Introduction to Operating Costing in Cost Accounting

Operating Costing in Cost Accounting

Operating costing provides information about the cost of operating a company’s production facilities. It includes the costs of raw materials, labour, and other expenses incurred in the production process.

This information is used to determine the selling price of the company’s products and to assess the profitability of its operations.

Cost accounting has always been associated with industrial firms. However, in today’s competitive market, cost accounting is increasingly being used in service industries such as banks, insurance companies, transportation organisations, power generation companies, hospitals, passenger transport and railways, hotels, road maintenance, educational institutions, road lighting, canteens, and port trusts, among others.

Operating Costing

The costing method utilised in above mentioned businesses is known as ‘Operating Costing’. According to the Institute of Cost and Management Accountants [UK], operating costing is, ‘that form of operating costing which applies where standardised services are supplied either by an undertaking or by a service cost centre within an undertaking’.

Nature of Operating Costing

The fundamental purpose of operating costing is to quantify the cost of the services delivered by the firm.

To achieve this, it is required to decide the unit of cost in such circumstances. The cost units differ from industry to industry. For example, in the product transport industry, the cost per tonne-kilometer is to be discovered, while in the case of passenger transport, the cost per passenger kilometre is to be computed.

One of the most significant characteristics of operating costs is that most of these expenditures are fixed. For example, in the case of a passenger transport organisation, the majority of expenditures are fixed, while a few, such as diesel and oil, are variable and proportional to the number of kilometres travelled.

Examples of Operating Costing

Operating costing can be a valuable tool for businesses of all sizes. By understanding the cost of producing their goods or services, businesses can make more informed decisions about pricing, production, and marketing.

Here are some examples of how operating costing can be used by businesses:

• A manufacturer can use operating costing to determine the cost of producing each widget. This information can then be used to set the price of the widget.
• A retailer can use operating costing to determine the profitability of selling each type of product. This information can then be used to decide which products to promote and which products to discontinue.
• A service provider can use operating costing to determine the efficiency of their production process. This information can then be used to identify areas where improvements can be made.