Process Costing 2

OPERATING COSTING

 The Method Described

Those organisations which provide a service to their customers use this method to establish the costs of their service.  The service is regarded in the same way as the process is regarded in process costing and is the cost centre to which cost is attributed.  If several types of service are provided, there will be a series of cost centres and it will be necessary to evolve a technique of apportioning overheads with a view to building up an overhead absorption rate system.

The direct costs associated with each service will be collected under the service heading, and overheads will be charged to them by use of the predetermined overhead absorption rates.  Costs of services are therefore built up in the same way as the costs of processes are found in an orthodox process costing systemThe main difference between ordinary process costing and operating costing is the selection of the unit of activity whereby unit costs are arrived at.

Units of Operating Costing

As we can see by reference to transport organisations, buses, railways, airlines, carriers, etc., there are several possible units of division.  We could calculate the cost per mile of running, per passenger carried or per ton of freight moved.  Each of these possibilities has some merit, but it is usual to combine the two main factors – the distances travelled and the weights or numbers of goods or passengers carried over these distances.

We therefore establish the total cost of a service during a period, and evaluate the activity relating to that service in terms of ton-miles or passenger-miles for the same period.  Dividing the total service cost by the total activity will give the unit cost of each ton-mile or passengermile, i.e. the cost of moving one ton (or one passenger) a distance of one mile.

The necessary data is available from the drivers’ logbooks, which would specify loads carried, mileage travelled, pick-up points and delivery points.  Additional control is available by analysing the vehicle’s tachograph.

Use of Operating Costing

A list of types of organisation which would be likely to use this method of costing is given below, with a note of the different units for which costs may be ascertained.

 

            Organisation Cost Unit
            Road Transport Running hour
  Ton carried
  Mile
  Passenger-mile
  Ton-mile
            Railways Engine-mile
  Ton-mile
  Passenger-mile
  Wagon-mile
            Gas Production 1,000 cubic ft produced
  1,000 cubic ft sold
  Ton of coal carbonised
            Electricity Production 1,000 units generated
  1,000 units sold
            Hospitals Available bed-day
  Occupied bed-day

PROCESS COSTING INVOLVING BOTH LOSSES AND WORK-IN-PROGRESS

To further explain process costing and to help your overall understanding, here are some examples of process costing where both work-in-progress and abnormal loss/gains are involved.

 

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