Service Costing
Areas to be covered:
 INTRODUCTION
 THE USE OF SERVICE COSTING
 FEATURES OF SERVICE COSTING
 SERVICE COSTING COMPARED WITH PRODUCT COSTING
 THE UNIT COST MEASUREMENT
Service Costing:
Service costing is a costing method concerned with establishing the cost, not for items of
production, but the cost of services provided. It is also called operation or function costing.
Profit seeking service organisations include accountancy firms, law firms, transport
companies, hair salons, banks and hotels. Non-profit organisations include hospitals, schools
and libraries.
Service Costing:
THE USE OF SERVICE COSTING
Service costing is used in:
• External Services: provided by a company in a service industry, for example car hiring
services, transport services, courier services, etc.
• Internal Services: carried out by internal departments of a company, for example the
costs of the vans or Lorries used in distribution departments, the costs in computer
departments or costs for staff canteens.
Features of Service Costing:
• Intangibility: Output is ‘intangible’ rather than a tangible product.
• Perish ability: Services are not ‘storable’ and cannot be bought in bulk.
• Simultaneity: Service is performed and consumed simultaneously.
• Heterogeneity: Nature and output is never standardized as human input is major element
of a service
• Cost nature: In a service industry sector a higher proportion of costs incurred are indirect
as compared to direct
• Composite cost units: More than one cost units like cost per patient/night, cost per
passenger/mile.
THE UNIT COST MEASUREMENT
It is difficult to define a reasonable service cost unit. Frequently, a composite cost
unit may be deemed more appropriate. Hotels, for example, may use the
'occupied bed-night' as an appropriate unit for cost. Other typical cost units that
can be used include:
Services
Composite Cost unit
Transport company
Passenger/kilometer ton/mile or kilometer
Education
Student/subject
Hospital
Patient/night
Canteen
meals served
SERVICE COSTING COMPARED WITH PRODUCT COSTING
• Labour element in service costing is more prominent than material used
• There is no standardized process for recording of material, labour and other expenses.
These all vary subject to nature of service
• Not all services are revenue generating; customer service centres, distribution facility,
libraries etc are main examples. So purpose of service costing may not necessarily be
establishing a profit or loss attributable to that service but rather to provide the
management with costs associated and efficiency and effectiveness of service being
provided.
There are two measures used in service cost calculation:
ℎ
:
ℎ
$
ℎ
% :
ℎ
ℎ
100
Example 1: The following information is available for Rose Motel for the last 20 day period.
Number of rooms available per night
45
Percentage occupancy achieved
90%
Room servicing cost incurred
$30,000
Required: What is the room servicing cost per occupied room-night last period?
Solution:
Example 2: A private hospital has 25 bedrooms each accommodating one patient. The
average length of stay is five days per patient. In a 30 day period there were 105 patients.
What was the bed occupancy for the period?
Solution:
Example 3: A Private City Bus Company (PCBC) has 30 buses, each bus has capacity of 25
passengers. Each bus on average completed 5 rounds a day. On a specific day, 3,000
passengers has travelled . Calculate average passenger occupancy for PCBC per bus?
Solution:
Practice Questions