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INTRODUCTION
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. They are the cost of resources used by an organization just to maintain
its existence.
Operating costs fall under the two broad categories i.e. fixed cost and
variable costs. Operating Cost is calculated by Cost of goods sold + Operating
Expenses. Operating Expenses consist of:
Administrative and office expenses like rent, salaries, to staff, insurance,
directors fees etc.
Selling and distribution expenses like advertisement, salaries of salesmen.
It includes all operating cost such as salary, rent, stationery, furniture etc.
In the case of a device, component, piece of equipment or facility (for the
rest of this article, all of these items will be referred to in general as
equipment), it is the regular, usual and customary recurring costs of operating
the equipment. This does not include the capital cost of constructing or
purchasing the equipment (depending on whether it is made by the owner or
was purchased as a constructed system).
Operating costs are incurred by all equipment unless the equipment
has no cost to operate, requires no personnel or space and never wears out (any
examples? perhaps intangibles, though not equipment). In some cases,
equipment may appear to have low or no operating cost because either the cost
is not recognized or is being absorbed in whole or part by the cost of something
else.

Equipment operating costs may include:

Salaries or Wages of personnel
Advertising
Raw materials
License or equivalent fees (such as Corporation yearly registration fees)
imposed by a government
Real estate expenses, including
o Rent or Lease payments
o Office space rent
o furniture and equipment
o investment value of the funds used to purchase the land, if it is
owned instead of rented or leased
o property taxes and equivalent assessments
o Operations taxes, such as fees assessed on transportation carriers
for use of highways
Fuel costs such as power for operations, fuel for production
Public Utilities such as telephone service, Internet connectivity, etc.
Maintenance of equipment

Office supplies and consumables

Insurance premium
Depreciation of equipment and eventual replacement costs (unless the
facility has no moving parts it probably will wear out eventually)
Damage due to uninsured losses, accident, sabotage, negligence,
terrorism and routine wear and tear.
Taxes on production or operation (such as subsidence fees imposed on oil
wells)
Income taxes

Some of these are not applicable in all instances. For example,

A solar panel placed on one's home for use in generating electric power
generally has only capital costs; once it's running there are no personnel
costs, utility costs or depreciation and it uses no extra land (that wasn't
already part of the place where it is located) so it has no real operating
costs; however there may need to be taken into account costs of
replacement if damaged.
An automobile or any other item purchased for personal use has no salary
cost because the owner does not charge themselves for operating the
device.
An item which is leased may have some or all of these costs included as
part of the purchase price.

MEANING
Operating costing is the method used to ascertain the cost of providing a
service such as transport, hotel, hospital, gas or electricity. Operating costs
denotes the costs of providing a service as opposed to cost of manufacturing a
product. It is also termed as Service Costing. ICMA has defined operating
costing as that form of operation costing which applies when standardized
services are provided either by an undertaking or by a service cost centre within
an undertaking. Cost Accounting Standard 1 by ICWA defines Operating
Cost as the cost incurred in conducting a business activity. Operating costs
refer to the cost of undertakings, which do not manufacture any product but
which provide services.

APPLICATION

Operating costing is employed in different types of service industries such as

- Transport services e.g. Truck operator, Road Transport, Railways, Air-line
etc.
- Municipal services like Road maintenance, Garbage Disposal, Street
Lighting etc.
- Supply services such as Electricity, steam, gas, water etc.
- Welfare services e.g. Canteen, Hospital, and Library etc.

FEATURE OF OPERATING COSTING

1. It involves distinction of cost into
a. Fixed cost or standing cost
b. Variable cost or running cost or maintenance cost
2. Service costing is applicable for undertakings which do not produce
physical articles for sale but provide services to customers.
3. Service costing helps to ascertain the cost which helps to quote the prices
for services rendered.
4. In this, there are various cost units such as passenger km, quintal km,
tonne km, these are all known as composite units and are computed in 2
ways:
a. Absolute (weighted average): (e.g.) tones km - Multiplying total
distance by respective load quantity.

b. Commercial (simple average): (e.g.) tonne KmMultiplying total

distance by average load quantity.
5. The selection of cost unit in the case of operating costing is a difficult
job. It depends upon the nature of business.

COST UNIT
For ascertaining costs, it is necessary to decide suitable cost units for each
type of service industry. Basically, operating costing is a type of Process
Costing. Thus it uses the methods of Process Costing when ascertaining the
cost of supply of electricity, steam etc. However, sometimes operating costing
may adopt a particular job as a unit of cost for example when costing a
particular trip by a bus so as to quote the charges. In such cases operating
costing uses the methods of job costing by treating a specific trip as a separate
job. A cost unit under operating costing may be of two typesa. Simple cost unit
b. Composite cost unit
Following is the list of different cost units used in different types of service
enterprisesSERVICE INDUSTRIES
Passenger Transport
Good Transport
Road Maintenance
Water supply
Canteen

SIMPLE COST UNIT

Per kilometre
Per kilometre
Per K.M. of road maintained
Per kilo litre of water supplied
Per Meal/Dish

SERVICE INDUSTRIES
Passenger transport
Goods transport
Electricity

COMPOSITE COST UNIT

Per passenger K.M.
Per Ton K.M.
Per Kilowatt Hour

Steam, gas
Per K.G. / Cubic Ft.
Hospital
Per Patient Day
Library
Per Member- Book
Thus it can be seen that in operating costing, in most cases the cost unit is
compound unit. It refers to both Quantum of service and Period of Service.
Thus a transporter charges for carrying so much weight (tons) for so much
distance (km); an electricity company charges one for use of both the Quantum
(Kilowatt) and the period (Hours); and so on.

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

below.
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, diesel,
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 the Log book and the cash/purchase/journal vouchers.
c. Fixed costs: Fixed Costs (fixed charges) include garage rent,
insurance, road license 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
and 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 from part of operating costs. Examples
are- penalty, detention charges, demurrage and costs related to abnormal
break down.

STATISTICS
CA-5 by ICWA also states that proper records shall be maintained to
determine the actual operating cost of vehicles showing details of various
elements of cost, such as salaries and wages of driver, cleaner and others, cost
of fuel, lubricants, grease, amortized cost of tyres and batteries, repairs and
maintenance, depreciation of vehicles, distance covered and trips made, goods
hauled and transported.
Two basic documents are normally maintained for collection of cost and
operational details i.e. log book and Daily operation schedule. Same as job is
assigned a distinct number in job costing method, each vehicle is provided with
a log book or log sheet, which contains all information for operation and cost
control, of one particular vehicle.

LOG BOOK
Vehicle no.
License no.
Route no.

Trip
no.

From

Date:
Time left garage:
Time returned:

To

Supplies: ..
Petrol: ..
Oil: ...
Grease: .

Trip record
Package weight
Out
Collecte
d on
route

Workers time
Driver:
Assistant:
Cleaner:

Kms.

Out

Time
In
Hours taken

Remarks:
Loading delay: ..
Traffic delay: .
Accident: ...

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Etc.: ...
Most of the details required for controlling the vehicles are available from the
log book. A daily operation schedule has to be maintained by firms operating a
fleet of vehicles, so as to keep control over utilization of each vehicle,
minimizing vehicle idle hours, and also, keeping repairs cost under control. A
system of requisition of vehicles may also be introduced for proper
authorization for use of vehicles. Similarly, major repairs should be undertaken
after obtaining authorization for the same.

FORMAT OF COST SHEET [TRANSPORTER]

BASED ON CAS-5
Cost Sheet for (month/year)
VEHICLE NO.
CARRIAGE CAPACITY [Seats or Tonnes]
DAYS OPERATED
STE COSTS
P
A.
FIXED COST
Insurance
License fee, permit fee and taxes
Depreciation
Other fixed cost (specify)
B.

VARIABLE COST
Salaries and wages of drivers, cleaners and
other operating staff
Fuel and lubricants
Consumables
Amortized cost of tyre, tube and battery
Spares
Repairs and maintenance

Rs.

XX
XX
XX
Rs.

XX
XX
XX
XX

XX

XX
XX
XX
XX
XX
XX
XX

XX

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Other variable cost(specify)

XX

C.

TOTAL OPERATION COSTS [A+B]

XX

D.

PROFIT/LOSS
XX

E.

REVENUE [TAKINGS]

The above cost sheet is as prescribed in cost accounting standard -5 by ICWA

which is mandatory w.e.f. 1-4-2010. CAS-5 is mandatory for cost audits under
the companies act and for computing transport cost under the Excise act. The
above cost classification is different from the traditional cost classification. In
most cases, the final unit cost remains the same, even if the classification vide
CAS-5 is different.
Notes:
1. Fixed costs are costs of owing the vehicles. These must be paid whether
the vehicle runs or not.

These also include office/administrative

overheads.
Variable costs are incurred to actually run a vehicle. These vary with the
operations- the more a vehicle runs, the higher are the variable costs.
2. Effective kilometres = Run * load = [one way trip (km.) * trips per day *
days operated]*[carriage capacity*usage rate]
2.1. In case of passenger transport, carriage capacity is in terms of
seats; and cost unit is effective kilometres per passenger.

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2.2.

In case of goods transport, carriage capacity is in terms of Tonnes;

and cost unit is effective kilometres per Tonne.

3. Cost per kilometre = operation cost / effective kilometres
4. Revenue (or takings = cost + profit) per kilometre = Takings / effective
kilometre
5. Tariff to be charged per kilometre = Takings per effective km. /
Distance of trip
6. Special points: cost of battery, tyres and tubes shall be amortized over its
useful life.

THE COSTS OF OPERATING TRUCKS

Our methodology for determining truck-operating costs differs
substantially from that for passenger vehicles because there are very different
types of information available. When looking at cars, there are many third party
sources that estimate operating costs and resale values of different models, as a
service to potential buyers. No similar service exists for trucks. This is probably
because buyers of trucks are more knowledgeable about their purchases, and
hence have less use for such services. Since they are using trucks for a specific
purpose, they tend to buy the same type of truck over and over, and hence have
a good understanding of costs and resale values.
The result of this lack of third party cost estimates is that Truck
operators must develop estimates of truck costs more from research sources,
which will in general be aimed at purposes slightly different than ours. That is,

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they may include some fixed costs, or some costs that may vary with the
number of trips but not with the number of miles driven.
While there are obviously many different sizes and types of trucks, they
estimate a single composite value to account for all of them. This was done for
two reasons. First, analysts will typically not have detailed counts of different
types of trucks. Second, and more importantly, we could not establish robust
estimates of the costs of operating different types of trucks. The available
sources tend to focus either on long-haul tractor-trailer combination trucks, or
on all commercial trucks; there does not seem to be much information on
how types of trucks differ from each other.
The lack of information on the costs of different truck types is especially
problematic given that they are interested in a specific type of cost, namely
operating the truck on a highway under varying start-stop and pavement
roughness conditions. However, available estimates of operating costs tend to
focus on the typical environment for a truck type, which may be very
different from this. For example, trucks used in construction and for deliveries
operate mostly in extreme conditions; on a highway they may cost less, but no
one has had reason to figure this out. And ultimately they dont have that much
precision available on the costs of combination trucks, which are the type that
they know the most about. So to be conservative, they derive a consensus
operating cost and assume that this cost applies to all truck types.

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Road Transport Operations

(Ascertaining Cost of Road transport of service
vehicle)
Field:

Transport

Sub-field:

Commercial Road Transport

Purpose:

People credited with this unit standard are

able to identify the variable and fixed cost
components of a vehicle used in a road
transport operation and develop a costing
system for a road transport service vehicle.

Special notes:

Definitions
A road transport operation may form part of
a road transport organization or it may
constitute a complete organization; Vehicle
may be a single vehicle or a combination
vehicle.

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Elements and Performance Criteria:

Element 1
Identify the variable and fixed cost components of a vehicle used in
a road transport operation.
Range:

includes but is not limited to Road User Charges, fuel,

wages and salaries, tyres, repairs and maintenance (both
scheduled

and

unexpected),

depreciation

and

interest,

overheads, insurance.
Performance criteria
Costs identified are consistent with historical data and/or industry survey.

Element 2
Develop a costing system for a road transport service vehicle.
Range:

per kilometer, per hour, per day, per month.

Performance criteria
Costing system reflects the aggregation of identified cost components.
Range:

fixed costs, running or standing costs, variable costs.

Note:
Costing system includes a process for the review of the costing
constants and the updating of data.
Costing system is evaluated on two assignments, one biased for
time, one biased for distance.
Calculations are checked and accurate.

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CASE STUDY TRANSPORT INDUSTRY

Mamta Transport service (transport contractors)
Suppliers of all types of vehicles
Owner Mr. Ankush K. Langade
Address: Check naka, tempo owners association, near Modella
mill, wagle check naka, thane 400 604.
History
The owner, Mr. Ankush K. Langade started business with one truck
in 1992 for Rs. 2, 50,000. He bought additional truck for Rs. 2, 90,000 in 1995
and in 1999 for Rs. 3, 30,000. Then due to some business crises/losses, he sold
all 3 trucks for Rs. 1,40,000, Rs. 1,45,000 and Rs, 2,00,000 respectively.
When he recovered his losses and came into stable position, he
again started business in 2004 by purchasing one new truck costing
Rs. 4, 50,000 having capacity of 2.5 tonnes and in 2008 he made addition of
new truck having capacity of 5 tonne for Rs. 9, 00,000.

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At present
At present, his business is running on 2 trucks which are purchased
on 2004 and 2008 respectively and have estimated life of 10 years. Both the
trucks are of TATA Company and used for goods transport as GOODS
CARRIER. Both trucks carry goods like electronics, wooden cases and
household goods or as per the job or order.
He adopted straight line method of depreciation for trucks @ 10%.
Finally, from his business he earns approximate income of Rs. 50000 and
Rs. 80000 per month respectively.

Mamta transport service

Statement of Operating Cost sheet for year .
Vehicle no.
Carriage capacity
Days operated
Trips per day
Kilometre run per litre

STE
P
A.

Truck I
MH 04 7267
2.5 tonnes
20 days
1
10 kms

PARTICULARS
FIXED COST
Driver salary
Cleaner salary
Road tax (Rs. 36000 once in life time
for truck I)
Insurance
R.T.O. passing (Road license)
License renewal
Garage rent (parking)

Truck II
MH 04 DS 2987
5 tonnes
20 days
1
8 kms

TRUCK I

TRUCK II

48000
30000
3600

48000
30000
8500

18000
2000
1000
2400

22000
2000
1000
2400

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TOTAL FIXED COST[A]

B.

VARIABLE COST
Maintenance
Diesel
Tires and tubes (maintenance)
Oil and grease
Repairs (body change)
New tyre and tubes
Truck I (12000*4)
Truck II (12000*6)
Servicing charges
Depreciation @ 10%
TOTAL VARIBALE COST[B]

105000

113900

72000
180000
5000
10000
40000

120000
360000
8000
20000
80000

48000
10000
45000

72000
10000
90000

410000

760000

515000

873900

C.

TOTAL OPERATION COST

[A+B]

D.

TOTAL
EARNINGS/TAKINGS/REVENUE

600000

960000

PROFIT

85000

86100

E.

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CONCLUSION
We conclude that operating costing is technique and process by which
one can ascertain the cost of rendering services. But such variable or standing
costs could also change after the project is over, again because either the
length or the operating conditions, especially speed, might have changed for
certain trips.

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BIBLIOGRAPHY
COST ACCOUNTING by Ainapure

WEBLIOGRAPHY
http://en.wikipedia.org/wiki/operatingcost
http://www.technologyevaluation.com/search/for/indian-trucksoperatingcosts

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