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14: Service costing ⏐ Part D Costing and accounting systems
1 Service costing
Service organisations do not make or sell tangible goods.
1.1 What are service organisations?
Profit-seeking service organisations include accountancy firms, law firms, management consultants, transport
companies, banks, insurance companies and hotels. Almost all not-for-profit organisations - hospitals, schools,
libraries and so on – are also service organisations. Service organisations also include charities and the public sector.
1.2 Service costing versus other costing methods
(a) With many services, the cost of direct materials consumed will be relatively small compared to the
labour, direct expenses and overheads cost. In product costing the direct materials are often a greater
proportion of the total cost.
(b) Because of the difficulty of identifying costs with specific cost units in service costing, the indirect costs
tend to represent a higher proportion of total cost compared with product costing.
(c) The output of most service organisations is often intangible and hence difficult to define. It is therefore
difficult to establish a measurable cost unit.
(d) The service industry includes such a wide range of organisations which provide such different services
and have such different cost structures that costing will vary considerably from one service to another.
(e) There is often a high fixed cost of maintaining an organisation's total capacity, which may be very
under utilised at certain times. Consider the demand for railway and bus services, for example. Demand
at midday is likely to be much lower than demand during the rush hours. The costing system must
therefore be comprehensive enough to show the effects of this type of demand on the costs of operation.
This often involves the analysis of costs into fixed and variable components, and the use of marginal
costing techniques and breakeven analysis. 'Cut-price' prices can then be offered, which might produce a
low but still positive contribution to the organisation's high operational fixed costs.
You should bear in mind, however, that service organisations often have large-scale operations (think about power
stations, large city hospitals) that require sophisticated cost control techniques to manage the very high level of costs
involved. One such technique is control using flexible budgets, which we looked at in Chapter 10, and which can apply
equally to service organisations as to manufacturing ones.
1.3 Characteristics of services
Specific characteristics of services
•
Intangibility
•
Simultaneity
•
Perishability
• Heterogeneity
Make sure you learn the four specific characteristics of services. This will help you identify organisations that might use
service costing.
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RWAR
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Assessment
focus point
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