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INDEX

SR. NO. PARTICULARS PG. NO.

1. Introduction 2-3

2. Application of operating costing 4

3. Cost unit 5-6

4. Classification of Operating Costing 7-11

5. Features of operating costing 12

7. Advantages and disadvantages 13-14

8. Hostel Costing 15-19

9. Hospital Costing 20-29

10. Transport costing 31-35

11. Conclusion 36-37

12. References 38

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INTRODUCTION

Operating costing 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 organization itself certain departments too are known as service

departments which provide ancillary services to the production departments. For example:

maintenance department; power house; boiler house; canteen; hospital; internal transport.

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. It is

the category of the basic costing method, applicable, where standardized goods or services

result from a sequence of repetitive and more or less continuous operations, or processes to

which costs are charged before being averaged over the units produced during the period. The

two costing methods included under this head are process costing and service costing.

CIMA has defined ‘Operating Costing’ “As that form of operation costing which applies

when standardized services are provided either y an undertaking or by a service cost center

within an undertaking”.

Cost Accounting Standard – 1 by ICWA defines ‘Operating Cost’ “As the cost incurred in

conducting a business activity. Operating costs refer to the cost of undertakings, which do

not manufacture any product but which provide services”.  

Because of the varied nature of activities carried out by the service undertaking, the cost

system used is obviously different from that followed in manufacturing concerns.

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The 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:

Operating and running charges: It includes expenses of variable nature. For

example expenses on petrol, diesel, lubricating oil, and grease etc.

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.

Fixed or standing charges: These includes garage rent, insurance, road license,

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.

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APPLICATION OF OPERATING COSTING

1. Transport Service: Under this method of costing, the operating cost of each

vehicle is determined. The common unit of service is tonne kilometer in case of goods

transport, and passenger kilometer in case of passenger transport. Examples of transport

service are Truck operators, road transport, Railways, Airlines, etc.

2. Supply service: It includes services like electricity, steam, gas, water, etc. where

steam is used for the purpose of generating electricity, it is possible to compute the cost

of electricity generated by aggregating the steam production costs with other related cost

of electricity generation. A cost unit is generally in terms of kilograms.

3. Welfare Services: It includes services like canteen, hospital, library, etc. Hotels,

restaurants employ operating costing. The total operation of a hotel can be divided into

number of cost centers like Restaurant, Housekeeping, Laundry, etc. The cost unit is

generally in terms of per meal/ dish.

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COST UNIT

For ascertaining costs, it is necessary to decide suitable cost units for each type of service

industry. Basically, Operating Costing is a type of Process Costing. Thus it uses the

methods of Process Costing when ascertaining the cost of supply of electricity, steam etc.

However, sometimes Operating Costing may adopt a particular Job as a unit of costs as

for example when costing a particular trip by a bus so as to quote the charges. In such

cases Operating Costing uses the methods of Job Costing by treating a specific trip as a

separate job. A cost unit under operating costing may be of two types –

a. Simple cost unit; or

b. Composite cost unit.

Following is the list of different cost units used in different types of service enterprises –

Service Industries Simple Cost Unit

Passenger Transport Per Kilometer

Goods Transport Per Kilometer

Road Maintenance Per K.M. of Road maintained

Water Supply Per Kilo Liter of Water Supplied

Canteen Per Meal / Dish

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Service Industries Composite Cost Unit

Passenger Transport Per Passenger - K.M.

Goods Transport Per Ton - K.M.

Electricity Per Kilowatt – Hour

Steam, Gas Per K.G. / Cubic Ft.

Hospital Per Patient – Day

Library Per Member – Book

Thus, it can be seen that in Operating Costing, in most cases the cost unit is a compound

unit. It refers to both the Quantum of Service and Period of Service. Thus a transporter

charges for carrying so much weight (tons) for so much distance (Km); an electricity

company charges one for use of both the Quantum (Kilowatt) and the Period (Hours); and

so on.

CLASSIFICATION OF COST

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Broadly, operating costs fall into fixed and variable categories, determined by the form

they take from period to period. Fixed costs remain the same no matter what goes on at a

company, while variable costs fluctuate in response to use and other activities.

Accounting for both is necessary to keep accurate records and develop appropriate

budgets. Some tools for estimating variable costs are available to help control them, as

they can become a problem when a business fails to account for them.

A business’s fixed operating costs remain stagnant no matter how long it is open and how

much it produces. These costs include things like rent or mortgage payments, insurance,

fees to retain legal counsel, and so forth. They are regular, recurring expenses that do not

fluctuate, except by arrangement. For example, an insurance company may increase the

price of a policy when it renews. From month to month, however, the premiums would

remain the same.

In contrast, variable operating costs fluctuate. Utilities like water and electricity are

metered to provide use-based charges. When companies use more, they pay more,

sometimes substantially more if they go over baseline usage estimates. Supplies and

employee payroll can also be variable. If a restaurant is open for dinner seven nights a

week, for instance, it will need more food than if it is closed three of those nights.

Likewise, more employees would be needed for peak business periods and extended

hours, and hours could be cut at other times to lower payroll expenses.

Within fixed and variable operating costs, businesses may be able to treat costs under a

variety of tax categories. Some are expenses directly related to business improvement,

like leases on equipment and structures, which may be tax deductible. Likewise,

professional fees from attorneys and accountants would fit in their own tax category to

allow the company to deduct them. If a cost can be directly linked to the expense of doing

business, it may be eligible for special tax treatment.

Fixed costs include premiums, rents, leases, and fees, while variable operating costs may

involve activities like capital expenditures, payroll, and supplies. Companies that need

to budget for theirvariable expenses can use tools like estimates from utility agencies, and

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charting from year to year. These charts can provide rough information about how much

a company might expend to spend, given past experiences. For example, payroll for

employees during the holiday season might be predictable on the basis of last season’s

expenditures, with an adjustment for raises.

Business overhead costs

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.

Equipment operating costs

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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 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

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.

An item which is leased may have some or all of these costs included as part of

the purchase price.

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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 staff needed to keep the shop operational are mostly considered

overhead.

formula for operating cost = total cost* number of weeks

An operating expense tied to compensation could include pension plan contributions,

sales commissions or benefits, and pay for non-production employees. Sales and

marketing departments often accrue different operating expenses such as costs for

advertising, sales materials, travel, direct mailings and entertainment provided for clients

and customers. Different operating expenses accrued for a typical office may include

accounting expenditures, insurance costs, payments for property taxes and utilities, repair

and rental fees for non-production facilities, office supplies and legal fees.

Some companies also include the costs of goods sold (COGS) as an operating expense.

For example, direct labor or rent for production facilities may be classified as different

types of operating expenses. In addition, compensation and benefits for production

personnel and direct labor may be classified under operating expenses for accounting

purposes. When considering the COGS, a company may consider the cost of direct

materials, repairs of facilities and equipment and property taxes on production

facilities as an expenditure classified as an operating expense.

The primary difference between an operating expense and an administrative expense is

that types of operating expenses are related to the departments that produce products and

services whereas administrative expenses are more general and not necessarily specific to

a department within the company. For example, employees such as receptionists or

secretaries may be compensated as part of administrative expenses. Postage, telephone

bills and general office supplies shared by all departments also typically are not classified

as operating expenses. Instead, these general expenses are considered administrative

costs.

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FEATURE OF OPERATING COSTING

The main features of operating costing are as following:

(1) The undertaking which adopts service costing does not produce any tangible goods.

These  undertakings render unique services to their customers.

(2) 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.

(3) The cost unit may be simple or composite. The examples of simple cost units are cost

per  unit in electricity supply , cost per litre in water supply, cost per meal in canteen etc.

Similarly cost per passenger kilometers in transport cost per patient-day in hospital, cost 

per room-day  in hotel etc. are the examples of composite cost unit.

(4) Total cost are averaged over the total amount of service rendered.

(5) Costs are usually computed period-wise. However,in the case of utilization of 

vehicles, use  of road-rollers etc., the costs are computed orderwise.

(6) Service costing can be used for service performed internally or externally.

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(7) documents like the daily log sheet, cost sheet etc. are used for the collection of cost

data.

ADVANTAGES AND DISADVANTAGES

Advantages of cost accountingManagers appreciate cost accounting because it can be adapted, tinkered with and

implemented according to the changing needs of the business. Unlike static, Financial

Accounting Standards Board (FASB)-driven financial accounting, cost accounting need

only concern itself with internal eyes and internal purposes.

Labor costs are easier to monitor and control through cost accounting. Depending on the

nature of the business, wage expenses can be taken from orders, jobs, contracts, or

departments and subdepartments. This means management can pick and choose how it

determines efficiency and productivity. This is very important when estimating marginal

productivity of individual employees.

Cost accounting can be thought of as a sort of three-dimensional puzzle. Accounts,

calculations and reports can be manipulated and viewed from different angles.

Management can analyze information based on criteria that it values, which guides how

prices are set, resources are distributed, capital is raised and risks are assumed. It's a

crucial element in management discussion and analysis.

Disadvantages of cost accounting

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The benefits of cost accounting come with a price. Since costing methods differ from

organization to organization, it's not clear how these costs might manifest themselves

until a specific firm is examined.

Generally speaking, complex cost accounting systems require a lot of work on the front

end, and constant adjustments need to be made for improvements. This complexity

consumes time and resources and leaves room for misinterpretation.

Even if the rigidity of financial accounting creates some inherent disadvantages, it does

remove the uncertainty and misapplication of accounting guidelines of cost accounting.

Uncertainty equals risk, which always comes at a cost. This means additional, and often

more vigorous reconciliation to verify accuracy.

Higher-skilled accountants and auditors are likely to charge more for their services.

Employees have to receive extra training and must sufficiently cooperate with data input;

non-cooperation can render ineffective an otherwise beautifully constructed system.

The repeated tradeoff in any accounting method is accuracy versus expediency. Cost

accounting reflects this more dramatically than other accounting methods because of its

pliability. Every business needs to find its own balance between the two.

Costing methods are typically not useful for figuring out tax liabilities, which means that

cost accounting can't provide a complete analysis of a business' true costs. It's easy

enough to compensate for this by combining financial accounting with cost accounting,

but it, nevertheless, highlights a flaw in cost accounting.

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HOTEL COSTING

Hotel and lodges, providing daily accommodation facility to general public, have

mushroomed all over the country due to the impetus provide by modern civilization to

‘travel’ both on personal and commercial work.

The Operating Costing is applied in lodging houses in order to find out the cost of

accommodation provided.

The convenient form measuring the accommodation facility is in terms of ‘Room day’.

Cost per room day means the cost of maintaining one room in usable condition for one

day when occupied.

When different classes of rooms are provided, they can be expressed in term of a single

class with the help of weights based on appropriate width.

While determining the cost per room day, factors such as room accommodation available,

whether cubicles or dormitories, number of persons lodging, facilities provided to the

lodgers, etc. are to be taken into account.

Most of the costs in the lodging houses are fixed in nature like depreciation, staff salaries,

maintenance, etc.

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Hence, the distinctions between fixed and operating charges are rarely observed. In case

the customers are provided food and drinks along with accommodation facility, a

separate charge may be levied from them.

The cost per room day is arrived at by dividing the total cost with the number of room

day. Some amount of profit is added to the cost per room per day to determine charge per

room day. Once the charge per room day is determined, the same is to be multiplied with

the assigned weights to arrive at the rate to be charged for different classes of room per

day.

Hotels, restaurants employ operating costing. The total operation of a hotel is divided into

number of cost centers. Restaurant-cost unit is number of meals served Housekeeping-

cost unit is no. of rooms cleaned Laundry-cost unit is number of clothes washed.

Fixed and Variable Costs in hotels

The terms Variable costs and fixed costs in hotel operation is used to distinguish between

those costs that have  direct relationship to Hotel occupancy  and those that has no

relation to occupancy and business .

Fixed Costs

Fixed costs are normally not effected by changes in occupancy or sales volume. They are

said to have little direct relationship to the business volume because they do not change

significantly when the number of sales increases or decreases. The term fixed should

never be taken to mean static or unchanging,but merely to indicate that any changes that

may occur in such costs are related only indirectly or distantly to changes in volume.

Examples of Fixed costs are:

Land, Building Taxes to government.

Wages to employees.

Hotel employees health premium.

Out sourced services contracted for fixed amount in a month eg:- security

services.

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Yearly maintenance contract fees ( AMC ) for all equipments, machineries and

Hotel Management software's.

Fixed internet, telephone plans.

Advertising cost.

Yearly external auditing cost.

Payroll.

Provision.

In house moves / satellite TV.

Music entertainment.

Reservation expenses.

Subscription - Newspaper, magazine etc.

Human resources.

Sales & marketing.

Interest on loan.

Other fixed charges etc.

Variable Costs

Variable costs are clearly related to hotel occupancy and business volume. As business

volume or occupancy increases, variable costs will increase; as hotel occupancy

decreases, variable costs should decrease as well. 

Examples of variable costs are:

Food, beverages, house keeping cleaning supplies.

Flower arrangements.

Guest room amenities.

Guest room, restaurants and banquets linen.

Banquet HVAC costs.

Stationeries used in Front desk and restaurants.

Chemicals for laundry and water treatment plants.

T/A commission.

Flower & decorations.

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Guest supplies -amenities.

Guest relations.

Laundry operations.

Laundry Uniform.

Printing supplies.

Entertainment.

Telephone & Fax.

Transportation.

Other operating supplies.

Administration & General

llustration:

From the following 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.

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

3. Light, heating and power:

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

occupied.

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

4. Repair to bed and other furniture: Rs 30,000 per annum.

4. Repair to Hotel building: Rs 50,000 per annum.

4. License fees: Rs 12,400 per annum.

7. Sundries: Rs 10,000 per annum.

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

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

10% p.a. on equipments.

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10. There are 200 rooms in the Hotel, 80% of the rooms are generally occupied in

summer, 60% in winter, 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 as 30 days of an average.

Solution:

Operating Cost Statement

Particular Rs p.a. Rs p.a.

Office staff salaries (50,000 × 12)

Room attendant wages (WN – 1)

Lighting and Heating (WN – 2)

Power (WN – 3)

Repair to bed and other furniture

Repair to building

License fee

Sundries (10,000 × 12)

Interior decoration and furnishing

6,00,000

8,16,000

6,80,000

96,000

30,000

50,000

12,400

1,20,000

1,00,000

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Depreciation:

                    Building @ 5%

                    Equipment @10%

Total Cost

Add: Profit 25% of Cost (Excluding interest on

loan)

Total Earnings

1,00,000

5,00,000

1,50,000

26,54,400

6,63,600

33,18,000

HOSPITAL COSTING

Modern day hospitals provide a variety of services to patients under one roof. It is akin to

a large service organisation considering the number of personnel involved and the

capital-intensive nature of the business be it the civil structures, operation theatres and

equipment, diagnostic and therapeutic equipment, resuscitation equipment, gas lines,

surgical instruments, consumables, and so on. Moreover, it is a 24×7 operations with

people playing a vital role in the well being of the patients in the hospital.

There are various complexities that necessitate the hospital management to put in place

robust costing systems. However, traditional hospital managements have not given

serious thought to the same. The corporate world has adopted and benefited from good

costing systems, since the early 1930’s. The same holds true of modern day corporate

hospitals, who believe in providing cost effective services to patients and ensuring patient

loyalty to the healthcare provider.

Traditionally, hospitals used bed occupancy as the yardstick of measurement of

performance. With the advancements in medical technology, the average length of stay

(ALOS) is reducing and hence, bed occupancy is not the main performance measure any

longer.

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The increased utilisation of costly resources, e.g. equipment in operating theatres, ICUs,

Cath-Lab, Pathology Lab etc. in addition to doctors’ times are the key to success in

hospitals.

Importance

Until a few years ago, it was practically absurd to think of a marketing function within a

hospital. That situation is pass with almost every hospital worth its salt employing

marketing professionals to attract new corporates. Hospitals also employ loyalty cards

and discount health cards to attract and retain customers.

The advent of health insurance companies has also queered the pitch. With the costs of

treatment going up and the privatisation of the insurance industry, the hospitals are forced

to give quality service at highly competitive prices as the insurance companies will pay

only for the services that are desired and will also monitor the services that are rendered

closely. This leads to deductibles, co-payments and all claims by hospitals do not get

settled hundred percent. There is also a time element involved as costs are incurred

upfront and outstanding amount is received only after a couple of months.

It is therefore imperative for hospitals to have a system to control the costs, while at the

same time providing high quality service to the patients.

The costing problemPatients undergoing treatment receive services of varied nature from different

departments. The hospital has to recover the expenses of the direct departments as also of

the support departments from the patients availing these services.

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Nowadays, any composite hospital with latest facilities for advanced medical/surgical

procedures in the various areas of treatment will have nearly 50 or more revenue centres

and about 10 to 15 supporting service centres. Furthermore, most of the revenue centres,

particularly, in-patient wards, will have classification depending on the level of services

for different class of patients according to their monetary or other needs. Again, each

department, other than wards, undertakes several types of procedures/operations etc.

All these make the list of procedures and classification of services quite large. It is for

this reason that ascertaining true costs of various services and fixing of the Schedule of

Charges becomes extremely complex. Costing needs to be done after careful analysis of

past data, comparative data from other hospitals, study of utilisation of capacities.

Costing techniques shall be applied to provide acceptable costs and charges, enabling

optimization of capacity utilization, which, in turn, result in better overall revenues and

leave adequate funds for growth and development of newer and advanced facilities.

Setting up a costing system

Unlike in other industries, where pricing of products/services is generally uniform except

in special cases such as exports, institutional sales etc., in hospitals most of the services

rendered are charged at different rates based on class of patients. Besides, a category of

patients are given free or semi-free treatment, where the charges are nil or kept very low.

Thus, the final charges or pricing has no direct relevance to ‘costs’ individually. But, the

overall revenue expected from the charges recovered from all patients has to cover the

total costs incurred, to make the procedure or department self-supporting. This matching

of expected revenue and costs can be done only on the basis of exhaustive analysis of

past quantitative and financial data. Thus, detailed statistics play an extremely important

role in Costing of services and fixing of schedule of charges.

Based on such analysis, discussions with medical personnel of each department,

regarding the practical problems and expected quantum of each procedure with class-

wise level of patients and detailed budgeting of revenue has to be made. This forms the

broad structure for cost allocation to the various cost centers and fixation of individual

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charges. Keeping in mind the purpose and its importance to the hospital in recovering all

expenses incurred, the procedure for cost allocation should be designed so as to obtain

accurate and realistic results. We shall not go into the intricacies of these procedures in

this article but limit ourselves to the basic steps for the purpose of ascertaining the final

costs to obtain the desired results.

Broadly, the steps needed include identifying the various cost centers in the institution

and arranging them into revenue producing centers by charging patients for the services

and supporting non-revenue producing centers, allocating direct expenses to all centers

by analysis of each element of cost, developing cost allocation criteria for allocating costs

of supporting cost centers to other supporting cost centers and revenue producing centers.

Now, each revenue center has the total direct costs of the center and indirect costs

representing the allocated expenses of the supporting centers. The total costs thus arrived

at for each of the revenue providing centers is to be appropriately distributed among the

various services rendered to the patients by that center. This involves not only finding the

nature of the services but also learning the general application of the services to the

patients. This should be done in conjunction with the medical personnel and modalities

determined for each type of service.

Once the costs are available for each profit and cost center, they can be used for the

various purposes identified earlier. Typically, to arrive at the above costs, one needs to

setup various monitors across the hospital, which will give the necessary data for

computing the costs. Computerisation could significantly simplify the process of data

collection and analysis. A good hospital management system software should form the

basis for the costing system.

A concern of most countries is health sector resources: the sources of finance for health

services, the ability to maintain past funding levels, resource allocation patterns, and the

efficiency of health services delivery. The hospitals of these countries are an important

element of the concern about health resources because they are the largest and most

costly operational unit of these health systems and account for a large portion of the

health sector's financial, human, and capital resources. In aggregate terms,

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hospitals utilize nearly half of the total national expenditure for the health sector;

hospitals commonly account for 50 to 80 percent of government recurrent health

sector expenditure:

hospitals use a large proportion of the most highly trained health personnel

A hospital is engaged in providing various types of medical services to the patients.

Hospital costing is applied to decide the cost of these services. A hospital may have

following departments for providing various types of services:

1. Outdoor Patient Department. (O.P.D)

2. Indoor Patient Department (Medical Wards).

3. Medical Services Department:

X – Ray Department,

Scanning Centre,

Pathology Laboratory,

Sonography Department.

4. General Services Departments:

Bolier House,

Power House,

Catering department,

Laundry Room,

Administrative Department,

5. Miscellaneous Services Departments:

Transport Department,

Dispensary Department,

General Porting Department.

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UNIT OF COST:

The common units of costs of various departments in a hospital are as follows:

Department Unit of Cost

1. Outdoor Patient Department Per out-patient

2. Indoor Patient Department per Room-day

3. X – Ray Department Per 100 units

4. Scanning centre per case

5. Pathology Laboratory per 100 Requests

6. Laundry Department Per 100 items laundered

7. Catering Department Per Patient per week

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The cost of hospital is divided into fixed and variable costs. Fixed costs include staff

salaries, depreciations of building, rent of building whereas variable cost include light

and power, water, laundry charges, food supplied to patients etc.

Why are hospital costs important?

Hospital cost information is derived 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, where to allocate the resources within or among

hospitals, or to compare the performance of different hospitals to one another. Some of

the Basic reasons for wanting cost information are to improve efficiency, increase

effectiveness, enhance sustainability, and improve quality.

COST SHEET FOR MONTH/YEAR

A.

B

FIXED STANDING COSTS

Salaries to staff                                         ………….

Premises Rent                                           ………….

Repairs and maintenance                          ………….

General administration Expenses              .…………

Cost of Oxygen, X-Ray, etc.                     .…………

Depreciation              .………..

                                             

RUNNING OR VARIABLE COSTS

Doctor’s fees                                               …………

Food                                                            …………

xx

xx

xx

xx

xx

xx

xx

xx

XX

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C.

D.

E.

Medicines                                                    …………

Diagnostic Services                                     …………

Laundry                                                       .………..

Hire charges for Extra Beds              .……….

                       

TOTAL OPERATING COST

NO. OF PATIENTS DAYS

COST PER PATIENT DAY (C)+(D)

xx

xx

xx

xx

XX

XX

XX

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Illustration:

Apollo Hospital runs an Intensive Care Unit in a hired building at a rent of Rs. 7500 p.m.

The Hospital has undertaken to bear the cost of repairs and maintenance. The Intensive

Care Unit consists of 35 beds and 5 more beds can be conveniently accommodated

whenever required. The permanent staff attached to the unit is as follows:

2 Supervisors, each at a salary of Rs. 2500 p.m., 4 Nurses each at a salary of Rs. 2000

p.m., 4 Ward boys each at a salary of Rs.500 p.m. Though the unit was open for the

patients all the 365 days in a year but it was found that only 150 days in a year, the unit

has the full capacity of 35 patients per day and for another 80 days it had on an average

25 beds only occupied per day. But there were occasions when the beds were full, extra

beds were hired from outside at a charge of Rs. 10 per bed per day. This did not come to

more than 5 beds extra above the normal capacity any one day. The total hire charges for

the extra beds incurred for the whole year amounted to Rs. 7500.

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The unit engaged expert doctors from outside to attend on the patients and fees were paid

on the basis of the number of patients attended and time spent by them on an average

worked out to Rs.25000 per month in the year 2003.

The other expenses for the year were as under:

Repairs and Maintenance (Fixed)                                                Rs. 8100

Food supplied to patients (Variable)                                            Rs. 88000

Janitor and Others Services for patients (Variable)                     Rs. 30000

Laundry Charges for their bed linen (Variable)                            Rs.60000

Medicines supplied (Variable)                                                      Rs. 75000

Cost Oxygen, X – Ray, etc., other

Than directly borne for treatment of patients (Fixed)                          Rs. 108000

General Administration Charges allocated

To the unit (Fixed)                                                                                Rs. 100000

1. Calculate the profit per patient day made by the unit in the year 2003 if the unit

recovered on the overall amount of Rs. 200 per day on an average from each patient.

2. The unit wants to work on a budget for the year 2004, but the number of patients

requiring intensive care is a very uncertain factory.

Assuming that same revenue and expenses prevail in 2004 in the first instance, work out

the number of patient’s days required by the unit to break-even.

SOLUTIONS:

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Calculation of No. of Patients days:

35 beds * 150 days = 5250

25 beds * 80 days = 2000

Extra bed days 7500 / 10 = 750

8000

STATEMENT OF COST

Particulars Rs Rs

1. Income Received (Rs. 200 * 8000 Patient days) 1600000

2. Variable Costs (Marginal Costs) Per Annum:

Food 88000

Janitor charges 30000

Laundry Charges 60000

Medicines supplied 75000

Doctors Fees (25000 *12) 300000

Hire Charges for extra beds 7500 560500

Contribution 1039500

3. Fixed costs

a. Salaries:

Supervisors (2 * 2500 * 12) 60000

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Nurses (4 * 2000 *12)

Ward Boys (4 * 500 * 12)

96000

24000

b. Rent (7500 *12) 90000

c. Repairs and Maintenance 8100

d. Cost and oxygen etc. 108000

e. General Administration 100000 486100

553400

Profit per Patient-day = 553400 / 8000 patients’ days

             = Rs. 69.175

Break – even Point =

Fixed Cost / Contribution * Income

486100 / 1039500 * 1600000

= Rs. 748206

Break-even Point for Patient-days = 782206 / 200

= 3741 patients-days.

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TRANSPORT COSTING

INTRODUCTION:Transport operating costs refer to costs that vary with vehicle usage, including fuel, tires,

maintenance, repairs, and mileage-dependent depreciation costs (Booz Allen & Hamilton,

1999). Projects that alter vehicle miles traveled, traffic speed and delay, roadway

surfaces, or roadway geometry may affect travelers' vehicle operating costs, which should

be considered in a benefit-cost analysis.

Vehicle ownership costs refer to fixed costs that are not directly affected by vehicle

mileage, including time-dependent depreciation, insurance and registration

fees, financing, and residential parking.

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Projects that change per capita vehicle ownership rates, such as significant changes in the

quality of alternative modes and land use accessibility, may affect vehicle ownership

costs, which should be considered in benefit-cost analysis.

Estimate changes in total vehicle miles traveled along a corridor.

Estimate changes in vehicle travel speeds and delay due to road and traffic

conditions.

Estimate fuel consumption rates, fuel prices, and non-fuel-related operating costs.

Calculate total changes in vehicle operating costs.

For improvements to ride quality, such as pothole repairs and curve or grade

reductions, estimate effects on vehicle wear.

Estimate changes in per capita vehicle ownership in an area.

Estimate average vehicle ownership costs.

Calculate total changes in vehicle ownership costs.

Factors Affecting transportation Operating Costs

The following factors affect vehicle costs (Booz Allen & Hamilton, 1999; Litman 2009;

Polzin, Chu and Raman, 2008):

1. Vehicle Type — Ownership and operating costs vary by vehicle size, class, and

other characteristics. Trucks typically have much higher vehicle costs than cars.

2. Vehicle Speed — Vehicle speed is the dominant factor affecting vehicle

operating costs. Typically operating costs decrease with increasing speed to a

certain point, and then begin to increase with increasing speed.

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3. Speed Changes — Changes in speed (also known as speed cycles) increase

vehicle operating costs. This added cost is higher when speed cycling occurs at

higher speeds.

4. Gradient — Grades can be either positive (uphill) or negative (downhill).

Positive grades are more demanding on vehicle engines and require greater fuel

consumption. This leads to an increase in operating costs. Negative grades may

reduce operating costs, but may also increase wear on brakes.

5. Curvature — A highway curve requires a greater output of energy from a vehicle

to counter the centrifugal force. This, combined with additional wear on the

vehicle's tires, leads to an increase in operating costs.

6. Road Surface — The roughness of the road surface can affect vehicle operating

costs by affecting rolling resistance. Rough surfaces can reduce speed, require

greater fuel consumption, increase wear on tires, and increase maintenance costs.

COST SHEET for (Month/Year)

STEP COSTS Rs. Rs.

A.

B

FIXED COST

Insurance                                           ………….

License fee, Permit fee and Taxes     ……….....

Depreciation                                      ………….

Other Fixed costs (specify)                …………

                                             

VARIABLE COST

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C.

D.

E.

Salaries and Wages of Drivers, Cleaners & other Operating Staff

…………

Fuel and Lubricants                            ………..

Consumables                                      …………

Amortization Cost of Tyre ,Tube & Battery                                 

Laundry                                              …………

Spares     ………...

Repairs & Maintainable                    …………

Other Variable Cost (specify)             ………...

TOTAL OPERATING COST[A+B]

PROFIT/LOSS

REVENUE [TAKINGS]

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VEHICAL NO                                                                             XXX

     CARRAIGE CAPACITY [Seats or Tonnes]                               XXX

     DAYS OPERATED                                                                    XXX

Illustration:

A mineral is transported from two mines – A and B and uploaded at plots in a Railway

station. Mine A is at a distance of 10kms, and B is at a distance of 15kms. From railhead

plots. A fleet of lorries of 5 tonne carrying capacity is used for the transport of mineral

from the mines. Records reveal that the lorries average a speed of 30kms per hour , when

running and regularly take 10 minutes to unload at the railhead. At mine “A” loading

time averages 30 minutes per load while at mine “B” loading time averages 20 minutes

per load. Drivers’ wages, depreciation, insurance and taxes are found to coat Rs9 per

hour operated. Fuel, oil, tyres, repairs and maintainance cost Rs 1.20 per Km. Draw up a

statement, showing the cost per tone- kilometer of carrying mineral from each mine.

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Assuming the quality and other aspects pertaining to material is same in both the mines,

where should the material be purchased?

Solution

1.                                 Operating analysis

Particulars A B

I. Total kms operated

II. Total operating time

a. Time from plot to mine

(10*60/30) , (15*60/30)

b. Loading time

b. Time from mine to plot

(10*60/30) , (15*60/30)

d. Unloading time

III. Effective tone kilometer

(5*10km) , (5*15km)

20km

20mins

30mins

20mins

10mins

80mins

50tonn-km

30km

30mins

20mins

30mins

10mins

90mins

75tonn-km

2. Statement showing the cost per tone –kilometer of carrying Mineral from each

mine

Costs Mine A Mine B

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(Drivers wages , depreciation , insurance & taxes)

A: 1hour 20minutes @ Rs9 per hour

B: 1hour 30minutes @ Rs9 per hour

(refer to working note 1)

(Fuel, oil , tyres , repairs and maintainance)

A: 20kms @ Rs1.20 per km

B: 30kms @ Rs1.20 per km

Total cost per trip

12

24

36

13.50

36.00

49.50

Cost per ton-km

= Total cost / Total ton-km

A = 36/50 = Rs 0.72

B = 49.5/ 75 = Rs 0.66

cost per tone

= Total cost \ Total tones

A= 36/5 = Rs 7.2

B = 49.5/5 = Rs 9.9

Since the cost per tone is the lowest in case material is procure from mine A it will be

considered

CONCLUSION

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Operating costs are expenses that relate to a buisness’ operations. It can also refer to the

costs of operating a specific device or branch of a corporation. These costs usually fall

into two categories, called fixed costs and variable costs, and a business may have more

of one type than the other.

Fixed operating costs are expenses that tend to remain the same whether the business or

device is inactive or operating at full capacity. Examples of such expenses include

employee salaries and machinery leasing fees. Salaries must be differentiated from hourly

wages in this regard.

Flexible expenditures are known as variable operating costs. These expenses fluctuate

based on a variety of factors. Money dispensed on hourly wages, for example, can be

adjusted by varying the amount of time recipients are engaged in labor.

Operating costs are not unique to any country, although actual expenses may vary from

one country to another or even from one location to another. Within an industry, it is very

possible for expenses to vary. It is, however, difficult to find a business that does not

have any of these costs. Even Internet businesses, in which the costs of operations can

often be reduced, it is almost impossible to completely eliminate them.

Process costing method is applicable where goods or services result from a sequence of

continuous or repetitive operations or processes and products are identical and cannot be

segregated. Costs are charged to processes and averaged over the units produced during

the period.

Single or output costing is used when the production is uniform and identical and a single

article is produced. The total production cost is divided by the number of units produced

to get unit or output cost. Examples are mining, breweries, brick making, etc.

Operation costing refers to the methods where each operation in each stage of production

or process is separately costed. Thereafter, the cost of finished unit is determined. This is

suitable to industries dealing with mass production of repetitive nature for example,

motor cars, cycles, toys, etc.

Expenses associated with administering a business on a day to day basis. Operating costs

include both fixed costs and variable costs. Fixed costs, such as overhead, remain the

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same regardless of the number of products produced; variable costs, such as materials,

can vary according to how much product is produced.

Businesses have to keep track of both operating costs and costs associated with non-

operating activities, such as interest expenses on a loan. Both costs are accounted for

differently in a company's books, allowing analysts to see how costs are associated with

revenue-generating activities and whether or not the business can be run more efficiently.

REFERENCES

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Advanced Cost Accounting – Manan Prakashan

https://en.wikipedia.org/wiki/Operating_cost

http://www.accountingtools.com/questions-and-answers/what-is-operation-

costing.html

http://www.wisegeek.com/what-are-the-different-types-of-operating-costs.htm

https://en.wikipedia.org/wiki/Operating_cost

http://www.investopedia.com/ask/answers/040915/what-are-different-types-

operating-expenses.asp

http://ehealth.eletsonline.com/2011/02/costing-system-in-hospitals/

#sthash.ygy5yMoV.dpuf

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