Service Costing form of Operational Costing in Accounting

Service costing is that form of operational costing which applies where standardized services are 

provided either by an undertaking or by a service cost centre with in an undertaking. This method may be used where service is not completely standardized, but where it is convenient to regard it as such and to calculate average cost per period in relation to the standardized unit of measurement. Thus it is the cost of producing and maintaining a service. It is a method of costing applied to undertaking which provides service rather than production of commodities. These services may be internally used e.g., canteen, delivery van etc. or may be rendered to the public as is done by State transport Corporation, Hospital, Electricity, Gas companies etc. in both the cases operating costs are required to be ascertained. The operating costs are generally period Costs. The expenses are accumulated for a period and they are related to the quantum of service rendered during the period. In certain cases, however, the operating cost can be terminal cost e.g., when a bus chartered out for a specific trip, the cost of such trip is worked out treating it as a specific job.

Costs are classified into the following three heads:

1. Standing or Fixed charges – These charges are incurred in spite of the kilometers run e.g., salary of operating manager and supervisor etc., insurance, motor vehicle tax, general supervision, interest on capital etc.
2. Maintenance Charges – Semi- variable expenses are include in this group e.g., repair and painting, overheads etc.
3. Operating and Running Charges – These charges vary more or less in direct proportion to kilometers and include petrol, oil, grease etc., wages of driver, conductor, attendant etc. if the payment is related to time or distance of trips, commission of taking etc. in short, all the variable charges of running vehicle are include in this Group. 

The service to be costed could either be:

Transport Services – Tramways, Railways, bus transport
Supply Services – Gas Supply, Electricity Supply, water supply
Welfare Supplies – Hospital, Canteen, Libraries
Municipal Services – Street light, Road Maintenance Etc.

Fund Flow Statement Method and Objective

Fund flow statement is a method by which we study changes in the financial position of a business enterprise between beginning and ending financial statements dates. Hence, the fund flow statement is prepared by comparing two balance sheet and with the help of such other information derived from the accounts as may be needed. Broadly speaking, the preparation of a fund flow statement consists of two parts:

1. Statement or schedule of changes in working capital.
2. Statement of Sources and Application of funds.

Statement or schedule of changes in working capital.

Working capital means the excess of current assets over current liabilities. Statement of changes in

working capital is prepared to show the changes in the working capital between two balance sheet dates. This statement is prepared with the help of current assets and current liabilities derived from the two balance sheets. The changes in the amount of any current asset or current liability in the current balance sheet as compared to that of the previous balance sheet either results in increase or decrease in working capital. The difference is recorded for each individual current asset and current liability. In case a current asset in the current period is more than in the previous period, the effect is and increase in working capital and it is recorded in the increase column. But if a current liability in the current period is more than in the previous period, the effect is decrease in working capital and it is recorded in the decrease column or vice versa. The total increase and the total decrease are compared and the difference shows the net increase or net decrease in working capital.

 WORKING CAPITAL = CURRENT ASSETS – CURRENT LIABILITIES

·        An increase in current assets increases working capital

·        A decrease in current assets decreases working capital

·        An increase in current liabilities decreases working capital

·        A decrease in current liabilities increases working capital

Statement of Sources and Application of funds

Fund flow statement is a statement which indicates various sources from which funds have been obtained during a certain period and the uses or applications to which these funds have been put during that period.