Chapter 9
Cost Accounting for Service
Businesses and the Balanced
Scorecard
Learning Objectives
LO1 Perform job order costing for service
businesses.
LO2 Prepare budgets for service businesses.
LO3 Apply activity-based costing for a service
firm.
LO4 Compare the results of cost allocations
using simplified costing versus activitybased costing.
LO5 Prepare a balanced scorecard for various
business entities.
Characteristics of a
Service Business
 Typically have little or no inventory.
 Labor costs often comprise 75% or more
of the total costs.
 Approximately 90% of jobs created in the
U.S. in the past 20 year have been
service industries.
Job Order Costing for
Service Businesses
 When the amount of
complexity of service
provided varies from
customer to
customer, a job order
costing system
should be used.
Job Cost Sheet
 The basic document used to accumulate
costs for a service business.
 Will indicate labor time, labor rate, and
the total cost for each labor category
worked.
 Other direct costs may be traced to the
individual jobs.
Budgeting for Service
Businesses





Revenue budget.
Labor budget.
Overhead budget.
Other direct expenses budget.
Budgeted income statement.
Activity-Based Costing in
a Service Firm
 Firms that use activity-based costing
attempt to shift as many costs as possible
out of the indirect cost pool and into direct
cost pools that can be specifically traced to
individual jobs.
 Remaining costs are separated into
homogeneous cost pools and allocated to
individual jobs via separate allocation bases
for each pool.
Activity-Based Costing vs.
Simplified Costing
 Activity-based costing is worthwhile to
implement when different jobs use
resources in different proportions.
 Should be a cost/benefit decision as to
whether to implement a more
sophisticated costing system.
Simplified Job Costing for
a Law Firm
Client A
Client B
Professional labor cost:
50 hours X $50
$2,500
75 hours X $50
$3,750
Professional support:
50 hours X $25
1,250
75 hours X $25
Total
1,875
$3,750
$5,625
Activity-Based Costing for
a Law Firm
Client A
Client B
Partner labor cost:
40 hours X $100
$4,000
5 hours X $100
$500
Associate labor cost:
10 hours X $37.50
375
70 hours X $37.50
2,625
Legal support:
50 hours X $20
1,000
75 hours X $20
1,500
Secretarial support:
40 hours X $25
1,000
5 hours X $25
Total
125
$6,375
$4,750
The Four Categories of a
Balanced Scorecard




Financial
Customer
Internal Business Processes
Learning and Growth
Financial




Return on Investment (ROI)
Operating Income
Gross Margin Percentage
Revenue from New Products
Customer




Number of New Customers
Market Share
Percentage of Products Returned
Customer Satisfaction Surveys
Internal Business
Processes
 Percentage of On-Time Deliveries
 Percentage of Defect-Free Units
Produced
 Time Taken to Replace Defective
Products
 Time From Receipt of Order to Shipment
Learning and Growth
 Employee Turnover
 Number of Employee suggestions
 Percentage of Employees Trained in
New Processes
 Percentage of Compensation Based on
Employee/Team Performance