Chapter 11: Job, Batch, Process and Service Costing
Job Costing
Job costing is the process of calculating the costs of a specific job.
Job costing is where a unique item is being made and costs can be specifically traced into
that item.
Job costing is an appropriate system for deriving the cost of unique or specific customer orders. It is
helpful in industries where each job is different (and incurs different costs).
A job is a cost unit that consists of a single order or contract. Compared to continuous production,
it is usually limited in scope and period.
For example, a building company may contract to construct an office building for a client. The
office building will be a unique product specific to that customer. It will have a unique cost,
according to the materials, labour and other expenses involved in creating the product.
The job could be large (such as building a house or a ship) or small (such as constructing a
set of shelving for a room). A job may be a single physical product, several products or a service –
for example; a decorating job carried out by a decorator for a customer. It may also include a
combination of products and services.
Often jobs are given identifying numbers, such as contract numbers or simply job numbers.
All relevant costs are labelled with that number and the total costs can be accumulated.
The total cost is made up of the following:
 Material costs:
 Labour costs:
 Other expenses:
The critical difference between a job and continuous production is that the output of each job is
uniquely identifiable, compared to the homogeneous result of continuous production, where every
cost unit is identical.
Job Costing Process
Stage
Customer specifies
requirements
Specification and
delivery date agreed
Supplier estimates
pricing
Pricing agreed
Job is scheduled for
production
Description
The customer describes desired requirements and specifications to
the supplier.
Customer and supplier agree on requirements, specifications and
timeframe of delivery.
The supplier calculates the price and negotiates with the customer.
Various methods may be used to calculate the price, including
markup, where a profit is added to the total cost to arrive at the
selling price.
Supplier and customer agree on a price.
The job is scheduled for production by the supplier.
Supplier sets up unique job cost codes and accounts.
Once a job has been agreed upon, the company carrying out the job carries out the following steps:
1. Each job is given a unique code
2. All direct costs associated with the job are coded directly to the job code
3. A share of the overheads is calculated and charged to the job
4. The job cost is calculated, usually on a job cost card.
5. The difference between the actual costs and the agreed selling price is the profit.
Job costing is collecting all the cost information relating to that job.
Job cost card
Direct materials
Direct labour
Direct expenses
Total direct costs
Production overhead
Total production costs
Administration overhead
Selling overhead
Total job cost
$
X
X
X
X
X
X
X
X
X
The cost card will be used to create a budget for the job. The actual costs will be recorded in the
accounting system.
Illustration: Job Costing Process
Step 1: Job cost card
When planning a job, the expected material, labour costs, and other estimated direct expenses and
overheads are collected on a job cost card.
Job cost card
$
$
Direct materials
800
Direct labour
500
Direct expenses
1,800
Total direct (prime) cost
3,100
Production overhead
1,000
Total production cost
4,100
Administration overhead
600
Selling and distribution overhead
300
Cost of sales
5,000
Step 2: Budget
The job cost card is used to inform a budget for the job.
The budget in this example would be $5,000
Step 3: Job Account
The actual costs for the job are recorded in a job account.
Job account
$
$
Direct materials
900
Cost of sales 5,250
Direct labour
600
Direct expenses
1,900
Production overhead at budgeted rate 1,100
Administration overhead
500
Selling and distribution overhead
250
5,250
5,250
Note that the actual job costs are different from the budget.
Step 4: Comparison with Budget
The figures from the job account are compared to the budget so that the manager can identify any
variances and see if the job was completed on budget.
Budget Actual Variance
$
$
$
Total direct (prime) cost
3,100 3,400
(300)
Production overhead
1,000 1,100
(100)
Total production cost
4,100 4,500
(400)
Administration overhead
600
500
100
Selling and distribution overhead
300
250
50
Cost of sales
5,000 5,250
(250)
 If a job is completed over budget, the profit will be less than expected
 If a job is completed under budget, the profit will be more than expected.
Example 1
Job 555 required 20 kgs of a material in stores which cost $15/kg, and also a special component had
to be bought at a cost of $150. 30 hours labour were spent on the job where the employees were
paid at $9/hour. In addition, 3 hours was spent by a supervisor who is paid at $15/hour. Overheads
are absorbed at the rate of $4/labour hour.
Calculate the total absorption cost of the job.
Solution:
Material cost = (20kg*15) + 150 =
450
Labour cost = (30hrs*9) + (3hrs*15) =
315
Overheads = (30 + 3)*4 =
132
Total job cost =
$897
Cost-Plus Pricing
The cost-plus pricing method adds the required profit to the total cost of the product or job.
The required profit may be expressed as:
 Mark-up %
A percentage of the cost. i.e. cost = 100%, profit = x%, selling price = (100+x)%
 Margin %
A percentage of the selling price. i.e. selling price = 100%, profit = x%
Example 2
a) T-Shirt Co has a job, Job A, with a total cost of $5,000.
Calculate Job A’s profit and selling price, with a profit markup of 20% on the total cost.
b) T-Shirt Co has a job, Job B, with a total cost of $5,000.
Calculate Job B’s profit and selling price, with a profit margin of 20%.
Solution
Example 3
a) The total cost of a job is $45,000. The markup is 30%. What is the selling price for this job?
b) The total cost of a job is $500,000. The markup is 15%. What is the selling price for this job?
c) The total cost of a job is $45,000. The profit margin is 30%. What is the selling price for this
job?
d) The total cost of a job is $500,000. The profit margin is 15%. What is the selling price for this
job?
Example 4
Example 5
Batch Costing
In batch costing several identical items are produced as a batch. Each batch will be given a number
(a batch code) so that costs can be traced into the batch. The batch costs can be averaged over the
units produced.
Batch costing is like job costing; the only difference is that the job’s output is several units rather
than a single unit. The units within a batch are homogeneous (identical to each other).
Batch costing is often used in manufacturing, especially where liquids or large numbers of a standard
item are made.
Examples of batches include:
 Computer chips – different memory sizes will be made in different batches
 Inks and dyes – different colours will be made in different batches
 T-shirts at T-Shirt Co – different t-shirts will be made in different batches.
The costs involved in producing a single batch (for example, 100 plain white t-shirts) are estimated
and collected to calculate the total batch cost. The cost per unit within the batch can then be
calculated using the following formula:
Cost per unit = total batch cost / number of units in a batch
Example 6
Batch 7777 used 2,000 kgs of a material in stores which cost $10/kg, and also 500 kgs of
special material that was bought in at $4/kg. 90 hours labour were spent in Department A where the
employees were paid at $12/hour, and 40 hours were spent in department B where employees are
paid at 10/hour. Overheads are absorbed at the rate of $3/labour hour.
900 units were produced.
Calculate the total absorption cost of the batch and each unit produced.
Solution:
Material cost = (2,000kg*10) + (500kg*4) = 22,000
Labour cost = (90hrs*12) + (40hrs* 10) =
1,480
Overheads = (90 + 40) * 3 =
390
Total batch cost
$23,870
Cost for each unit produced = 23,870/900 = $26.52 per unit
Example 7
A company manufactures buttons. Production of 500 green buttons, produced in Batch G24, had
the following costs:
Direct materials $800
20 hours of heating at $20 per hour
Direct labour
30 hours shaping at $15 per hour
The cost of hiring special safety equipment was $100.
Production overheads were absorbed at $9.60 per direct labour hour.
Selling and distribution overheads were $300.
What was the cost per unit (per button) for Batch G24?
Solution
Set-Up Costs
The equipment used for batches often needs to be cleaned and set up for the next batch to be
processed. This is because the next batch might require different production inputs and settings.
For example, a large-scale manufacturer might produce a batch of detergent and then clean and
reconfigure the same machinery to produce bleach.
Set-up costs can be high, so they are included in the batch cost as a direct expense.
Illustration
A company manufactures memory chips for phones. A customer has ordered 300 chips.
A standard batch of 100 chips has the following costs:
Direct materials $25
Direct labour
$10
Machine set up $100
The production overheads are $100 per labour hour. Labour is paid $20 per hour.
What is the cost of this customer order?
Solution
$
calculation Explanation
Direct material 75 $25 × 3
Each batch is 100 chips, so three batches are needed to
make 300 chips.
Direct labour
30 $10 × 3
The labour cost is taken from the costs per batch.
Direct expense 300 $100 × 3
Three batches would require set-up to be performed three
times.
Prime cost
405
Production
150 0.5 × 3 ×
Labour is paid at $20 an hour, and the cost per batch is $10,
overheads
$100
so each batch requires ½ an hour, and three batches are
needed for this order.
Total cost
555
The total cost for 300 chips is $555.
Cost per chip
= $555 ÷ 300
= $1.85 per unit
Reducing Set-Up Costs
 Keeping subsequent batches as similar as possible to the initial batch, minimising changes to the
set-up.
 Regular maintenance of production machinery, reducing downtime.
 Increasing batch size (without compromising quality) produces more units per set-up.
 Examining the set-up requirements and designing the process to reduce set-up costs and
downtime.
Managers regularly monitor the costs incurred by an organisation and take action to try to ensure
that the organisation is not spending more money than it needs to.
Some cost control strategies are as follows:
Action
Description
Identifying the highest costs of the business and managing
Focus on the highest costs and
their drivers (the activities that incur them) may lead to
what drives them.
substantial savings.
Reviewing supply chains and
Removing intermediaries from the supply chain saves costs
buying as close to the source
from the profit these intermediaries may earn.
as possible
To manage their associated costs, contracts should have fixed
Renegotiate contracts
terms and be renegotiated where favourable.
Investing in automation and advanced production techniques
Invest in mechanisation
reduces errors and costs associated with labour, which may be
retrained for higher-value tasks.
Where processes are labour intensive, business is sensitive to
Invest in training of labour
the performance and costs of labour. A high-quality, welltrained workforce will minimise error and turnover costs.
Remuneration methods should be examined to align them
Examine and improve
closely with the needs and objectives of the business, to avoid
remuneration processes
slack and align labour’s goals.
Examine the organisation's need for the proposed asset
Evaluate asset expenditure
expenditure and discuss alternatives that will satisfy that need
carefully
while minimising costs and risk.
Variances provide a breakdown of any deviations in costs
Examine variances and their
from expectations, so examining them and their causes will
relationships
provide insight into controlling costs.
Budgets are an excellent way to ensure costs do not exceed
Use budgets effectively
expectations, and advanced budgeting techniques assist
managers in examining the value of activities that incur costs.
Financial controls and authorisation procedures help ensure
Implement strong financial
that costs are only incurred for the organisation’s benefit and
controls
reduce incidences of leakages due to errors or fraud.
Process Costing - Introduction
Some organisations produce a large volume of production output through a continuous process –
for example, oil refining or chemical manufacturing. In this case, it is not practical to track the cost
of each output unit separately.
These organisations use a system called process costing. Under process costing, the unit cost of
production is calculated by dividing the total cost of the process by the output from the process.
Sometimes, the output from one process forms the material input for subsequent processes. For
example, crude oil goes through several refining processes before becoming petroleum.
Materials that have entered the production process but have not yet been output are part of the
work in progress.
Process costing deals with manufacturing that takes place as a continuous process.
Examples of industries using process costing are:
 Oil refining
 Chemical works
Because work carries on continuously, there are no batches as creating a batch implies that
you know when it starts and stops, and therefore what costs have gone into it.
In process costing, costs are worked out for periods: measure the costs that are used in a
period and the output produced in the period and you have a way of working out the cost per
unit.
Example 8: (An example of process costing without losses i.e. input units = output units)
Costs for July:
• Material costs = 100,000 units costing $20,000
• Labour costs = $10,000
• Overheads = $5,000
• Output produced in July = 100,000 units
Cost per unit = Input cost/Output = ($20,000 + $10,000 + $5,000)/100,000 = $0.35/unit
In a process account this would be:
Multiple Products
Multiple products produced from a process are known as joint products or by-products.
Term
Common
process
Split-off point
(separation
point)
Item
Process 1
Description
Joint products and by-products are two or more products that
come from a common process.
In this diagram, the common process is Process 1.
End of Process 1 Joint and by-products are created after a split-off point, or
(branches)
separation point, in the processing.
At the end of a common process, several different products
are formed.
Common costs Input
(pre-separation
costs)
Joint products Products A and
C
By-product
Product B
Further
processing
Process 2
For example, gasoline and kerosene are joint products from a
(common) oil refining process after the split-off point.
Getting one product without getting the other is impossible,
and the products are often produced in a fixed ratio.
Costs incurred before the split-off point are common costs.
The costs input into a process that produces multiple
products is known as common costs.
Common costs must be apportioned between joint products.
Products that are produced at the same time from the same
process.
Almost all of the process output’s sales value is from its joint
products.
In this diagram, assume that Products A and C are joint
products.
A product that is produced at the same time as joint products,
but has a significantly lower sale value, is a by-product.
Its value is so low that it is not worthwhile to undertake the
process for it. This sales value is usually subtracted from
common costs.
In this diagram, assume product B is a by-product.
The output of a process may be further processed into
another product.
The organisation must decide whether further processing of a
product is profitable.
This diagram shows that Product C can be added to Process 2
to create Product D.
Examples of By-Products
 Molasses from sugar refining: molasses can be sold to consumers for cooking and baking and
can also be used by manufacturers of drinks and animal feed.
 Sawdust from wood processing: sawdust can be used to create certain building materials.
 Straw from harvesting grains: straw can also be used for animal bedding and feed, to make hats,
or to create biofuels.
Common Cost Apportionment
A process’s common costs may be apportioned to joint products using the following methods:
 By physical measurement (quantity, weight, or volume)
 By market value
 By net realisable value
Example 9
Example 10
Example 11
Example 12
Process Costing – With Normal Losses
Many processes incur losses which are inevitable. For example, liquids evaporate or solids
are filtered out. Therefore, the units of GOOD OUTPUT are often not the same as the units
INPUT.
If you can’t make units without some losses, then the cost of that loss is spread over (or
absorbed) into the good units produced. The loss is just another cost on the way to good
production.
Formula:
Cost/unit =
costs for the period (or the input cost)
expected good output for the period
N/B: Expected good output = Input units – normal loss
Normal loss is a.k.a expected loss
Example 13: (When not selling the normal loss/Wastage):
1,000 units at $3.60/unit were input to a process and there was a 10% loss due to
evaporation. 900 good units should result and their cost per unit would be:
Solution:
Cost/unit =
costs for the period (or the input cost)
expected good output for the period
Costs for the period (or the input cost) = 1,000u * 3.6 = 3,600
Expected good output = Input units – normal loss
= 1,000u – (10%*1,000) = 900u
Cost/unit =
3,600
900
= $4 per unit
Sometimes the ‘lost’ material or waste can be sold as scrap. For example, in a saw-mill, sawdust can
be sold for various uses.
Example 14: (When selling the normal loss as scrap)
For example: 1,000 units at $4.00/unit were input to a process and there was a 20% loss
due to filtration. The materials filtered out could be sold for $0.50/unit.
800 good units should result and their cost per unit would be:
Solution:
Cost/unit =
costs for the period (or the input cost) – scrap value
expected good output for the period
Costs for the period (or the input cost) = 1,000u * 4 = 4,000
Scrap value = normal loss * selling price of the normal loss
= (20% * 1,000) * $0.50 = $100
Expected good output for the period = Input – normal loss
= 1,000 – 200u = 800u
Cost/unit =
4,000 – 100
800
= $4.875 per unit
In a ‘T’ account this would be shown as:
Example 15
3,000 units are input to a process and total costs amount to $9,000. 100 units are expected to
be lost and can be sold for $1 each.
What is the cost per unit of good output?
A £2.97
B $3.00
C $3.10
D $3.07
Workings:
Cost/unit =
costs for the period (or the input cost) – scrap value
expected good output for the period
Costs for the period (or the input cost) = 9,000
Scrap value = normal loss * selling price of the normal loss
= (100u) * $1 = $100
Expected good output for the period = Input – normal loss
= 3,000 – 100u = 2,900u
Cost/unit =
9,000 – 100
2,900
= $3.07 per unit
Example 16
In August, 2,000 kgs of a material were introduced to a process at a cost of $5/kg, and
200 hours labour were spent at a cost of $12/hour. Overheads are absorbed at the rate of $3/
labour hour. Normal losses are incurred at the rate of 5% of input and lost units can be sold for $0.8
per kilogram 1,900 units were produced.
Calculate the total absorption cost of the good output and also show the process account.
Solution:
Cost/unit =
costs for the period (or the input cost) – scrap value
expected good output for the period
Cost for the period = (2,000kg*5)+(200hrs*12)+(200hrs*3) = $13,000
Scrap value = normal loss * selling price of the normal loss
= (5%*2,000kg) * 0.8 = $80
Expected good output for the period = Input – normal loss
= 2,000kg – (5%*2,000) = 1,900kg
Cost/unit = 13,000 – 80
1,900
= $6.8 per unit i.e. total absorption cost of the good output.
Dr.
Process account
Cr.
Material cost = 2,000*5 = 10,000.00 Normal loss = 100*0.80 =
80.00
Labour cost = 200*12 =
2,400.00
Overheads = 200*3 =
600.00 To finished goods = 1,900*6.8 12,920.00
13,000.00
13,000.00
Process Costing – With Abnormal Losses and Gains
In terms of normal loss (i.e. normal loss being the benchmark):
 When actual loss > normal loss (or expected loss) = abnormal loss
 When actual loss < normal (or expected loss) = abnormal gain
Alternatively:
In terms of normal output or expected output (i.e. normal output being the benchmark):
 When actual output > normal output (or expected output) = abnormal gain
 When actual output < normal output (or expected output) = abnormal loss
Example 17
In August, 2,000 kgs of a material were introduced to a process at a cost of $6/kg, and 200 hours
labour were spent at a cost of $15/hour. Overheads are absorbed at the rate of $4/
labour hour. Normal losses are incurred at the rate of 5% of input and lost units can be sold for $0.9
per Kilogram. 1,800 kgs were produced.
Calculate the total absorption cost of the good output, the treatment of any abnormally
lost or gained units, and also show the process account.
Solution:
Cost/unit =
costs for the period (or the input cost) – scrap value
expected good output for the period
Cost/unit =
(2,000*6)+(200*15)+(200*4) – (5%*2,000*0.9)
2,000 – (5%*2,000)
= $8.268 per unit
Expected output = 2,000 – (5%*2,000) = 1,900kg
Actual output = 1,800kg
Abnormal loss = 1,900 – 1,800 = 100kg
The abnormal loss is valued at cost per unit of the good output i.e. 100kg * 8.268 = $826.8
Dr.
Process account
Cr.
Material cost = 2,000*6 = 12,000.00 Normal loss = 100*0.90 =
90.00
Labour cost = 200*15 =
3,000.00 Abnormal loss = 100*8.268 =
826.80
Overheads = 200*4 =
800.00 To finished goods = 1,800*8.268 14,882.40
15,800.00
15,799.20
Example 18: (Assignment)
In May, 5,000 kgs of a material were introduced to a process at a cost of $9/kg, and labour and
overheads amounting to $25,000 were also contributed.
Normal losses are incurred at the rate of 10% of input and lost units can be sold for $1 per
Kilogram. 4,700 kgs were produced.
Calculate the total absorption cost of the good output and also show the process account.
Solution:
Cost/unit =
Cost/unit =
costs for the period (or the input cost) – scrap value
expected good output for the period
(5,000*9)+(25,000) – (10%*5,000*1)
5,000 – (10%*5,000)
= $15.444 per unit
Expected good output = 5,000 – (10%*5,000) = 4,500kg
Actual output = 4,700kg
Abnormal gain = 200kg, Valued at 200kg * 15.444 = $3,088.80
Dr.
Process account
Cr.
Material cost = 5,000*9 = 45,000.00 Normal loss = 500*1 =
500.00
Labour cost & overheads 25,000.00
Abnormal gain
3,088.80 To finished goods = 4,700*15.444 72,586.80
73,088.80
73,086.80
Example 19
Example 20
Input costs to a process amount to $120,000. It is expected that 1,000 units of good output
will be produced and that normal losses will be 200 units. In fact, only 900 units of good
output were produced. All losses, whether normal or abnormal can be sold for $5/unit.
What is the cost per unit of good output and what is its inventory value?
A Cost per unit = $131.67; inventory value = $118,500
B Cost per unit = $132.22; inventory value = $118,000
C Cost per unit = $119; inventory value = $107,100
D Cost per unit = $100; inventory value = $90,000
WORKINGS
Cost/unit =
costs for the period (or the input cost) – scrap value
expected good output for the period
Cost/unit =
120,000 – (200*5)
1,000
= $119 per unit
Inventory value = value of actual output = 900u * 119 = $107,100
Example 21
Which one of the following statements is true?
A. The number of units abnormally lost does not affect inventory value
B. The number of units abnormally lost or gained does not affect the cost per unit of
good inventory.
C. The number of units abnormally lost or gained does affect the cost per unit of good
inventory.
D. Abnormally gained production is valued at scrap value.
Example 22
Normal losses are 10% of input.
400 units are produced.
There are 50 abnormally lost units
Lost units have no sales value.
Input costs = $120 per unit input
What is the cost per unit produced?
A $150.00
B $120.00
C $133.33
D $118.52
WORKINGS
Actual output = 400u
Expected output = 400 + 50 = 450u
= 90%
?
= 100%
Input = 100% = 100/90 * 450 = 500u
Input cost = 500u * 120 = 60,000
Cost/unit =
costs for the period (or the input cost) – scrap value
expected good output for the period
Cost/unit =
60,000 – 0
450
= $133.33
Process Costing – with closing work-in-progress
As explained above, in process costing discrete batches are not produced and instead costs and
output are measured for periods. This can mean that at the end of the period some items are not
completed and remain partially finished i.e. work-in-progress.
Costs will have gone into both completed units and the work-in-progress and therefore have to be
averaged over all of those units.
To account for partially completed units i.e. the WIP, the concept of equivalent units is used.
Example 23
The concept of equivalent units says, for example, that 100 units 60% complete is equivalent
to: 100 x 60% = 60 units completely produced.
For example, in a month, resources enough for 1,100 units and amounting to $12,360 have
been used in production and have resulted in 1,000 completed units plus 100 units in work-inprogress 30% complete.
Production in equivalent unit terms =
1,000 wholly done + the equivalent of 100units x 30% wholly done = 1,030 units.
Cost/unit = Input cost/ Production in equivalent unit terms
Cost/unit = $12,360/1,030 = $12.
In a ‘T’ account this would be represented as:
Example 24
In a month, 4,600 units are input. Total costs are $10,000. At the end of the month, 4,000 complete
units are output and 600 units are 35% complete.
What is the cost per equivalent unit?
A $2.17
B $2.38
C $2.28
D $2.50
Workings:
Cost/unit =
Input cost
Production in equivalent unit terms
Cost/unit =
10,000
4,000 + (35%*600)
= $2.38
Example 25
In December 23,000 kgs of a material were introduced to a process at a cost of $6/kg, and 300
hours labour were spent at a cost of $10/hour. Overheads are absorbed at the rate of $5/labour
hour. 21,000 units were completed and 2,000 units were in closing inventory 40% complete.
Calculate the total absorption cost of the completed output and the work-in-progress and
also show the process account.
Solution:
Cost/unit =
Input cost
Production in equivalent unit terms
Cost/unit =
(23,000*6)+(300*10)+(300*5)
21,000 + (40% * 2,000)
= $6.54 per unit
Service Costing
 This looks at costing services, such as providing transport or haulage.
 A particular characteristic of service costing is that it often requires the use of composite cost
units. For example, if costing a bus service, you would be interested in the cost per passenger
kilometre; if costing haulage you would be interested in cost per tonne kilometre.
 Composite units are essential because if you wanted to estimate, say a haulage cost that should
be charged, it will depend on both weight and distance.
 The costs are mostly overheads i.e. indirect costs

Providers of services generally offer customers expertise or the use of facilities. There is usually
no physical product to take home (although the service provider might furnish something to
show that the service has been received, such as a report, statement, receipt or bill).
Some examples of service providers are:
 Accountancy firms: providing audit services
 Banks: providing financial services such as bank accounts, loans and credit
 Dentists: providing tooth cleaning services
 Universities: providing an education
 Lawyers: providing legal expertise and advice.
Characteristics of Services
Characteristic
Description
Intangibility
services are not physical
Perishability
services cannot be stored
for future use
Inseparability
(Simultaneity)
the service provider
cannot be separated from
the service
Inconsistency
(Heterogeneity or
variability)
each instance of the
service is unique
Involvement
No transfer of
ownership
Lawyer example
The lawyer’s arguments in court are not a
physical item.
A lawyer’s arguments in court cannot be
saved and stored for later use. They are only
relevant at this moment for this audience.
the lawyer cannot be separated from the
services they are providing.
Every case and client is different, so each
time the lawyer is in court, they will use a
unique approach to represent their client.
the customer is involved in The client is vital to the legal case – it
the service delivery.
wouldn’t exist without them.
The service is not owned,
The lawyer’s services for executing a legal
and cannot be sold to a
case cannot be sold to a third party.
third party.
Classify the items below as either a good or a service.
Classification
Item
(Goods or Services)
Shampoo
Goods
Pillow
Goods
Haircut
Service
Stay at hotel
Service
Childcare
Service
Bicycle
Good
Theatre performance Service
Bus journey
Service
Textbook
Good
Language class
Service
Example 26
Total annual cost of running a lorry fleet = $80,000
Jobs:
Required: What is the cost per kg-km of transport?
Solution:
Job Weight(kg) Distance(km) kg-km
1 5,000.00
200 1,000,000.00
2 10,000.00
500 5,000,000.00
3 7,000.00
400 2,800,000.00
4 12,000.00
600 7,200,000.00
Total kg-km
16,000,000.00
Cost per kg-km of transport = Total cost/Total kg-km
= 80,000/16,000,000 =
Example 27
$0.005 per kg-km
Service Organisations and Internal Services
Service organisations are companies and not-for-profit organisations which sell or provide services
to customers.
However, services are also provided within service organisations and those selling goods. These are
service departments or cost centres, for example:
 Maintenance: repairs and upkeep of property and machines
 Libraries: organisations may have knowledge resources available to staff

Canteens: factories and many government organisations provide subsidised meals for
workers.
These are internal services.
Proliferation of Service Organisations
As economies develop, there is a trend towards higher numbers of service organisations rather than
manufacturing organisations. Therefore, knowledge and understanding of service costing will be
critical to a management accountant’s work.
Problems in Service Costing
Challenge
Lawyer example

Difficult to identify a cost unit to which costs
are allocated.


Indirect costs are often a more significant
percentage of a service’s cost than a physical
product. This makes a meaningful and fair
allocation of shared costs necessary.



The number of inputs for each cost unit may
be unique.
A court case often involves multiple
activities: client interaction, paperwork,
court appearances, etc., and may be
performed by various staff.
It is not easy to meaningfully allocate
costs and price the service.
a lawyer’s office space will probably be
expensive (especially in a prime location.
Lawyers might incur extensive
entertainment and administrative support
expenses.
These costs need to be allocated to each
legal case on a fair basis.
Each legal case handled by the lawyer will
take a different amount of time and
require different resources and support
from the firm.
Service Cost Units
Cost Unit
Description
Example
Simple cost
Service is homogeneous and
 Haircut per customer
unit
provided to one customer at a
 Gigabyte of mobile data
time.
 Car wash session
 Subscription fee
Composite cost Made of two parts related to
 Hotel Room-night
unit
the service’s extent.
 Hospital bed-night
 Charge-out rates (associate hour or
partner hour)
Complex
services
(by job or
engagement)
Service is unique,
personalised, and complex,
with many cost elements.
It may include both simple
and composite cost units.



Cost to argue a legal case in court
Contractor services for
construction/refurbishment of
buildings.
Other complex service provisions
(maintenance contracts, etc.)
Illustration: Select the most appropriate cost unit for the organisation.
Organisation Composite cost unit
School
Student-semester
Hospital
Bed-day
Bus service
Passenger-kilometre
Service cost card
A service cost card would be like a job cost card, with each cost element separately identified.
$
$
Direct materials (medicine)
500
Direct labour (nurses and doctors)
1200
Direct expenses
0
Total direct (prime) cost
1700
Service overhead (hospital rent, cleaning)
200
Total service cost
1900
Administration overhead
100
Cost of service
2000
It is estimated by dividing the total budgeted costs for the year by the number of hospital beds to get
the cost per bed and then by 365 to get the cost per bed per day.
Indirect costs (overheads) relating to the service may be calculated using absorption costing to show
the total service costs.
The following formula is used to calculate the cost per service unit:
Calculating Total Cost per Service Unit
The following is an example of how to approach calculating the total cost of a night’s stay at a hotel.
The composite cost unit of occupied room-night is used.
Cost
Charge to cost
Examples
Description
element
unit
Direct costs
Only incurred if a
Directly charged
 Toiletries
room is occupied.
to cost unit.
 In-room beverages
Other
service
costs
Overheads









Air-conditioning
Newspaper
Breakfast
Room turnover (cleaning)
Laundry
Facilities (pool, gym,
restaurant, etc.)
Shared services (cleaning,
maintenance, room
amenities, concierge,
baggage handling)
Administrative
(management salaries)
Property costs (leases,
licenses, etc.)
Usually fixed in
nature, they need to
be apportioned
reasonably.
They are charged
to cost units on a
reasonable basis.
Cost / total
estimated roomnights
Usually fixed in
nature, it needs to be
apportioned
reasonably.
They are charged
to cost units on a
reasonable basis.
Cost / total
estimated roomnights
NB:
If a hotel has 10 rooms with a 70% yearly occupancy rate, the number of room-nights would be:
= 10 ×365 × 70%
= 2,555 room-nights per year.
If fixed hotel costs are $63,875 per year, the cost per room-night would be:
= 63,875 ÷ 2,555
= $25 per room-night
Illustration
a) A hospital has 100 beds. In one week, the average bed occupancy was 67%. The cost of
running the hospital for the week was $90,000.
What was the cost per patient per night for the week?
b) A school has 250 students. In one year, the cost of running the school is $880,750.
What was the cost per student per year?
c) A local government is responsible for 40,000 kilometres of roads. The maintenance costs for
the year were $350,000.
What was the maintenance cost per kilometre per year?
Solution
a) Cost per patient-night
= $90,000 / (100 nights × 7 days × 67% occupancy)
= $90,000 / 469
= $192 per patient-night
b) Cost per student-year
= $880,750 / 250
= $3,523 per student-year
c) Maintenance cost per kilometre-year
= $350,000 / 40,000
= $8.75 per kilometre-year