owner should charge per mile to earn a profit of Rs 2 per mile:ParticularsBasisCost / INRCost of the Vehicle25,000 Garage rent Rs per year 1,200Insurance charges Rs per year 400Road Tax Rs per year 500Driver's wages Rs per month 400Cost of petrol Rs per litre 1.40Miscellaneous Costs (incl tyres & maintenance)Rs per mile 0.20Estimate Life of the vehicleIn Miles 150,000 Miles run per litre of petrolMiles per litre of petrol 5 Estimated Annual Mileagein Miles per annum 10,000 Practical Q 2
Operating Cost Sheet of M/s for the period ending…..Particulars of CostBasis of AlllcationCost / RsA. Standing CostsC. Variable Costs or Running CostsD. Total Cost 13,367 E. Total Miles in the year10,000 F. Cost per mile 1.34 G. Profit desired per mileRs per mile2.00 Annual write off of the cost of vehicle per yearVehicle Cost / Life in Miles X Miles pa1,667 Road Tax500 Insurance Premium400 Garage Rental1,200 Total Standing Costs3,767 Drivres' SalariesWages pm X 124,800 Cost of PertolNte 42,800 Miscellaneous Exps [incl maintenance + tyres]0.20 X 10,0002,000 Total Running Costs9,600 H. Sale Price per mileRs per mile3.34 Solution
Working NotesNote 1: Petrol consumptionRs per Litre1.40 Note 4: Petrol consumptionMiles per Litre5 Total Miles Travelled in a year10,000 No of litres cons2,000 Cost for the year2,800 Solution
Process CostingProcess costing is a method of costing used mainly in manufacturing where units are continuously mass produced through one or more processes. Examples of this include the manufacture of erasers, chemicals or processed food.In process costing it is the process that is costed (unlike job costing where each job is costed separately). The method used is to take the total cost of the process and average it over the units of production.Cost per unit = Cost of inputs Expected / Expected output in units
Important terms used in Process CostingIn a manufacturing process the number of units of output may not necessarily be the same as the number of units of inputs. There may be a loss during the process. A simple example is that when say 500 grams of oranges are processed only say 200 grams of juice is derived. This loss of quantity may either due to normal loss or abnormal loss.Normal lossThis is the term used to describe normal expected wastage under usual operating conditions. This may be due to reasons such as evaporation or any other associated loss during the process in the normal course. The quantity lost due to normal loss will be the same for all companies using that process. Hence, it is logical to say that the cost of normal loss should be recovered from the actual output qty.Abnormal lossAbnormal loss occurs over and above the normal loss and arises due to factors such as, faulty machinery or labor inefficiency etc. Abnormal loss is enterprise specific and hence, should not be recovered from the customer. If the cost of abnormal loss is built into the price, the product will become expensive while the competitors’ product will be cheaper as they do not incur such abnormal loss.