Assigning indirect costs overheads models such as

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Unformatted text preview: s) models such as Activity Based Costing may be used. 2. Process costing method: In process costing system the cost of a service is obtained by assigning costs to masses of similar unit and then computing unit cost on an average basis. Retail banking, Postal delivery, Credit card etc. uses process costing method. 3. Hybrid costing method: Many companies uses a method of costing which is neither job costing nor process costing method. They in fact uses a hybrid costing method which combines elements of both job costing and process costing methods. The job costing and process costing for manufacturing sector have been discussed in the Cost Accounting book of PE-II level. The same cost principles as discussed for manufacturing sector will apply to service sector. 7.4.1 Job costing method in service sector: The two significant costs which are incurred in service sectors are : (i) Direct labour (ii) Service overheads For ascertaining the price of a service provided by service sector if job costing method is followed, the costs for each job are to be monitored continuously. There are two main uses of this job cost information : © The Institute of Chartered Accountants of India 7.4 Advanced Management Accounting 1. To guide decisions on job pricing 2. To assist in enhancing profitability by cost planning and cost control The five steps which are generally adopted for assigning costs to individual jobs are as follows: (i) Cost Accumulation Identify the job that is chosen as cost object : For instance, litigation work for Motorola India Ltd. by Dua & Associates by assuming that work requires 100 budgeted hours of professional labour. (ii) Identify the direct cost categories for the job: In the above example the professional hours required for doing litigation work is a direct cost. (iii) Identify indirect costs (overheads) associated with the job: This step requires identification of indirect costs incurred for providing services. These costs may include the costs of support labour, computer time, travel, telephone/fax machine, photocopying etc. Cost Allocation (iv) Select the cost allocation base to be used in assigning each indirect cost to the job: This step requires the selection of cost allocation base that has a cause and effect relationship between changes in it and changes in the level of indirect costs. The allocation base suitable for allocating indirect cost of law firm is professional labour hours. (v) Identify the rate per unit of the cost allocation base used to allocate cost to the job: The budgeted indirect cost allocation rate is computed by using following formula Budgeted total indirect cost Budgeted indirect cost rate = Budgeted total quantity of cost allocation base The indirect cost of job is computed as = Budgeted indirect cost rate × Professional labour hours reqd. for job Example Dua and Associates is a law firm speing in carrying out litigation work for clients. It has 25 professionals who work for clients (5 partners...
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