Operating Costing Questions and Answers

Operating Costing Questions and Answers

SECTION – A

Question 1.
What do you mean by operating costing or What is service costing.
Answer:
Operating costing or Service costing is a form of operation costing which applies to areas where standardized services are provided either by an undertaking or by a service cost centre within an undertaking.

Question 2.
What is transport costing.
Answer:
Method of ascertaining cost in transport undertakings is known as transport costing

Question 3.
What is operating cost.
Answer:
The ICMA terminology defines operating cost as “the cost of providing a service”.

Question 4.
State any two running expenses in operating costing.
Answer:
Running expenses in operating costing are petrol, diesel, oil, gas, wages of driver, conductor, attender, tyres and tubes, spares, repairs and maintenance etc.

Question 5.
What is composite cost unit?
Answer:
The cost unit for services are usually tangible any they are often composite cost unit that is they are often made up of two parts, for example if we were attempting to monitor and control the cost of a delivery services.

Question 6.
Name the industries where the operating costing system is applied.
Answer:
The following are the industries, where in the operating costing is applied:

• Railways
• Hospitals
• Hotels (Lodging)
• Gas distribution
• Educational institutions
• Cinemas

Question 7.
What is Power house costing? or boiler house costing.
Answer:
Power house costing is the process of ascertain the cost per unit of electricity generated. Power house operating cost sheet is prepared to ascertain cost per unit of electricity generated. The cost of producing steam used in power house for the generation of electricity is also included in the power house cost.

Question 8.
What is canteen costing?
Answer:
Canteen costing is a method of ascertaining the cost providing meals, dishes of different type.

Question 9.
What do you mean by hotel costing?
Answer:
Hotel costing is the process of recording on providing daily accommodation facility to general public, have mushroomed all over the country due to the movement provide by modern civilization to travel both on personal and commercial work. Hotels have many unavoidable costs such as labor, utilities, property operation costs, customer acquisition costs, etc.

Question 10.
What is hospital costing?
Answer:
Hospital cost information is divided by relating the inputs of resources in monetary terms to the outputs of services provided by the hospital. Cost information is part of the basic information needed by managers and policy makers for making decisions about how to improve the performance of a hospital, were to allocate the resources within or among hospital or to compare the performance of different hospitals to one another.

Question 11.
What are standing charges in operating costing?
Answer:
Standing charges 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.

SECTION- B

Question 1.
Explain various application of operating costing.
Answer:
The various applications of operating system are as following:

• Administrative and office expenses like rent, salaries, to staff, insurance, director’s fees etc.
• Selling and distribution expenses like advertisement, salaries of salesmen.
• Fuel costs such as power for operations, fuel for production.
• Public Utilities such as telephone service, Internet connectivity etc.
• Maintenance of equipment.
• Office supplies and consumables.
• Insurance premium.
• Depreciation of equipment and eventual replacement costs.
• Taxes on production or operation (such as subsidence fees imposed on oil wells).
• Income taxes.

Question 2.
State the characteristic features of operating costing.
Answer:
The main characteristic features of operating costing are as following:

• It is adopted in industries which does not produce any tangible goods.
• The expenses are divided into fixed and variable cost.
• The cost unit may be simple or composite.
• Total cost is averaged over the total amount of service rendered.
• Costs are usually computed period-wise.
• Service costing can be used for service performed internally or externally.
• Documents like the daily log sheet, cost sheet etc. are used for the collection of cost data.

Question 3.
State the objectives of transport costing.
Answer:
The objectives of motor transport costing are 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.
• 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 and vehicle can be charged.

Question 4.
What is Power house costing? What are the objectives of power house costing?
Answer:
Power house costing is the process of ascertain the cost per unit of electricity generated. Power house operating cost sheet is prepared to ascertain cost per unit of electricity generated. The cost of producing steam used in power house for the generation of electricity is also included in the power house cost.

The objectives of power house costing are:

• To minimize a plant’s overall energy costs by controlling operations.
• To achieve the optimum cost of purchased fuel and electricity.
• To provide reliable process steam and electricity to the plant as needed and with minimum variation.
• Instantly and consistently respond to any change in load demand.
• Fulfill with operating regulations and constraints.

Question 5.
What do you mean by hotel costing? Mention any two objectives of hotel costing.
Answer:
Hotel costing is the process of recording on providing daily accommodation facility to general public, have mushroomed all over the country due to the movement provide by modern civilization to travel both on personal and commercial work. Hotels have many unavoidable costs such as labor, utilities, property operation costs, customer acquisition costs, etc.
The two objectives of hotel costing.

• To ascertain the cost of producing meals or dishes,
• To fixed the rate of meals to be charge.

Question 6.
Give the concept of canteen Costing.
Answer:
The expenses of the canteen are shown under the following heading:
→ Provision: Example – Milk, tea, coffee, coal drinking, bread, biscuits, cake, vegetable cooked and eggs etc.

→ Labour: Example – Salaries of cook, wages of cook, assistance cook, supervisor etc.

→ Fuel and power: Example – Gas, steam, coal, power, fire wood.

→ Miscellaneous expenses: Example – Rent, insurance, depreciation etc. With regard to food provision it should be kept in view that:

• Article should be kept in the canteen according to the daily sales requirements.
• The use of refrigerators and the air conditions rooms help to preserve the food ingredients and quality.
• The demand of the articles in the canteen various with change in season. The seasonal article should be provided according to the demand.
• The needless and cleanliness in the canteen is very essential and it helps In the sale to grow.

Question 7.
What is hospital costing? What are the objectives of hospital costing?
Answer:
Hospital cost information is divided by relating the inputs of resources in monetary terms to the outputs of services provided by the hospital, Cost information is part of the basic information needed by managers and policy makers for making decisions about how to improve the performance of a hospital, were to allocate the resources within or among hospital or to compare the performance of different hospitals to one another.

The objectives of hospital costing are:

• Utilisation of resources.
• Department-wise profitability analysis.
• Fixation of doctors’ honorarium.
• Fixing schedule of charges.
• Monitoring of factors affecting pricing.

Practical Problems

Question 1.
Kumar Transport Limited is running four buses between two towns which are fifty miles apart; Seating capacity of each bus is 40 sengers. Actual passengers carried were 75% of the seating capacity. All the four buses ran on 25 days in the month. Each bus made one round trip per day.
Calculate the total passenger kms. covered during the month.
Solution:
The total passenger kms. covered during the month.
= No. of buses x distance x No. of trips x capacity x actual capacity x No. of days in a month
= 4 x (50 x 2) 40 x \(\frac {75}{100}\) x 25
= 3,00,000 passenger miles
or 4,80,000 passengers kms.

Question 2.
From the following information calculate:
(a) Total Kilometers
(b) total passenger kilometers
Days operated in a month – 30 days
Trips made by each bus covering a distance of 200 kms one side No. of buses – 4
Capacity of each bus 50 passengers Average passenger travelling – 75% capacity.
Solution:
Total Km = No. of bus x No. of days x Distance
= 4 x 30 x 200 x 2 = 48,000 km
Total passenger Km = 48,000 x 50 of 75/100
= 48,000 x 50/1 x 75/100
= 18,00,000

Question 3.
A transport company has 4 busses running between two cities which are 60 kms apart.
Seating capacity of each bus is 60 passengers. The actual capacity carried is 80%. Each bus makes one round trip per day.
Calculate total kilometers and total passenger kms for the month of September assuming that 25% of the busses are off the road always for repairs and maintenance. Solution:

Cost per passenger/Kms (76012.33/304000)	=  0.250
Profit (1/4 taking or 1/3 of cost)	=  0.083
Rate per passenger	0.333

Rate per passenger to be charged:
(a) Bangalore to Mysore 140 x 0.333 = 46.62
(b) Bangalore to Chitradurga 200 x 0.333 = 66.66
Total passenger/Kms
= No. of Passenger x No. of trips x No. of Buses x Capacity x No. of days x Kms
= 60 x 2 x 3 x 80/100 x 30 60
= 5,18,400 passengers/Kms
Total Kms run = Trips distance x No. of Buses x No. days
= 60 x 3 x 30
= 5400 Kms

Question 4.
A transport company runs 4 buses between two cities which are 60 kms apart. The seating capacity of each bus is 60 passengers. The actual capacity carries is 80%. Each bus makes 4 round trips per day. On the onward journey, the buses run to full capacity and on return trip run 20% empty. Calculate the kilometers and total passenger kilometers for a month assuming that no bus is off the road due to repairs and maintenance.
Solution:
Calculation of total passenger kilometer
Total passenger/Kms
= No. of passenger x No. of trips x No. of buses x capacity x No. of days x Kms
Onward = 60 x 4 x 4 x 80% x 30 x 60 = 17,28,000
Return = 60 x 4 x 4 80% x 30 x 60 = 13,82,400
Total passenger Kilometer 31,10,400.

Question 5.
A transport company is running 5 Buses between two cities which are 40 kms apart, seating capacity of each bus is 50 passengers, actual passengers carried were 80% of the seating capacity. Each bus made one trip per day (Assume it to be a return trip).
All the buses run on all the days of the month.
Find the total passenger kms covered during the month of Septermber 2005.
Solution:
T.P. Kms = No. of pass x No. of trips x No. of buses kms x Capacity x No. of days x kms
= 50 x 2 x 5 x \(\frac {80}{100}\) x 30 x 40
= 500 x \(\frac {80}{100}\) x 30
= 12,000 pkms x 40
= 4,80,000 pkms

Question 6.
From the following data calculate the cost per km of a vehicles Value of vehicle 30,000; Road license p.a. 1,000; Driver’s wages 400; Garage rent p.a. 1,200; insurance p.a. zoo; cost of petrol per litre 6; Kms per litre 10; Proportionate charges of tyres per k.m. Re.0.50; Estimated life 1,50,000 kms; Estimated annual kms 6000.

Question 7.
Shivaprakash Road Lines supplies the following details in respect of a truck of 5 ton capacity.
Cost of the truck – 9,00,000
Estimated life – 10 years
Diesel, oil, grease – 150 per trip each way
Repairs and maintenance – 5,000 p.m
Drivers wages – 5,000 p.m.
Cleaners wages – 2,500 p.m.
Insurance – 48,000 p.a.
Road tax – 24,000 p.a.
General supervision charges – 48,000 p.a.
The truck carries goods to and from the city covering a distance .of 50kms; each way. While going to the city, freight is available to the extent of full capacity and while returning only 20% of the capacity. Assuming the truck runs on an average 25 days in a month work out
(i) operating cost per ton-km
(ii) rate per ton per trip that should be charged to earn a profit of 50% on freight. Dec 2008

Question 8.
Adarsha Transport Company supplied the following details in respect of a truck of 5 tonne capacity.
Cost of truck – 9,00,000
Scrap value – 45,000
Estimated life – 10 years
Diesel, oil and grease – 750 per trip each way
Repair and maintenance – 5,000 per month
Driver wages – 5,000 per month
Cleaner wages – 2,000 per month
Insurance – 12,000 per annum
Tax – 24,000 per year
General supervision charges 12,000 per year. The truck cames goods to and from the city covering a distance of 50 km each way. On outward trip freight is available to the extent of full capacity and on return 40% of capacity. Assuming that truck runs on an average 25 days a month calculate:
(1) Operating cost per tonne km
(2) Rate per tonne per trip that company should charge if a profit of 50% on freightage is to be earned.

Question 9.
Pranav Transport runs a minibus with a capacity of 25 seats. The bus rungs between tow tons which are 25 km apart.
It runs for 30 days in a month and on an average 80% of seating capacity is utilised. The bus makes two round trips each day.
Cost of the bus – 30,00,000
Estimated scrap value at the end of its useful life of 10 years – 1,20,000
Driver’s salary per month – 18,000
Conductor’s salary p.m. – 15,000
Manager’s salary p.m. – 12,000
Cleaners salary p.m. – 9,000
Garage rent p.a. – 64,800
Life Tax – 1,44,000
Rent, Lighting etc. p.m. – 3,000
Repairs p.m. – 7,200
Diesel, oil etc. p.m. – 72,000
The profit expected 20% of takings
Prepare statements to show
(a) Operating cost per passenger kilometer.
(b) The fare per passenger kilometer.

Question 10.
A person owns a bus which runs between Bangalore and Mysore and back for 10 days in a month.
The distance between Bangalore and Mysore is 140 kins. The bus completes one round trip each day. The bus goes for another 10 days in the month to Chitradurga. The distance between Bangalore and Chitradurga is 200 kms. The bus completes one round trip each day. For the rest 4 days of its operation in a month, it runs in the local city. The daily distance covered in the local trip is 60 kms.
Calculate the rate, the person should charge, if he wants to earn a profit of 25% on his takings. The other details are as follows:
Cost of the bus 6,00,000
Depreciation 15% p.a.
Salary of the driver 4,000 p.m.
Salary of the conductor 3,000 p.m.
Accountant salary 1,800 p.m.
Insurance 12,000 p.a.
Diesel consumption 5 kms per litre costing 40 per litre Token tax 2,500 p.a Lubricant oil ‘ 10 for 50 kms.
Repairs and maintenance 5,000 p.m.
Permit fee 3,800 per 6 months.
Normal capacity 50 passengers
The bus is generally occupied 80% of its capacity when it goes to Mysore and 90% when it goes to Chitradurga. It is normally full when it rungs with in the city. Nov 2016

Question 11.
Union transport company supplies the following details in respect of a truck of 5-tonne capacity.
Cost of truck – 90,000
Estimated life – 10 years
Diesel, oil, grease – 15 per trip each way
Repairs and maintenance – 500 per month
Cleaner’s wages – 250 per month
Driver’s wages – 500 per month
Insurance – 4,800 per year
Tax – 2,400 per year
General supervision charges – 4,800 per year
The truck carries goods to and from city covering a distance of 50k. meter each way.
While going to the city, freigh is available to the extent of full capacity and on return 20% of capacity.
Assuming that the truck run on an average 25 days a month. Work out
i) Operating cost per tonne k. meter and
ii) Rate per trip that the company should charge, if profit of 50% on freightage is to be earned.

Question 12.
A transport company operates two trucks. The following is the data regarding the monthly cost of operating them. Trucks

	A	B
Drivers salaries	250	275
Clearners wages	150	160
Petrol	300	350
Mobile oil	25	30
Garage rent	125	125
Tax and Insurance	50	50
Depreciation	560	620
Expenses of supervision	100	100
Repairs	120	140
Overheads	40	40

Two trucks carried 150 tonnes of goods each during the month of November 2004. The distance covered were A – 3,500 kms and B- 5,000 kms respectively.
Prepare an operating cost sheet for Nov. 2004.

Question 13.
From the following data relating to 2 different vehicles A and B. Compute the cost per running km.

Particulars	Vehicle A	Vehicle B
Kms run (annual)	30,000	12,000
Cost of vehicle	6,50,000	3,00,000
Road licence (annual)	1,500	1,500
Insurance (annual)	1,400	800
Garage rent (annual)	1,200	1,000
Supervision and Salaries (annual)	2,400	2,400
Driver’s wages per hour	8	8
Cost of fuel per litre	28	28
Kms run per litre	10	7
Repairs and maintenance per km	0.65	2
Tyres allocation per km	0.75	0.55
Estimated life of vehicle	1,00,000	75,000

Charge interest at 6% on cost of vehicles. The vehicles runs 16 kms per hour on an average.

Question 14.
Workout in an appropriate cost sheet and find the unit cost i.e. per passenger km, for the year 2018-19, for a fleet of passenger buses run by a transport company, the following information is extracted from its books.
(a) 5 passenger buses of 1,00,000, 2,40,000, 90,000, 1,10,000 and 1,60,000 respectively.
(b) Yearly depreciation on vehicle is 20% of cost.
(c) Annual repair charges, maintenance and spare parts 80% of depreciation.
(d) Wages of 10 drivers is 200 per month
(e) Wages of 20 cleaners at ‘ 100 per month
(f) Director’s fees 800 per month
(g) Office establishment 2,000 per month
(h) License and taxes at 4,000 per annum
(i) Realization by sale of old tyres and tubes 6,400 for every 6 months.
(j) Yearly rate of interest is 4% on capital
(k) Diesel expenses per annum is 40,000
(i) 900 passengers were carried over 1,600 kms during the year
(m) Rent of 6 garages at 100 each per month.