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Operating Costing

The Chartered Institute of Management Accountants, London defines “operating cost” as “the cost of providing a service.” Services performed may be internal or external. Services are termed as internal where they have to be performed on inter-departmental basis in the factory itself, e.g. supplying power, gas or electricity from factory’s own power-house, catering from the factory’s canteen; supplying steam raised from the boiler house, repairing necessary items by the repair and maintenance department etc. Services are termed as external when they have to be provided to outside parties. Such concerns are service undertakings, e.g. transport corporations carrying loads of goods or human beings; electricity companies generating electricity or power; hospitals serving patients or carrying out operations; canteens serving meals or dishes of different varieties etc. The method employed to find out the cost of rendering a service, either internal or external, is service costing or, so to say, operating costing.

Operating costing is just a variant of unit or output costing. The method of computing operating cost is very simple. The expenses of operating a service for a particular period are grouped under suitable headings and their total is divided by the number of service units for the same period, and thus cost per unit of service is obtained. The cost for a future period may be estimated on the basis of estimated service units and the estimated costs. This will help in fixing the price to be charged for the service units and the estimated costs. Thus, the principle involved under operating costing is the same as under unit costing but they differ in the manner in which costing information have to be collected and allocated to cost units. The data about expenses are to be classified according to their nature of variability and moreover, the units of cost may be simple or composite.