Understanding Service Costing in Cost Accounting

hi everyone welcome back to sahab Academy today in this video we're going to start this new chapter of cost

accounting as you can see over here service costing or it's also known as operating costing there are two names of

this chapter so first we are going to understand the complete concept of this chapter with 100% logic and then slowly

we'll move on to simple problems then Advanced problems yeah that's what we always do but before going ahead with

that I want to tell you one thing understand this video series is for degree level students as well as CA

inter students okay now at degree level for bcom BBA BF if you have this chapter in your syllabus then understand mostly

you know your syllabus will be only of Transportation sector you will get questions only from Transportation

sector okay you have to check your syllabus once but for CA intermediate transportation is very important 70%

questions will come from Transportation but you know other sectors are also important for C intermediate like

hospitals hotels powerhouses stol roads yeah and then educational institution is that clear yes so for CA intermediate

you have to see lots of different variety of questions is that clear and we'll do that don't worry now let's just

understand the basic concept and get the complete idea of this chapter and overview then we'll see the questions in

the coming videos okay let's begin now see here we have the concept of this chapter it's really simple and

straightforward all we are trying to do in this chapter is we are trying to calculate the cost of operating a

service we are a company right we are providing service to our customers so we are operating a service how much is the

cost of that service that is what we need to know okay that's why it's called as operating costing as well let just

say for example we are a bus company we are taking people from one place to another let just say from Mumbai to

Bangalore okay so we have many buses so to provide this service to operate this service of course we have a cost yeah we

have incurred a cost we are incurring a cost so how much is that cost we need to calculate that right so how are we going

to do that we are going to prepare operating cost sheet yeah operating cost sheet like in product costing also we

had a cost sheet isn't it direct material direct labor isn't it direct expenses we used to get the Prime cost

and so on isn't it but here it won't be like that here the operating cost sheet will consist of only three things three

categories really simple we'll have fixed cost variable cost and then we'll have semi- variable cost like this

categorization will be there easily you can take and add up everything you will get the total cost okay that's what

you're going to do in in this chapter fine and then what will happen is you have to you know divide that total cost

of a period understand everything here will be on period basis and divide that cost by a denominator that denominator

is very important everything is about the denominator only okay we'll see what is that denominator and all right so

this is what will happen we'll get the cost per surface or we can say cost per unit to be exact okay cost per unit and

and then if we add the profit percentage to that we'll get the sales how much we have to charge from our

customer okay that's what we are trying to do in this chapter it's really simple see let's just read this service costing

is a method of costing which is used to ascertain the cost of operating a service it is applied in service sectors

like Transportation industry hospitals hotels Cinema canteen powerhouses toll roads educational institutions yeah

accounting firms insurance companies consultancy firms Etc in all these type of businesses what is happening we are

providing services to our customers no products are being sold no actual tangible products are sold is that clear

now in transportation what happens is there are two types of Transportation understand there is first passenger and

then there is Goods transport okay is it clear yes and I've told you the main focus for everyone is transportation

only so we have to put lot of time here only solving these type of questions now you have to understand all of these

businesses what they are trying to do they are providing services to their customers and customers are outside

isn't it customers are outside from business so that's called external service isn't it externally we are

providing the service and we are getting money but then there is also something which is called as internal service okay

what do you mean by internal service let's just say for example we are a hospital right we are providing service

to our patients we are treating them that's external service costing will be applied in that right in that situation

but let's just say for example our nurses are there doctors are there and other administrative staff so for them

let just say we have a canteen on the ground floor right so they can have meals over over there for free so for

that canteen also hospital is incurring a cost isn't it to operate that service of canteen isn't it yes so in that

situation also service costing can be applied now nurses are there and other administrative staff is there let just

say we have a bus service mini bus service for them you know to pick and drop from their homes so for that

service also cost is there cost is being incurred by the hospital in that situation also service costing can be

applied do you understand Services can be internal as well as external internal I gave you just now the examples see

service performed on inter departmental basis let just say it department is there so it Department what do they do

they provide IT services to other departments Whenever there is a need and all right so that is also what internal

service do you understand this these are all you know Support Services fine okay then there is external which is the

main thing right services rendered to outside customers like bus company to their customers hospitals to their

patients like that is it clear yes so in both the situation the same thing will happen what will happen see here service

costing will be applied first we will collect all the cost incurred okay all cost incurred are collected and then

we'll accumulate that cost for a certain period in the month of August how much cost we have incurred yeah all of that

will be collected right and then we'll record that in the cost accounting system yes of course we have to record

that and then what will happen is you know we have to what do you say express it in terms of cost unit of a service I

told you now what will happen is we'll have a cost unit like in manufacturing industry what happens let's talk about

steel company they are producing Steel so they are expressing now in this month we have produced 500 metric ton of Steel

the cost of per ton is this much so what is that per ton what is that called that is called as cost unit isn't it yes

similarly in service costing in service Industries also they will have a cost unit and it'll be a little bit difficult

to know exactly what would be the cost unit in that business yeah I mean for you in the question it will be given and

you can easily understand that but I'm just saying generally yeah cost unit is difficult to know we have to see the

business properly and understand for example in bus company they use cost unit per passenger per kilometer two

variables are there two units are combined per passenger per kilometer this is a cost unit in bus service in

truck industry it is you know uh per tons per kilometer yeah two things are combined do you understand in Cinema it

will be per seat okay per ticket just one single thing is there simple cost unit is there yeah in canteen it will be

per meal simple cost unit is there in powerhouses where power is generated electric companies what do they do

kilowatt hour you see kilowatt is there and then hour is there two units are combined okay like that and then in

hotels what will be there in hotels there will be room different types of rooms can be there no so there is room

and then there is day for how many days you know the customer stays two units are combined so that's called composite

cost unit okay is it clear so like that it is fine so these units are used and in these units we express the cost at

last is that clear okay now I want to explain you how service costing is different from product costing yeah a

little bit idea you need see here service costing I I told you you know here we are providing Services there are

no tangible products so we will not be having any inventory we cannot store anything is it clear yes in product

costing we have tangible products for example steel industry you know they have steel they will have inventory of

Steel yes and then see here composite cost units are mostly used you know service costing yeah I mean service

Industries are little bit complex yeah as you know in hotels they are providing different types of rooms and for days so

two variables are there there can be deluxe room there can be luxury room there can be economical room right and

for how many days they stay you see how service is complex they are not just selling steel not just one ton of Steel

no it's not like that in service industry it is very complex it's customized so cost unit are also little

bit different composite cost unit we used where you know things are combined units are combined there can be more

variables more than one variable involved okay and then there can also be simple cost unit also in service costing

that can also happen like as I said in cinema it's just you know per seat yeah simple but in product costing always it

will be simple cost unit only and then see here in service costing what happens is mostly employee cost is a major cost

element than material cost okay yes but in product costing you all know material cost is the major cost than the labor

costing in product manufacturing right generally and then the last point is see here indirect cost like admin overhead

forms a significant portion in total cost of a service because understand in service business what happens is support

services are very important okay so indirect cost like admin overheads and all will form a major part of the total

cost of a service right but you have to understand what happens with indirect cost traceability of indirect cost to a

particular service is not possible properly so what do we do we abortion that is that clear yes but in product

costing yeah in manufacturing industry what happens indirect cost does not form a significant portion in total cost as

much as you know uh service industry does yeah still it's little bit significant but not as significant as a

service industry right yes simple so this where the differen is between service costing and product costing now

let's just understand cost unit in very much detail now see here we have the concept of cost unit it's really simple

I've already explained this to you in a brief way I told you if there is a steel industry which produces steel as their

main product how are they going to express their production in a month you said they will say 500 tons they have

produced 1,000 tons they have produced in a month right like that similarly at the end what will happen they will

prepare their cost sheet also and they will get to know what is the cost of their steel per ton they have produced

no so what is the cost of that so they will get to know that from the cost sheet cost of steel per ton so that is

their cost unit ton per ton is it clear cost unit refers to the unit of product service or time or combination of these

in relation to which cost may be ass attained or expressed isn't it yeah they express that in form of tons so that's

their cost unit similarly in service industry also a suitable cost unit must be determined but it is very difficult

to do that properly yeah you have to first understand the business properly the service business how services are

provided like for example in bus what happens we have so many different passengers and then we are traveling so

many kilometers right two variables are there in operating that service so we have to use a cost unit which reflects

both of these things right so that is why for bus what do we have what kind of cost unit per passenger kilometer two

variables two units are combined and that's why we call it as composite cost unit okay so that's how it is fine so

now in bus company what will happen then whatever cost is there that cost will be collected all the cost incurred during a

period are collected I told you we prep a cost cost sheet and all we calculate the total cost and then we express that

total cost in terms of a cost per unit of service understand clearly what I'm telling now we prepared the cost sheet

we get the total cost we take that total cost in the numerator and then we divide that by a denominator what is that

denominator that denominator is the total cost units okay then only we will be able to calculate cost per unit of

service total cost divide by total units we have to do what is that total units total passenger kilometer and we have to

understand how to calculate that don't worry we'll do that right now just focus on this cost unit may be simple cost

unit or composite cost unit simple cost unit means what simple cost unit means that it contains of only one variable

like in steel industry in this manufacturing industry I said per ton yeah or per metric done it's just single

element only yeah like in canteen what will happen per meal in taxi only one passenger is there isn't it in taxi that

that's what happens no so just per kilometer is important there will not be so many passengers and all only one

passenger so per kilometer is enough in that business in cinema we are providing service we are letting people to watch

the film right so here also what is there there is just a ticket just a seat so per ticket

okay but in some businesses the services are complex so we have to you know combine many things together composite

cost unit is nothing but many different units combined together comprises of two or more variables like in bus industry I

told you per passenger kilometers we have 50 passengers in our bus and how many kilometers are we taking them right

so that's two elements we combining and then in hotel what is happening there are rooms and then there are days we are

combining that right is it clear yes and then there is Truck Yeah if we are a shipping company what happens we are

taking the goods from the customer and we are taking those goods some other place so how many kilo of what do you

say ton of goods are there and for how many kilometers are we taking that right so two units we have to combine ton and

kilometer per ton kilom do you understand the logic behind this it's really simple okay all right now now in

the study module what has happened is they have given you a table consisting of all these examples see here in

Transport Services we discussed passenger kilometer in public transportation like bus kintal kilometer

or ton kilometer in Goods Carriage yeah in trucks for shipping electricity Supply service like power generation

kilowatt hour hour is there and kilowatt two separate things have been combined in hospital what is there patient is

there and then for how many days the patient stay or maybe we can say room is there yeah

deluxe room economical room so many different types of rooms are there no so room is there and then per day for how

many days the patient is there yeah or room per bed also can happen per operation simple cost unit can also be

there like just a patient is coming just for an operation and then it's going so simple cost unit can also be there yeah

it depends upon the situation you have to read properly the situation in Practical life I'm saying okay questions

also right in canteen it's simple cost unit per item per meal okay in cinema per

ticket simple hotels guest days or room days yeah what is happening in hotels composite cost unit only room and days

two units are combined Banks or financial institution here all the services are provided no yes so per

transaction or per service or per application or per project all these are simple cost unit and then education

institutes per course per students per batch per lecture like that and then in it companies what happens cost per

project per module all these are what simple cost unit only same in the insurance also per policy per claim per

TPA is it clear okay now the most important thing for you is transport only is it clear right okay now you have

to understand there is two way to calculate the composite cost unit I told you now we have a numerator and we have

have a denominator numerator I told you it's total cost of operating the service yeah total cost which we'll get from the

cost sheet operating cost sheet but the denominator we have to calculate how that calculation will happen we have to

understand so if we have a composite cost unit yeah then in case of this truck we have a different calculation

okay we have different calculation so that calculation we have to see with a practical example and we'll see the

formulas Also let's just do that now see here composite cost unit it can be computed in two ways absolute basis

which is also known as weighted average and then there is commercial basis which is also known as simple average it's

really easy what happens over here is see absolute basis means both the things we are going to take actual yeah what

happens see we are understanding this in the context of shipping company trucks okay we are transporting goods right we

are transporting goods so what happens in this business you have to understand that first see our truck is of course

going from one place to another so that's kilometer element right and then how many Goods it's carrying inside that

is what weight element right tons yes so two things are there isn't it we saw now in trucks there is ton and there is

kilometers see here truck per ton kilometer two elements are there ton and kilometer so in absolute basis what

happens is both the things will be actual actual okay but in commercial basis what will happen is we will take

the actual kilometer how much distance the truck is traveling actual what is there we will take that but the tons

which the truck is carrying and what will happen is you know truck will go in different places and it will be keep on

loading and unloading the the weight isn't it the goods it will be unloading and loading will be keep on happening so

we will add up all of that and we'll just take a simple average average tons average weight we will consider that's

the only thing the difference between absolute bases and Commercial bases here both are actual here the weight is on

average simple average is it clear okay so now let's just understand this properly with a practical example and

you will be completely clear see here this is the illustration one from the ICI study material what they are saying

a Lori starts with a load of 20 metric ton metric ton is uh you know simple ton only okay weight only of goods from

station a okay see station a is there truck is there on the back of the truck how much is there 20 metric ton is there

it unloads 8 metric ton in station B so truck went to station B and unloaded how much unloaded 8 metric ton so in the

back of the truck how much is there 12 metri T is there 20 - 8 that's 12 yeah so 12 metric ton still is there see here

and balance Goods in station C so then from B it goes to C and it unloads 12 metric ton yeah they said now balance

good is unloaded in the station C so here 12 is completely gone so now how there is 16 then let's just read on

return trip yeah return trip mean it's coming back from C to a on return trip it reaches station a with a load of 16

metric tons they are saying from B it's going to C unloading complete 12 metric tons and then refilling the truck with

16 metric ton of goods okay see they saying 16 metric loaded at station c yeah the new goods are loaded over here

the distance between a to B B to C and C2 a are 80 km 120 km and 160 km 80 120 160 simple Yes compute absolute metric

ton kilometer and Commercial metric T kilometer they want to calculate you know from both the formulas they need

answer from both the formulas so let's calculate it's really simple see here first what we are going to do first we

are going to calculate from absolute where we take both actual actual yeah from A to B they went 80 km that's the

actual kilometer and how much weight the truck was carrying 20 metric and so 80 into 20 80 into 20 both are actual data

right and then from B to C it went 120 km carrying what carrying 12 metric tons on the back of it right so 12 into 120

yeah you see 120 into 12 yes and then what happened from C to a it went 160 km actual kilometer only 160 km and then

how much it was carrying on the back of it 16 metric ton so into 16 yeah actual into actual we have done that's called

absolute weighted average if you do this calculation 1,600 here 1440 here 2560 yeah that's equal to

5,600 metric T kilom do you understand this so this is the denominator if you want to right now calculate the cost

what you have to do simply you have to take the total cost of this service and divide it by 5,600 metric T kilom what

you will will get you will get cost per metric ton kilometer yeah cost per unit of service

cost per unit of service that's what you are going to get that's the objective of this chapter isn't it I've been saying

now we need the denominator numerator is total cost of the period then we have to divide the total units of that period

only then only we'll get what cost per unit of service cost per metric T kilometer do you understand yes simple

so absolute is done now let's talk about commercial in commercial what happens the same only actual kilometer actual

kilometer actual kilometer okay so that's what we have to take see 80 km 120 km 160 km this is what actual

distance We'll add up all of them we'll add up all of them all are actual then we need what average weight we need a

average weight of goods isn't it average tons average weight we need so how are we going to calculate average tons

really simple 20 + 12 + 16 divide by how many are there 3 divide by 3 20 + 12 + 16 divide by 3 that is equal to 16

metric ton do you understand so 80 + 120 + 160 that is equal to 360 km 360 into 16 metric tons that's equal to

576 60 metric T kilom is it clear simple and straightforward what we have done over here we have taken the actual

kilometers we have taken the actual kilometers we have added up all of them but we have not taken the actual weight

we have not taken the actual tons we have taken a simple average of weight 20 + 12 + 16 divide by 3 16 metric ton is

it clear of course it will be different only it won't be same this is what composite cost unit calculation is fine

now let's just move on to the concept of Transport industry now see here we have the concept of Transportation industry

in the beginning only I told you that first we will only be focusing on Transportation industry then only we'll

move on to the other sectors right so in transportation we have to understand how it all works right how the format will

be what all different types of cost can be there and then we have to see how it all works with a practice practical

example right so let's begin that see here costing of transport services so what's our objective over here to find

out the cost of operating a transport service isn't it yes and we have to find out how much to charge from our customer

how much money we should take from the customer yeah the ticket price the fair is that clear yes and transport

organization are broadly classified into two your all know passenger transport and goods transport in passenger

transport the cost unit is what passenger kilometer in Goods transport ton kilometer isn't it yes so now how

will this happen how are we going to find out the total cost you all know we will prepare a cost sheet operating cost

sheet and we will find out total cost of a period it can be of a month or of a year depending upon the question and

this will be our numerator okay then we have to divide this by total cost units if you're talking about

bus company then what will be our total cost units it will be this total passenger kilometer right this will

calculate separately in a working note and we will take that over there right so when we divide these two yeah that is

total cost for the period divide by total passenger kilometer of that same period we will get cost per unit is it

clear cost per passenger kilometer that's how it will happen fine once we have found that out we will add the

profit percentage to that let's just say for example you have found out cost is one Rupee cost is 1 rupee per passenger

kilometer so now if you want to add 30% profit then what will happen it will be 1 rupee and 30 PES right 1.3 so this

will be your what Cost Plus profit that's the f that you have to charge from the

customer yeah if a customer says yeah if a passenger says he wants to travel 400 kilometer on our bus from one place to

another what would be the ticket price we have the cost per unit we have taken the profit element into that we have the

fair per you know passenger kilometer so 1.3 isn't it into 400 and only one passenger is there so only one ticket no

that will be 520 that's the ticket price this is how it will happen yeah the basic service costing I showed you just

now is it clear 520 is the money that we have to take from the customer right the same concept applies in Goods transport

also the same way it will happen okay fine so that's regarding the technique how it will happen now coming to the

cost total cost we have to calculate by making what operating cost sheet yes so to do that first you have to understand

how it will be see here all cost incurred by a transport organization can be classified into three categories it

will be fixed cost variable cost and semi variable cost what is semi variable cost fixed and variable you know semi-

variable cost mean it has both the element fixed as well as variable it will be fixed at a certain level of

limit and then it will increase then again it will increase after a certain threshold certain limit okay that's how

it is so see here fixed cost we will call it as standing charges in this chapter

variable cost running charges and semi- variable cost maintenance charges yeah if you're talking about Transport

company is it clear yes this is how it will be now what will be the standing charges what does that mean it means it

will be fixed even if you run your buses or not still you have to incur those cost and running charges running charges

mean if you are running the buses running the Vehicles operating the service then only you have to incur this

cost yeah simple logic yeah and this both okay right so see here in standing charges we have salary to driver

conductor and cleaners you have to pay the salary no now this salary can also be running charge if it is connected if

it is connected with the activity okay but if the salary is paid on monthly basis if it is paid on paid on monthly

basis then it will be a fixed cost and then insurance premium fixed cost it doesn't matter whether you run your

buses or not yeah even if your service is shut down still you have to pay the insurance same with the garage rent

taxes also right it doesn't matter it's your mistake that you are not running the service you have to pay the taxes to

government right the same with the license fees also isn't it the permit fees and all then depreciation

understand depreciation happens because of time no due to passage of time the value of asset goes down right and we

charge expense to our profit and loss yeah from the accounting perspective so depreciation is a expense that will

happen no matter what whether you run the buses or not so if it is charged on period basis on time basis then it will

be treated as a fixed cost but let's just say you are not charging depreciation like that you are charging

the depreciation based on the activity how much you know the vehicles are run in that basis then depreciation will

become variable cost it will become running charge okay like that can also happen another the point of view okay

and then Administration expenses also all the office expenses and all that will also happen no matter what right

whether the buses run or not you have to pay the administration expenses is it clear standing charges clear to you yes

and then interest will also come over here in standing charges yeah mostly interest should not be taken but still

the module is taking then have to understand interest will also come over here then we have running charges yeah

so running charges we have see petrol and Diesel do you always pay petrol and Diesel no only if your bus is running

you're using the fuel then only you will fill up the tank no petrol and Diesel yes same with the lubricant oils also

right and then the salary to driver conductor and cleaners if it is related with the activity if you are paying the

driver per trip like that then it is running charge it is not monthly basis the salary salary is by per trip yeah if

that's the case then it will be a running charge you have to take under this category then depreciation if

depreciation is charged on the basis of activity how many kilometers we have traveled on that basis you charging the

depreciation then it will come over here is it clear and then any other variable cost which we can identify that will

also come in this right and then we have maintenance charges now maintenance charges means what semi variable cost it

is fixed up to a certain limit and then it will increase right that's what maintenance charges are so see repairs

and maintenance tires you know now after certain kilometers you have to change the tires right and then spare parts

also yeah you have to change the spare parts right after a certain limit like that is it clear so this is how it is

yeah standing charges running charges and then maintenance charges is it clear now let me just show you the format of

operating cost sheet now the format is little bit summarized okay see it's really simple operating cost sheet

format particulars and amount column and then you know cost per unit column also we will make cost per unit means means

what if you're talking about bus then it will be per passenger kilometer if you are talking about a truck Shipping

Company then per ton kilometer like that yeah right now this is based on bus so it's like that fine so see standing

charges first you will take garage R salary Insurance depreciation interest yeah and so many things are there over

here here I've just taken a few see salary monthly base will come over here depreciation time base will come over

here if salary is activity base it will go in running charges if depreciation is also activity based it will go in

running charges is it clear yes so see total standing charge you will take now sometime the question will ask you that

they need standing charges and everything also per passenger kilometer so we will divide and find out per

passenger kilometer standing charge okay let just say here it is 5,000 5,000 divide by whatever passenger kilometer

is there you will get per unit figure you will write that over here is it clear simple then see running charges

petrol diesel salary lubricant oils depreciation see both are what activity based salary and depreciation also yeah

operation and activity based fine so you will add up all of it that's total running charge yeah and then the same

case and then you have maintenance charges repairs and maintenance tires spare paths yeah the same whatever is

there that thing only nothing different right it's just I have taken few over here I just wanted to show you the

format okay not the complete detail because I don't have the space properly so see you will add up all of this you

will get total running charge yeah so total standing charge running charge and here it will be maintenance charge sorry

this will be maintenance I will fix that okay my bad it has been just copy pasted okay maintenance charge okay total

maintenance charge right then you will add up all of the three you will get the total cost you see in the operating cost

sheet you will get the total cost I've been saying no so see total cost you have got so this is our numerator yeah

then we divide it by what total passenger kilometer this thing total passenger kilometer we will get the

figure what is the cost per passenger kilometer will come over here is that clear to that you can add the profit

percentage directly to that single unit only and then if you add you get the gross takings gross takings simply means

sales revenue is that clear and this will be the fair that you'll be charging to your passenger is it clear fair to be

charged per passenger kilometer per passenger kilometer huh this is not the entire fair this is the you know Fair

per unit is that clear if a passenger is there who wants to travel 300 kilomet then you have to take this and multiply

with 300 you will get the ticket price like that is it clear simple and straightforward I hope you have

understood this fine easy now let's discuss some important points regarding this for goods transport we generally

follow absolute basis of cost unit yeah for goods transport which means the trucking company yeah for that what we

need to do we have to follow absolute basis absolute basis means actual kilometers into actual tons yeah this

thing yeah this is more preferred for the lores for the trucks this answer 5,600 km this way you have to do right

unless and until question says something else whereas for passenger transport what happens for passenger transport you

will see we follow commercial bases yeah we follow commercial bases in commercial bases what happens in commercial bases

actual distance is considered but the passengers yeah just you know imagine this formula in passenger kilometer what

do you have you have kilometer and passengers no so kilometer will be actual but the passengers will be on

average basis okay we'll see how it is when we'll see the formula right then see round trip yes this term is

very important you have to understand what is round trip round trip is very simple to go and come back yeah if

you're going to Mumbai let's just say from Bangalore so you're going to Mumbai and then you're also coming back right

so how many trips are involved over here going and coming back two trips are involved so always whenever bus

companies operate they will operate on round trip basis do you understand one round trip means two single trips is

that clear simple okay in the example it will be more clear and then see here in general for goods transport one side of

a round trip is empty what does that mean it means see in this example what happened in this example the truck went

no the truck went and then truck came back with 16 metric tons this usually doesn't happen yeah uh few months back

what I did was you know I ordered a wardrobe you know four doors Wardrobe from Kerala so it came you know from

Kerala so see this is Kerala this is my place let just say right so it came with the Wardrobe and then it went back empty

you know it went back to Kerala empty so that's what happens usually with the trucking companies right when they come

you know one side of a round trip is full and the other side is empty this is what happens for goods transport usually

if the question is silent we assume it like this but if it's a passenger transport then remember if the bus is

going from Bangalore to Mumbai it's going with passengers and then when it's coming back from Mumbai to Bangalore

yeah return trip at that time also it is coming with passengers okay both sides of a round trip is occupied do you

understand simple these are the general what do you say points if the question says something specific then that you

have to follow all right now let's just understand the formulas right formulas are very important so see here what

you're going to do is we are focusing first on this passenger transport only okay now we'll not talk about Goods

transport anymore so in passenger transport see here we have to calculate this total passenger kilometer I told

you not this denominator is very important how will you calculate for that you have a formula right first

understand first we will only calculate total Kil kilom traveled then we will take this element okay so

see kilometers traveled first we have to see how many vehicles do we have how many buses do we have number of buses

okay into the kilometers from Mumbai to Bangalore how many kilometers are there that distance

you have to take let's just say for example it is 40 kilm the distance between these two just for example okay

so 40 km we will take yeah and then we will multiply with two why two because mostly in the question they will say

round trips so whenever they say round trips then you have to always take two into two that's fixed is it clear simple

round trip you will take into two that means 2way it's going to Mumbai and coming back also right so this kilometer

which is there now it is traveled two times yeah going 40 km Coming Back 40 km like that into number of round trips per

day how many times we are doing this yeah in a day that is what we are going to take over here let just say for

example we are going locally only okay 40 km locally only so 40 km that Journey can be done three four times in a single

day no so how many times it is happening that is what we are going to take into the number of days we operate in a month

right it will be 30 days 31 days depending upon the month is it clear so this is the formula for total kilometers

traveled once you calculate this once you get the answer you will take take it at the below see here kilometers

traveled and then you will multiply with the total passenger capacity let just say 50 seats are there in the bus how

many seats 50 seats okay but let's just say for example you know in this bus in that route in that route it's not so

much occupied yeah all 50 seats are not occupied on average on average only let just say 80% is occupied so you multiply

with 80% 0.80 you get what 40 on an average only 40 seats are filled do you understand this the question will tell

you 50 seats are there 80% capacity is utilized like that so you will just take that total passenger capacity 50 and

capacity utilized is 0.80 now this capacity utilized what is this what is this this is commercial basis this is

commercial basis on average we are taking here this is an average yeah I told you now what did I tell you I told

you while discussing that point uh for passenger transport we follow commercial bases I told you commercial basis means

taking simple average so this is simple average that will be given to you in the question total passenger capacity into

average we are taking average capacity utilize is it clear right so kilometers traveled you got that from the above and

then you will multiply this you will get passenger kilometer you have taken the kilometer element and then the passenger

element you have have got total passenger kilometer is it clear simple and straightforward then what you will

do then simply you will use the cost per passenger kilometer formula right I told you now numerator total cost for the

period you will divide by total passenger kilometer for the period okay this thing right so when you divide that

you will get cost per passenger kilometer yeah where will we get this total cost total cost we will get over

here only see total cost this is the total cost yeah a plus b plus C right we prepare a cost sheet this thing you can

do separately or it will happen here only in the cost sheet only yeah the same thing is happening you see this

total cost divide by total passenger kilometer okay so now you have got the idea how passenger kilometer is coming

in the cost sheet yeah how are these figures coming it's same only so how is it coming with this formula right with

this formula simple understood now let's just see a practical example and let's have a crystal clear VI of this now see

here we have a practical example of Passenger Transport Service let's understand all the formulas and

everything with complete logic see here let's just say we are a small company having only one bus and we are operating

it between these two places it goes from place a to place B and then it also comes back right okay the distance

between these two places is 40 km and then the capacity of the bus is 50 seats but the question is saying on an average

capacity utilized is only 90% so what does that mean it means we have 50 seats in the bus but all of them

are not occupied on an average only 90% is occupied into 0.90 so that means 45 seats are occupied on an average okay

yes so that's the thing regarding the you know occupancy and then the question is saying about round trip round trip

means what going and coming back right the bus goes 40 km and comes back 40 km do you understand this yes how many

times does this happen the question says three round trips in a day three round trips in a day means what it means three

times this is happening now you have to think carefully three round trip means six single trips yeah in the formula

what do we need in the formula we need what number of round trips per day and two also we have what's the logic of

this let's understand that rather than taking this you can also take what number of single trips yeah let's see

how many single trips are happening over here three round trips they are saying three round trips means in the morning

round trip afternoon round trip Night round trip let's just say for example so in total it is what six single trips it

is six single trips how six single trips 3 into 2 3 2 are 6 no so six single trips yeah in the morning it's going

coming back in afternoon going coming back in night also going coming back in total six single trips do you understand

this yes yeah now there are two ways to take this in the formula okay you can do what you can do 2 into 3 that's six or

directly also you can take six over here if you're taking directly six over here then you will not take this two yeah see

for this you can take six entirely if you are not taking six then what you have to do two round trip which

is fixed and then number of round trips per day which is three 2 into three that's also six do you understand this

yes simple okay so that's what round trips are and then the question is saying that bus operates 30 days in a

month okay so we'll use those days we have that in the formula and the total cost the question is saying is 2 lakh

per month okay yes so see here let me just write that over here it is per month okay total cost is 2 lakh per

month operating cost of the service now first we will calculate what kilometer traveled one bus we have 40 km is the

distance between these two places which we are operating isn't it yes but round trips are happening so two ways going

and coming back so into two we have to do do you understand understand this easy then how many times it is happening

how many round trips in total three round trips in total three round trips per day yeah into 30 days this is

happening for 30 days in a month yeah bus is operating for 30 days no so monthly figure we have calculating over

here in a month the bus travels how many kilometers 7,200 km in total this is just kilometers traveled I told you now

first calculate the kilometers traveled right then go for passenger element yeah take

this 7,200 at the below yeah then take the passenger element what is the passenger element how many seats are

there capacity is 50 seats how much is utilized 90% is utilized into 90% okay this is what you have to do 50 into 90

is what 45 yeah so 45 into 7,200 that's equal to 324,000 passenger kilom is it clear simple answer straightforward

these are the total cost units in a month do you understand this simple if you multiply this into 12 you will get

the annual figure that also you can do if you want okay right then what will happen then we also have to calculate

the cost per passenger kilometer I told you now cost per passenger kilometer either you can do this separately or in

the cost sheet only at the below total cost for the period divided by total passenger kilometer for the period both

the things we have this is the total passenger kilometer for 30 days and this total cost is also for 30 days yeah so

see cost per passenger Kil numerator total cost you got this you got from the cost sheet okay it's directly given over

here but it comes from cost sheet you divide that by the total passenger kilometer that is 324,000 passenger

kilometer you get what 0.617 what is this 0.617 this is the cost per passenger

kilometer if you want to take take one passenger in this bus 1 kilom how much is the cost for you the cost is this

much 0.617 that's the interpretation this is just the cost then what you will do

0.617 is just the cost let's just say you want to add 40% profit to this yeah you need 40% profit let just say what

you will do you will 1 4 yeah you will multiply 1.40 because 40% is the profit okay and that 100 is that one is what

that is the cost okay so 1.40 if you multiply or 1.4 only then you get what 0.86 38 what is this in this there is

cost as well as profit both the things are there okay so this will be your fair per passenger kilometer this will be

your sale or what do you say Revenue per passenger kilometer this much you have to charge your passengers let just say

there is a passenger who wants to go you know 20 kilm only not 40 km he wants to get down somewhere in between so you

will take this into 20 you will get 17.2 yeah this much ticket price will be there for that guy

he wants to travel 20 kilm now so this much you have to take this is your fair to be charged to that customer 17.2

maybe you will round it off you'll make it 18 okay that can happen is it clear so this is how the service costing is

done in passenger trans Port you understand this really simple and straightforward it's not difficult at

all okay kilometers travel first you calculate then you add the passenger element you will get the passenger

kilometer then numerator and denominator the thing okay total cost for the period total units for the period you will get

the cost per passenger kilometer like this okay so in the next video we'll solve a full flesh problem of you know

passenger transport bus and you will see how simple it is so that's all for this video I hope you have understood each

and everything if you have any doubts comment down below or just take a screenshot ask me in Instagram yeah so

that's it see you in the next video bye