costing project of operating costing

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L. S. RAHEJA
RE-ACCREDITED BY NAAC WITH ‘A’ GRADE
Juhu Road, Santacruz
DECLARATION BY THE STUDENT
I, AMOL SHINDE student of M Com Part
Paper “OPERATING COSING
2014-15, is based on actual work carried out by me under the guidance and supervision of
_______________________.
I further state that this work is original and
[1]
degree.office@gmail.com Tel. : 26609320
SADHANA EDUCATION SOCIETY’S
L. S. RAHEJA COLLEGE OF ARTS AND COMMERCE
ACCREDITED BY NAAC WITH ‘A’ GRADE
Juhu Road, Santacruz (West), Mumbai – 400 054.
DECLARATION BY THE STUDENT
student of M Com Part-I Roll Number 21212121 hereby declare that the project for the
OPERATING COSING” submitted by me for Semester –I during the academic year
is based on actual work carried out by me under the guidance and supervision of
original and not submitted anywhere else for any examination.
Signature of Student
Tel. : 26609320
COMMERCE
hereby declare that the project for the
I during the academic year
is based on actual work carried out by me under the guidance and supervision of
not submitted anywhere else for any examination.
Signature of Student

2. [2]
EVALUATION CERTIFICATE
This is to certify that the undersigned have assessed and evaluated the project on “OPERATING
COSING” submitted by AMOL BALU SHINDE Student of M Com Part-I.
This project is original to the best of our knowledge and has been accepted for Internal Assessment.
Internal Examiner External Examiner Principal

3. [3]
L. S. RAHEJA COLLEGE OF ARTS & COMMERCE
Internal Assessment: Project 40 Marks
Name of the Student Class Division Roll Number.
First name : AMOL
Father’s Name: BALU
Surname : SHINDE
M COM
PART I
21
Subject:
Topic for the Project: “OPERATING COSING”
Marks Awarded Signature
DOCUMENTATION
Internal Examiner
(Out of 10 Marks)
External Examiner
(Out of 10 Marks)
Presentation
(Out of 10 Marks)
Viva and Interaction
(Out of 10 Marks)
TOTAL MARKS (Out of 40)

4. [4]
ACKNOWLEDGEMENT
I would like to express my sincere gratitude to Principal of LS Raheja College of
Commerce our project guide Prof. ________, for providing me an opportunity to
do my project work on “THE OPERATING COSTING ON HOTEL &
TRANSPORT”. I also wish to express my sincere gratitude to the non - teaching
staff of our college. I sincerely thank to all of them in helping me to carrying out
this project work. Last but not the least, I wish to avail myself of this
opportunity, to express a sense of gratitude and love to my friends and my
beloved parents for their mutual support, strength, help and for everything.
Date: Name: AMOL BALU SHINDE
Signature:

5. [5]
CONTENTS
Sr. No. TITLE Page No
1 Introduction 6
2 Limitations 11
3 Research Methodology 13
4 Features of operating costing 14
5 Advantage of Operating costing 15
6 Disadvantage Operating costing
7 Cost Analysis 18
8 Staff Canteen Costing 19
9 Hotel Costing 20
10 Transport Costing 32
11 Conclusion 36
12 Bibliography 37

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INTRODUCTION OF OPERATING COSTING
MEANING
OPERATING COSTING is the method used to ascertain the cost of providing a service
such as transport, hotel, hospital, gas, or electricity. Operating cost denote the cost of
providing a service as opposed to cost of manufacturing a product. CIMA has defined
operating costing as that form of operation costing which applies when standardize
service are provided either by an undertaking or by a service cost centre within an
undertaking. Cost accounting standard -1 by ICWA define operating cost as the cost
incurred in conducting a business activity. Operating cost refer to the cost of undertaking,
which do not manufacture any product but which provide service.
DEFINITION
The day-to–day expenses incurred in running a business, such as sales and administration,
as opposed to production .Also called operating expenses. These are recurring expenses in
operating the business. The expenses can include property maintenance, taxes, and wages.
APPLICATION:
Operating costing is employed in different types of service industries such as
• Transport service e.g. truck operator, road transport, railway, air-line etc.
• Municipal service like road maintenance, garbage disposal, street lighting etc.
• Supply service such as electricity, steam, gas, water etc.
• Welfare service e.g. canteen, hospital, library etc.
COST UNIT:
For ascertaining cost it is necessary to decide suitable cost unit for each types of service
industry. Basically, operating costing is a types of process costing. Thus it used the
method of process costing when ascertaining the cost of supply of electricity, steam etc.
however, sometime operating costing may adopt a particular job as a unit of cost as for
example when costing a particular trip by a bus so as to quote the charger. In such cases
operating costing used the method of job costing by treating a specific trip as a separate

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job. A cost unit under operating costing may be of two types (a) simple cost unit (b)
costing cost unit. Following is the list of different cost unit used in different types of
service.
SERVICE INDUSTRIES SIMPLE COST UNIT
Passenger transport
Good transport
Road Maintenance
Water supply
Canteen
Per kilometer
Per kilometer
Per K.M. of road maintained
Per kilo liter of water supplied
Per meal/ dish
SERVICE INDUSTRIES COMPOSITE COST UNIT
Passenger transport
Good transport
Electricity
Steam, Gas
Hospital
Library
Per Passenger K.M.
Per Ton K.M
Per kilowatt Hour
Per K.G. / Cubic Ft.
Per Patient Day
Per Member Book
Thus it can be seen that in operating costing in most cases the cost unit is a compound
unit. It refer to both the quantum of service and period of service. Thus a transport charge
for carrying so much weight (Ton) for so much distance (Km) an electricity company
charge one for use of both the quantum (Kilowatt) and the period (Hour) and so on.
PROCEDURE:
1) DETERMINE COST UNIT: The first in operating costing is the determination
of the cost unit. This is a complex task as explained in para 1.3.
2) ASCERTAIN COST: The next point to be notes is that operating cost are period
cost. The cost of supplying the service for a period are ascertained in the following
manner(taking the example of a transport)

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VEHICLE NO.: Each vehicle is treated as accost centre and given a specific
number. All the cost account against this number. A separate account is opened to
record the cost and income of each vehicle.
VARIABLE COST: Variable cost are the running and operating. This included
expenses of variable nature e.g. petrol, diesel, lubricating oil, grease etc. the
material requisition note and time sheet (or Log) bears the vehicle no. the relevant
vehicle account is debited with it direct material and direct labour cost. Direct
expenses such as a fuel are debited to vehicle account on the basic of log book and
the cash / purchase / journal vouchers.
FIXED COSTS: Fixed cost (fixed charge) included garages rent, insurance, road
license fees etc. the fixed charges are apportioned and absorbed by each vehicle
no. on the basic of overhead absorption rate which may be actual or pre determine.
The fixed cost attributable to the vehicle are debited to the relevant vehicle
account.
REVENUE: The revenue from the vehicle is credited to the vehicle account.
PROFIT OR LOSS: the vehicle account at this stage will reveal the profit or loss
made on operating that vehicle. The profit or loss is then transfer to the costing
profit and loss account the total operating cost of a period is divided by the
number of cost unit (KM/Passenger/ Ton)supplied during the period to arrive at
the operating cost Per unit for that period.
3) NO STOCK: In case of a service industry there is no question of any closing
stock or work-in-progress since it is not possible to store a service for future use.
4) ABNORMAL COST: According to cost accounting standard 5 (transportation
cost)abnormal and non recurring cost shall be directly debited to p&l a/c and shall
not form part of operating cost. Example are penalty, detention charge demurrage
and cost related to abnormal breakdown.

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LIMITATIONS
OPERATING COST ACCOUNTING HAS CERTAIN LIMITATIONS
a)Based on estimates: Indirect costs are not charged fully to a product or process. It is
charged to all the products and processes on the basis of estimates. Actual cost varies
from estimated cost. Due to these limitations, all cost accounting results are taken as mere
estimates.
b)Lack of uniformity: Procedures of cost accounting followed by different organizations
are different for different products. There is no uniformity. There is also possibility of
difference in pricing material issues for production. All these lead to different cost results
for the same operation.
c)Many conventions: There are many conventions for classification of costs, pricing of
material issues, apportionment of indirect costs, adoption of marginal or standard cost,
etc. These create difficulty in determining the exact cost, because no one type of cost is
suitable for all. Purposes and in all circumstances.
d)Expensive: Cost accounting is expensive. It involves lots of clerical won for
maintaining various costing records for different purposes. For medium and small size
concern, the benefit derived from costing system may not justify the cost involved.
e)Result requires reconciliation: Information and results provided b;financial
accounting and cost accounting may be different for the as activity. This requires
reconciliation to find out correctness of the two before taking any decision.

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f)Dependent: It is not an independent system of accounting. It depends on
other accounting systems.
g)Does not include all items of expense and income: Items of purely financial nature such
as interest, financial charges, discount and loss on issue of shares and debentures, etc. are
not taken into consideration in Cost Accounting.
h)Not an exact science: Like other accounting system, it is not an exact] science but an art
that has developed through theories and practices.
RESEARCH METHODOLOGY
One important aspect of analyzing cost data is the challenge of how to present the
findings in a manner that potential users may be able to apply to their own settings.
Consequently, a key question underlying the development of this report is: who are the
potential users of operating cost information and how will the information be used?
Since this analysis has been motivated by informational needs of provincial
Ministries of health, the analysis below assumes that the primary users of the findings
will be provincial Ministries of health and other significant purchasers of health care
services, such as the B.C. Health Services Purchasing Organization (HSPO).
This analysis assumes that the primary users of the methods and findings
regarding operating costs of hospitalizations will be provincial Ministries of health and
other significant purchasers of health care services.
FEATURES 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.

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(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 liter 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 order wise.
(6) Service costing can be used for service performed internally or externally.
(7) documents like the daily log sheet, cost sheet etc. are used for the collection of cost
data.
ADVANTAGES
ADVANTAGES OF OPERATING COSTING:
1. Invest in more training for your employees. Wait-isn't this article about reducing
operating expenses? Well, it is. Investing in more training for employees will
reduce the number of errors that are made, which will inevitably save money for
the company. Not only that, but investing more in your employees will show them
that they are valued. In return, they will be more engaged and produce more (and
better) work.
2. Cut office supply expenses. Reducing supply expenses can significantly reduce
your operating expenses and improve your bottom line. This can be done by going
from paper to electronic whenever possible or ordering supplies in bulk in order to
obtain discounts. In addition, if you purchase all of your supplies at the same
outlet, you may be able to negotiate a better price. At the very least, shop around
for lower prices and any loyalty programs offered by potential suppliers.

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3. Cut out travel and entertainment expenses. Although T & E expenses are
considered a "perk," during tough times, these are expenses a business can do
without. Instead of traveling to business meetings, hold conference calls or
meetings online. Also, try not to spend funds on company outings, meals, or other
entertainment.
4. Rent or lease equipment as opposed to purchasing new equipment. Leasing
business equipment and tools preserves capital and provides flexibility. According
to Nolo.com, a legal advice website, the primary advantage of leasing business
equipment is that it allows businesses to acquire assets with minimal initial
expenditures. In addition to this, leasing offers the benefits of improved cash flow,
tax advantages, flexible terms, and the ability to easily upgrade equipment.
5. Reduce marketing and advertising expenses. Business magazine and
websiteEntrepreneur.com suggests that business owners "split advertising and
promotion costs with neighboring businesses. Jointly promote a sidewalk sale, or
take your marketing alliance further by sharing mailing lists, distribution
channels and suppliers with businesses that sell complementary goods or
services." If you are advertising via television or radio ads, look for cheaper time
slots as another option.
6. Reduce your staff-well, sort of. This doesn't necessarily mean completely laying
off your workers. Instead, consider rehiring your workers on a contract basis as a
temporary employee. This could save you money on salary expenses as well as
employee benefits until the business gets back on track and is able to rehire
workers on a permanent basis.
7. Outsource administrative functions. Consider outsourcing functions such as your
accounting and payroll to help reduce your business expenses. This will give you more
time to focus on building your business and costing projects, while possibly reducing the
expense of these functions if you are able to outsource them for cheaper than performing
them within your business.

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While cutting expenses may seem like something to do temporarily to maintain your
business, actually implementing these ideas when revenues are increasing will continue to
help your business generate the most profitability possible.
DISADVANTAGES
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
COST ANALYSIS
The costs incurred in departments rendering services or service organizations are grouped
under the following heads:
1. Fixed or standard charges
2. Semi-fixed or maintenance charges
3. Variable or running charges
To ascertain the cost per unit, these charges are aggregated and divided by the number
of service units during the specified period.
Cost per unit = total cost during the period
Number of service unit during the period

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Determination of cost per unit serves the following purposes:
1. It is used for price fixation.
2. It is used for cost control
STAFF CANTEEN COSTING
Most of the factories have canteens for staff. They are subsidized either partly or wholly.
It is manned by a supervisor who is responsible for running it. The supervisor is
accountable to the works manager or personnel manager. The major accounting headings
are
(i) provisions,
(ii) services,
(iii) labor,
(iv) consumable stores and
(v) miscellaneous overheads.
Cost per meal can be calculated on the number of meals served; for other items such as
snacks, on the number of snacks served, and tea/ coffee: no. of tea or coffee served.
A specimen of operating cost statement for a canteen is shown as follow
HOTEL COSTING
Hotel industry is a service industry and covers various activities as provision for food and
accommodation and providing other comforts like recreation, business facilities, shopping
areas for shopping facilities. In order to provide the service, hotel industry is required to
incur various expenses. Expenses may be fixed or variable. Fixed expenses comprise staff
salaries, repairs and renovations, interior decoration, laundry contract cost, sundries and

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depreciation on fixed assets, variable expenses include lighting charges, attendants
salaries and power charges
In order to calculate the room rent to be charged per person, notional profit is added in the
total operating cost and divided by the number of rooms available. The numbers of rooms
available are calculated after taking into consideration various categories of suite, various
seasons and occupancy percentage.
ELECTRICITY GENERATION
Power houses engaged in electricity generation or steam generation use ‘Power House
Costing.’ Operating cost statement can be prepared by identifying the costs associated
with the power generation or steam generation. Cost unit is different for electricity
generation and steam generation. For electricity generation, cost unit is cost per kilowatt-
hour while for steam it is lb
EXPENSE ACCOUNT
• An expense account typically ties to an item making a company spend money, but there
also are non-cash cost accounts that reduce the organization’s income. If you hear finance
people using terms such as cost, expense, charge and outlay, just note they’re referring to
the same thing. Expense accounts run the whole operating gamut, from merchandise cost
and interest to selling, general and administrative outlays. Think of SG&A outlays as
anything from rent and litigation to insurance, office supplies, travel and business
entertainment. Non-cash expense accounts include depreciation, amortization and
depletion.
DATA REPORTING
Operating accounts constitute the conceptual fulcrum around which an organization builds its
bookkeeping and financial reporting practices. These accounts help the business publish
accurate, complete financial data summaries at the end of a given period -- say, a month,
quarter or fiscal year. A full set of accounting reports includes a balance sheet, an income
statement, an equity statement and a cash flow statement.

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OPERATING COSTING—MANAGEMENT CONTROL
The operating activity encompasses all the management functions involved in the day-to-
day performance of organizational tasks and missions. As such, it is primarily a lower-
echelon function and is, therefore, of considerable importance to wing/base level
managers. In fact, it can be said that the preponderant portion of a wing/base-level
manager’s efforts are expended in the operating activity. In this regard, many if not most
management actions are concerned primarily with operational effectiveness, mission
accomplishment, and the like—considerations which do not necessarily require cost data.
Nevertheless, there are two areas of operating activity in which managers use cost
information: management control and decision-making.
In essence, management control is the function of ensuring that management plans and
policies are implemented as intended. In performing this function, cost information can
help in three important ways: it can serve as a means of communication; it can be used to
motivate; and it can be used as a yardstick of appraisal.
COMMUNICATION
The communicating role of cost data is inherent in the data themselves. Their very
existence constitutes a record of some activity, and the simple act of transmittal
constitutes a report, be it formal or informal. Perhaps it is this characteristic of cost
information that is responsible for the interest in cost information for its own sake. A
cursory consideration of the communicating role of cost data could lead to the erroneous
argument that, since any and all cost information by its very nature constitutes a record
and/or report, any and all cost information is of use to management. This argument,
however, ignores one of the basic precepts of communication: to be effective, any
communication must convey the intended thought. In order to be an effective means of
communication, then, cost data must be collected and presented in a fashion suitable for
conveying the intended thought. This is simply another way of stating the introductory
premise—cost has no meaning unless the type of cost is specified. From this discussion it
follows that no special category of cost data is required in performing the communicating

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function. What is required is that the correct type of cost data be used, depending on the
purpose of the communication.
MOTIVATION
Cost information can be used as an important tool for motivating subordinates. If nothing
else, the mere collection of cost data indicates that management is concerned about costs,
and this fact alone will serve to motivate subordinates to comply with management plans
and policies that can be measured in terms of cost.
At this point it would be appropriate to digress for a moment and consider the importance
of motivation. Motivation, really, is the only way that management can ever accomplish
anything. Mr. Robert Anthony expressed this idea most succinctly:
An obvious and fundamental fact about organizations is that they are made up of human
beings. The management control process in part consists of inducing the people in an
organization to do certain things and to refrain from doing others. Although for some
purposes an accumulation of the costs of manufacturing a product is useful, management
literally cannot “control” a product or the costs of making a product. What management
does—or at least attempts to do—is control the actions of the people who are responsible
for incurring these costs.8
Regardless of how it is attained, cost control is certainly one of the most important
management objectives.9
But, to repeat, this objective can only be realized by motivating
people. However, “. . . costs can be controlled only on the basis of accurate,
comprehensive, well-coordinated knowledge of their nature, amount, and reason for
existence . . .”10
The logical consequence of these arguments is that, for management
control purposes, costs must be collected and people must be motivated. This twofold
requirement can be satisfied by measuring costs incurred and categorizing them in terms
of the person or persons responsible for incurring the costs. This process will fix
responsibility for costs with those individuals who have control over the costs.11
This
concept of measuring and categorizing costs as either controllable or uncontrollable
serves a dual purpose: to collect the required cost data and to motivate responsible

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individuals toward cost control and other management objectives, thereby satisfying the
need of cost data for management control.
APPRAISAL
Closely associated with the function of motivation is the appraisal or evaluation function.
As far as people are concerned, the two functions are practically inseparable—a man will
be motivated to perform to the extent that he will be evaluated on his performance.
Evaluation, per se, must be based on much more than just cost performance.
Nevertheless, since cost performance, or efficiency, is a management objective, it must
enter into evaluation to some extent. The other half of the evaluation coin is
effectiveness—how well the job was done. In the military, effectiveness is rightfully
considered to be more important than efficiency, and it should therefore be given primary
consideration in evaluation. The problem, then, is to motivate toward efficiency and
evaluate efficiency without jeopardizing effectiveness. This may be accomplished by
evaluating efficiency in terms of extremes—the very good and the very bad being
identified and evaluated accordingly, and all those in between being evaluated entirely on
effectivenss.12
At any rate, the same cost concepts are applicable to the appraisal of
people as were developed in the preceding discussion on motivation—controllable costs
and uncontrollable costs.
A further application of the appraisal function concerns the evaluation of decisions.
Decisions are often based at least in part on cost considerations. In order to evaluate such
decisions it is necessary to measure results in terms of the cost parameters used in the
decision process.13
It is evident, then, that the same cost considerations and categories
will be used in evaluating decisions as were used in making them, and these will be
considered in succeeding paragraphs.
Suffice it to say in summary that cost information is used in the management control
function of the operating activity in order to communicate, to motivate, and to evaluate,
and that these uses of cost information require that costs be categorized as controllable or
uncontrollable. At any rate, the same cost concepts are applicable to the appraisal of
people as were developed in the preceding discussion on motivation—controllable costs
and uncontrollable costs

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OPERATING COSTING—DECISION-MAKING
“There’s more than one way to skin a cat” is a homespun adage which expresses one of
the most basic and most generally accepted truisms of human activity—that there is more
than one way to do anything. One of management’s most basic and most frequently
performed tasks is selecting the best way to do something. This, of course, is the essence
of management decision-making—choosing among alternatives. Moreover, the decision-
making process is one of comparing the relative effects of the various possible
alternatives. Any course of action may be thought of or measured in terms of change,
based on the situation existing before and after the implementation of that course of
action. The more a given course of action improves a given situation (or the less it
degrades the situation), the better is that alternative. Or, in the words of Haynes and
Massie, “. . . decisions are based on measuring the benefits to be derived . . . against the
sacrifices (costs) incurred.”14
One of the most important aspects of cost information in the decision-making process is
futurity. Decisions are concerned with the impact of alternatives on future events, not
with past history. It follows, then, that “only those costs not yet incurred are important to
a . . . [management] decision,” and unavoidable costs should never even be considered in
the decision-making process.
COST FOR DECISION-MAKING
The effective communication of cost information for decision-making depends, in large
part, on categorization of costs to reflect those aspects illustrated in the automobile
example. The first requirement is to separate the costs incurred as a direct result of
performing a given task from those only indirectly related to the task. These aspects may
be identified as direct and indirect costs respectively.16
All the costs listed in Table I are
direct costs associated with owning and operating an automobile. Indirect costs would be
incurred for such things as upkeep of garage and driveway, utilities for the garage, etc.
A further distinction must be made between costs that vary in direct proportion to output
and those that do not, termed “variable” and “fixed” costs respectively.17
In the
illustration, gasoline and lubricants and tire replacements are examples of variable costs,

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and their magnitude is determined solely by the number of miles driven. Costs such as
depreciation, registration, garage rent, insurance, etc., are fixed and they remain
essentially the same regardless of how much the car is driven.
Of even more interest in decision-making is the distinction between costs that will be
affected by a particular decision and those that will not, termed “incremental” and “sunk”
costs respectively.18
Returning to our example once more, if the family lives in a house
that has a garage and driveway, the costs of these facilities are sunk costs. They have been
incurred and cannot be reduced by any decision concerning the use of the family car.
Finally, a manager must consider opportunity costs (or opportunity losses). He must
consider that any gain which might have resulted from employing his resources in a
manner other than the one being considered must be foregone if the alternative is selected
and is therefore part of the cost (sacrifice) incurred by choosing the first course of action.
This aspect of cost data has been termed “implicit” cost, as opposed to “explicit” costs,
which represent the resources actually consumed by the alternative selected.19
All the
costs listed in Table I, for example, are the explicit costs of owning and operating the
family automobile for one year.
DESIGNING THE SYSTEM Designing the system begins with product development.
Product development involves determining the characteristics and features of the good (or
service if engaged in a service-oriented industry) to be sold. It should begin with an
assessment of customer needs and eventually grow into a detailed product design. The
facilities and equipment that will produce the product, as well as the information systems
needed to monitor and control performance, are part of this system design process. In
fact, manufacturing process decisions are integral to a system's ultimate success or
failure. "Of all the structural decisions that the operations manager faces, the one with the
greatest impact on the manufacturing operation's success is the process/technology
choice, " said Thomas S. Bateman and Carl P. Zeithaml in Management: Function and
Strategy. "This decision addresses the question 'How will the product be made?' " Product
development should be a cross-functional decision-making process that relies on
teamwork and communication to install the marketing, financial, and operating plans
needed to successfully launch a product.

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PLANNING THE SYSTEM Planning the system describes how management expects to
utilize the existing resource base created as a result of the production system design. One
of the outcomes of this planning process may be to change the system design to cope with
environmental changes. For example, management may decide to increase or decrease
capacity to cope with changing demand, or rearrange layout to enhance efficiency.
Decisions made by production planners depend on the time horizon. Long-range
decisions could include the number of facilities required to meet customer needs or
studying how technological change might affect the methods used to produce services and
goods. The time horizon for long-term planning varies with the industry and is dependent
on both complexity and size of proposed changes. Typically, however, long-term
planning may involve determining work force size, developing training programs,
working with suppliers to improve product quality and improve delivery systems, and
determining the amount of material to order on an aggregate basis. Short-term scheduling,
on the other hand, is concerned with production planning for specific job orders (who will
do the work, what equipment will be used, which materials will be consumed, when the
work will begin and end, and what mode of transportation will be used to deliver the
product when the order is completed).
MANAGING THE SYSTEM Managing the system involves working with people to
encourage participation and improve organizational performance. Participative
management and teamwork are an essential part of successful operations, as are
leadership, training, and culture. In addition, material management and quality are two
key areas of concern.
Material management includes decisions regarding the procurement, control, handling,
storage, and distribution of materials. Material management is becoming more important
because, in many organizations, the costs of purchased materials comprise more than 50
percent of the total production cost. Questions regarding quantities and timing of material
orders need to be addressed here as well when companies weigh the qualities of various
suppliers.
A budget provides a roadmap for the financial management of the organization including
controlling costs. Historical results along with the effects of current revenue and cost

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trends provide the basis for a budget and can help predict the future financial health of the
organization. It will also provide the benchmark for reporting future financial results.
Monthly reviews of actual financial results compared to budgeted amounts will provide
the information necessary to react quickly to variances to the plan.
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:
1. Analysis of operating costs, namely, wages, full cost, insurance, repairs and
maintenance.
2. Control of operating and running costs and avoidance of waste of fuel and other
consumable material.
3. Comparison of cost of running and maintenance of different vehicles.
4. Assignment of costs to services provided by each vehicle.
5. To quote hiring rates.
6. To compute cost of idle vehicle and lost running time.
7. Collection and analysis of cost for cost control.
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.

23. [23]
PARTICULAR AMT
Wages
Salary of office staff
Diesel & other oil
Repair
Taxesation insurance
Depreciation
Interest & other exp
24000
10000
35000
8000
16000
26000
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:
PARTICULAR AMT AMT
(A) Fixed cost
Wages
Salary of office staff
Taxesation insurance
Interest & other exp
(B) Variable cost
Diesel & other oil
Repair
Depreciation
Total cost (A+B)
24000
10000
16000
20000
35000
8000
26000
70000
69000
139000

24. [24]
Working note:
50* 75% * 50*2*30*5 = 562500
Cost passenger Km = Total cost
passenger Km
= 139000
562500 (ANS): = 0.247
CONCLUSION
Our detailed analysis of operating cost structures leads us to conclude that although the
Big4 Indian IT companies offer similar services and operate in same geographies, each of
them has control over and manages their operating costs differently. And this naturally
has varying effects on their operating profits.
We further conclude that the timeless essence of studying each company closely holds
true even when companies are in the same sector.
BIBLIOGROPHY
www.wikipedia.com
www.icai.com
www.investopedia.com