STRATEGIC COST MANAGEMENT

service Costing

THE OPERATING COSTING ON HOTEL, HOSPITAL

& TRANSPORT

M B A THIRD SEMESTER

Dr. Mustafa K
Visiting Faculty
School of Management Studies,
DCMS, University of Calicut
mustafapsmo@gmail.com
 INTRODUCTION
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.

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  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 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.

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 SERVICE INDUSTRIES SIMPLE COST UNIT

Passenger transport Per kilometer

Good transport Per kilometer

Road Maintenance Per K.M. of road maintained

Water supply Per kilo liter of water supplied

Canteen Per meal/ dish

SERVICE INDUSTRIES COMPOSITE COST UNIT

Passenger transport Per Passenger K.M.

Good transport Per Ton K.M

Electricity Per kilowatt Hour

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

Hospital Per Patient Day

Library Per Member Book

[4]
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) DETERM INE 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)

 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,

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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) ABNORM AL 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.

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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.

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.

[8]
 F EATURES OF OP ERATING 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 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.

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 ADVANTAGES & DISADVANTAGES OF OP ERATING

COSTING

 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
3. Cut out travel and entertainment expenses. Although T & E expenses are
any considered
loyalty programs
a offered by potential suppliers.

"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.

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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 equipmentis 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 and expenses. magazine
marketing advertising Business 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.

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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.

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 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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 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

Determination of cost per unit serves the following

purposes:

1. It is used for price fixation.

2. It is used for cost control

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 STAF F 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

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 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 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.

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 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,
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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.

 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.5

In essence, management control is the function of ensuring that management

plans and policies are implemented as intended.6 In performing this function, cost

COMMUNICATION
information can help in three important ways: it can serve as a means of

The communicating
communication; it role
can ofbecost datatoismotivate;
used inherent inand
theitdata
can themselves.
be used as aTheir very of
yardstick
existence
appraisal.
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 [17]

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 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 and fundamental about organizations is that they are made up of

obvious fact human
beings. management process in part consists of inducing the people in
The control an
organizatio to do certain and to refrain from doing others. Although for
n things some
[18]
purposes an accumulation of the costs of manufacturing a product is useful,
management

literal y 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 . . .”1 0 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.1 1 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 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

[19]
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.1 2 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. 1 3 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.”1 4

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
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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.1 6 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. 1 7

In the illustration, gasoline and lubricants and tire replacements are examples of

variable costs, 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 wil not, termed “incremental” and

“sunk” costs respectively.1 8 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. 1 9 All the costs listed in Table I, for example, are the explicit costs of owning
[22]
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.

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
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and goods. The time horizon for long-term planning varies with the industry and is

dependent on both complexity

and size of changes. Typically, however, long-term planning may
proposed 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,
Materia and culture. Inincludes
management addition, decisions
material management
regarding theandprocurement,
quality are two key areas of
control,
l handling,
concern.
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
trends
[24]
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.

[30]
 HOSP ITAL COSTING

Service costing system is used in ascertaining the cost of operations hospital.

of a The
activities of a hospital are divided into a number of cost centers, which
are:

i. Out-patient
department

ii. Pathology centre

iii. Wards

iv. Operation
theatre

v. Laundry

vi. Kitchen

Cost is collected for each such cost centers, and the cost per unit of output is
ascertained

with respect to each cost centre. 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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 TRANSP ORT
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.

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  SOLVE THE
PROMBLE

TRANSP
ORTER

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

Taxesation insurance 16000

Depreciation 26000

Interest & other exp 20000

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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 24000 70000

Wages

Salary of office staff 10000

Taxesation insurance 16000

Interest & other exp 20000

(B) Variable cost

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Diesel & other oil 35000 69000
Repair

8000

Depreciation

26000

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

[30]
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.

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