18859sm_finalnew_cp7 - 7 Costing of Service Sector LEARNING...

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7 Costing of Service Sector LEARNING OBJECTIVES : After finishing this chapter, you will be able to understand and appreciate the peculiarities involved in the costing of service sector. Through this chapter you will gain an understanding as to the various methods applied by service sector entities to determine their unit costs. 7.1 INTRODUCTION Service sector companies provide their customers with services or intangible products. The activities of service sector may be used for both: (i) Provision of services to outside customers (ii) Provision of services internally (i.e. captive consumption). The types of services that may be provided, by service sector are of diverse nature and have their own peculiarities and requirements in respect of the cost accounting treatment, however, the general principles of costing discussed in earlier chapters relating to manufacturing sector also apply to service sector. 7.2 MAIN CHARACTERISTICS OF SERVICE SECTOR (i) Activities are labour intensive: Due to their inherent nature, the activities of service sector are generally labour intensive. The direct material cost is either small or non- existent. The labour cost (i.e. salary and wages) constitutes a significant portion of the total operating costs of a service sector entity. For example, cost of stationery used by a professional consultant for expressing an opinion in black and white, for a client will be small or even non existent in case he gives verbal opinion. In the preceding example direct labour cost (i.e. the salary of the consultant) constitutes a significant portion of the total operating cost as compared to the material cost which constitutes a negligible portion. (ii) Cost-unit is usually difficult to define: The selection of cost unit for service sector is relatively difficult to ascertain as compared to the selection of cost unit for manufacturing sector.
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Advanced Management Accounting 7.2 The following table provides some examples of the cost units for service sector. (A) To External Customers Cost Unit (i) Hotel Bed nights available, Bed night occupied (ii) School Student hours, Full time students (iii) Hospital Patient per day, Room per day (iv) Accounting firm Charged out client hours (v) Transport Passenger km., quintal km. (B) Internal services Cost Unit (i) Staff canteen Meals provided, No. of staff (ii) Machine maintenance Maintenance hours provided to user department (iii) Computer department Computer time provided to user department (iii) Product costs in service sector: Costs are classified as product or period costs in manufacturing sector for various reasons viz. (i) To determine the unit manufacturing costs so that inventories can be valued and the selling prices be determined & verified. (ii) To report production costs on income statement.
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