Service and operation
costing
Service costing
Service costing is used when an organisation or
department provides a service.
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 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.
Examples of service industries include the following:
* hotel;
* college;
* hairdressers;
* clinic.
We can ask the following questions about, e.g. the hotel industry.
* Is output in the form of performance?
Yes – the hotel provides a bed and possibly breakfast. You will judge
the service of the hotel on how comfortable the bed was and how
tasty the breakfast was. You cannot really ‘touch’ the performance of
the hotel.
* Is the standard of the service variable?
Yes – your stay at the hotel may vary each time you stay there. You
may not have such a comfortable bed and your breakfast may not be
very tasty each time you visit.
The standard of service is therefore variable because lots of different
staff work at the hotel – the standard of the service you receive may
depend on which staff are on duty.
* Can you inspect the services in advance of receiving
them?
In general, you cannot sleep in a hotel bed or eat breakfast
at the hotel until you have booked in and made a contract
to buy the services of the hotel.
* Can the hotel services be stored?
No! You cannot take your bed away with you, nor can you
keep your breakfast – it must be eaten during the
morning of your stay.
Unit cost measures for service costing
One of the main difficulties in service costing is the
establishment of a suitable cost unit.
In some situations it may be necessary to calculate a
composite cost unit.
* A composite cost unit is more appropriate if a service is a
function of two variables.
Examples of composite cost units are as follows:
– tonnemiles for haulage companies;
– patientdays for hospitals;
– passengermiles for public transport companies;
– guestdays for hotel services.
Cost per service unit
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 it is sometimes necessary to classify
costs as being fixed, variable or semivariable.
* If costs are semivariable, it is necessary to separate
them into their fixed and variable.
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.
Service cost analysis
If organisations in the same service industry use the same
service cost units then comparisons between the
companies can be made easily, as the following example
of a service cost statement shows.
Example
The following figures were taken from the annual accounts of two
electricity supply boards.
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