What is Operating Costing? Definition, Features, Types, Objectives

  • Post last modified:4 March 2021
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What is Operating Costing?

Operating Costing can be stated that operating costing is a method of costing which is used for calculating cost per unit in those industries which do not produce an article or product but which create and provide a service that is needed by people in the society.

Definition of Operating Costing

operating costing is that form of operation costing which applies where standardised services are provided either by an undertaking or by a service cost centre within an undertaking.

Operating costs or operational costs, are the expenses which are related to the operation of a business, or to the operation of a device, component, piece of equipment or facility. They are the cost of resources used by an organization just to maintain its existence.

Features of Operating Costing

There are some special objectives or features of operating costing which are mentioned below:

  1. Cost classification: Costs are classified into a variable and fixed. In case additional service is provided, variable cost will be affected.

  2. Periodical ascertainment of costs: Under this system, the costs are ascertained periodically, generally at the end of specific periods.

  3. Many stages and processes: The conversion of basic materials into services involves many stages and processes.

  4. Valuation of work-in-progress: In this system, the valuation of work-in-progress is comparatively easy in relation to other types.

  5. Intangible products: Service organizations do not produce tangible goods. On the other hand, they are engaged in providing services to the public.

  6. Cost unit differs: As service organizations provide a wide variety of services, it is difficult to provide a common cost unit. It differs from organization to organization.

Types of Operating Costing

  1. Transport Costing
  2. Power Generation and Distribution Costing
  3. Boiler House Costing
  4. Canteen Costing
  5. Hospital Costing
  6. Hotel Costing

Transport Costing

The costing in the transport industry meets multiple objectives. These objectives can be segregated as follows by the type of transport service an organization provides:

  • Private Transport: When the vehicle is hired individually for private tours, service costing is used to determine the hiring charges to be applied.

  • Passenger Transport: It also ascertains the cost of conveyance, per passenger up to to a certain distance in case of public or passenger transport companies.

  • Goods Transport: When we talk about goods transport services, the cost of carrying a defined quantity of goods up to a particular distance is also decided through service costing.

The common objectives of transport costing include a comparison between two different vehicles or group of vehicles and; whether to use an alternative source of transport or own vehicle, in terms of cost involved.

To get a practical overview of transport costing, please go through the example given in this article which is in the context of goods transport services.

Power Generation and Distribution Costing

The powerhouses produce energy in the form of electricity through water, gas or sunlight. The cost of power generation services majorly includes fixed costs, i.e., interest on capital, depreciation, repairs and maintenance, administration expenses; and variable costs such as steam consumed, labour wages, lubricants, coal, etc.

Boiler House Costing

The boiler house provides supporting services to power and electricity generation units, in the form of steam which is used in the air conditioning, power generation and air compression.

The overheads involved in the total cost of boiler services include fuel (coal, oil), direct and indirect labour, water and its processing, indirect material (tools, service material), maintenance and fixed costs (rent, taxes, depreciation, administration expenses, etc.)

Canteen Costing

The government organizations, factories, companies, offices, colleges, schools and even hospitals have canteens to provide affordable foodstuff like meals, refreshment, snacks, etc. to the staff, students and patients.

The canteen manager or supervisor keeps control over the costs and performs service costing to ascertain revenue of these business organizations. The costs involved in canteen services include the cost of material, labour, services, consumable stores and miscellaneous overheads.

Hospital Costing

The services provided by the medical organizations like hospitals health centres, nursing homes, medical camps and clinics require cost analysis, which is possible through service costing.

The hospital cost includes fixed charges such as labour salaries, maintenance charges, rent, administration expenses and other overheads. Also, the variable charges like medicines, bed charges, doctors fees, etc. are involved in the total cost.

Hotel Costing

The hotels provide accommodation to the guests as services; thus, it involves a high maintenance cost along with the fixed cost. The fixed cost includes depreciation, staff salaries, interest on capital, taxes, etc. Whereas, variable cost involves electricity charges, temporary staff salary, etc.

Difference between Operation Cost and Operating Cost

BasisOperation CostOperating cost
MeaningOperation refers to a stage in manufacturing activity where output is converted from one form into another. Cost of each operation is called operation Cost.Operating cost refers to the total cost of providing a utility or service or product.
Nature of OutputOutput of each operation is tangibleThere is no tangible output only services are provided
Cost ClassificationCost is classified into direct material, direct labour, direct expenses and production overhead.Costs are classified into fixed or standing charges, variable or running charges and semi-variable or maintenance charges.
Cost ExpressionAt the end of each operation, the unit operation cost may computed by dividing the total operation cost by total output.Emphasis is on the ascertainment of cost of rendering service rather on the cost of manufacturing a product.
Suitable IndustriesOperation costing system is suitable for manufacturing industries, such as
1. Soap, 2. Paint, 3. Chemical
Operating costing system is suitable for service industries, such as
1. Transport, 2. Hospital, 3.Theatres, 4. Schools etc.

Industries which use Operating Costing

Opertating Costing is used by those industries which are engaged in the activity of rendering service to customers. Undertakings which function in the following fields make use of operating costing :-

  • Transport – motor, rail, water and air. They may be providing service to passangers who wish to travel from one place to other placer or they may provide service for transporting goods.

  • Public Utility Services – supply of water, gas, electricity, communication etc.

  • Education – establishing and running schools, colleges, universities, technical institutes etc.

  • Entertainment – sports clubs, theatres, dramas, liabraries, orchestras, Restuarants, hotels, lodges, boardings, cafeteria, canteens.

  • Health – Hospitals, nursing-homes, diagnostic centres etc.

Some undertakings may be doing the work of creating the service and providing the service to customers while some undertakings may buy the service from outside and merely provide it to customers. For example an electricity company may itself generate electricity and provide it to its customers while some other company may buy electricity from electricity generating company or power-station and distribute it among its customers.

Undertakings which create/produce the service and then sell it to the customers will have to follow more elaborate costing system than the undertaking which buys the service from outside and merely sells it to its customers.

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