CHAPTER 1

INTRODUCTION TO TOPIC
It is a method of costing applied by undertakings which provide service rather than production of
commodities. Like unit costing and process costing, operating costing is thus a form of operation
costing.
The emphasis under operating costing is on the ascertainment of cost of rendering services rather
than on the cost of manufacturing a product. It is applied by transport companies, gas and water
works, electricity supply companies, canteens, hospitals, theatres school etc. Within an
organisation itself certain departments too are known as service departments which provide
ancillary services to the production departments. E.g. Maintenance department, power house,
boiler house, canteen, hospital, internal transport.
The information concerning the business enterprise is very helpful to the management to control
it in an efficiently way. As the other branches like financial accountancy and management
accountancy, the cost accountancy also serves the important information to the management
regarding the operating efficiency of the business. It becomes very easy for management to lay
down management policies, to guide management decisions or evaluate operating management
performance with the information provided by cost accounting.
The term operation in business terminology refers to an activity of the business. It is very
important to study the operations of the business in detail because depends on the operations,
which it performs. The management should always concentrate on the efficiency of the operation
and also the costs associated to the operations. It is very important to control the costs associated
to the operations for the enterprises like manufacturing companies, companies engaged in the
process of extraction of materials from earth like, coal mines etc.

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Generally, the above mentioned business enterprises depend on the operation that it has to be
performed in to produce in to produce the final output. The costs associated with such operations
are generally higher. These costs are called as operating costs.
The costs, which are incurred to perform the operation of the enterprise, are called as operating
costs. These costs are to be accounted for in order to arrive at the total costs of operation or
process, which helps in determining the price of the final product.
cost accounting is the classifying, recording and appropriate allocation of expenditure for the
determination of the costs of products or services, and to the presentation of suitably; arranged
data for the purposes of control and guidance of management.
It includes the ascertainment of the costs of every process, operation, services or contrast as may
be appropriate. It deals with the cost of production, selling and distribution. It thus, the provision
of such analysis and classification of expenditure as will enable the total cost of any particular
unit of production to be ascertained with reasonable degree of accuracy and at the same time to
disclose exactly how such total cost is constituted (i.e. The value of material used, the amount of
labour and other expenses incurred) so as to control and reduce the cost.
Operating costs are the costs incurred by undertakings which do not manufacture any product but
provide a service. Such undertakings for example are transport concerns, gas agencies;
electricity undertakings; hospitals; theatres etc. Because of the varied nature of activities carried
out by the service undertakings, the cost system used is obviously different from that followed in
manufacturing concerns.
ESSENTIAL FEATURES OF OPERATING COSTS ARE AS FOLLOWS:
(1) the operating costs can be classified under three categories. For example in the case of
transport undertaking these three categories are as follows:
(a) operating and running charges. It includes expenses of variable nature. For example
expenses on petrol, diesel, lubricating oil, and grease etc.
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(b) maintenance charges. These expenses are of semi-variable nature and include the cost of
tyres and tubes, repairs and maintenance, spares and accessories, overhaul, etc.
(c) Fixed or standing charges. These includes garage rent, insurance, road licence, depreciation,
interest on capital, salary of operating manager, etc.
(2) The cost unit used is a double unit like passenger-mile; Kilowatt-hour, etc.
It can be implemented in all firms of transport, airlines, bus-service, etc., and by all firms of
Distribution Undertakings.

THE FEATURES OF COST ACCOUNTING:

1

It is a process of accounting for costs.

It records income and expenditure relating to goods and services

It provides statistical data on the basis of which future estimates are prepared and
quotations are submitted.

It is concerned with cost ascertainment, cost control and cost reduction.

Finally it involves the preparation of right information to the right person at the right time
so that it may be helpful to management for planning, evaluation of performance, control
and decision-making

ADVANTAGES OF COST ACCOUNTANCY

1

It enables a concern to measure the efficiency and than to maintain and improve it. This
can be done with the help of comparison of data made available of the previous periods
and current period.

It provides information upon which estimates and tenders are based.

It guides for future production polices. It explains the cost incurred and there by provides
data on the basis of which production can be appropriately planned.

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The extract cause of decrease or increase in profit/loss can be detected. A concern may
suffer not because of the cost of production is high or prices are low but also because the
output is much below the capacity of the concern.

Efficiency of public enterprises. Costing has a more important role to play in public
enterprises than in private enterprises. The primary objective of the public enterprises is
not to raise profits but it is to serve the society by providing quality good at cheaper rates.

DISADVANTAGES OF OPERATING COSTING:

Start-up businesses are typically more costly and risky since there is no proven formula.

In order to obtain capital to fund the business, a lengthy detailed business plan must be
put together.

All of the details of starting the business, including licenses, marketing, naming the
business, finding product sources, etc. are the responsibility of the owner

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CHAPTER 2
It is defined as the refinement of process costing. It is concerned with the determination of the
cost of each operation rather than the process. In those industries where a process consists of
distinct operations, the method of costing applied or used is called operation costing. Operation
costing offers better scope for control. It facilitates the computation of unit operation cost at the
end of each operation by dividing the total operation cost by total input units. The two costing
methods included under this head are process costing and service costing.

Preparation of Cost Sheet under Operating Costing

For preparing a cost sheet under operating cost, costs are usually accumulated for a specified
period viz., a month, a quarter, or a year etc.
All of the accumulated costs should be classified under the following three heads:
1. Fixed costs or standing charges:
Which are the same whether the operation is closed or running at 100% capacity. Fixed Costs
include items such as the rent of the building. These generally have to be paid regardless of what
state the business is in.
2. Variable costs or running charges, (Fuel, Driver Wages, Depreciation, oil etc.):
Which may increase depending on whether more production is done, and how it is done
(producing 100 items of product might require 10 days of normal time or take 7 days if overtime
is used. It may be more or less expensive to use overtime production depending on whether
faster production means the product can be more profitable). Variable Costs include indirect
overhead costs such as Cell Phone Services, Computer Supplies, Credit Card Processing,
Electrical use, Janitorial Supplies, Office Products, Payroll Services, Telecom, Uniforms,
Utilities, or Waste Disposal etc.
3. Semi-variable costs or maintenance costs. (Supervision salary, Repairs and Maintenance)

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Under operating costing, the 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.

Overhead costs for a business are the cost of resources used by an organization just to maintain
its existence. Overhead costs are usually measured in monetary terms, but non-monetary
overhead is possible in the form of time required to accomplish tasks.
Examples of overhead costs include:

payment of rent on the office space a business occupies

cost of electricity for the office lights

some office personnel wages

Non-overhead costs are incremental costs, such as the cost of raw materials used in the goods a
business sells.
Operating Cost is calculated by Cost of goods sold + Operating Expenses. Operating Expenses
consist of:

Administrative and office expenses like rent, salaries, to staff, insurance, directors fees
etc.

Selling and distribution expenses like advertisement, salaries of salesmen. It includes all
operating cost such as salary, rent, stationery, furniture etc.

In the case of a device, component, piece of equipment or facility (for the rest of this article, all
of these items will be referred to in general as equipment), it is the regular, usual and customary
recurring costs of operating the equipment. This does not include the capital cost of constructing
or purchasing the equipment (depending on whether it is made by the owner or was purchased as
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a constructed system).Operating costs are incurred by all equipment unless the equipment has
no cost to operate, requires no personnel or space and never wears out (any examples? perhaps
intangibles, though not equipment, per se). In some cases, equipment may appear to have low or
no operating cost because either the cost is not recognized or is being absorbed in whole or part
by the cost of something else.

EQUIPMENT OPERATING COSTS MAY INCLUDE:

Salaries or Wages of personnel

Advertising

Raw materials

License or equivalent fees (such as Corporation yearly registration fees) imposed by a

government

Real estate expenses, including

o

Rent or Lease payments

Office space rent

furniture and equipment

investment value of the funds used to purchase the land, if it is owned instead of
rented or leased

property taxes and equivalent assessments

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Operations taxes, such as fees assessed on transportation carriers for use of

highways

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 (unless the facility has no
moving parts it probably will wear out eventually)

Damage due to uninsured losses, accident, sabotage, negligence, terrorism and routine
wear and tear.

Taxes on production or operation (such as subsidence fees imposed on oil wells)

Income taxes

SOME OF THESE ARE NOT APPLICABLE IN ALL INSTANCES. FOR EXAMPLE,

A solar panel placed on one's home for use in generating electric power generally has
only capital costs; once it's running there are no personnel costs, utility costs or
depreciation and it uses no extra land (that wasn't already part of the place where it is
located) so it has no real operating costs; however there may need to be taken into
account costs of replacement if damaged.

An automobile or any other item purchased for personal use has no salary cost because
the owner does not charge themselves for operating the device.
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An item which is leased may have some or all of these costs included as part of the
purchase price.

It might be questionable to assert that the cost of ten extra people on the sales force are an
incremental cost or an overhead cost, since the wages for these people are both overhead and
incremental. The staffs needed to keep the shop operational are mostly considered as overhead.

formula for operating cost: total cost*no. of weeks

THE MAIN FEATURES OF OPERATING COSTING ARE AS FOLLOWING:

The undertaking which adopts service costing does not produce any tangible goods. These
undertakings render unique services to their customers.

The expenses are divided into fixed and variable cost. Such a classification is necessary to
ascertain the cost of service and the unit cost of service.

The cost unit may be simple or composite. The examples of simple cost units are cost per unit in
electricity supply, cost per liter in water supply, cost per meal in canteen etc. Similarly cost per
passenger kilometers in transport cost per patient-day in hospital, costs per room-day in hotel etc.
are the examples of composite cost unit.

Total cost is averaged over the total amount of service rendered.

Costs are usually computed period-wise. However, in the case of utilization of vehicles, use of
road-rollers etc., the costs are computed order 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

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EXAMPLES OF THE COST UNITS FOR SERVICES

Transport

Ton- Kilometer, Passenger KM, KM Travelled

Hotel

Bed- nights available, occupied, meals

College/Schools

Students hours, full time/part time student hours

Hospitals

Patient bed days, occupied, per operation, per visit

Electricity

Kilowatt-hours

Swimming pool

Bathers attended, Hours of opening

Canteen

Meals provided, Ingredients of Dishes

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Illustration of Operating cost sheet:A

Particulars
Standing charges :-

Total cost

Cost per km

License fees
Insurance Premium
Road tax
Garage rent
Drivers wages
Attendant-cum-cleaners wages

Salaries and wages of other staff

Total
Running charges :Repairs and maintenance
Cost of fuel (diesel, petrol etc.)
Lubricants, grease and oil
Cost of tires, tubes and other spare parts

Depreciation
Total
Total charges [ (A) + (B) ]

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CHAPTER 3

Operating costing is further divided in and used in 3 main areas namely

Hospital industry

Transport industry &

Hotel industry

HOSPITAL COSTING

Service costing system is used in ascertaining the cost of operations of a hospital. The activities
of a hospital are divided into a number of cost centers, which are:

Out-patient department

ii

Pathology centre

iii

Wards

iv

Operation theatre

Laundry

vi

Kitchen

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Cost is collected for each such cost centers, and the cost per unit of output is ascertained with
respect to each cost center. Costs are classified into fixed and variable for preparing operating
cost sheet

Cost unit: Different cost centers have different cost units to measure the output. Cost-output
relationship and all other relevant factors will have to be considered to select a cost unit. The
following cost units are used generally:
Bed-days for in-patients department (Ward)

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TRANSPORT COSTING
Service costing method is used to ascertain the cost of services provided by an organization
(transport firm) which uses its vehicles for transporting goods or passengers. In motor transport
costing, the cost unit is tone-km or passenger-km.

OBJECTIVES OF MOTOR TRANSPORT COSTING:

Analysis of operating costs, namely, wages, full cost, insurance, repairs and
maintenance.

Control of operating and running costs and avoidance of waste of fuel and other
consumable material.

Comparison of cost of running and maintenance of different vehicles.

Assignment of costs to services provided by each vehicle.

To quote hiring rates.

To compute cost of idle vehicle and lost running time.

Collection and analysis of cost for cost control.

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 SOLVE THE PROMBLE

TRANSPORTER

A transport company is running 5 bus between 2 town which are 15 Km apart setting capacity of
each bus is 50 passenger the following particular were obtain from the book April 1998.

PARTICULAR

AMT

Wages

24000

Salary of office staff

10000

Diesel & other oil

35000

Repair

8000
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Taxation insurance

16000

Depreciation

26000

Interest & other exp

20000

Additional Information:

Actually passenger carried were 75% of capacity all buses run on all day. If each bus made 1
round trip per day find out cost of per passenger km.

SOLUTION:

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PARTICULAR

AMT

AMT

(A) Fixed cost

Wages

24000

Salary of office staff

10000

Taxation insurance

16000

Interest & other exp

20000

70000

(B) Variable cost

35000
Diesel & other oil
Repair

8000

69000

26000

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Depreciation
Total cost

(A+B)

139000

Working note:
50* 75% * 50*2*30*5 = 562500
Cost passenger Km = Total cost
passenger Km
= 139000
562500

(ANS): = 0.247

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CHAPTER 4
Hotel industry
In the hotel industry, expenses are divided into two main categories:

Direct Expenses:

These are the expenses that vary with the level of production. For example, in the Food and
Beverage department, the Cost of Food Sales is a direct expense. For, the more dishes we serve,
the more cost of Food Sales the Hotel incurs. Moreover, in the Telephone Department, the Cost
of Calls is a direct expense. For, the more we connect guests to whatever destination wanted, the
more cost of calls the hotel incurs.
At this very stage a bracket would be opened to explain that there is a primordial difference
between revenue generator departments. In fact, revenue generator departments are classified
into two: Service Type departments versus merchandising departments. Service type departments
are revenue generators making money from solely providing services (Ex. Rooms Division
department). On the other hand, merchandising departments ensure revenue by getting use of
certain raw material, processing it, and then sell the final product (Ex. F&B department,
Telephone department). Therefore, only merchandising departments have a direct expense
called Cost of Sales.

Indirect Expenses:

These are the expenses that do not vary with the level of production, or variable costs that
cannot be feasibly distributed to various Financial Reporting Centers. In the hotel industry,
indirect expenses are, hence, divided into two different categories:
1. Fixed Charges:

Page | 19

Examples might include rent, insurance, property taxes, and interest expense. For, these very
expenses are incurred for the benefit of the hotel as a whole not for the benefit of each single
department. To illustrate, if a hotel insures itself against fire, theft and burglary, and one day
some valuable equipment has been stolen, from any department whatsoever, the insurance
company will indemnify the hotel.
2. Undistributed Expenses:
Examples might include electricity, energy, and water expenses. For, usually the hotel receives a
total energy bill to be paid. In the old days, some hotels went for allocating this amount
according to certain factors (ex. Surface, Department Usage). However, this practice proved to
be misleading, since it might under-allocate energy expenses for some departments and overallocate it for others. Nowadays, most of the hotels decide not to allocate such expenses any
more. Rather, hotels report such expenses in separate schedules.
At this stage, departments of a typical hotel would be listed along with their various related
direct expenses. Later, examples of fixed charges and undistributed expenses would be
discussed. Last, a bracket would be opened to discuss one of the most important Direct Expenses
in any hotel, which is Payroll and Related Expenses. For, hotels being described as labor
intensive companies devote a big percentage of their financial resources to such an expense.

Financial Reporting Centers:

A Financial Reporting Center is an area of responsibility for which separate Cost Information
must be collected
Might be classified as Revenue Centers, Support Centers, and Other Financial Reporting Centers
1. Revenue Centers Generate Revenue through sales of Products and/or Services to Guests

Rooms

Food and Beverage

Telephone

Gift Shops

Garage and Parking

Other Operated Departments

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Rentals and other Income

2. Support Centers those departments that have minimal Guest Contact and do not produce
Sales. Yet, they do provide services to Revenue Centers, which, in turn, provide Services to
Guests

Administrative & General

Marketing

Property Operation and Maintenance

Data Processing

Human Resources

3. Other Financial Reporting Centers include Energy Costs and Fixed Charges (Rent
Expense, Property Taxes, Insurance Expense, Interest Expense, Depreciation and Amortization
Expenses)
Each Financial Reporting Center should be assigned an Identification Number. To illustrate,
consider the following Example:

Financial Reporting Center

Rooms
Food and Beverage
Telephone
Administrative & General
Marketing
Property Operation and Maintenance
Energy Costs
Fixed Charges

Identification Number
11
15
17
31
36
38
41
51

Furthermore, each Account should be assigned an Identification Number. Hotels commonly

opt for either the Five-Digit (xx-xxx) or Eight-Digit Account Numbering Systems (xx-xxx-xxx)

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Responsibility Accounting:
Aim provides Financial Information useful in evaluating the effectiveness of Managers and
Department Heads. That's why only Direct Expenses should be charged to Specific Departments
1. Expenses include the day-to-day Costs of Operating the Business, the Expired Costs of
Assets through Depreciation and Amortization, and the "write-off" of pre-paid items. Expenses
are classified as Direct expenses (Cost of Sales and Operating Expenses), Indirect Expenses
(Fixed Charges and Undistributed Expenses) and Income Taxes
a

Direct Expenses they are Costs incurred solely for the benefit of a particular Department

Cost of Sales

Payroll Expenses

Payroll-related Expenses

Operating Supplies

China, Glassware, Silver, and Linen

Laundry and Dry Cleaning

Indirect Expenses They are incurred for the benefit of the Hotel as a whole, and cannot be
identified with any particular Department

Property Insurance

Interest Expense

Property Taxes

| FIXED CHARGES

Rent Expense

Depreciation and Amortization

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Marketing Expense

Administrative & General Expenses

| UNDISTRIBUTED EXPENSES

Property Operations and Maintenance

Energy Costs

Income Taxes it is neither a Direct Expense, nor an Indirect Expense. It should appear as a
separate Line Item on a Hotel's Summary Income Statement

2-Departmental Expense Accounting:

Separate Expenses versus one Lump-sum Amount of Expenses

Payroll and Payroll-related Expenses:

1. Salaries and Wages (Payroll Expense) Includes Salaries, Wages, Overtime Pay, and any
Employee Bonuses and Commissions
2. Employee Benefits Include Vacation and Holiday Pay
3. Payroll Taxes Includes Social Security Taxes (Employer's Portion)
4. Employee Meals Includes the Cost of Food furnished to Employees as a Convenience to
the Employer
5. Worker's Compensation Insurance Includes the Expense of Worker's Compensation
Insurance
6. Employee Group Plans Includes Life and Health Insurance, and Other Forms of Employee
Group-plan Fringe Benefits

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FORMAT:-

Sheet format for Hotel Organization:

------------ Hotel Limited
Cost Sheet for the month of -----------------------Days Operated/Rooms Occupied:
Particulars

Amount
(Rs.)

Amount Per
room

1) Salaries to staff
2) Salaries of room attendants
3) Laundry expenses
3) Electricity charges
4) Repairs and maintenance
5) Interior and tapestry
6) Sundry expenses
7) Depreciation
8) Interest
9) Rent
10) Administration charges
Total Cost
Cost Per Room Day
Add: Profit
Rent per room day

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ILLUSTRATIONS 1 :-

New Ranjeet hotel has three types of suites for his customer, viz. single room, double room and
three rooms respectively. State the rent to be charged for each type of suite on the basis of the
following information:
The number of suites of each type are:
Single room suites 100.
Double room suites 30.
Three room suites 20.
The rent of double room suites is to be fixed at 11/2 times the single room suites and that of three
room suites as twice the single room suite.
The occupancy of each type of suite is as under:
Summer
a) Single room suites
b) Double room suites
c) Three room suites
The annual expenses are as follows:
a) Staff salaries Rs. 2,20,000.
b) Room attendants wages when occupied:
a) Single room suites
b) Double room suites
c) Three room suites

Winter

90%
80%
60%

Summer
Rs. 2
Rs. 3
Rs. 4

50%
20%
20%

Winter
Rs. 3
Rs. 4.50
Rs. 6

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Lighting, heating and power for full month, when occupied:

Lighting, Heating
a) Single room suites
b) Double room suites
c) Three room suites

Rs. 40
Rs. 60
Rs. 80

Repairs and renovation

Rs. 42,000

Linen, etc.

Rs. 45,000

Interior decoration

Rs. 50,000

Sundries

Rs. 31,550

Power
Rs. 20
Rs. 30
Rs. 40

Depreciation : Building @ 5% on Rs. 14,00,000

Furniture and fixture @ 10% on Rs. 1,00,000
Air conditioner @ 10% on Rs. 2,00,000.
Summer may be assumed for 7 months and winter for 5 months in a year. A month may be taken
as of 30 days.
Profit including interest on investment @ 25% on cost.

Page | 26

Solution:
In the Books of New Ranjeet Hotel
Operating Cost Statement (Per annum)
Particulars

Rs.

Staff salaries

2,20,000

Room attendants wages

93,150

Lighting, heating

55,400

Power

27,700

Repairs and renovation

42,000

Linen

45,000

Interior decoration

50,000

Sundries

31,550

Depreciation On Building (14,00,000 X 5%)

70000

On Furniture (1,00,000 X 10%)

10000

On Air conditioner (2,00,000 X 10%)

20000

1,00,000
6,64,800

+ Profit 25%

1,66,200

Total Rent

8,31,000

Rent for one day = 831000/41550

= Rs. 20 per day.
Working Notes:I)
i)

Room Days
Single rooms
Summer = 100 X 90% X 7 X 30 = 18900
Winter = 100 X 50% X 5 X 30 = 7500

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ii)

iii)

A) 26400
Double rooms
Summer = 30 X 80% X 7 X 30
= 5040
Winter = 30 X 20% X 5 X 30
=
900
5940
Equivalent to total single room
= X 1.5
B)
8910
Three rooms
Summer = 20 X 60% X 7 X 30
= 2520
Winter = 20 X 20% X 5 X 30
= 600
3120
Equivalent to total single room
= X2
C)
6240

Total Room Days = A+ B+C

= 41550

II) Room attendant wages

1) Summer

Single

= 18900 X 2

= 37800

Double = 5040 X 3

= 15120

Three

= 10080

= 2520 X 4

2) Winter

Single = 7500 X 3

= 22500

Double = 900 X 4.50

= 4050

Three = 600 X 6

= 3600
93150

III) Lighting , Heating

Single = 26400/ 30 X 40

= 35200

Double = 5940/30 X 60

= 11880

Three = 3120/30 X 80

= 8320
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55400
IV) Power
Single = 26400/30 X 20

= 17600

Double = 5940/30 X 30

= 5940

Three = 3120/30 X 40

= 4160
27700

Illustration 2:From the given information relating to a hotel, calculate the room rent to be charged to give a
profit of 25% on cost excluding interest charged on loan for the year ended 31st March, 2008:
1

Salaries of office staff Rs. 50,000 per month.

Wages of the room attendant : Rs. 20 per day per room when the room is
occupied.

Lighting, heating and power :

a) The normal lighting expenses for a room for the full month is Rs. 500, when
occupied.

Page | 29

b) Power is used only in winter and the charges are Rs. 200 for a room, when
occupied.
4

Repairs to beds and other furniture : Rs. 30,000 per annum.

Repairs to hotel building : Rs. 50,000 per annum.

License fees : Rs. 12,400 per annum.

Sundries : Rs. 10,000 per month.

Interior decoration and furnishing : Rs. 1,00,000 per annum.

Depreciation @ 5% p.a. is to be charged on building costing Rs. 20,00,000 and @

10% p.a. on equipments Rs. 5,00,000.

10 There are 200 rooms in the hotel, 80% of the rooms are generally occupied in
summer. 60% in the winter and 30% in rainy season.
The period of summer, winter and rainy season may be considered to be of 4 months in each
case. A month may be assumed of 30 days of an average.

Solution :Operating cost statement

Page | 30

Particulars
Salaries of office staff (50000 X 12)

Rs.
6,00,000

Wages of room attendant

8,16,000

Lighting, heating

6,80,000

Power

96,000

Repairs to beds and other furniture

30,000

Repairs to hotel building

50,000

License fees

12,400

Sundries (10000 X 12)

1,20,000

Interior decoration and furnishing

1,00,000

Depreciation :
On building ( 20,00,000 X 5%)

1,00,000

On equipment (5,00,000 X 10%)

50,000
26,54,400

+ 25% Profit

6,63,600

Total rent
Room rent to be charged :

33,18,000

Per day = 3318000/40

= Rs. 81.32

Working notes :
I)

Room days :
Summer = 200 x 4 x 30 x 80%

= 19200

Winter = 200 x 4 x 30 x 60%

= 14400

Rainy = 200 x 4 x 30 x 30%

= 7200

Total room days

40800
Page | 31

II)

Room attendant = 40800 x 20

= 816000

III)

i. Lighting and Heating

summer = 500 x 4 x 200 x 80%

= 320000

winter = 500 x 4 x 200 x 60%

= 240000

rainy = 500 x 4 200 x 30%

= 120000
680000

ii. Power
winter = 200 x 4 x 200 x 60%

= 96000

Illustration 3:
From the following information, prepare operating cost statement for hotel SEA LINK and
also suggest room rent to be charged per day so that owner earns profit @ 20% on capital
employed Rs.75,70,000.
a) Staff salaries Rs. 4,00,000 p.a.
b) Room attendant charged Rs. 200 per day per room when occupied.
c) Power Rs. 250 per month per room when occupied during summer and Rs. 150 p.m. per
room when occupied during winter.
d) Repairs to building Rs. 30,000 p.a.
e) Sundries Rs. 1,50,000 p.a.
f) Furnishings Rs. 80,000 p.a.
Page | 32

g)

Depreciation building at 10% p.a. on Rs. 40,00,000 and furniture on Rs. 10,00,000 at
15% p.a.

There are 200 rooms in a hotel, 60% of the rooms are occupied in summer and 20% of the rooms
are occupied in winter.
During the year, summer is 7 months and winter is of 5 months, assume 30 days of month.

Solution :Operating cost statement of Hotel Sea Link

Particulars
Staff salaries

Rs.
4,00,000

Room attendant charges

62,40,000

Power

2,40,000

Repairs to building
Sundries
Furnishing

30,000
1,50,000
80,000

Depreciation
On building (40,00,000 x 10%)

4,00,000

On furniture (10,00,000 x 15%)

1,50,000
76,90,000

+ Profit 20%

15,14,000
92,04,000

Room rent to be charged per day

= 9204000/31200
= Rs. 295

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Working notes:I)

Room days
Summer = 200 x 7 x 30 x 60%

= 25200

Winter = 200 x 5 x 30 x 20%

= 6000
31200

II)

Room attendant = 200 x 31200

III)

Power
Summer = 250 x 7 x 200 x 60%
Winter = 150 x 5 x 200 x 20%

= 6240000

= 210000
= 30000
240000

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CONCLUSION
After studying the topic in depth and data collection from a firm following are the findings from
the project

As the subject, important features and advantages of cost accounting are studied and the project
throws light on operating costing

It is a method of costing applied by undertakings which provide service rather than production of
commodities. Like unit costing and process costing, operating costing is thus a form of operation
costing.

It is applied by transport companies, gas and water works, electricity supply companies, canteens,
hospitals, theatres school etc.

The costs, which are incurred to perform the operation of the enterprise, are called as operating
costs. These costs are to be accounted for in order to arrive at the total costs of operation

Operating Costs are the costs incurred by undertakings which do not manufacture any product but
provide a service.

The various steps and items of the operating cost sheet is explained in depth along with
illustrative example and cost units for various services

The three main area namely

o

Hotel industry

Hospital industry &

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Transport industry

BIBLIOGROPHY

www.operatingcosting.com
www.wikipedia.com
www.icai.com
www.investopedia.com
Advanced cost accounting: - Dr. Varsha M. Ainapure

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