Chapter 9
Cost Accounting
For Service Businesses
and the Balanced Scorecard
1
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
activity-based costing.
LO5 Prepare a balanced scorecard for
various business entities.
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Characteristics of a Service
Business

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Little or no inventory.
Labor costs often comprise three-fourths
or more of the total costs.
As of June 2009, service businesses
employed roughly 85% of U.S. non-farm
workers and this percentage is expected
to grow.
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Job Order Costing for
Service Businesses

When the amount and
complexity of services
provided varies substantially
from customer to customer, a
job order costing system
should be used, just as the
manufacturers of
differentiated products use
such a system.
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Job Order Cost Sheet

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The basic document used to accumulate
costs for a service business.
Indicates labor time, labor rate, and the
total cost for each labor category worked.
Because direct labor cost is the single
largest cost to the firm, the amount of
direct labor cost determines the amount of
overhead charged to each job.
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Budgeting for Service
Businesses

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Revenue budget.
Labor budget.
Overhead budget.
Other direct expenses budget.
Budgeted income statement.
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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.
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Allocations Using Simplified
Costing Versus Activity-Based
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.
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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
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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 professional hours X $20
1,000
75 professional hours X $20
1,500
Secretarial support:
40 partner hours X $25
1,000
5 partner hours X $25
Total
125
$6,375
$4,750
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The Four Categories
of a Balanced Scorecard

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Financial
Customer
Internal Business Processes
Learning and Growth
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Financial

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Return on Investment (ROI)
Operating Income
Gross Margin Percentage
Revenue from New Products
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Customer

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Number of New Customers
Market Share
Percentage of Products Returned
Customer Satisfaction Surveys
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Internal Business Processes
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Percentage of On-Time Deliveries
Percentage of Defect-Free Units Produced
Time Taken to Replace Defective Products
Time From Receipt of Order to Shipment
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Learning and Growth

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Employee Turnover
Number of Employee Suggestions
Percentage of Employees Trained in
New Processes
Percentage of Compensation Based on
Employee/Team Performance
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Guidelines for a Good
Balanced Scorecard

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To be effective the performance
measures must be consistent with the
company strategy.
There should not be too many
performance measures.
Employees should be able to understand
and have control over the performance
measures by which they are evaluated.
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