Mumbai Metro Project Project (Operating Cost) 1.1 Introduction : Operating Costing is a method of costing applied in ascertaining the cost of rendering services. It is not applicable for entities manufacturing tangible goods. The main objective of operating costing is to compute the cost of the services offered by the organization. The information concerning the business enterprise is very helpful to the management to control it in an efficiently way. As the other branches like financial accountancy and management accountancy, the cost accountancy also serves the important information to the management regarding the operating efficiency of the business. It becomes very easy for management to lay down management policies, to guide management decisions or evaluate operating management performance with the information provided by cost accounting. The term operation in business terminology refers to an activity of the business. It is very important to study the operations of the business in detail because depends on the operations, which hit performs. The management should always concentrate on the efficiency of the operation and also the costs associated to the operations. It is very important to control the costs associated to the operations for the enterprises like manufacturing companies, companies engaged in the process of extraction of materials from earth like, coal mines etc. Generally, the above mentioned business enterprises depend on the operation that it has to be performed in to produce into produce the final output. The costs associated with such operations are generally higher. These costs are called as “operating costs”. The costs, which are incurred to perform the operation of the enterprise, are called as operating costs. These costs are to be accounted for in order to arrive at the total costs of operation or process, which helps in determining the price of the final product. “Cost accounting is the 1 Mumbai Metro Project Project (Operating Cost) classifying, recording and appropriate allocation of expenditure for the determination of the costs of products or services, and to the presentation of suitably; arranged data for the purposes of control and guidance of management.”It includes the ascertainment of the costs of every process, operation, services or contrast as may be appropriate. It deals with the cost of production, selling and distribution. It thus, the provision of such analysis and classification of expenditure as will enable the total cost of any particular unit of production to be ascertained with reasonable degree of accuracy and at the same time to disclose exactly how such total cost is constituted (i.e. the value of material used, the amount of labour and other expense incurred) so as to control and reduce the cost. Operating costs are the expenses which are related to the operation of a business, or to the operation of a device, component, piece of equipment or facility. They are the cost of resources used by an organization just to maintain its existence. 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. 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 same regardless of the number of products produced; variable costs, such as materials, can vary according to how much product is produced. 2 Mumbai Metro Project Project (Operating Cost) 1.2 Concept of Operating Costing : Operating costing is the method used by undertakings rendering services, such as transport and electricity, steamship companies , hospitals, restaurants, theaters, travel agencies , schools etc. Cost per unit = Total operating cost the quantity of service provided Cost unit in operating costing can be divided in to two types. (a) Simple cost unit (b) Composite cost unit Transport Costing : Under this method, 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. While, calculating the unit ofservice, the weight and/or passenger and the distance should be calculated. In transport costing cost are classified under following three heads. Fixed cost / Specific cost: Garage charges, Insurance, Taxes, license, time-based depreciation, wages of drivers and cleaners, establishment cost of workshops, general service cost. Semi-variable cost / Maintenance cost : Expenditure on repairs, maintenance, tyres, tubes, accessories and spares. 3 Mumbai Metro Project Project (Operating Cost) Variable cost / Running expenses : Such cost depends on the trips made and the distance run by the vehicle. These cost include cost of fuel, lubricating oil, depreciation based on run, wages of driver and cleaner etc. Boiler Costing / Power House costing : 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. The main heads of expenditure for a boiler house are as follows: Water : Cost of supply, purification Indirect Materials: service materials and small tools Fuel : Coal or oil Labour Supervision Maintenance Overhead cost : Rent, rates, depreciation, insurance and interest on capital Canteen Costing : Hotels, restaurants employ operating costing. The total operation of a hotel is divided into number of cost centers. 4 Mumbai Metro Project Project (Operating Cost) Restaurant-cost unit is number of meals served Housekeeping-cost unit is no. of rooms cleaned Laundry-cost unit is number of clothes washed The important heads of expenditure is: Provisions: Vegetables, fruits, meat . Flour, milk , oil, sugar Labour: Salary of cooks, kitchen assistance, supervisors service : steam, gas , electricity, power and light Consumable stores : crockery, glassware Misc. overheads : Rent , rates, depreciation , insurance , Credit Charges of meals. Tea and other sales Hospital costing : The hospital services can be divided into the following categories. Outpatient Department Wards General Services Other Service Department Method of costing are as follows: a) Utility Services: canteen, hospital b) Distribution Services: Electricity c) Transportation Services: Railways, Bus etc. d) Other Services: such as Management Consultants, courier services etc. 5 Mumbai Metro Project Project (Operating Cost) Business operating costs : For a commercial interprise, operating costs fall into two broad categories : Fixed costs, which are the same whether the operation is closed or running at 100% capacity. Fixed Costs include items such as the rent of the building. These generally have to be paid regardless of what state the business is in. Variable costs, which may increase depending on whether more production is done, and how it is done (producing 100 items of product might require 10 days of normal time or take 7 days if overtime is used. It may be more or less expensive to use overtime production depending on whether faster production means the product can be more profitable). Variable Costs include indirect overhead costs such as Cell Phone Services, Computer Supplies, Credit Card Processing, Electrical use, Express Mail, Janitorial Supplies, MRO, Office Products, Payroll Services, Telecom, Uniforms, Utilities, or Waste Disposal etc. 6 Mumbai Metro Project Project (Operating Cost) Features of Cost Accounting : 1. It is a process of accounting for costs. 2. It records income and expenditure relating to goods and services. Two Steps in Operating Costing : I. Cost Unit : It is necessary to decide the unit of cost. The cost units vary from industry to industry. For example, in goods transport industry, cost per ton kilometer is to be ascertained while in case of passenger transport, cost per passenger kilometer is to be ascertained. Costs units may be single or composite. a) Single Cost Unit : Enterprise Cost Unit Transport Per ton, per Km, per passenger Hospital Per bed Water Supply Per gallon 7 Mumbai Metro Project Project (Operating Cost) b) Composite Cost Unit : Passenger Transport Per passenger-km Goods Transport Per ton-km, ton mile Hotel Per room day Cinema Per seat per show Electricity Per kilowatt hour II. Identify Costs : The next step is to identify various costs under different headings as below : a) Fixed or standing charges b) Semi-fixed or maintenance charges c) Variable or running charges 8 Mumbai Metro Project Project (Operating Cost) 2.1 Mumbai - Hub of Mass Transportation system : Greater Mumbai, the financial capital of India is the heart of commercial and trade activities of the country. Mumbai has always had the distinction and advantage of a high modal share (88%) in favor of a public mass transport system. The role of existing Suburban Rail Services is extremely important in the life of people of Greater Mumbai. The system carries about 6 million passengers every day. The BEST provides feeder services to the many station going passengers, to complete their journey. Due to the city‟s geographical constraint, the road and rail infrastructure development could not keep the pace with the growing