Operating Costing in Service Industries: Objectives, Benefits and Types | Cost Accounting

Operating Costing in Service Industries: Objectives, Benefits and Types. In this article we will discuss about the applications of operating costing in service industries.

Operating Costing in Service Industries: Objectives, Benefits and Types

1. Transport Costing – Operating Costing as Applicable to Transport Services:

The term ‘Transport’ includes all modes of transport like Air, Water, Rail and Road. However, the present discussion is confined to Road transport only. Road transport includes both passenger transport and goods transport. It may be carried out by Trucks, Buses, Tempos, and Taxis etc.

Objectives of Transport Costing:

The following are the common objective of operating costing in the transport service:

(a) Cost Ascertainment:

Finding out the costs of operating the vehicles.

(b) Price Fixation:

Determining the prices to be charged for the usage of service by customers.

(c) Quotations:

Providing appropriate and required data for preparing quotations on customer’s enquiries.

(d) Decision Data:

Providing information for managerial decisions like comparative cost benefit of different vehicles.

(e) Control Over Maintenance:

Ensuring that repairs and maintenance expenditure of the vehicles is under control.

(f) Operational Efficiency:

Assessing and highlighting the efficiency with which vehicles are rented out and the expenses incurred while operating them.

Benefits or Advantages of Operating Costing in Transport Organisations:

(a) Reliable Prices:

Prices fixed for the services are accurate, fair and reliable.

(b) Cost Recovery:

All the costs incurred are ensured to be recovered from the users of the services.

(c) Cost Control:

Costs can be controlled and wherever possible reduced with the help of the information made available.

(d) Policy Decisions:

Comparative costs and revenues of different vehicles and also relative benefits of owned and hired vehicles are made available. Such information is invaluable in Policy formulation.

(e) Logistics:

Routing and scheduling the vehicles and the loads to be carried by different vehicles become easier because of the cost data made available.

Computation of ‘Cost Unit’ in Road Transport Business:

Operating costs are expressed in terms of running kilometres or passenger kilometres or Ton-kilometres.

1. A running kilometre is one kilometre distance travelled by a vehicle, irrespective of the load carried.

2. A passenger kilometre is ‘carrying one passenger over a distance of one kilometre’.

3. A Ton-kilometre is ‘carrying a load of one ton over a distance of one kilometre’.

For example-

(a) If a bus runs 5 k.m.s empty or with passengers, the running kms are 5.

(b) Empty bus running 5 kms means passenger kms are ‘nil’.

(c) A bus running 5 kms carrying 30 passengers means 30 x 5= 150 passenger kms. (Or) carrying 30 passengers over 5 kms is equal to carrying 150 passengers over 1 km.

(d) A lorry carrying a weight of 5 tons over 10 kms distance is equal to 5 x 10 = 50 ton kms.

Importance of Running kms:

Fuel consumption, tyres and tubes, lubricants, overhauling etc., are always related to the actual distance run, irrespective of the passengers or weight earned. Thus, computation of running kms is necessary even when the actual ‘cost unit’ is ‘passenger km’ or ‘Ton km’.

Absolute and Commercial Ton kms:

In goods transport, there are two possible methods of calculating ton kms viz.:

1. Absolute Ton-kms, and

2. Commercial Ton Kms.

Absolute Ton-kms – Actual distance travelled x load carried

Commercial Ton kms = Total distance travelled x average load carried.

For example – if a vehicle carries 10 Tons over 20 kms, 8 Tons over 40 kms and 3 Tons over 30 kms,

Absolute Ton – kms = (20 x 10) + (40 x 8) + (30 x 3) = 610 Ton kms

= 90 x 7 = 630 commercial Ton kms.

Normally customers are charged on the basic of commercial Ton kms.

2. Power House or Boiler House Costing:

Large sized factories may have their own power generation unit. It is treated as internal service. It is essential to ascertain the rate of power or steam generated to charge it to the user departments.

Power generation is also an independent industry including Thermal, Hydro and wind power segments. They are out of our purview.

Cost Unit:

Steam is usually measured in terms of ‘pounds of steam’ or ‘Therms’. Electricity or power is measured in k.w.h. (kilowatt hours) or units.

Costs:

The ‘generation costs’ of steam of electricity are fully variable costs. The administration and supervision charges are treated as fixed costs.

3. Costing for Cinema Theatres:

‘Cinema’ is a medium of mass entertainment. The theatres or halls which show the movies have to recover their expenses and profit from the ticket sales.

Cost Unit:

The usual cost unit adopted is ‘man-show’. Cost per man-show means cost incurred to enable one patron to see one movie. If different classes of seats are provided, they can be expressed in terms of a common class.

Costs:

The costs include fixed and variable expenses. Fixed expenses include depreciation of the building, screen, seating, fixtures, projector etc., and the staff salaries.

Variable costs include the projection expenses, hire charge for films, entertainment tax on tickets sold etc.

Any income from showing slides and rentals from stalls should be shown as a deduction from the costs.

Total cost is divided with, equivalent ‘manshows’ to ascertain cost per manshow. Profit can be added to arrive at the ticket price. Multiplying such price with the weights for different classes provides the ticket prices for each class of seating accommodation.

4. Costing for Lodging Houses:

Hotels and Lodges providing accommodation to customers on daily basis have mushroomed all over the country due to the impetus provided by modern civilisation to ‘Travel’, both on personal and commercial work.

Cost Unit:

The usual cost unit employed is ‘Room-Day’. Cost per room day indicates the cost of maintaining one room in usable condition for one day, when occupied. If different classes of rooms are available, they can be expressed in terms of a single class with the help of weights based on approximate worth.

Costs:

Most of the costs of a lodging House are fixed in nature, like depreciation, staff salaries, maintenance, etc. So, the distinction between variable and fixed costs is rarely observed. Charge for food and drinks, if provided to customers, is separately made.

The total costs are divided with, the No. of room-days to ascertain cost per room-day. Profit is added to obtain the charge per room day. It is multiplied with the assigned weights to arrive at the rates to be charged for different classes of rooms per day.