# Composite Cost Units

## What Are Composite Cost Units?

A composite cost unit combines two or more measurement units to express the cost of a service. A single unit (e.g., just 'km' or just 'tonnes') cannot capture the full nature of most transport or service operations.

## Common Examples

Industry	Composite Cost Unit
Road/Rail Freight	Tonne-km
Railways/Airlines	Passenger-km
Warehousing	Quintal-km
Hospitals	Patient-day
Hotels	Room-night

## Two Methods of Computing Composite Units

### 1. Absolute Method (Weighted Average)

Each quantity is weighted by its actual distance or volume
Formula: Total composite units = Σ (Quantity × Distance)
More accurate — reflects actual work done

### 2. Commercial Method (Simple Average)

Uses simple averages of quantities and distances
Formula: Total composite units = (Average quantity) × (Average distance)
Simpler but less precise

> The two methods give different results — exam questions may ask you to distinguish them.

## Cost Classification in Service Cost Sheet

All costs in a service cost sheet are classified into three heads based on variability:

Head	Also Called	Behaviour	Examples
Fixed Costs	Standing Charges	Do not vary with output	Rent, insurance, depreciation
Variable Costs	Operating Expenses	Vary directly with output	Fuel, driver wages
Semi-variable Costs	Maintenance Expenses	Partly fixed, partly variable	Repairs, tyre replacement

Worked example

### Example 1

A transport company makes two trips: Trip A carries 200 tonnes for 100 km; Trip B carries 100 tonnes for 200 km.

Absolute Method: Total tonne-km = (200 × 100) + (100 × 200) = 20,000 + 20,000 = 40,000 tonne-km

Commercial Method: Avg quantity = (200+100)/2 = 150 tonnes; Avg distance = (100+200)/2 = 150 km; Total = 150 × 150 = 22,500 tonne-km

The Absolute method (40,000) is more accurate than Commercial (22,500) — a significant difference that affects cost per unit calculation.

### Example 2

A hospital operates 50 beds for 20 days and 30 beds for 15 days. Patient-days = (50 × 20) + (30 × 15) = 1,000 + 450 = 1,450 patient-days. Total cost = ₹2,90,000. Cost per patient-day = ₹2,90,000 ÷ 1,450 = ₹200. Fixed costs (nursing admin, building) are spread over all patient-days.

⚠️ Common exam mistakes

Confusing Absolute method with Commercial method — Absolute multiplies each individual quantity by its specific distance before summing; Commercial averages both sides first.
Forgetting to include all trip legs when computing total tonne-km — each segment of a route must be included separately.
Classifying maintenance/repair costs as purely variable — they are semi-variable (have a fixed base component plus a variable element based on usage).
Using tonne-km for passenger transport — tonne-km is for goods/freight; passenger-km is for people.

Reference:

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