11

Service Costing/Operating Costing

CHAPTER OUTLINE
LEARNING OBJECTIVES

After reading this chapter, you will be able to understand:

  • The meaning of operating costing
  • The importance of operating costing
  • The industries where operating costing is adopted
  • Different units used in operating costing
  • How the fares and tariff are fixed in transport industries
11.1 INTRODUCTION

It is a method of ascertaining costs of providing or operating a service. This method of costing is applied by those undertakings, which provide services rather than production of commodities. The emphasis under operating costing is on the ascertainment of cost of services rather than on the cost of manufacturing a product. This costing method is usually made use of by transport companies, gas and water works departments, electricity supply companies, canteens, hospitals, theatres and schools.

Operation costing is an advanced form of job-order and process costing. Operation costing uses the methods that are found in either process or job-order costing. Service costing is the cost of providing a service. In other words, service costing is a method of costing applied to determine the cost of rendering service. It is adopted by those businesses, which operate a service rather than produce goods. Service is their final product and this service is sold to consumers. This service may be used within the enterprise as in the case of canteen boiler houses and so on; or may be rendered to the public as in state transport, hospitals, electricity and so on. Service provided within the organization is known as internal service. Service provided outside the organisation is known as external service.

11.1.1 When is operation costing appropriate?

Operation costing is appropriate in businesses that have products that are very similar, yet differentiated in some form from each other. This difference can be in the finishing or in the actual functionality of the product.

For computing the operating cost, it is necessary to decide first, about the unit for which the cost is to be computed.

The cost units usually used in the following service undertakings are as below:

 

Transport service
Supply service
Hospital
Canteen
Cinema
Passenger kilometre, quintal kilometre, or tonne-kilometre
Kilowatt-hour, cubic metre, per kilogram, per litre
Patient per day, room per day or per bed, per operation, etc.
Per item, per meal, etc.
Per ticket.

11.1.2 Cost units used in service costing

The selection of cost unit is different in service costing. Both simple and composite cost units are used.

 

Name of the serviceCost unit
    (I)   Passenger transport
   (II)   Goods transport
  (III)   Hospital
  (IV)   Electricity supply
   (V)   Canteen
  (VI)   Cinema theatre
 (VII)   Lodge
Per passenger kilometre
Per tonne-kilometre
Per patient bed
Per kilowatt-hour
Per meal per person
Per man show
Per room day

 

Passenger kilometre = No. of vehicles × No. of. days × No. of. trips × Distance covered × Capacity × Normal passenger travelling

11.1.3 Transport costing

Transport industries include air, water, road and railways. Motor transport includes private cars, buses, taxis, carriers and lorries. The objectives of motor transport costing may be summarized as follows:

  • To provide information whereby the efficiency with which the vehicles are rented may be judged.
  • To provide an accurate basis for quotation and fixing of rates
  • To ensure that all journeys have been carried out in proper time, fuel consumed is not excessive and that tyres are properly maintained
  • To provide cost comparison between own transport and alternative, e.g. hiring
  • To compare the cost of maintaining of one group of vehicles with another group
  • To determine what should be charged against departments using the service
  • To decide at what price the use of vehicle can be charged
  • To ensure that cost of maintenance and repairs is not excessive

Illustration 1

 

Number of buses
Days operated
Round trips by each bus
Distance of route 20 km long one side
Capacity of bus
Normal passenger travelling 90% of capacity.
10
25
4

40 seats

 

Tonne kilometre = Total capacity (number of vehicles used × tons carried) × average kilometre × number of trips × days of month × percentage of vehicles runs on or average × capacity used.

Solution:

 

image

 

Illustration 2

 

Number of VehiclesCapacity (in tonnes each)
10
05
20
02
06
05

 

Each vehicle makes 5 trips a day covering distance of 10 km in each trip. On average 10% of the vehicles are laid up for repairs daily and 80% of capacity of vehicle is actually used. Company operates for 25 days a month.

 

Solution:

 

image

 

Accounting Procedure for Transport Costing

Preparation of Cost Sheet under Operating Costing

For preparing a cost sheet under operating cost, costs are usually accumulated for a specified period namely a month, a quarter, or a year.

All the accumulated costs should be classified under the following three heads:

  1. Fixed costs or standing charges,
  2. Variable costs or running charges,
  3. Semi-variable costs or maintenance costs.

Note: In the absence of information about semi-variable costs, the costs may be shown under two heads only, i.e. fixed and variable.

Under operating costing, the cost per unit cost of service may be calculated by dividing the total cost for the period by the total units of service in the period.

Treatment of depreciation and interest—depreciation, if related to effluxion of time, may be treated as fixed. If it is related to the activity level, it may be treated as variable.

If information about interest is explicitly given, it may be treated as fixed cost.

 

Examples of fixed charges are:Examples of fixed charges are:Examples of variable charges are:
(a) wages (if passed monthly)(a) wages (if passed monthly)(a) petrol and diesel
(b) rent(b) rent(b) oil
(c) licence(c) licence(c) repair
(d) insurance(d) insurance(d) maintenance
(e) salary(e) salary(e) wages (if based on km run)
(f) taxation(f) taxation(f) depreciation
(g) interest(g) interestfor calculation of the rate per km/per passenger the following points are essential
(h) supervision(h) supervision
(a) days maintained
(b) days operated
(c) days idle
(d) total hours operated
(e) total kilometre covered
(f) total trips made
(g) total kilometre run

 

Illustration 3

 

Number of buses4
Number of days operated30
Number of trips per day per bus2
Seating capacity60 persons
Average passengers traveling40
Distance covered on way20 km

 

Calculate passenger kilometre

 

Solution:

 

image

 

Illustration 4

 

Number of buses5
Number of days operated25
Number of trips made2
Seating capacity60 persons
Average passengers travelling75%
Distance covered two way48 km

 

Calculate passenger kilometre

 

Solution:

 

 

image

 

Illustration 5

 

Number of lorries5
Capacity of a lorry8 tonnes
Number of days operated20 days
Kilometre covered each day200 km
Load carried 80% of capacity
Kilometre run empty30%

 

Calculate tonne-kilometre

 

Solution:

 

image

 

Illustration 6

Number of lorries10
Capacity of a lorry20 tonnes
Number of days operated26 days
Number of trips per day1
Average load carried 70% of capacity
Empty running40%
Kilometre covered each day200 km

 

Calculate tonne-kilometre.

 

Solution: Calculation of total tonne-kilometre

 

image

 

Illustration 7

Operating cost sheet of truck for the year

p.a.per km
ParticularsRs P.Rs P.
Fixed charges:
   Road licence650
   Insurance800
   Garage rent700
   Supervision1,400
   Interest on vehicle (10% on 30,000)3,000
Total fixed charges6,5500.33
Variable charges:
   Petrol image0.20
   Repairs1.80
   Type allocation0.40
   Driver's wage image0.10
   Depreciation image0.30
Operating cost per running km3.13

 

Illustration 8

 

Value of vehicleRs 40,000
Road licence (annual)Rs 2,000
Driver's wages (per month)Rs 3,000
Insurance (annual)Rs 3,000
Garage rent (annual)Rs 4,000
Direct wages (per month)Rs 3,000
Cost of petrol per litreRs 25
Mileage per litre30
Estimated life in miles1,00,000
Annual mileage runs10,000

 

Calculate cost per mile.

 

Solution: Calculation of cost per mile

 

p.a.per km
ParticularsRs P.Rs P.
Standing charges
   Road licence2,000
   Insurance3,000
   Garage rent4,000
Total standing charges9,0000.90
Variable charges
   Type maintenance4.00
   Petrol image0.83
   Driver's wages image3.60
   Depreciation image0.40
Operating cost per mile9.73

 

COST PER EFFECTIVE KILOMETRE

Illustration 9

Anandhan owns a fleet of taxis and the following information is available from the records maintained by him.

 

  1. Number of taxis10
  2. Cost of each taxiRs 54,600
  3. Salary of managerRs 700 p.m.
  4. Salary of accountantRs 500 p.m.
  5. Salary of cleanerRs 200 p.m.
  6. Salary of mechanicsRs 400 p.m.
  7. Garage rentRs 600 p.m.
  8. Insurance premium5% p.a.
  9. Annual taxRs 900 per taxi
10. Driver's salaryRs 350 p.m. per taxi
11. Annual repairsRs 1,000 per taxi

 

Total life of a taxi is about 2,00,000 km. A taxi runs in all 3,000 km in a month and 30% of this distance has to be run without any passenger. Petrol consumption is one litre for every 10 km at 4.41 per litre. Oil and other expenses are Rs 10.50 per 100 km.

Calculate the cost of running a taxi per km.

Solution: Cost of running a taxi per km

 

per monthper km
ParticularsRs P.Rs P.
Fixed charges:
   Manager's salary image70
   Accountant salary image50
   Cleaner's salary image20
   Mechanics salary image40
   Garage rent image60
   Insurance premium image227.50
    Annual tax image75
   Driver's salary350
   Annual repairs image83.33
Total fixed charges975.830.4646
Variable charges:
   Depreciation image819
   Petrol image1,323
   Oil and other expenses image315
Total variable charges2,4571.17
Cost of running a taxi per km1.635

 

Illustration 10

Ram owns a fleet of taxies and the following information is available from the records maintained by him.

 

  1. Number of taxis10
  2. Cost of each taxiRs 50,000
  3. Salary of managerRs 1,000 p.m.
  4. Salary of accountantRs 600 p.m.
  5. Salary of cleanerRs 200 p.m.
  6. Salary of mechanicsRs 400 p.m.
  7. Garage rentRs 600 p.m.
  8. Insurance premium5% p.a.
  9. Annual taxRs 600 per taxi
10. Driver's salaryRs 500 p.m. per taxi
11. Annual repairsRs 1,000 per taxi

 

Total life of a taxi is about 2,00,000 km. A taxi runs in all 3,000 km in a month of which 30% of it runs empty. Petrol consumption is one litre for 10 km @ Rs 7 per litre. Oil and other sundries are Rs 10 per 100 kilometres.

 

Solution: Calculation of effective km run

 

Taxi runs in a month3,000
Less: 30% empty900
Effective km run2,100
Fixed charges:
Manager's salary image100
Accountant salary image60
Cleaner's salary image20
Mechanics salary image40
Garage rent image60
Insurance premium image208.33
Annual tax image50
Driver's salary500
Annual repairs image83.33
Total fixed charges1,121.660.53
Variable charges:
Petrol image2,100
Oil and other expenses image300
Depreciation image750
Total variable charges3,1501.50
Cost of running a taxi per km2.03

 

Illustration 11

Jawan owns a fleet of taxis and the following information is available from the records maintained by him:

 

  1. Number of taxis5
  2. Cost of each taxiRs 20,000
  3. Salary of managerRs 900 p.m.
  4. Salary of accountantRs 600 p.m.
  5. Salary of cleanerRs 300 p.m.
  6. Salary of mechanicsRs 400 p.m.
  7. Garage rentRs 800 p.m.
  8. Insurance premium5% p.a.
  9. Annual taxRs 1,200 per taxi
10. Drivers salaryRs 400 p.m. per taxi
11. Annual repairRs 1,000 per taxi

 

Total life of a taxi is about 2,00,000 km. A taxi runs in all 5,000 km in a month of which 40% of it runs empty. Petrol consumption is one litre for 10 km @ Rs 1.80 per litre. Oil and other sundries are Rs 5 per 100 km.

Calculate the cost of running a taxi per kilometre.

 

Solution: Calculate effective km

 

Taxi run in a month5,000
(Less) 40% empty2,000
Effective km run3,000

 

image

 

Illustration 12

 

Staff salary Rs 60,000 per annum
Room attendant's salary is Rs 6 per day.
Room attendants are needed only when the room is occupied. There is one room attendant per room.
Normal lighting expenses for a room for a month is Rs 60
Power is used only in winter and normal charge per month when occupied for a room is Rs 30
Repairs to building Rs 12,000 per annum
Linen and cleaningRs 5,200 p.a.
Other expensesRs 4,800 p.a.
Interior decorationRs 12,000 p.a.
Cost of buildingRs 4,20,000
Rate of depreciation10%
Other equipmentsRs 1,40,000
Depreciation10%
InvestmentRs 10,00,000 interest 10%
There are 100 rooms in the hotel.
70% of the room are normally occupied in summer.
70% of the room are normally occupied in winter.
Winter and summer are of six months each.
Normal days in a month is 30
Profit to be earned25% on cost

Calculate the room to be charged per day.

 

Solution: Calculation of room days:

 

image

 

Total Rs 1,08,000

Calculation of lighting:

 

image

 

Total Rs 36,000

Calculation of power:

 

image

 

Statement of operating cost

 

Particularsp.a.
Staff salary60,000
Room attendants1,08,000
Lighting36,000
Power5,400
Repairs12,000
Linen and cleaning5,200
Other expenses4,800
Interior decoration12,000
Depreciation on building image42,000
Depreciation on equipments image14,000
Interest on investments image1,00,000
3,99,400
Profit (3,99,400 − 1,00,000) × 25%74,850
4,74,250/18,000
Rs 26.35

 

Power House Costing

It is concerned with the ascertainment of cost per unit of electricity produced. The unit of cost referred here is kilometre per hour. Here, labour is treated as variable charges.

 

Boiler House Costing

Boiler houses too take to operating costing. Their aim is to ascertain the total and per unit cost of generating steam or electricity so as to fix departmental charges and outside tariffs while the details of constituent elements of cost are furnished by the cost office; technical data is supplied as to steam pressure, evaporation metre—reading, factory heating, turbines, losses. are supplied by the engineering department. Standards of expenditure should be worked out under each major head on the basis of detailed studies.

The main heads of expenditure for an undertaking like boiler house are the following:

  1. Water—cost of supply, purification and softening.
  2. Indirect materials—service materials and small tools.
  3. Fuel—coal or oil, including of course its cartage handling and storage.
  4. Labour—wage of coal handlers, stockers and ash removers.
  5. Supervision—wages of foremen and salary of the works manager.
  6. Maintenance—furnace repairs, renewal of fire bars, replacement of fire iron and so on.
  7. Overhead costs—rent, rates, depreciation, insurance and interest on capital.

Illustration 13

 

Total units generated14,00,000 kWh
Operating labourRs 80,000
Repairs and maintenanceRs 60,000
LubricantsRs 60,000
Plant supervisionRs 1,40,000
Administration overheadsRs 1,20,000
Coal consumed per kWh in 4.5 kg
Rate of coal per kg0.60 paise
Depreciation @ 10% on capital cost of Rs 4,00,000
Prepare operating cost sheet for kWh.

 

Solution: Operating cost sheet

 

Particulars per kWh

 

Fixed charges

 

Plant supervision1,40,000
Administration overheads1,20,000
Total fixed charges2,60,000/14,00,0000.1857

 

Variable charges

 

Operating labour80,000
Repairs60,000
Lubricants60,000
Depreciation (4,00,000 × 10%)40,000
2,40,000/14,00,0000.1714
Coal consumed (4.5 kg × 0.60)2.70
Cost per kWh3.0571

 

Illustration 14

 

Operating labourRs 24,000
Plant supervisionRs 64,000
LubricantsRs 12,600
RepairsRs 22,400
Administration overheadsRs 1,20,000
Capital costRs 1,60,000
Units producedRs 16,00,000
Coal consumed per kWh in 2.5 kg
Depreciation10%
Rate of coal per kg0.80 paisa

 

Prepare cost per unit of kWh.

 

Solution: Operating cost shee

 

kWh
ParticularsRs
Fixed charges
Plant supervision64,000
Administration overheads1,20,000
1,84,000/16,00,0000.115
Variable charges
Operating labour24,000
Repairs22,400
Lubricants12,600
Depreciation (1,60,000 × 10%)16,000
75,000/16,00,0000.047
Coal consumed (2.5 kg × 0.80)2.00
Cost per kWh2.162

 

Miscellaneous Illustrations

 

Illustration 15

From the following data relating to two different vehicles A and B, compute the cost per running mile:

 

Vehicle A
Rs
Vehicle B
Rs
Mileage run (annual)15,0006,000
Cost of vehicle30,00020,000
Road licence (annual)1,0001,000
Insurance (annual)800600
Garage rent (annual)1,000500
Supervision and salaries1,5001,600
Driver's wage per hour33
Cost of fuel per gallon33
Miles run per gallon20 miles15 miles
Repairs and maintenance per mile1.652.00
Tyre allocation per mile0.800.60
Estimated life of vehicles1,00,000 miles75,000 miles

 

Charge interest at 5% per annum on cost of vehicles. The vehicles run 20 miles per hour on an average.

 

Solution: Cost sheet (cost per mile running)

 

Vehicle A
Rs
Vehicle B
Rs
A. Standing charges:
   image4,5001,600
   Road licence1,0001,000
   Insurance800600
   Interest @ 5%1,5001,000
   Total7,8004,200
B. Maintenance charges:
   Garage rent1,000500
   Supervision and salaries1,5001,600
   Repairs and maintenance24,75012,000
   Total27,25014,100
C. Running charges:
   Petrol: image2,2501,200
   Driver's wages: miles run × 3/202,250900
   Tyre expenses12,0003,600
   Total16,5005,700
Total operating cost (A + B + C)51,55024,000
Total miles run15,0006,000
Cost per running mile3.444

 

Problem 1. From the following data relating to two different vehicles A and B, compute the cost per running mile:

 

A
Rs
B
Rs
Mileage run (annual)15,0006,000
Cost of vehicles25,00015,000
Road licence (annual)750750
Insurance (annual)700400
Garage rent (annual)600500
Supervision, salaries, etc. (annual)1,2001,200
Driver wage per hour88
Cost of petrol per litre1010
Miles run per litre20 miles15 miles
Repair and maintenance charge (per mile)0.200.30
Tyre allocation per mile0.800.60
Estimated life of the vehicle1,00,000 miles75,000 miles

 

You are to charge interest on cost of vehicles at 5% per annum. The vehicles run 20 miles per hour on an average.

(ICWA)
[Ans: Rs 2.45 (Vehicle A); Rs 2.77 (Vehicle B)]

 

Illustration 16

Work out in appropriate cost sheet form, the unit cost per passenger mile for the year 1968–1969 for a fleet of passenger buses run by a transport company from the following figures extracted from its books:

5 passenger buses costing Rs 50,000, Rs 1,20,000, Rs 45,000, Rs 55,000 and Rs 80,000, respectively. Yearly depreciation of vehicles—20% of the cost. Annual repair, maintenance and spare parts—80% of depreciation.

 

Wages of 10 drivers @ Rs 100 each per month
Wages of 20 cleaners @ Rs 50 each per month
Yearly rate of interest @ 4% on capital
Rent of six garages @ Rs 50 each per month
Director's fees @ Rs 400 per month
Office establishment @ Rs 1,000 per month
Licence of taxes @ Rs 1,000 every 6 months
Realization by sale of old tyres and tubes @ Rs 3,200 every six months.
900 passengers were carried over 1,600 miles during the year

(I.C.W.A. Final)

 

Solution:

 

Total passenger miles = 1,600 × 900 = 14,40,00

 

RsCost per passenger mile Re
Annual fixed expenses
   Interest @ 4% on capital costs14,000
   Rent for six garages @ 50 p.m.3,600
   Director's fees4,800
   Office establishment12,000
   Licence and taxes2,000
   Wages of drivers (10 × 12 × 100)12,000
   Wages of cleaners (20 × 12 × 50)12,000
Total60,4000.042
Annual variable expenses
   Depreciation @ 20% on Rs 3,50,00070,0000.048
   Repairs and maintenance charges 80% of Rs 70,00056,0000.039
0.129
Less: Recovery from sale of tyres and tubes64,0000.004
Cost per passenger mile0.125

 

Problem 2. Anandhan owns a fleet of Taxis and the following information is available from the records maintained by him.

 

  1. Number of taxis10
  2. Cost of each taxiRs 54,600
  3. Salary of managerRs 700 p.m.
  4. Salary of accountantRs 500 p.m.
  5. Salary of cleanerRs 200 p.m.
  6. Salary of mechanicsRs 400 p.m.
  7. Garage rentRs 600 p.m.
  8. Insurance premium5% p.a.
  9. Annual taxRs 900 per taxi
10. Driver's salaryRs 350 p.m. per taxi
11. Annual repairsRs 1,000 per taxi

Total life of a taxi is about 2,00,000 km. A taxi runs in all 3,000 km in a month and 30% of this distance has to be run without any passenger. Petrol consumption is one litre for every 10 km at 4.41 per litre. Oil and other expenses are Rs 10.50 per 100 km.

Calculate the cost of running a taxi per km.

(Madras, 1995)
[Ans: Cost of running a taxi per km: Rs 1.635; Cost per taxi per month: Rs 3,432.83;
Effective running km per month per taxi: 2,100 km]

 

Illustration 17

You have been given a permit to run a bus on a route 20 km long. The bus costs you Rs 1,00,000. It has to be insured @ 3% p.a. and the annual tax will be Rs 2,000. Garage rent is Rs 100 p.m. Annual repairs will be Rs 1,000 and the bus is likely to last for 5 years at the end of which the scrap value is likely to be Rs 5,000.

The driver's salary will be Rs 150 p.m. and the conductor's Rs 100 together with 10% of the takings as commission (to be shared equally by both). Stationery will cost Rs 50 p.m. The manager-cum-accountant's salary will be Rs 450 p.m.

Diesel and oil be Rs 25 per 100 km. The bus will make 3 round trips for carrying on the average 40 passengers on each trip. Assuming 15% profit on takings, calculate the bus fare to be charged from each passenger. The bus will work on the average 25 days in a month.

Solution: Operating cost statement

 

Bus No. DLP 4179 carrying
capacity: 40
Per annum
Rs P.
Per 100 Passenger
km. Rs P.
123
A. Standing charges
   Depreciation (1,00,000 − 5,000) ÷ 519,000
   Tax2,000
   Insurance3,000
   Stationery600
   Manager's salary   5,400            
   Total30,0002.083
B. Maintenance charges
   Garage rent1,200
   Repairs   1,000            
   Total2,2000.152
C. Operating or running charges
   Diesel and oil9,000
   Driver's salary1,800
   Conductor's salary   1,200            
   Total12,0000.833
Grand total (A + B + C)3.068
Loading @ 25/751.022   
Fare per passenger km4.09

 

Notes:

  1. Number of km run in a month: 3 × 2 × 20 × 25 = 3,000
  2. Diesel and oil: 3,000 × 25/100 = Rs 750

  3. Number of passenger km

    per month: 3,000 × 40 = 1,20,000

    per annum: 1,20,000 × 12 = 14,40,000

  4. Loading: If taking is Rs 100, 10 will have to be given as commission and 15 must remain as profit; the cost must therefore be 75. On 75 the loading must be 25 to make the taking equal to 100.

Problem 3. A transport company is running four buses between two towns, which are 50 km apart. Seating capacity of each bus is 40 passengers. The following particulars were obtained from their books for April 1998:

 

Rs
Wages of drivers and conductors2,400
Salaries to office staff1,000
Diesel and other oils4,000
Repairs and maintenance800
Taxes and insurance1,600
Depreciation2,600
Interest and other charges  2,000 
14,400

 

Actual passengers carried were 75% of the seating capacity. All the four buses run on all days of the month. Each bus made one round trip per day. Find out the cost per passenger km.

(Madras, B.Com., (ICE) C & M, May 1999; April 1998; B.Com., Sept. 1988; B.A 1993)

[Ans: Passenger km for the month: 3,60,000; Cost per passenger km = Re 0.038888 (or) 0.04]

Illustration 18

Jaidka owns a fleet of taxis and the following information is available from the records maintained by him:

 

  1. Number of taxis10
  2. Cost of each taxiRs 30,000
  3. Salary of managerRs 1,000 p.m.
  4. Salary of accountantRs 700 p.m.
  5. Salary of cleanerRs 300 p.m.
  6. Salary of mechanicsRs 500 p.m.
  7. Garage rentRs 600 p.m.
  8. Insurance premium5% p.a.
  9. Annual tax600 per taxi
10. Drivers salaryRs 200 p.m. per taxi
11. Annual repairRs 1,000 per taxi

 

Total life of a taxi is about 2,00,000 km. A taxi runs in all 3,000 km in a month of which 30% of it runs empty. Petrol consumption is one litre for 10 km @ Rs 1.80 per litre. Oil and other sundries are Rs 5 per 100 km.

Calculate the cost of running a taxi per kilometre.

Solution: Operating cost sheet

(Effective km 2,100)

 

image

 

Problem 4. Ram owns a fleet of taxies and the following information is available from the records maintained by him.

 

  1. Number of taxis10
  2. Cost of each taxiRs 50,000
  3. Salary of managerRs 1,000 p.m.
  4. Salary of accountantRs 600 p.m.
  5. Salary of cleanerRs 200 p.m.
  6. Salary of mechanicsRs 400 p.m.
  7. Garage rentRs 600 p.m.
  8. Insurance premium5% p.a.
  9. Annual taxRs 600 per taxi
10. Driver's salaryRs 500 p.m. per taxi
11. Annual repairsRs 1,000 per taxi

 

Total life of a taxi is about 2,00,000 k.m. A taxi runs in all 3,000 km in a month of which 30% of it runs empty. Petrol consumption is one litre for 10 km @ Rs 7 per litre. Oil and other sundries are Rs 10 per 100 kilometres.

(CA, ICWA)

[Ans: Rs 2.03]

Illustration 19

An entrepreneur owns a bus, which runs from Delhi to Agra and back for 25 days in a month. The distance from Delhi to Agra is 170 km. The bus completes the trip from Delhi to Agra and back on the same day. Calculate the fare the entrepreneur should charge a passenger if he wants to earn a profit of 33.33% on cost. The following information is further available

 

Cost of busRs 3,50,000
Salary of driver per monthRs 1,200
Salary of conductor per monthRs 700
Salary of part-time accountant per monthRs 480
Insurance per annumRs 6,720
Diesel consumption 16 km per gallon costingRs 26
Local taxes per annumRs 1,200
Lubricant oil per 100 kmRs 25
Repairs and maintenance per annumRs 1,000
Licence fee per annumRs 3,000
Normal capacity (person)Rs 50
Depreciation rate per annumRs 15

 

The bus usually runs full up to 90% of its capacity both ways. Interest is payable on the cost of bus at 10% per annum.

 

Solution: Operating cost statement to determine the fare of running a bus from Delhi to Agra per passenger km.

 

ParticularsTotal cost (Rs)
(i) Standing charges
    Salary of driver (Rs 1,200 × 12)14,400
    Salary of conductor (Rs 700 × 12)8,400
    Salary of part-time (Rs 480 × 12)5,760
    Insurance6,720
    Local taxes1,200
    Licence fee3,000
    Interest (10% × 3,50,000)35,000
          
(ii) Running charges74,480 (i)
    Depreciation of bus (15% × 3,50,000)52,500
    Diesel cost per annum (170 × 2 × 25 days × 12 months) × Rs 25 ÷ 161,59,375
    Lubricant oil (1,02,000 km × Rs 20) ÷ 10020,400
    Repairs and maintenance per annum    1,000
2,33,275 (ii)
(iii) Total charges (I + II)3,07,755
(iv) Total passenger km in a year (170 × 2 × 25 days × 12 months × 45 persons)45,90,000    
(v) Cost per passenger km (III + IV)0.067
(vi) Add desire profit (33½% on cost)0.022
    Fare per passenger km0.088
    Fare charges (Re 0.089 × 170 km)15.13

 

Problem 5. A person owns air condition bus, which runs between Delhi and Chandigarh and back for 10 days in a month. The distance between Delhi and Chandigarh is 150 miles. The bus completes the trip from Delhi and Chandigarh and will be back on the same day.

The bus goes to Agra for another 10 days. The distance between Delhi and Agra is 120 miles. This trip is also completed on the same day. For the rest of the 4 days of its operation, it runs in the local city. Daily distance covered is 40 miles.

Calculate the charge to be made by the person when he wants to earn profit of 33 1/3% on his takings. The other information is:

 

Cost of the busRs 1,00,000
Depreciation20% p.a.
Salary of driverRs 650 p.m.
Salary of conductorRs 650 p.m.
Salary of accountantRs 360 p.m.
InsuranceRs 1,680 p.a.
Diesel consumption 4 miles per litre costing Rs 3 per litre
Road taxRs 600 p.a.
LubricantRs 20 per 100 miles
Repairs and maintenanceRs 500 p.a.
Permit feeRs 284 p.m.
Normal capacity50 per sons

 

The bus generally occupies 90% of the capacity when it goes to Chandigarh, 80% when it goes to Agra. It is always full when it runs within the city. Passenger tax is 20% of his net takings.

(B. Com., Bangalore)

[Ans: Cost per passenger per mile Re 0.072; Charges for Chandigarh per passenger:
Rs 10.80; Charges for Agra per passenger: Rs 8.64]

Illustration 20

Compute cost per running kilometre from the following data of a truck.

 

Estimated life of vehicle1,50,000 km
Annual running15,000 km

 

Rs P.
Cost of vehicle40,000
Road licence (annual)1,000
Insurance (annual)1,000
Garage rent (annual)900.00
Supervision and salaries (annual)2,700.00
Drivers’ wages per hour3.00
Cost of fuel per litre3.00
Repairs and maintenance per km1.75
Tyre allocation per km0.90

 

Charge interest at 5% per annum on cost of vehicle. The vehicle runs 20 km per hour on an average and one litre of fuel gives 20 km.

 

Solution: Operating cost sheet of truck for the year

 

image

 

Note: Depreciation and driver's wages are running charges because they are related to the distance covered.

 

Problem 6. From the following data calculate the cost per mile of a vehicle:

Rs
Value of vehicle1,00,000
Garage rent per year1,200
Insurance charges per year400
Road tax per year500
Driver's wages per month600
Cost of petrol per litre6.40
Tyre maintenance per mile0.80
Estimated life—1,50,000 miles
Miles per litre of petrol-8
Estimated annual mileage-6,000

 

(B. Com., Kerala)
[Ans: Rs 3.82]

Illustration 21

Jayakumar with an inter-state bus permit, has been running a bus of 50 passenger capacity every month as follows:

  1. Madras–Kolar (150 km apart)—Round Trip, 10 days in a month with 90% passengers.
  2. Madras–Chittoor (200 km apart)—Round Trip, 10 days in a month with 80% passengers
  3. Madras–Tirupathi (150 km apart)—Round Trip, 10 days in a month with 70% passengers.

He requests you to fix ‘cost-based’ passenger rates, providing the following information.

  1. Passenger tax payable to Government 1/6 of gross receipts.
  2. Commission to conductor and driver at 5% on net receipts.
  3. Required profit 35% on net receipts.
  4. Bus purchase price Rs 2,10,000 to be depreciated at 10% p.a.
  5. Interest on the capital cost of bus at 5% p.a.
  6. Expenses of the bus were

 

Rs
Permit fees per annum14,400
Token tax per annum5,100
Insurance per annum9,000
Office expenses (apportioned per month)1,000
Tyres and tubes Re 0.4 per km
Diesel 10 km per litre at Rs 10 per litre
Drivers salary per month1,200
Conductors salary per month800
Cleaning and repairs charges per month1,500
Lubricants and supplies Rs 0.10 per km
Sundry route expenses per month500

 

Solution: Statement showing operating cost (4,00,000 pass km)

 


Particulars
Per month
Rs
Per pass km.
Rs P.
Standing charges:
Permit fees image1,200
Token tax image425
Insurance image750
Office expenses1,000
Driver's salary1,200
Conductor's salary800
Sundry route expenses500
Depreciation image1,750
Interest on capital cost
image
875
         
Total standing charges (A)8,5000.02125
Maintenance charges:
Tyres and tubes (10,000 × 0.4)4,000
Cleaning and repairs1,500
Lubricants and supplies (10,000 × 0.10)1,000
Total maintenance charges (B)6,5000.01625
Running charges:
image10,0000.02500
                        
Total operating cost (A + B + C)25,0000.0625
Add: Commission of conductor and driver (W.N.3)2,0830.00500
Add: Required profit (W.N.3)14,5830.03500
Net collections41,6670.1042
Add: Passenger tax at 1/6 on gross receipts (or) 1/5 on net collections8,3330.0208
                        
Gross collections50,0000.125

 

Bus charge from Madras to Kolar = 150 km × 0.12 = Rs 18

Bus charge from Madras to Chittoor = 200 × 0.12 = Rs 24

Bus charge from Madras to Tirupathi = 150 km × 0.12 = Rs 18

 

Working Note (1):

 

image

 

Working Note (2):

Running km: Days × distance

Madras–Kolar = 10 × 150 × 2 = 3,000

Madras–Chittoor = 10 × 200 × 2 = 4,000

Madras–Tirupathi = 10 × 150 × 2 = 3,000

Running km per month = 10,000

Working Note (3):

If net collections are = 100

 

image

 

∴ Driver and conductor's commission

5% on net collections or 5/60 on cost = image

Required profit = 35% on net collections

or 35/60 on cost = image

Problem 7. A transport company is running 4 buses between towns which are 50 km apart. The seating capacity of each bus is 40 passengers. The following particulars were obtained from their books for the month of April.

 

Rs
Wages of drivers, conductors and cleaners4,000
Salaries to office staff2,000
Diesel and other oils5,000
Repairs and maintenance800
Taxes, insurance, etc.1,600
Depreciation2,600
Interest and other charges2,000

 

Actual passengers carried were 75% of the capacity. All the four buses ran on all the days of the month. Each bus made one trip (up and down) per day. Calculate the cost per passenger km.

(B. Com., Madras)
[Ans: 3,60,000 passenger-km; per passenger-km: Re 0.05]

Illustration 22

Iron ore is transported from two mines ‘A’ and ‘B’ and unloaded at plots in a railway station. ‘A’ is at a distance of 10 km and ‘B’ is at a distance of 15 km, from the rail head plots. A fleet of lorries of 6 tonne capacity is used for transport from mines. The lorries average a speed of 30 km per hour when running and consume 10 minutes to unload at the railhead. At mine ‘A’ loading time averages 30 minutes while at mine ‘B’ it is 20 minutes per load.

Driver's wages, depreciation, insurance and taxes are found to cost Rs 12 per hour operated. Fuel, oil, tyres, repairs and maintenance cost Rs 1.50 per km. Draw up a statement showing the cost per ton-km of carrying iron ore from each mine.

 

Solution: Statement showing operating cost

 


Particulars
Mine A
(50 ton-km)
Mine B
(75 ton-km)
Standing charges per tripRs 16Rs 18
Running charges per tripRs 30Rs 45
Total cost per tripRs 46Rs 63
Cost per ton-km (total cost/ton-km)46/6063/90
Re 0.77Re 0.7

 

Working Note (1):

 

Tonne kilometre:Mine AMine B
Vehicle capacity6 tonnes6 tonnes
Distance to be travelled10 km15 km
∴ Tonne kilometres= 6 × 10 = 606 × 15 = 90

 

Working Note (2):

Schedule of trip times

 

image

 

Working Note (3):

Costs

 

ParticularsMine A (Minutes)Mine B (Minutes)
Driver's wages, etc. per tripimageimage
Fuel, oil, etc. per trip(1.50 × 20) = Rs 30(1.50 × 30) = Rs 45.00

 

Illustration 23

Delhi Transport Company has been given a route of 20 km long to run a bus. The bus costs the company a sum of Rs 70,000. It has been insured at 3% p.a. and the annual tax will amount to Rs 1,500. Garage rent is Rs 100 p.m. Actual repairs will be Rs 1,500 and the bus is likely to last for 5 years.

The driver's salary will be Rs 150 per month and the conductor's salary will be Rs 100 per month in addition to 10% of the takings as commission (to be shared by the driver and the conductor equally). Cost of stationery will be Rs 50 p.m. Manager-cum-accountant's salary is Rs 400 p.m.

Petrol and oil will be Rs 25 per 100 km. The bus will make 3 round trips carrying on the average 40 passengers on each trip. Assuming 15% profit on takings, calculate the bus fare to be charged from each passenger. The bus will run on an average 25 days in a month.

 

Solution: Statement showing the fare to be charged from a passenger for one km

 

image

 

*In order to calculate the amount of commission payable to the driver and the conductor, total takings will have to be calculated.

 

Let total takings = x

 

image

 

Profit to be changed = image

 

Total cost per month without including commission = Rs 3,100

 

image

 

Problem 8. Pallavan Transport Corporation runs the following fleet of buses in a particular area of Madras for 30 days in a month: 25 buses of 50 passenger capacity, On an average, each bus makes 10 trips a day covering a distance of 8 km in each trip with 75% of seats occupied. Generally, 10% of buses are kept away from the roads for repairs.

 

Rs
Monthly expenses:
   Rent2,500
   Road tax500
   Salary of chief operating manager1,500
   Salary of three assistant managers800 each
   Salary of four supervisors400 each
   Wages of 30 cleaners100 each
   Wages of 25 drivers240 each
   Wages of 25 conductors200 each
   Consumable stores4,500
   Diesel34,000
   Lubricants5,500
   Replacement of tyres1,750
Miscellaneous2,750
Depreciation6,500
Work shop expenses3,500

 

Calculate the cost per passenger km of operating the service.

(Madras, 1987)

[Ans: Cost per passenger km = Re 0.04; Total passenger km = 20,25,000 per month;
Total expenses per month = Rs 81,000]

Illustration 24

A Transport Company has been given a 20 km long route to run a bus. The bus costs Rs 70,000 and has been insured @ 6% p.a. while annual taxes amount to Rs 2,000. Garage rent is Rs 100 p.m. yearly repairs will be Rs 2,000 and the bus is likely to last for five years.

The driver's salary will be Rs 4,000 p.a. and that of conductor's Rs 2,000 p.a. in addition to 10% of the taking as commission (to be shared by the driver and the conductor equally). Cost of stationery will be Rs 600 p.a. Manager's salary is Rs 400 p.m. who also looks after accounts.

Petrol and oil will be Rs 25 per 100 km. The bus will make 3 round trips carrying on the average 40 passengers on each trip. Assuming 25% profit on taking, calculate the bus fare to be charged from the each passenger. The bus runs on an average 25 days in a month.

Solution: Statement showing the fare to be charged for a passenger km

 

Annual exp.
Rs
Monthly exp.
Rs
Fixed expenses:
   Insurance4,200
   Taxes2,000
   Garage rent1,200
   Driver's salary4,000
   Conductor's salary2,000
   Cost of stationery600
   Manager's salary4,800
18,8001,566.67
Variable expenses:
   Depreciation14,000
   Repairs2,0001,333.33
   Petrol7,50.00
   Commission562
   Total cost p.m.4,212
   Profit 25% on takings1,404   
   Total takings5,616

 

image

 

Note: Calculation of commission:

Let total takings be ‘x

Commission will be image

Profit charged is image

Total expenses without commission are Rs 3,650

 

image

 

Problem 9. Laxmi Transport Company is running 4 buses between two towns, which are 100 km apart. Seating capacity of each bus is 40 passengers.

The following particulars were obtained from their books for April:

 

Rs
Wages of drivers, conductors and cleaners4,800
Salaries of office and supervisory staff2,000
Diesel oil and other oil8,000
Repairs and maintenance1,600
Taxation, insurance, etc.3,200
Depreciation5,200
Interest and other charges4,000
28,800

 

Actual passengers carried were 75% of the seating capacity. All the four buses ran on all the days of the month. Each bus made one round trip per day. Find out the cost per passenger-km.

(M.Com., Bhopal)
[Ans: Re 0.04]

Illustration 25

A practising Chartered Accountant now spends Re 0.90 per kilometre on taxi fares for his clients, 5 works. He is considering two other alternatives, the purposes of a new small can or an old bigger car. The estimated cost figures are:

 


Items
New small car
Rs
Old bigger car
Rs
Purchase price40,00025,000
Sale price of the car after five years20,00015,000
Repairs and servicing, per annum1,0001,200
Taxes and insurance per annum1,700700
Petrol price, per litre3.503.50
Petrol consumption per litre10 km7 km

 

He estimates that he does 10,000 km annually, which of the three alternatives will be cheaper? If his practice expends and he has to do 19,000 km per annum, what should be his decision? At how many km per annum, will the cost of the two cars break even and why? Ignore interest and income tax.

 

Solution: Statement showing comparative cost of alternative modes of conveyance

 

image

 

For his present practice, an old bigger car is the cheapest. But at his practice expends, a new small car will be the cheapest.

The difference in the variable costs of running the two cars is 15 paise. The difference of fixed costs is Rs 2,800. Hence, the break-even point between the two cars is calculated as:

 

image

 

At 18,667 km per annum, the cost of the two cars will break even as verified below.

 

New car
Rs
Old car
Rs
Fixed costs6,7003,900
Variable costs5,6008,000
12,30011,900

 

Illustration 26

XY & Company Limited owns a fleet of ten trucks each costing Rs 75,000. The company has employed one manager to whom it pays Rs 450 p.m. an accountant who gets Rs 250 p.m. and a peon who gets Rs 100 p.m. The company has got its trucks insured @ 2% per annum. The annual total tax is Rs 1,200 per truck. The other expenses are as follows:

 

Driver's salaryRs 300 per month
Cleaner's salaryRs 100 per month
Mechanic's salaryRs 400 per month
Repairs and maintenanceRs 1,200 per year for one truck
3 km per litre at Re 90 per litre
The estimated life of the truck is five years.

 

Other information:

 

Distance travelled by each truck per day 200 km.
Normal loading capacity100 quintals
Wastage in loading capacity10%
Percentage of truck laid up for repair5%
Effective days in a month25

 

Calculate (a) cost per quintal kilometre and (b) cost per kilometre of running a truck.

 

Solution:

 

image

 

image

 

Operating cost per quintal km and per km.

 

Fixed expenses per monthRs
Manager's salary450
Accountant's salary250
Peon's salary100
Mechanic's salary   400
Total for 10 trucks per month for one truck1,200
Rs
Salary for one truck120.00
Driver's salary per truck300.00
Cleaner's salary100.00
Repair and maintenance100.00
Insurance image125.00
Annual tax image100.00
Depreciation image1,250
            
2,095

 

Effective quintal km per month 4,750 for one truck

Effective km per month
4,750 for one truck
per km
paise
per quintal km
paise
Fixed expenses0.440.049

 

Variable expenses per truck

 

image

 

Note: Diesel consumption value has been taken for 5,000 km per truck because it has been assumed that during the time of repairs there will be consumption of diesel. Hence 5,000 km for truck has been calculated as follows:

Number of truck × distance travelled × effective days in a month 1 × 200 × 25 = 5,000 km

 

Problem 10. A transport company supplies the following details in respect of a truck of five ton capacity:

 

Cost of truckRs 1,20,000
Estimated life10 years
Scrap value at the end of lifeRs 6,000
Diesel, oil, greaseRs 25 per trip each way
Repairs and maintenanceRs 500 p.m.
Driver's wageRs 600 p.m.
Cleaner's wageRs 250 p.m.
InsuranceRs 4,800 p.a.
TaxRs 2,400
General supervision chargesRs 6,000 p.a.

 

The truck carries goods to and from the city covering a distance of 50 miles each way.

On outward trip freight is available to the extent of full capacity and on return 20% of capacity.

Assuming that the truck runs on an average 25 days a month, work out:

  1. Operating cost per tonne-mile
  2. Rate per tonne per trip that the company should charge if a profit of 50% on freightage is to be earned.

[Ans: Cost per tonne-mile: Re 0.63; Profit 50% of freightage: Re 0.63; That is freight per
tonne-mile: Re 1.26; Freight per trip: 250 ë Rs 1.26 + 50 ë Rs 1.26 = Rs 378]

Illustration 27

SMC is a public school having five buses each plying in different directions for the transport of its school students. In view of a larger number of students availing of the bus service the buses work two shifts daily both in the morning and in the afternoon. The buses are garaged in school. The workload of the students has been so arranged that in the morning the first trip picks up senior students and the second trip plying an hour later picks up the junior students. Similarly in the afternoon the first trip takes the junior students and an hour later the second trip takes the senior students home.

The distance travelled by each bus one way is 8 km. The school works 25 days in a month and remains closed for vacation in May, June and December, Bus fee however, is payable by the students for all 12 months in a year.

The details of expenses for a year as under

 

Driver's salaryRs 600 per month per driver
Cleaner's salaryRs 350 per month
(Salary payable for all 12 months)
(One cleaner employed for all the five buses)
Licence fee, taxes, etc.Rs 900 per bus per annum
InsuranceRs 1,000 per bus per annum
Repairs and maintenanceRs 3,500 per bus per annum
Purchase price of the busRs 2,00,000 each
Life 12 years
Scrap valueRs 20,000
Diesel costRs 2.00 per litre
Each bus gives an average mileage of 4 km per litre of diesel
Seating capacity of each bus is 50 students.
The seating capacity is fully occupied during the whole year.

Students picked up and dropped within a range up to 4 km of distance from the school are charged half fare. 50% of the students travelling in each trip in this category ignore interest. Since the charges are to be based on average cost, you are required to:

  1. Prepare a statement showing the expenses of operating a single bus and the fleet of five buses for a year.
  2. Work out the average cost per student per month in respect of
    1. Students coming from a distance of up to 4 km from the school and
    2. Students coming from a distance beyond 4 km from the school.

Solution: SMC Public School

Operating cost statement

 

image

 

Working Note:

  1. Calculation of diesel cost per bus:

     

    Number of trips of 8 km each/day: 8
    Distance travelled per day by a bus: 8 × 8 km/trip = 64 km
    Distance travelled during a month: 64 × 25 = 1,600 km
    Distance travelled p.a. (May, June: 1,600 × 9 = 14,400 km and December being vacation)
    Mileage: 4 km/litres
    Diesel required: 14,400/4 = 3,600 litres.
    Cost of diesel: 3,600 litres × Rs 2 per litre = Rs 7,200 p.a. per bus.

  2. Calculation of number of students per bus:
    Bus capacity50 students
    Half fare50%, i.e.25 students
    Full fare50%, i.e.25 students
    Full fare students as equivalent to half fare studentsi.e.50 students
    Total number of half fare students per trip75 students
    Total number of half fare students in two trips150 students
    On full fare basis number of students in two trips75 students

 

Problem 11. From the following information, calculate total kilometres and total passenger kilometres:

 

No. of buses: 5
Days operated in the month: 25
Trips made by each bus: 4
Distance of route: 20 km, long (one side)
Capacity of bus: 50 passengers
Normal passenger travelling: 90% of capacity

 

(B. Com.)
[Ans: Total km: 20,000; Total passenger-km: 9,00,000]

Illustration 28

A state transport corporation has been in serious financial and operational difficulty due to the high prices of spares, rising fuel cost and high wages.

The running operational expenses have been worked out for a single deck bus and are reproduced below:

Total fleet—500 buses single—deck

Average passengers occupying each trip—40

List of expenses for one-year period ending 31-12-197

 

Variable expensesTable for 30,000 km per bus per year (Rs)
(i) Fuel diesel oil20,000
(ii) Tyres, tubes and batteries5,000
(iii) Lubricants1,500
(iv) Spare parts and accessories4,500
(v) Wages, fringe benefits and bonus28,000
Fixed expenses
(i) Road tax1,500
(ii) Insurance2,500
(iii) Rent for night parking garage3,000
(iv) Maintenance garage establishment cost2,000
(v) Original cost per bus Depreciation @ 15% straight line basis2,50,000
Administrative expenses
(i) Administrative establishment cost (including salaries and PF)14,00,000
(ii) Staff welfare cost57,000
(iii) Retirement gratuity50,000
(iv) Rates and taxes50,000
(v) Travelling and conveyance38,000
(vi) Postage, telephone and stationery2,10,000
(vii) Audit fee25,000
(viii) Electricity70,000
(ix) Interest and bank charges2,80,000
(x) Miscellaneous40,000

Administrative overhead is to be absorbed in the operating cost on the basis of available number of budgeted operable fleet (calculated on the basis of total fleet less 15% breakdown).

You are required to advise management regarding the fare structure on cost plus 10% basis for the following stages of travel, assuming that the fare is charged in proportion to kilometres travelled.

 

Minimum fare on
1st stage of travel5 km (Rounded of
2nd stage of travel10 km to nearest
3rd stage of travel15 km paise)

Suggest suitable statistical data to be collected on a weekly basis for management information for effective operational control.

 

Solution:

State transport corporation operational expenses for the period ending 31-12-1978

 

image

 

Average passenger per bus—40

 

Cost per passenger per kmRs 3.694/40 = 0.09235 paise
Cost per kmRs 0.09235
Margin0.009235
Fare per km0.101 paise

 

The fare structure will be as follows:

 

Stage I5 km × 0.101 p= 0.505 paise
Stage II10 km × 0.101 p= 1.01

 

In order to have effective operational control, the following statistical data should be collected on a weekly basis for management.

  1. Number of buses run per-day and kilometres covered per day budgeted figure of 40 passengers per bus.
  2. Road breakdown
    1. Number of buses involved
    2. Kilometre lost
    3. Average fuel consumption per kilometre.

    4. Variable operational expenses against each item (for comparison with the budgeted expenses). If data are not available weekly, these should be submitted monthly.
    5. Total earning per day.

Problem 12. A transport company has been given a 10 km long route to run a bus. The bus costs Rs 50,000 and has been insured at 6% p.a., while annual taxes amount to Rs 2,000. Garage rent is Rs 100 p.m. Yearly repairs will be Rs 2,000 and the bus is likely to last for 5 years.

The driver's salary will be Rs 3,000 p.a. and that of conductor's Rs 1,800 p.a. in addition to 10% of the takings as commission (to be shared by the driver and the conductor equally). Cost of stationery will be Rs 600 p.a. Manager's salary is Rs 400 p.m. who also looks after accounts.

Petrol and oil will be Rs 25 per 100 km. The bus will make 5 round trips each day carrying on the average 40 passengers on each trip. Assuming 25% profit on takings, calculate the bus fare to be charged from each passenger. The bus runs on an average 25 days in a month.

(Madras, 1985)

[Ans: Bus fare to be charged: Re 0.046 or 4.6 paise per passenger km; Passenger km per month:
1,00,000; Total cost per month excluding commission: Rs 2,992; Petrol: Rs 625;
Commission: Rs 460; Profit: Rs 1,151; Total takings per month: Rs 4,603]

Illustration 29

The new thermal power generating plant gives you the following data; find out in an appropriate cost sheet, cost of electricity per unit produced during the month of August 1978.

  1. Fuel:

    Coal at the beginning of the month 500 tonnes.

    Supply during the month 1,100 tonnes

    Balance at the end of the month 400 tonnes.

    Annual contract for supply of coal for colliery at Rs 10 per tonne.

    Add: 10% to cover freight and handling charges.

  2. Oil: 10 tonnes at Rs 250 per tonne.
  3. Water: 50,000 litres. Pumping charges at 25 paise 100 per litre.
  4. Depreciation of steam boiler: Capital value Rs 24,000 and the rate of depreciation 12½% per annum.
  5. Salaries and wages of the boiler house:

    10 men at Rs 150 per month each.

    40 coolies at Rs 30 per month each.

  6. Recovery on account of sale of ashes: 100 tonnes at Re 1 per tonne.
  7. Salaries and wages of the generating station:

    50 men at Rs 150 per month each.

    20 coolies at Rs 30 per month each.

  8. Repairs and maintenance of the generating equipment: Rs 2,600.

    Depreciation of generating equipment: Capital value:

    Rs 1,80,000 and the rate of depreciation 12½% p.a.

  9. Share of administration charges: Rs 1,750
  10. Number of units generated: 1,46,000.
  11. Loss in the process 2,000 units generated.

Solution: Cost sheet (electricity generated

 

image

 

Illustration 30

Progressive Enterprises Limited runs a canteen for the benefit of its workmen and provides necessary subsidy to the canteen.

During month of August 1981, the following purchases were made:

 


Commodity
Quantity
kg
Rate per kg
Rs
  1. Tea410
  2. Sugar503
  3. Milk602
  4. Atta2102
  5. Flour203
  6. Vegetable ghee3011
  7. Besan124
  8. Dal303.50
  9. Potato902
10. Green vegetable201.50
11. Spices224

The other expenses for the month were : Rickshaw fare Rs 20 salary to cook (1) Rs 250 per month each. Wages to waiters (2) Rs 150 per month each. Supervisor's salary Rs 300 per month

Fuel, gas, coal, etc. Rs 400. Miscellaneous expenses crockery and glassware Rs 100. Depreciation of utensils and furniture Rs 50.

Sale of coupons 7,800 @ Re 0.15 per coupon.

Prepare trading and profit and loss account of the canteen for the month of August and find out the amount of subsidy paid by the company.

 

image

 

Solution: Trading and profit and loss account for the month of August 1981.

 

image

 

Canteen subsidy during the month of August 1981

 

image

 

Note: Cost sheet for the month of August 1981 to the above canteen can be prepared.

 

Illustration 31

The following cost data pertaining to the year 1964–1965 are collected from the books of ABC Power Company Limited

 

image

 

Coal consumed per kWh for the year is 1.5 lb and the cost of cool delivered to the power station is Rs 33.06 per metric ton. Depreciation rate chargeable is 4% per annum and interest on capital is to be taken at 1% higher than Reserve bank rate of 6% per annum.

 

 

Solution: Operating cost sheet of ABC Power Company Limited

 

image

 

Note: Cost of one tonne (2,205 1b) = Rs 33.06

 

image

 

Illustration 32

'Amitabh’ theatre in Bombay seeks your assistance in price determination. From the following data relating to April 1998, you are requested to

  1. Compute cost per ‘Man Show'
  2. Ascertain rates to be charged for each class of seating accommodation.

 

Rs
Staff salaries per month10,000
Monthly maintenance and cleaning2,500
Electricity charges per month2,000
Projector room supplies per month12,000
Advertising expenditure per month10,000
Hire-charges of print per month30,000
General expenses7,000
Revenue from slides shown per month2,000

The theatre premises and building are valued at Rs 9,00,000. 6% on the capital cost per annum should be charged as depreciation. Rents collected from stalls in the theatre are Rs 8,400 per year. Depreciation of furniture & projector per month respectively are Rs 1,000 and Rs 500.

During April 1998, four shows with average attendance of 80% were run daily. Out of the seats occupied, 10% represent free passes and owner's connections.

Entertainment tax 50% of collections

Profit required 50% of net collections

The theatre contains 200 balcony, 300 first class and 500 second class seats. The weightage given is 3, 2, 1 respectively in terms of worth.

 

Solution: (1) Statement showing operating cost for April 1988

 

image

 

(2) Rates to be charged for each class of seating

  Second class = 2.08 × 1 = Rs 2.08

  First class = 2.08 × 2 = Rs 4.16

  Balcony = 2.08 × 3 = Rs 6.24

 

Working Note (1):

Man Shows = Seats × weightage × days × shows × occupancy × paid occupancy

Second class = image

First class = image

Balcony = image

Total Man Shows for the month = 1,46,880

 

Working Note (2):

Computation of profit and tax per man show

If collections are100
Less: Entertainment tax image50
Net collections50
Less: Profit at 50% of net collections image25
Cost25

 

Note: Entertainment tax is on ticket price. Profit is on net collections, which is ticket price less tax.

 

Problem 13. The data given relates to ‘Vasanth Talkies’ a mini theatre, for the year ending 31-3-1976.

 

Salaries:Rs
One manager800 p.m.
10 gate keepers200 p.m. each
two operators400 p.m. each
four clerks250 p.m. each
Electricity and oil11,655
Carbon7,235
Sundry expenses5,425
Advertising34,710
Office expenses18,000
Hire for prints1,40,700

The theatre premises are valued at Rs 6,00,000 and the estimated life is 15 years. Projector costs Rs 3,20,000 on which 10% per annum depreciation is to be charged. Three shows are run daily throughout the year. The total capacity is 625 seats, which are divided into three classes as follows:

Janata circle 250 seats

Sanman circle 250 seats

Lords circle 125 seats

Ascertain cost per man show if

  1. 20% of the seats remain vacant
  2. Weightage for the classes is 1 : 2 : 3 respectively.

Determine the rates for each class if profit required is 30% on collections.

(Madras, 1983)

[Ans: Man shows 9,85,500 rate per man show = Re 0.50;
Rates: Janata: Re 0.50; Sanman: Re 1.00; Lords: Rs 1.50]

11.1.4 Hospital costing

The main purpose of hospital costing is to ascertain the cost of providing medical services. There are different departments in a hospital, which are generally formed on the basis of functions performed by them. The following are the main departments in a hospital:

  1. Out-Patient Department (OPD)
  2. Wards
  3. Medical Service Departments as diagnostic X-ray, radiotherapy, pathology, and so on
  4. General Service Department as boiler house, if any, power, heating, lighting, and so on: Catering, laundry, medical records, works maintenance, administration, and so on
  5. Miscellaneous service departments as transport, dispensary, cleaning, and so on

Cost of department 5 will have to be apportioned to the other departments on equitable basis. Cost of departments 1–4 above can be determined separately with reference to the units of cost, which are given below:

 

OPDPer out-patient attended
WardsPer new out-patient attended or per case
RadiotherapyPer course of treatment per day
Diagnostic X-rayPer 100 units weighted points value.
PathologyPer 100 requests
Boiler housePer 1,000 lbs, steam raised
Power, heating and lighting, etc.Per 1,000 cubic feet
CateringPer person fed per week
LaundryPer 100 articles laundered
Medical recordsPer weighted unit
Works and maintenancePer 1,000 cubic feet
AdministrationSuitable percentage of turnover

 

Cost Statement

The expenses of a hospital can be broadly divided into two categories: (1) capital expenditure and (2) Maintenance expenditure—This includes salaries and wages, provisions, staff uniforms and clothing, patients’ clothing, medical and surgical appliances and equipments, fuel, light and power, laundry and water.

11.1.5 Hotel costing

Hotel industry is a service industry and covers various activities as provision for food and accommodation and providing other comforts like recreation, business facilities, shopping areas for shopping facilities. In order to provide the service, hotel industry is required to incur various expenses. Expenses may be fixed or variable. Fixed expenses comprise staff salaries, repairs and renovations, interior decoration, laundry contract cost, sundries and depreciation on fixed assets, variable expenses include lighting charges, attendants salaries and power charges.

In order to calculate the room rent to be charged per person, notional profit is added in the total operating cost and divided by the number of rooms available. The numbers of rooms available are calculated after taking into consideration various categories of suite, various seasons and occupancy percentage.

Room rents may be different during season and off-season. Sometimes besides accommodation, food facilities are also provided. Then cost of meals, direct wages (restaurant and kitchen, housekeeping & general) and direct expenses (of house keeping and restaurant) are taken into consideration. Indirect expenses are apportioned on equitable basis among the different concerned departments.

11.1.6 Canteen costing

Hotel, motels, restaurants and cafeterias also employ operating costing. The aim obviously is to find out the total cost of running the business and then on that basis to fix the tariff. How much to charge per customer, per room, per bed, per meal, per dish, and so on can be determined only when these establishments maintain a complete set of record pertaining to each element of cost. After-all hotelling is a business and has to be conducted with minimum of cost and maximum of profit. The hotel manager has to ensure this. However, the point not to be missed is that most of the factory canteens are subsidised. The main heads of expenditure here are:

  1. Provision—vegetables, fruits, meat, flour, oil, milk, sugar, cream, tea, coffee and soft drinks
  2. Labour cooks, waitresses, kitchen assistants, supervision and porters
  3. Services—steam, gas, electricity, power and light water
  4. Consumable stores—cutlery, crockery, glassware, table linen, mops and washing-up clothes, dying up clothes, cleaning materials, dustpans and brushes
  5. Miscellaneous overhead—rent, rates, depreciation and insurance
  6. Credit—charges for meals, tea and other sales

Illustration 33

The following cost data is available from the books of ABC Power Company, Limited for 1995. Prepare cost sheet showing cost of power generation per unit of kWh.

 

Rs
Operating labour16,500
Plant supervision7,000
Lubricants and supplies10,500
Repairs21,000
Administration overheads10,000
Capital cost2,00,000

 

Total units of power generated 15,00,000. Coal consumed per kWh for the year is 1.5 pounds and the cost of coal purchased is Rs 33.06 per metric tonne. Depreciation is at 4% per annum and the interest on capital is to be taken at 7% per annum.

 

Solution: Operating cost sheet of ABC Power Company Limited for the year ended 1965

(15,00,000 kWh)

 


Particulars
Total
Rs
Per kWh.
Rs P.
Fixed charges:
Depreciation image8,000
Administration overheads10,000
Interest on capital cost image14,000
Plant supervision   7,000           
Total fixed charges (A)   39,000  0.026 
Variable costs
Coal33,7350.0225
Operating labour16,5000.0110
Lubricants and supplies10,5000.0070
Repairs  21,0000.0140
Total variable cost (B)  81,7350.0545
Total cost (A + B)1,20,7350.0805

 

Working Note:

Coal consumed
A metric tonne= 2.205 pounds
Coal per kWh.= 1.5 pounds
kWh produced= 15,00,000
Total coal required (15,00,000 × 1.5)= 22,50,000 pounds
Metric tons of coal image= 1,020.4081

 

image

 

Illustration 34

Find out the cost per unit of electricity generated in the powerhouse located in Eagle Engineering Works for the month of November 2001, with references to the following data extracted from the accounts books of works. The cost-sheet must be drawn up in the appropriation form:

Fuel:

 

Coal 1,200 tons @ Rs 11 per tonne
Coke 500 ton @ Rs 15 per tonne
Handling charges of the fuel at 50 P. per tonne
Ash removal charges—160 tonnes @ 25 P. per tonne
Cost of water pumped from the river—160 thousand gallons
@ 37 ½ P. per thousand gallon
Lubricating oil—50 gallons @ Rs 4 per gallon

 

Credit on account of

  1. Sale of ashes—280 tonnes @ 25 P. per tonne
  2. Cost of steam supplied to the manufacturing shops—30,000 therms @ Rs 10 per 1,000 therms

Salaries and wages of operating staff in the power house:

 

Foreman1 @ Rs 600 per month
Assistant foremen2 @ Rs 200 per month
Mechanics4 @ Rs 150 per month
Coolie1 @ Rs 4 per day for 30 days

 


Depreciation
Capital cost
Rs
Rate of depreciation
per annum
Boiler50,0006%
Generator and other electrical equipment1,50,0004%
Building18,0001%
25% share of monthly Total technical supervision charge4,200
Total gross units generated97,000 units
Loss during the month due to leakage in course of generation due to defective equipments1,000 units

 

Solution

 

image

11.2 ADVANCED-TYPE SOLVED PROBLEMS

Illustration 35

Fast roadways runs 10 buses between two suburban centres which are 25 km apart seating capacity at each bus in 30 passengers. The expenses for the month of November 1994 were as under:

Rs
Salaries of drivers and conductors30,000
Salaries of mechanical staff3,000
Diesel oil and lubricants20,000
Taxes, insurance etc.2,600
Repairs and maintenance4,000
Depreciation16,000

Seating capacity utilized was 60%.

All the buses ran 25 days at the month.

Each bus made four round trips daily.

  1. Find out the cost per passenger-kilometre and the cost per round trip per passenger
  2. What would have been the cost per passenger, if the seating capacity utilization were to go up to 80%.

  3. What would have been the cost per round trip per passenger, if all the expenses (other than depreciation) were to go up by 20% at a seating capacity utilization of 80%?

Solution:

    1. Passenger km = 10 × 25 × 30 × 4 × 2 × 25 × 60/100

                             = 9,00,000

    2. Total cost = Rs 75,600
    3. Cost per passenger km = 75,600/9,00,000

                                            = Rs 0.084

    4. Cost per round trip passenger = 50 × 0.084

                                                       = Rs 4.20

  1. Cost per round trip per passenger, if the seating capacity utilized were 80%
    1. Passenger km = 10 × 25 × 30 × 4 × 2 × 25 × 80/100

                             = Rs 12,00,000

    2. Total cost = Rs 75,600
    3. Cost per passenger km = 75,600/12,00,000

                                            = Rs 0.063

    4. Cost per round trip passenger = 50 × 0.063

                                                       = Rs 3.15

  2. Cost per round trip passenger if all the expenses (other than depreciation) were to go up by 20% at seating capacity utilization of 80%
    1. Total cost = 16,000 + (71,520)

                       = Rs 87,520

    2. Passenger kilometre = Rs 12,00,000
    3. Cost per passenger kilometre = 0.0729
    4. Cost per round trip to passenger = 50 × 0.072

                                                           = 3.60

Illustration 36

Raja runs a fleet of taxis and the following information is available from the rewards maintained by Rim.

 

  1. Number of taxis10
  2. Cost of each taxiRs 20,000
  3. Salary of managerRs 600 p.m.
  4. Salary of accountantRs 500 p.m.
  5. Salary of cleanerRs 200 p.m.
  6. Salary of mechanicsRs 400 p.m.
  7. Garage rent600 p.m.
  8. Insurance premium5% p.a.
  9. Annual taxRs 600 per taxi
10. Driver's salaryRs 200 p.m. per taxi
11. Annual repairsRs 1,000 per taxi

 

Total life of a taxi is about 2,00,000 km. A taxi runs in all 3,000 km in a month at which 30% of it runs empty. Petrol consumption is one litre for 10 km @ Rs 1.80 per litre. Old and other sundries are Rs 5 per 100 km.

Calculate the cost of running a taxi per km.

 

Solution:

Fixed expenses:

 

Amount p.m.
Rs
Cost per km
Salary of manager600
Salary of accountant500
Salary of cleaner200
Salary of mechanics400
Garage rent600
Insurance premium 5% on 2,00,000833.33
Driver's salary 200 × 102,000
Tax 600 × 10/12500
Total fixed expenses5,633.33
Effective kilometre 2,100 × 100 = 21,000 Fixed expenses per km0.268

 

Running expenses:

 

Depreciation20,000/1,40,0000.143
Repairsimage0.040
Petrolimage0.257
Oil and other sundriesimage0.071
Cost per km0.779

 

Illustration 37

Raja automobiles distributes its good to a regional dealer using a single lorry. The dealer's premises are 40 km away by road. The lorry has a capacity of 10 tonnes and makes the journey twice a day fully loaded on the outward journeys and empty on return journeys. The following information is available for a four-weekly period during the year 1991.

 

Petrol consumption8 km per km
Petrol costRs 6.50 per litre
OilRs 50 per week
Driver's wagesRs 200 per week
RepairsRs 50 per week
Garage rentRs 75 per week
Cost of lorry80,000 km
InsuranceRs 3,250 p.a.
Cost of tyresRs 3,125
Life of tyres25,000 km

 

Estimated sale value of Rs 25,000 lorry at end of its life. Vehicle licence cost Rs 650 p.a. Other overhead rate Rs 20,800 p.a. The lorry operates on a five-day week.

Required:

  1. A statement to show the total cost of operating the vehicle for a four-weekly period analysed into running costs and fixed costs.
  2. Calculate vehicle cost per km and per ton-km

 

Solution

 

Running costs (Rs):
Petrol cost2,600
Oil expenses200
Driver's wages800
Repairs200
Tyre cost400
Depreciation8,000
Total running cost (A)Rs 12,200
Fixed costs (Rs):
Garage rent300
Insurance250
Licence cost50
Other overhead cost1,600
Total fixed cost (B)2,200
Total cost (A) + (B)Rs 14,400

 

(b) Cost per kilometre:

 

image

 

Cost per ton kilometre:

 

image

 

Working Notes:

  1. Cost of petrol

     

    image

     

  2. Cost of tyres:

     

    image

     

  3. Depreciation of lorry:

     

    image

     

  4. image
  5. image
  6. image

Illustration 38

Raja has been promised a contract to run a tourist car on a 20 km long rate for the chief executive of a multinational firm. He buys a car costing Rs 1,50,000. The annual cost of insurance and taxes are Rs 4,500 and Rs 900, respectively. He has to pay Rs 12,500 p.m. for a garage where he keeps the car when it is not in use. The annual repair are estimated at Rs 4,000. The car is estimated to have a life at 10 years, at the end of which the scrap value is likely to be Rs 50,000.

He hires a driver who is to be paid Rs 300 p.m. plus 10% of the takings ads commission. Other incidental expenses are estimated at Rs 200 p.m. Petrol and oil will cost Rs 100 per 100 km. The car will make four round trips each day. Assuming that a profit of 15% on taking is desired and that the car will be on the road for 25 days on an average per month, what should be charge per round trip?

Solution

 

Per annum (Rs)Per month (Rs)
Standing charges:
Insurance4,500
Taxes900
Garage rent (500 × 12)6,000
Driver's salary (300 × 12)3,600
Incidental expenses (200 × 12)  2,400
17,4001,450
Running expenses:
Depreciation (10,000/12)833.33
Petrol and oil (100 × 4,000/100)4,000
Annual repairs (4,000/12)333.33
Commission882.22
Profit 1,323.34
8,822.22

 

image

 

Working Notes:

  1. Computation of total takings:

    Let x be the total takings per month

    Pricer's commission is 10% of x of = x/10

    Profit = 15% of x = 15/100 x = 3x/20

    Total takings per month = Total cost + driver's commission + profit

     

    image

     

  2. Profit = image
  3. Commission = image
  4. kms run = 20 km × 2 × 4 × 25 days = 4000 km
  5. A tram port service company is running five buses between two towns which are 50 km apart. Seating capacity of each bus in 50 passengers. The following particulars were obtained from their books for March 2003.

 

Rs
Wages for drivers, conductors and cleaners12,000
Salaries of office staff5,000
Diesel oil and other oil17,500
Repairs and maintenances4,000
Taxation, insurance, etc.8,000
Depreciation10,000
Interest and other expenses10,000
66,500

 

Actually, passengers carried were 75% of seating capacity. All buses ran on all days of the month. Each bus made one round trip per day.

Find out the cost per passenger-km.

 

Solution: Operating cost statement

 

Standing charge:
Wages of drivers, conductors and cleaners12,000
Salaries of office staff5,000
Taxation, insurance, etc.8,000
Interest and other expenses10,000
(A)35,000
Running cost:
Repairs and maintenance4,000
Diesel and other oil17,500
Depreciation10,000
(B)31,500

 

image

 

Illustration 39

A factory which uses a large amount of coal is situated between two colliery X and Y, the former being 5 km and the latter 10 km distant from the factory. A fleet of lorries of 5 tonne carrying capacity is used for the collection of coal from the pitheads. The lorries average a speed of 20 km per hour when running and regularly take 10 minutes in the factory premises to unload. At colliery X loading time averages 30 minutes per load and at colliery Y 20 minutes per load.

Driver's wages, licences, insurance, depreciation, garage and similar charges are noticed to cost Rs 6 per hour opened. Fuel, oil tyres repeats and similar changes are noticed to cost to paisa per kilometre run.

Recap a statement stating the cost per tonne-kilometre of carrying coal from each colliery. If the coal is of equal, quality and price at pithead from which colliery should the purchases be made?

Solution: Statement showing cost per tonne-kilometre

 

Colliery XColliery Y
Time taken per trip*1 hr 10 minutes1 hr 30 minutes
Fixed cost per trip @ Rs 6 per hour7.009.00
Running cost per trip @ Rs 60 per km6.0012.00
Cost per trip13.0021.00
Ton-km **2550
Cost per ton-km0.520.42
Cost per tonne2.604.20
It consists of:colliery Xcolliery Y
To and fro travelling time30 minutes1 hr
Loading time30 minutes20 minutes
Unloading time10 minutes10 minutes
1 hr 10 minutes1 hr 30 minutes
Ton-km
Journey from colliery5 tonne × 5 km = 255 tonne × 10 = 50
Journey to colliery0 × 5 = 00 × 10 = 0
*Total ton km2550

 

Illustration 40

Union transport company supplies the following details in respect of a truck of 5 tonne capacity.

 

Cost of truck—Rs 90,000
Estimated life—10 years
Diesel, oil, grease—Rs 15 per trip each day
Repairs and maintenance—Rs 500 p.m.
Driver's wages—500 p.m.
Cleaner's wages—250 p.m.
Insurance—Rs 4,800 per year
Tax—Rs 2,400 per year
General supervision charges—Rs 4,800 per year

 

The track carries goods to and from the city covering a distance at 50 km each way, on outward trip freight is available to the extent of full capacity and on return 20% of capacity.

Assuming that the truck runs on an average 25 days a month workout:

  1. Operating cost tonne km
  2. Rate per tonne trip that the company should charge if a profit of 50% on freight is to be earned.

Solution:

 

image

 

  1. Operating cost = 0.500 per ton-km
  2. Freight rate:

     

    Cost per ton-km0.50
    Profit per ton-km0.50
    1.00

 

Freight per trip both ways 300 tons-km @ Rs 1

(Track makes only one trip a day, ton-km covered in a trip would be 7,500/25)

Working Notes:

  1. Ton-km per month

    6 ton × 50 km × 25 days = 7,500 ton-km

    5 ton on outwards trip and 1 ton on return trip

     

    image

     

  2. It is assumed that the truck makes only one trip per day.
  3. The scrap value of the truck is assumed to be ‘nil’. Hence, the total amount to be depreciated in a year is 90,000/10 = Rs 9,000
CHAPTER SUMMARY

Having gone through this chapter, one would be able to understand the relevance of operating costing while fixing the cost/fares in transport sector, power sector, cinema houses, canteens and lodges. It helps one to understand the method in which the expenses are segregated to fix the cost/fares.

EXERCISE FOR YOUR PRACTICE

Objective Type Questions

I. State whether the following statements are True or False

  1. Service costing is applicable in canteens.
  2. The unit used in service costing is simple.
  3. Motor cost for passengers is referred to per passenger kilometre.
  4. Service costing is one of the basic methods of operating costing.
  5. Operating cost statement is prepared to calculate the cost in case of service costing.
  6. Service costing and process costing are the same.
  7. Under service costing depreciation is always fixed.
  8. Drivers wages when based on distance covered is fixed in nature.
  9. Kilometre run and effective kilometre are the same.
  10. Powerhouse costing and boiler house costing are the same.

[Ans: 1—true, 2—false, 3—true, 4—true, 5—true, 6—false, 7—false, 8—false, 9—false, 10—false]

 

II. Choose the correct answer

  1. The Tamil Nadu Transport Corporation must use
    1. job costing
    2. contract costing
    3. process costing
    4. operating costing

  2. Composit unit is a distinctive feature of
    1. single costing
    2. operating costing
    3. process costing
    4. job costing
  3. Service costing is adopted by
    1. cinema houses
    2. electricity companies
    3. gas supply
    4. all the above
  4. Classification and accumulation of costs by fixed and variable cost is of special importance in
    1. service costing
    2. job costing
    3. contract costing
    4. batch costing
  5. Canteens apply
    1. contract costing
    2. job costing
    3. service costing
    4. batch costing
  6. Motor costs for passengers is ascertained with reference to
    1. per seat occupied
    2. per distance travelled
    3. per ticket sold
    4. per passenger per kilometre
  7. In hospitals, the cost unit is
    1. per bed
    2. per tablet
    3. per doctor
    4. per patient
  8. The cost unit in a electricity generating concerns is
    1. per tube light
    2. kilo watt
    3. per metre
    4. per main
  9. Garage rent is classified under
    1. direct expense
    2. indirect expense
    3. standing charges
    4. machine expenses
  10. The cost unit for water supplies is
    1. per 1,000 gallons
    2. per lorry
    3. per dozen litres
    4. per consumer

[Ans: 1. d, 2.b, 3.d, 4.a, 5.c, 6.d, 7. a, 8.b, 9.d, 10. a]

DISCUSSION QUESTIONS

Short Answer-Type Questions

  1. What do you understand by operating costing?
  2. In what industries operating costing is used?
  3. Write a note on
    1. transport costing
    2. boiler costing
    3. canteen costing
  4. Explain the terms passenger kilometre and tonne-kilometre.
  5. Illustrate the term effective kilometre run.

Essay-Type Questions

  1. Explain the important objectives of transport costing.
  2. Give the accounting procedure for transport costing.
  3. Write a detailed note on hospital costing.
  4. Explain about hotel costing.
PROBLEMS
  1. A transport company is running four buses between two towns, which are 50 km apart.

     

    Seating capacity of each bus is 40 passengers.
    Actual passengers carried were 75% of seating capacity.
    All the buses run on 30 days.
    Each bus made one round trip per day.
    Find out the total passenger-kilometres.

    B. Com., Calicut)

    [Ans: 3,60,000 passenger-kilometres]

  2. A transport service company is running four buses between two towns 50 miles apart. Seating capacity of each bus is 40 passengers. The following particulars were obtained from their books:

     

    Rs
    Wages of drivers, conductors and cleaners2,400
    Salaries of office and supervisory staff1,000
    Diesel oil and other oil4,000
    Repairs and maintenance800
    Taxation, insurance, etc.1,600
    Depreciation2,600
    Interest and other charges  2,000
    14,400

     

    Actual passengers carried were 75% of the seating capacity. All the four buses ran on all the days of the month. Find out the cost per passenger mile.

    (B. Com., Delhi, C.A., Inter)

    [Ans: Re 0.04]

  3. A transport company is running two buses between two places 100 km apart. Seating capacity of each bus is 50 passengers. The following particulars are taken from their books for a month.

     

    Rs
    Wages of drivers, conductors and cleaners3,000
    Salary of supervisory and office staff1,500
    Diesel, oil, etc.6,000
    Repairs and maintenance1,500
    Taxation and insurance2,000
    Depreciation3,000
    Interest and other charges2,500

     

    Actual passengers travelled were 80% of the capacity. The buses ran on all the days. Each bus made a to and fro trip. Find out the cost per passenger-kilometre.

    (B. Com., Madras)

    [Ans: Re 0.041]

  4. A cinema hall has seating capacity of 800. It runs daily 4 shows on all 30 days of a month. It is generally full to the extent of 80% of its capacity. Find out the number of man shows during the month.

    [Ans: 76,800 man shows]

    Computation of cost units

    1. Passenger kilometres

      A transport company is running four buses between two towns, which are 50 km apart.

      Seating capacity of each bus is 40 passengers. Actual passengers carried were 75% of seating capacity, on an average.

      All the buses run 30 days in a month.

      Each bus made one round trip per day.

      Find out the total passenger-kilometres per month.

      (B.Com., Calicut)

      [Ans: 3,60,000 passenger km]

    2. Running kilometres

      Pankajam travels employ 5 buses, which run over a route of 140 km (one way), making one round trip per day. The buses run 360 days per year and 10% of them on average are laid out for repairs. Ascertain the total running kilometres per year.

      [Ans: 4,53,600 running km]

    3. Tonne-kilometres

      Vasan owns a lorry of six tonne capacity. During a month, it went on trips 20 days, covering on average 200 km each day. 40% of the time it ran empty. It carried an average load of 80% of capacity during the period.

      Find out the total ‘tonne-kilometres’ for the month.

      [Ans: 11,520 ton-km]

    4. Room days

      Calculate the total ‘Room days’ from the following details.

      1. No. of rooms—40 double and 100 single
      2. Weightage based on value: double room—2 and single room—1
      3. Room occupancy—Busy season—double rooms 80% and single rooms 90%. Slack season—double rooms 50% and single rooms 40%.
      4. Slack season—240 days and busy season 120 days.

      [Ans: 37,680 room-days]

    1. Running kilometres and passenger kilometres

      From the following information, calculate total running kilometres and total passenger kilometres.

      Number of buses: 5; days operated in a month: 25; trips per day made by each bus: 4;

      Distance of route: 25km (one side).,capacity of bus: 50 passengers. average passenger travelling—90% of capacity.

      (Madras, 2001)

      [Ans: 25,000 running km; 11,25,000 passenger km]

      Hint: Assume trips per day made as round trips.

    2. Raj travels operates a 60 seater luxury bus as follows:
      1. 10 days in a month Chennai to Tirupathi one round trip (200 km one way) every day. Average occupancy 90%.
      2. 14 days a month Chennai to Bangalore, a round trip (300 km one way) per day. Average occupancy 80%.
      3. six days in a month Chennai local, covering about 200 km a day, with 100% occupancy. Ascertain (a) running km (b) passenger km.

      [Ans: (a) 13,600 running km; (b) 6,91,200 passenger km]

    3. (Man shows)

      A cinema hall has three types of seating accommodation—balcony, 1st class and 2nd class with weightages of 3, 2 and 1 respectively on the basis of their worth. There were 300 seats in balcony, 400 seats in 1st class and 500 seats in 2nd class. The cinema hall runs daily four shows on all 30 days in a month. The average occupancy of seats is 80%.

      Find out the number of man shows in a month.

      [Ans: 2,11,200 man shows]

    4. Tonne-kilometres

      From the following information, calculate total tonne-kilometres:

      Number of lorries: 10; capacity: 5 tons each; days operated: 25 days per month; trips made by each lorry: one trip a day of a distance of 120 km; average load carried 80% of capacity; empty running—40% of the total running distance.

      [Ans: 72,000 ton-km]

    1. Passenger kilometres

      From the following calculate the total passenger kilometres.

      Number of buses—10; number of days operated in a month—28; number of trips by each bus per day—2 trips; distance of route—25 km (one side); capacity of the bus—50 passengers; normal operating capacity—80%.

      (B.Com., Mysore)

      [Ans: 11,20,000 passenger km]

      Hint: Assume trips by bus as round trips.

    2. Tonne-kilometres

      Chennai City Corporation employs 200 trucks for garbage clearance. Their capacities are as follows:

       

      40 trucks6 ton
      80 trucks5 ton
      80 trucks4 ton

       

      The trucks operate on all 30 days a month, making five trips a day, covering 10 km in each trip. They carry an average 80% capacity load. On average 20% of the vehicles are in garage for maintenance work.

      Calculate the tonne-kilometres per month.

      [Ans: 9,21,600 ton-km]

    3. Passenger kilometres

      Calculate the passenger kilometres covered by a fleet of four taxis run by CNN Travels from Hyderabad to Bhuvanagiri (45 km) and back four trips each day with five passengers on an average on each vehicle, for the month of April 1992.

      (Osmania, 1993)

      [Ans: 2,16,000 passenger km]

  5. From the following data calculate the cost per mile of a vehicle:

     

    Rs
    Value of vehicle15,000
    Road licence for the year500
    Insurance charges per year100
    Garage rent per year600
    Driver's wage per month200
    Cost of petrol per litre0.80
    Miles per litre8
    Proportionate charge for tyre and maintenance per mile0.20
    Estimated life1,50,000 miles
    Estimated annual mileage6,000 miles

     

    Ignore interest on capital.

    (Madras, 1988)

    [Ans: Cost per mile of vehicle: Re 1.00]

  6. The Union Transport Company supplies the following details in respect of a truck of 5 tonne capacity:

     

    Cost of truckRs 90,000
    Estimated life10 years
    Diesel, Oil, greaseRs 15 per rip each way
    Repairs and maintenanceRs 500 per month
    Driver's wagesRs 500 per month
    Cleaner's wagesRs 250 per month
    InsuranceRs 4,800 per year
    TaxRs 2,400 per year
    General supervision chargesRs 4,800 per year

     

    The truck carries goods to and from the city covering a distance of 50 miles each way.

    While going to the city, freight is available to the extent of full capacity and on return 20% of the capacity.

    Assuming that the truck runs on an average 25 days a month.

    Work out:

    1. Operating cost per ton-mile and
    2. Rate per ton per trip that the company should charge, if a profit of 50% on freightage is to be earned.

    (B. Com. Hons., Delhi)

    [Ans: (i) Re 0.50; (ii) Rs 50.00]

  7. Shriman operates a taxi. Compute cost per running km from the following details.

     

    Rs
    Purchase price of taxi50,000
    Insurance per annum1,000
    Rent of garage per month100
    Tyres and tubes per set (A set lasts 16,000 km)4,000
    Driver's wage per day of 8 hours32
    (Average distance per day 160 km)
    Fuel cost per gallon (A gallon lasts 24 km)12
    Repairs per annum1,200
    Stand and police payments p.a.2,600
    Interest on bank loan for the taxi p.a.4,000
    Kilometres run per annum20,000
    Life of the taxi (in km)1,00,000

     

    [Ans: Cost per running km: Rs 1.95]

  8. From the following data you are required to ascertain the cost of running the motor lorry per tonne-mile.

     

    Total tonnage carried in a week: 30
    Total mileage in a week: 600 miles

     

    Details of the above are:

     

    MilesTons
    Monday1206
    Tuesday1255
    Wednesday1104
    Thursday1005.5
    Friday804.5
    Saturday655.0
    60030

     

    Expenses for the week are as follows:

     

    Driver's salary: Rs 600 p.m.
    Cleaner's salary: Rs 200 p.m.
    Petrol, oil, etc.: Rs 1.00 per mile
    Repair and maintenance: Rs 300 p.m.
    Depreciation: 4,800 p.a.
    Other expenses: 500 p.m.
    Assume: 4 weeks in a month.

     

    (B. Com., Madurai)

    [Ans: Re 0.37]

  9. Raja runs mini bus service in the town and has two vehicles. He furnishes you the following data and wants you to compute the cost per running mile.

     

    Vehicle A
    Rs
    Vehicle B
    Rs
    Cost of vehicle25,00015,000
    Road licence (per year)750750
    Salaries (yearly)1,8001,200
    Driver's wage per hour44
    Cost of fuel per litre1.501.50
    Maintenance per mile1.502.00
    Tyre cost per mile1.00.80
    Garage rent per year1,600550
    Annual insurance premium850500
    Miles run per litre65
    Miles run during the year15,0006,000
    Estimated life of vehicles1,00,000 miles75,000 miles

     

    Charge interest at 10% p.a. on the cost of vehicle. The vehicle runs 20 miles per hour on an average.

    (Madras, 1999)

    [Ans: Cost per running mile: Vehicle A: Rs 3.70; Vehicle B: Rs 4.25]

  10. From the following data relating to two vehicles A & B, compute the cost per running mile.

     

    Vehicle A
    Miles
    Vehicle B
    Miles
    Mileage run (annual)15,0006,000
    Estimated life of vehicles1,00,00075,000
    Miles run per gallon of fuel2015
    RsRs
    Cost of vehicle25,00015,000
    Road tax (annual)750750
    Insurance (annual)700400
    Garage rent (annual)600500
    Supervision & salaries1,2001,200
    Drivers wages per hour33
    Cost of fuel per gallon33
    Tyres allocation per mile0.800.60
    Repairs and maintenance per mile1.652.00

     

    Charge interest at 5% per annum on cost of vehicles. The vehicles run 20 miles an hour on average.

    (Bharathiar, 1994)

    [Ans: Cost per running mile A: Rs 3.30; B: Rs 3.75]

  11. The Road Transport Company, which keeps a fleet of lorries, shows the following information:

     

    Kilometres run for April 199430,000
    Wages for AprilRs 2,000
    Petrol, oil, etc. for AprilRs 4,000
    Original cost of vehiclesRs 1,00,000
    Depreciation to be allowed @ 25% per annum on original cost
    Repairs for the month of AprilRs 6,000
    Garage rent, etc. for AprilRs 1,000
    Licence, Insurance, etc. for the yearRs 6,000

     

    Prepare a statement for April 1994 showing the fixed and variable cost per running km.

    (M. Com., Madras)

    [Ans: Re 0.52]

  12. From the following particulars, calculate the cost of running a taxi per kilometre:

     

      1. Number of taxis10
      2. Cost of each taxiRs 2,00,000
      3. Salary of managerRs 6,000 p.m.
      4. Salary of accountantRs 5,000 p.m.
      5. Salary of cleanerRs 2,000 p.m.
      6. Salary of mechanicsRs 4,000 p.m.
      7. Garage rentRs 6,000 p.m.
      8. Insurance premium5% p.a.
      9. Annual taxRs 6,000 per taxi
    10. Drivers salaryRs 2,000 per month per taxi
    11. Annual repairRs 10,000 per taxi

     

    Total life of a taxi is about 2,00,000 km. A taxi runs in all 3,000 k.m. in a month of which 30% of it runs empty. Petrol consumption is one litre for 10 km at Rs 18 per litre. Oil and other sundries are Rs 50 per 100 km.

    (Madras, 1991)

    [Ans: Cost of running a taxi per effective kilometre: Rs 7.793;
    Cost per taxi per month: Rs 16,366; Effective running km
    per month per taxi: Rs 2,100]

  13. Sohan Singh has started transport business with a fleet of 10 taxis. The various expenses incurred by him are given below:
    1. Cost of each taxi—Rs 75,000
    2. Salary of office staff—Rs 1,500 p.m.
    3. Salary of garage staff—Rs 2,000 p.m.
    4. Rent of garage—Rs 1,000 p.m.
    5. Driver's salary (per taxi) —Rs 400 p.m.
    6. Road tax and repairs per taxi—Rs 2,160 p.a.
    7. Insurance premium at 4% of cost p.a.

    The life of a taxi is 3,00,000 km at the end of which it is estimated to be sold at Rs 15,000. A taxi runs on an average 4,000 km per month of which 20% of it runs empty. Petrol consumption is 9 km per litre of petrol costing Rs 6.30 per litre. Oil and other sundry expenses amount to Rs 10 per 100 km.

    Calculate the effective cost of running taxi per kilometre. If the hire charge is Rs 1.80 per km, find out the profit Sohan Singh may expect to make in the first year of operation.

    (ICWA)

    [Ans: Effective cost of running taxi per km: Rs 1.65; Effective km per month: 3,200;
    Total cost per month: Rs 5,280; Profit in first year: Rs 57,600; Total collections:
    3,200 × 12 × 10 × 1.80 = Rs 6,91,200; Total cost 5,280 × 12 × 10 = Rs 6,33,600]

  14. From the following data, calculate the cost per kilometre of a vehicle:

     

    Rs
    Value of vehicle75,000
    Road licence fee per year500
    Insurance per year100
    Garage rent per year600
    Driver's wage per month500
    Cost of petrol per litre6.00
    Kilometres run per liter8
    Proportionate charge for tyre and maintenance per km0.40
    Estimated life1,50,000 km
    Estimated annual kilometres6,000
    Ignore interest on capital

     

    (B. Com., Mysore)

    [Ans: Rs 2.85]

  15. From the following data relating to a lorry of 4 tonne capacity, you are required to compute the operating cost per tonne-mile.

     

    Truck costRs 1,00,000
    Estimated life in years10
    MaintenanceRs 500 p.m.
    Payment to driver and cleanersRs 750 p.m.
    Annual insuranceRs 1,200
    Establishment chargesRs 650 p.m.
    Fuel per monthRs 600
    Sundry expenses en routeRs 2,000 p.a.

     

    The lorry goes to a town 50 miles away with full load and comes back empty for 20 days in a month.

    [Ans: Cost per tonne-mile Re 0.90]

  16. From the following data relating to vehicle ‘A’ compute the cost per running ton-km.

     

    Vehicle A
    Kilometres run (annual)15,000
    Tons per km (average)6
    Rs
    Cost of vehicle2,50,000
    Road licence (annual)800
    Insurance (annual)700
    Garage rent (annual)1,300
    Supervision and salaries p.a.2,700
    Driver's wages per hour4
    Cost of fuel per litre6
    Kilometres run per litre20
    Tyre allocation per km1
    Repairs and maintenance per km2

     

    Estimated life of vehicles 1,00,000 km

    Charge interest at 5% per annum on cost of vehicle.

    The vehicle runs 20 km per hour on an average.

    (Madras, 1991)

    [Ans: Cost per running ton-km: Rs 1.20; Total ton-km per annum 90,000 (15,000 ë 6)]

  17. The following figures are extracted from the books of a firm for the year 1994.

     

    Passenger buses5 Numbers
    Bus costingRs 50,000; Rs 1,20,000; Rs 45,000 Rs 55,000 and Rs 80,000
    Depreciation 20% of the cost per annum
    Annual repair and spare parts, etc. 80% of depreciation
    Wages of 10 driversRs 600 each per month
    Wages of 20 cleanersRs 300 each per month
    Interest8% on capital
    Rent of 6 garagesRs 100 each per month
    Director feesRs 900 per month
    Office establishmentRs 6,000 per month
    Licence and taxesRs 4,000 half yearly

     

    Realisation of sale of old tyres and tubes: Rs 3,600 half yearly. 900 passengers were carried over 1,600 km during the year. Work out in the appropriate cost sheet, the unit cost per passenger kilometres.

    (B.Com., Madurai)

    [Ans: Paise 27]

  18. From the following, data relating to vehicle ‘X’ calculate the cost per running kilometre.

     

    Vehicle X
    Kilometres run (annual)15,000
    Tons per km (average)6
    Cost of vehicleRs 25,000
    Road licence (annual)Rs 750
    Insurance (annual)Rs 700
    Garage rent (annual)Rs 900
    Supervision and salariesRs 2,400
    Drivers wages per hourRs 3
    Cost of fuel per litreRs 3
    Kilometres run per litre20
    Repairs and maintenance per kmRs 1.75
    Tyre allocation per km90 paise
    Estimated life of vehicle1,00,000 km

     

    Charge interest at 5% p.a. on cost of vehicle. The vehicle runs 20 km per hour on an average.

    (Madras, 1987)

    [Ans: Cost per running ton-km: Re 0.60; Cost per running km: Rs 3.60; Total running ton-km = 90,000 (15,000 ë 6)]

  19. XY & Co. owns a fleet of 10 trucks each costing Rs 60,000. The company has employed one manager to whom it pays Rs 450 p.m., an accountant who gets Rs 250 p.m. and a peon who gets Rs 100 p.m. The company has got its trucks insured @ 2% per annum. The annual total tax is Rs 1,200 per truck. The other expenses are as follows:

     

    Driver's salaryRs 200 p.m.
    Cleaner's salaryRs 80 p.m.
    Mechanic's salaryRs 300 p.m.
    Repairs and maintenanceRs 1,200 per year for one truck.
    Diesel consumption3 km per litre at Re 0.90 per litre
    Estimated life of the truck is 5 years.
    Other information:
    Distance travelled by each truck per day200 km.
    Normal loading capacity100 quintals
    Wastage in loading capacity10%
    Percentage of trucks laid up for repairs5%
    Effective days in a month25

     

    Calculate (a) Cost per quintal km and (b) Cost per km of running a truck.

    (Madras, 1991)

    [Ans: (a) Cost per running km: Re 0.65579 (or) paise 65.58; Running km per month per truck:
    4,750; (b) Cost per quintal km: paise 0.73; Quintal km per month per truck: 4,27,500;
    Diesel per truck per month: Rs 1,425; Other costs: Rs 1,690]

    Hint: Mechanic's salary is for all 10 trucks. Diesel is not consumed when trucks are laid up for repairs.

  20. A Transport Company operates two trucks. Following is the data regarding the monthly cost of operating them.

     

          Trucks      
    A RsB Rs
    Driver's salary250275
    Cleaner's wages150160
    Petrol300350
    Mobil oil2530
    Garage rent125125
    Taxes and insurance5050
    Depreciation560620
    Supervision100100
    Repairs120140
    Overheads4040

     

    The two trucks carried 150 tonnes of goods each during the month of November 1989. The distances covered were 3,500 k.m. and 5,000 k.m. respectively.

    Prepare an operating cost sheet for November 1989 from the above data.

    (B.Com., Mysore)

    [Ans: Ton-km per month: Truck A: 5,25,000; Truck B: 7,50,000; Cost per ton-km: Truck A:
    Re 0.003276 (or) .33 paise; Truck B: Re 0.00252 (or) .25 paise]

    Costing for lodging houses – Cost per room-day

  21. From the following data, find out the cost per ‘room-day’ and the charge to the customers if the profit required is 20% on cost.

     

    Room accommodation available
    50 double rooms
    100 single rooms

     

    Each double room is equal to two single rooms. Average occupancy throughout the year of 360 days is 75%.

    The costs are as follows:

     

    Rs
    Depreciation of premises1,00,000
    Depreciation of furniture1,20,000
    Opening stock of linen2,00,000
    Purchases of linen1,00,000
    Closing stock of linen1,50,000
    Salaries of staff1,00,000
    Sundry charges70,000

     

    [Ans: Room days: 54,000; Cost per room day: Rs 10; Charge per single room:
    Rs 12; Charge per double room: Rs 24]

  22. Following is the information given by the owner of a hotel. You are required to advise him what rent should be charged from customers per day so that he is able to earn 25% profit 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 attendant for one room.
    3. Lighting, heating and power: The normal lighting expenses for a room are Rs 50. Power is used only in winter and normal charge per month if occupied for a room is Rs 20.
    4. Repairs to buildings 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 per annum
    8. Cost of buildings Rs 4,00,000. Rate of depreciation is 5%
    9. Other equipment Rs 1,00,000. Rate of depreciation is 10%
    10. Interest at 5% may be charged on its investments of Rs 5,00,000 in the buildings 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 occupied in winter.

    You many assume that period of summer and winter is six months each. Normal days in a month may be assumed to be 30.

    (Madras, 1996)

    [Ans: Room-days per annum 19,800 (14,400 + 5,400); Rent per room-day:
    Rs 15; Total cost for one year: Rs 2,97,000]

    Power house costing – Cost per kWh

  23. From the following particulars, prepare operating cost sheet.

     

    Total units generated20,00,000 kWh.
    Operating labourRs 50,000
    RepairsRs 50,000
    LubricantsRs 40,000
    Plant supervisionRs 30,000
    Administration O.H.S.Rs 20,000

     

    Coal consumed per kWh = 2.5 kgs., at Re 0.02 per kg.

    Depreciation at 5% on capital cost of Rs 20,00,000 per annum.

    (Madras, B.Com., March 87)

    [Ans: Cost per kWh: Re 0.195]

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