Question

“Educational institutions use operating costing.” Comment. Name other two industries/service organisations that use service costing.

Hint:

To select the correct cost unit:
• Use Simple Units when the service consists of a single activity (e.g., cost per kilometer).
• Use Composite Units when the service combines volume and duration (e.g., cost per bed-day occupied for hospitals, or cost per student-year for colleges).

Answer 1

Step 1: Explaining Operating Costing in Educational Institutions:
Educational institutions (such as schools, colleges, and training academies) provide an intangible service rather than manufacturing physical goods. Therefore, they adopt Operating Costing (also known as Service Costing) to track and manage their expenses.
• Cost Accumulation: Costs are grouped into broad cost centers (such as Administration, Academic Departments, Library, IT Labs, and Maintenance).
• Cost Classification: Expenses are categorized into fixed standing charges (such as full-time teacher salaries, building insurance, and campus rent) and variable running charges (such as student handouts, laboratory chemicals, examination paper costs, and utilities).

Step 2: Defining the Composite Cost Unit:
Because educational services are structured around student enrollment and academic timelines, simple cost metrics are insufficient. Educational institutions use composite cost units to track performance, such as:
• Cost per Student-Semester
• Cost per Student-Year
• Cost per Student-Hour (commonly used in specialized vocational training centers) Calculating these metrics helps administrators establish tuition fees, allocate department budgets, and analyze the financial feasibility of academic programs.

Step 3: Naming Other Industries that Use Service Costing:
Two other major service industries that use operating costing are:
• The Transport Industry: Commercial bus services, railway systems, and passenger airlines. They use composite units like the Passenger-Kilometer or Ton-Kilometer to track efficiency.
• The Healthcare Hospital Industry: Nursing homes, medical clinics, and public hospitals. They use the composite unit Patient-Day (the cost of caring for one patient for one day) to manage overheads and set room rates.