CHAPTER 8 SERVICE AND OPERATION COSTING Flashcards
What is service costing
Service costing is used when an organisation or department provides a service, such as an accountancy firm preparing the accounts for a company.
There are four main differences between the ‘output’ of service industries and the products of manufacturing industries.
Intangibility – output is in the form of ‘performance’ rather than tangible (‘touchable’) goods.
Heterogeneity – the nature and standard of the service will be variable due to the high human input.
Simultaneous production and consumption – the service that you require cannot be inspected in advance of receiving it.
Perishability – the services that you require cannot be stored.
what suitable cost unit is used in service costing
One of the main difficulties in service costing is the establishment of a suitable cost unit.
Service organisations may use several different cost units to measure the different kinds of service that they are providing.
Examples for a hotel might include:
Meals served for the restaurant
Rooms occupied for the cleaning staff
Hours worked for the reception staff.
A composite cost unit is more appropriate if a service is a function of two variables.
Examples of composite cost units are as follows:
How much is carried over what distance (tonne-miles) for haulage companies
How many patients are treated for how many days (patient-days) for hospitals
How many passengers travel how many miles (passenger-miles) for public transport companies.
what must the total cost of providing a service include and what is the cost per service unit calculation
The total cost of providing a service will include labour, materials, expenses and overheads (the same as the costs associated with the products produced in manufacturing industry).
In service costing, it is not uncommon for labour to be the only direct cost involved in providing a service and for overheads to make up most of the remaining total costs.
In service costing costs can be classified as being fixed, variable or semi-variable. If costs are semi-variable, it is necessary to separate them into their fixed and variable constituents using the high/low method.
The cost per service unit is calculated by establishing the total costs involved in providing the service and dividing this by the number of service units used in providing the service.
The calculation of a cost per service unit is as follows.
cost per service unit = Toal costs for providing the service/number of service units used to provide the service
