Involves fixed and variable costs. The distinction is necessary to ascertain the cost of service and the unit cost of service.
• Many stages and processes: The conversion of basic materials into services involves many stages and processes.
• It is not concerned with accounting for inventories, other than those for miscellaneous supplies. There is nothing like finished services inventory similar to finished goods inventory.
• Service undertakings do not produce physical articles for stock and sale. But services are sold to consumers.

Objectives

• This system requires a more detailed but simpler statistical data for proper costing.
• Unlike in other methods of costing, selection of cost unit is difficult in operating costing.
• The amount of working capital required to meet out the day-to-day expenses, is comparatively less.
• These undertakings are engaged in rendering services of unique nature to their customers.
• Operating costs are mostly period costs.
• In the case of these undertakings, a proper distinction between fixed and variable cost is of utmost importance since the economies and scale of operations considerably affect the cost per unit of service rendered. For example, in case of a transport company if the buses run capacity packed, the fixed cost per passenger shall be lower.
• These undertakings are required to invest a large proportion of their total capital in fixed assets e.g., trucks, buses, ships, aircrafts, railway engines, wagons, railway lines, etc.

Classification of Operating Cost

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

Operating and running charges: It includes expenses of variable nature. For example:

• Expenses on petrol, diesel
• Lubricating oil, and grease, etc.
• Wages of the driver, conductor, etc. (if payment is based on time or distance of trips)
• The commission is taking on the bridge (toll)
• Depreciation (if allocated based on mileage run and treated as variable expenses)

Maintenance charges: These expenses are semi-variable and include the cost of:

• Tires and tubes
• Repairs and maintenance
• Spares and accessories, overhaul, etc.

Fixed or standing charges: These costs are fixed in nature though the operation is on standing position, which includes:

• Garage rent
• Insurance
• Road license
• Depreciation
• Interest on capital
• Administrative overheads
• Motor vehicle tax
• Garage rent
• General supervision
• Salary of an operating manager, supervisor, etc.