study about operating costing

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CHAPTER ONE
OPERATING COSTING
1.1 Introduction
Operating costs are expenses associated with the maintenance and
administration of a business on a day-to-day basis. The operating cost is a component of
operating income and is usually reflected on a company’s income statement. While
operating costs generally do not include capital outlays, they can include many
components of operating a business including Operating costs are costs that are incurred
on a day-to-day basis related to the business operations. It can also be related to the
operation of a device, component, and piece of equipment or facility. Operating costs
are also known as operating expenses. For example sales and administration costs are
operating costs. Operating costs are referred to as cost per unit of a product or service,
or the annual cost incurred on a continuous process. The operating costs are those that
do not include capital outlays or the costs incurred in design and implementation phases
of a new process.

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CHAPTER TWO
OPERATING COST
2.1 Definition
CIMA defines the method “Operating costing applies where standardized
services are provided by an undertaking’.
2.2 ClassificationofCost
Operating costs are classified and accumulated under the following three heads:
a) Fixed or Standing Charges:
These are expenses which are more or less fixed in nature. For example in case
transport service garage charges, insurance, taxes, license and depreciation are standing
cost. In case of Hospital the depreciation pertaining to the cost of building, equipment,
beds, beds insurance etc. are fixed charges. These expenses are constant and are
incurred irrespective of the extent of service.
(b) Maintenance Charges:
These are costs of semi-variable nature and include expenditure on repairs,
maintenance, tyres, tubes, accessories and spares.
(c) Running or Operating Charges:
These are variable cost. For example in case of hospital, the cost of medicine,
diet, laundry etc. will represent the running charges. In case of transport service petrol
or diesel, lubricating oil, wages of driver or cleaner are operating or running charges.

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2.3 Features ofOperating Costing
1. Uniform service is provided to all the customers.
2. The costs are classified into fixed and variable.
3. The fixed and variable cost classification is necessary to ascertain the cost of service
and the unit cost of service.
4. There is no physical stock of article if an undertaking renders a service.
5. If a cost center is operating for an undertaking, there is no sale of service but render
the service. In other words, if a cost center is operating for public, it sells its service to
the public.
6. The cost unit may be simple in certain cases or composite or compound in other cases
like transport undertakings.
7. Total costs are averaged over the total amount of service rendered.
8. The costs are collected from the authentic documents like daily log sheet, operating
cost sheet, boiler house cost sheet, canteen cost sheets etc.
9. Operating cost is the cost of rendering service.
10. Operating costing is the method of ascertaining costs.
2.4 Objectives of Operating Costing
The objectives of operating costing are listed below:
1. To supply the information through which the efficiency in rendering service is
improved.

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2. To provide a basis for fixing accurate quotation and fare
3. To ensure that the services are provided in proper time.
4. To control the fuel consumption and its expenses.
5. To ensure that the service equipments are properly maintained.
6. To provide cost comparison between own service and alternative service i.e. hiring.
7. To compare the cost of one service center with another.
8. To determine the apportionment cost if the services are provided within an
organization.
9. To decide the price that can be charged for use of vehicle.
10. To control the cost of maintenance and repairs.
2.5 Application of Operating Costing
Operating costing is applied by an organization, which provides service to the
public as a whole instead of manufacturing an article, and sells the same. For example,
Transport undertaking electricity, theatre, hospitals, schools and the like. Similarly, the
same type of an organization or cost center renders service to production departments.
For example, Electricity, powerhouse, canteen and the like.

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CHAPTER TWO
CONCLUSION
Operating costs are costs that are incurred on a day-to-day basis related to the
business operations. It can also be related to the operation of a device, component, and
piece of equipment or facility. Operating costs are also known as operating expenses.
For example sales and administration costs are operating costs. Operating costs are
referred to as cost per unit of a product or service, or the annual cost incurred on a
continuous process. The operating costs are those that do not include capital outlays or
the costs incurred in design and implementation phases of a new process.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, schools etc.

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BIBLIOGRAPHY
Web sites
https://en.wikipedia.org/wiki/operating costing
https://accountlearning.com/operating-costing-principles-features-objectives-
application/
References
"Managerial Accounting;" Ronald W. Hilton; 2008
“Cost accounting“ A vinod 2018: Calicut university