Meaning of Operating Costing

Meaning of Operating Costing:

It is a method of ascertaining costs of providing or operating a service. This method of costing is applied by those undertakings which provide services rather than production of commodities. The emphasis under operating costing is on the ascertainment of cost of services rather than on the cost of manufacturing a product. This costing method is usually made use of by transport companies, gas and water works departments, electricity supply companies, canteens,hospitals, theatres, schools etc. 

Cost per unit of a product or service, or the annual cost incurred on a continuous process. Operating costs do not include capital outlays or the costs incurred in design and implementation phases of a new process.

Operating costs are costs that are incurred on a day-to-day basis related to the business operations. It can also be related to the operation of a device, component, and piece of equipment or facility. Operating costs are also known as operating expenses. For example sales and administration costs are operating costs. Operating costs are referred to as cost per unit of a product or service, or the annual cost incurred on a continuous process. The operating costs are those that do not include capital outlays or the costs incurred in design and implementation phases of a new process.

Operating costs are divided into two categories. They are fixed costs and variable costs. Fixed costs are those which are fixed and do not vary with the changes in the level of output. They do not change whether the business is inactive or operating at full capacity. Variable costs are those costs which vary with the changes in the level of output.  Flexible expenditures are also known as the variable operating costs. The expenses fluctuate on the basis of a variety of factors.

Operating expenses differ in every country. The actual expenses vary in every location. The calculation of operating costs is essential for sound business planning. These costs should be properly budgeted; otherwise it will adversely affect the business. The lack of planning in a business increases the risk that a business will not maintain adequate funds to operate properly. When the operating costs are fixed, the likely business interruptions or economic declines should be taken into consideration. The business generally cannot be deferred until a business finds it convenient to pay them. Fixed operating costs are set on a payment schedule and need to be paid accordingly for the company to maintain good credit.

Operating Costing