The use of service/operation costing

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The use of service/operation costing

Situations where the use of service/operation costing is appropriate

Service/operation costing can be used by companies operating in a service industry or by companies wishing to establish the cost of services carried out by some of their departments. 

Service costing is used in the following circumstances

  1. A company operating in a service industry will cost its services, for which sales revenue will be earned;

    examples are electricians, car hire services, road, rail or air transport services, hairdressers, banks, colleges and hotels.

  2. A company may wish to establish the cost of services carried out by some of its departments, 

    i.e. establishing a specific cost for an internal service. For example costs of the vans or lorries used in distribution, the costs of the computer department, or the staff canteen.

Service organisations do not make or sell tangible goods. In fact, the output of service organisations/departments can be described as:

  • Simultaneous production and consumption
    Heterogeneity – the nature and the standard of the service will be variable
    Intangibility
    Perishability – cannot be stored

Service costing has two basic purposes

  • To control the costs in the service department

  • To control the costs of the user departments and prevent the unnecessary use of services.

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