Outline
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Service organisations
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Value chains
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Service production environments
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Costing systems for services
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Estimating service costs and the flow of costs
in service firms
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Uses of service costing
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Retail and wholesale costing
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What are overhead costs?
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Allocating indirect costs
Outline (cont.)
Outline (cont.)
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•Allocating overhead costs to productsAllocating overhead costs to products
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•Evaluating the allocation alternatives Evaluating the allocation alternatives
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•Issues in estimating overhead ratesIssues in estimating overhead rates
Service Organisations
Service Organisations
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•Organisations that:Organisations that:
-deliver help, utility or caredeliver help, utility or care
-provide an experience, information or other provide an experience, information or other
intellectual content
intellectual content
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•The majority of the value is intangible rather The majority of the value is intangible rather than residing in physical productsthan residing in physical products
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•Service organisations dominate many Service organisations dominate many economieseconomies
Differences Between Service and Manufacturing
Differences Between Service and Manufacturing BusinessesBusinesses
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•Most service outputs are intangibleMost service outputs are intangible
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•Service outputs are often heterogeneousService outputs are often heterogeneous
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•Services are consumed as they are producedServices are consumed as they are produced
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•Services are perishable and cannot be storedServices are perishable and cannot be stored
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•Some services include some physical or Some services include some physical or tangible aspectstangible aspects
Other Aspects of Services
Other Aspects of Services
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•Merchandising firms (such as retailers and Merchandising firms (such as retailers and wholesalers) are part of the service sectorwholesalers) are part of the service sector
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•The value chain for most business includes a The value chain for most business includes a customer service segmentcustomer service segment
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•Many companies outsource services due to Many companies outsource services due to technological advances or cost reductiontechnological advances or cost reduction
Flow of Costs in Service Firms
Flow of Costs in Service Firms
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•Often no inventory to valueOften no inventory to value
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•Costs are generally shown as a line item in Costs are generally shown as a line item in operating expenses, not in cost of goods soldoperating expenses, not in cost of goods sold
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•Costs in upstream or downstream areas may Costs in upstream or downstream areas may be included as overhead costsbe included as overhead costs
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•Individual service costs are usually not Individual service costs are usually not accumulated separatelyaccumulated separately
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•Service costing systems are created to Service costing systems are created to support management needs rather than support management needs rather than financial reportingfinancial reporting
Value Chain in Service Firms
Value Chain in Service Firms
Value Chain in Merchandising Firms
Value Chain in Merchandising Firms
Professional Service Firms
Professional Service Firms
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•Staffed by professional staff who provide Staffed by professional staff who provide individual services to customersindividual services to customers
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•Relatively few customersRelatively few customers
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•Most activity is in the front officeMost activity is in the front office
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•Service delivery involves people more than Service delivery involves people more than equipmentequipment
-Examples: medical, legal, accounting, management Examples: medical, legal, accounting, management consulting, engineering and architectural businessesconsulting, engineering and architectural businesses
Mass Service Entities
Mass Service Entities
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•Many customers, requiring limited staff time and Many customers, requiring limited staff time and limited customisationlimited customisation
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•Staff are mainly nonStaff are mainly non–professionalprofessional
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•Most of the value is in the back officeMost of the value is in the back office
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•The service may involve equipmentThe service may involve equipment
-Examples: bus companies, post offices, electricity Examples: bus companies, post offices, electricity suppliers and public service organisationssuppliers and public service organisations
Service Shops
Service Shops
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•A midway between professional and mass A midway between professional and mass service businesses in terms of the number of service businesses in terms of the number of customers, staff time and degree of customers, staff time and degree of customisationcustomisation
-Examples: hotel chains, banks, cafés, print shops and Examples: hotel chains, banks, cafés, print shops and car repair workshopscar repair workshops
Types of Service Entities
Types of Service Entities
Factors Affecting the Decision to Implement Service
Factors Affecting the Decision to Implement Service CostingCosting
Job, Process and Hybrid Costing in Service Entities
Job, Process and Hybrid Costing in Service Entities
Job Costing Systems for Professional Service Firms
Job Costing Systems for Professional Service Firms
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•Professional service firms have limited Professional service firms have limited
material or equipment and produce no
material or equipment and produce no
inventories
inventories
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•Job costing is suitable for professional Job costing is suitable for professional
service firms
service firms
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•Relatively few clientsRelatively few clients
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•Production process is ‘client’ uniqueProduction process is ‘client’ unique
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•Professional labour is the primary costProfessional labour is the primary cost
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•Labour cost can be traced to jobLabour cost can be traced to job
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•Job billing may be usedJob billing may be used
Process Costing Systems for (Some) Mass Services
Process Costing Systems for (Some) Mass Services
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•Produced in large quantitiesProduced in large quantities
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•Production processes are repetitiveProduction processes are repetitive
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•Different services consume similar resourcesDifferent services consume similar resources
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•Substantial indirect labourSubstantial indirect labour
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•Costs tracked directly to productionCosts tracked directly to production
BUT scope for discretion in service provision
BUT scope for discretion in service provision means process costing may be less accurate means process costing may be less accurate than in a manufacturing settingthan in a manufacturing setting
Hybrid Costing Systems for Service Shops and (Other)
Hybrid Costing Systems for Service Shops and (Other) Mass ServicesMass Services
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•Suitable for some service shops and some Suitable for some service shops and some mass service entitiesmass service entities
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•Varying degrees of customisation, Varying degrees of customisation, standardisation of processes and traceability of standardisation of processes and traceability of costscosts
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•Costing systems will vary on a continuum Costing systems will vary on a continuum
from job costing to process costing
from job costing to process costing
When Should Firms Estimate Their Service Costs?
When Should Firms Estimate Their Service Costs?
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•There are no external reporting requirements to There are no external reporting requirements to estimate service costsestimate service costs
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•Service costing systems should be Service costing systems should be implemented where benefits exceed costsimplemented where benefits exceed costs
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•Cost and benefits are influenced by: Cost and benefits are influenced by:
-complexity of the costing systemcomplexity of the costing system
-accuracy of the service cost informationaccuracy of the service cost information
-relevance of service cost informationrelevance of service cost information
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