Can be stored assembled and valued services are

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Unformatted text preview: valued. Services are rendered and cannot be stored or placed in a vault. In service sector the cost of material is insignificant. Rendering a loan service, representing someone in court of law or selling an insurance policy are typical services performed by professionals. For computing unit cost of these services the most important cost would be professional’s labour cost. The direct labour cost is traceable to service rendered. In addition to labour cost the service sector like manufacturing sector incurs various overhead cost. In service sector those overhead costs which are incurred for offering a service are classified as service overhead (like factory overhead in manufacturing sector). In order to arrive at the correct cost incurred for rendering services, it is imperative that such overheads be allocated/apportioned over the cost units. 7.3 COLLECTION OF COSTING DATA IN SERVICE SECTOR Costs are accumulated under various heads for control purposes and for decision making. Costs thus, collected are usually grouped under fixed costs and variable costs. The format in which costs data is presented depends upon the nature of industry and the need of the © The Institute of Chartered Accountants of India Costing of Service Sector 7.3 management. In the Cost Accounting book of PE-II level we have discussed in the chapter of operating costing the costing methods appropriate for different types of service sector i.e. Transport Sector, Hospital, Hotel, College etc. Often composite cost units such as passenger km, bed, nights etc. are used by these organisation for ascertaining the cost per unit in respect of these services respectively. For preparing a cost sheet under operating costing, costs are usually accumulated for a specified period viz. a month, a quarter or year etc. Since there is no direct relationship between the costs and level of services there is tendency in service sector to view all the costs as over- heads. If such a view is taken the cost control will be achieved by controlling the inputs rather than the outputs i.e. control will be relatively ineffective. This gives an impetus for the application of Activity Based Costing in service sector, with a desire to secure better understanding of costs, as an aid to decision making and cost control. Although the Activity Based Costing was initially developed for manufacturing sector, it can be applied with equal effectiveness to service sector for understanding cost behaviour of service sector entities as well. 7.4 COSTING METHODS USED IN SERVICE SECTOR Like manufacturing sector companies in the service sector, generally adopt one out of the following two basic costing methods to assign costs to services. These are: 1. Job costing method: In job costing method the cost of a particular service is obtained by assigning costs to a distinct identifiable service. In service sector like Accounting firm, Advertising campaigns etc. job costing method is used. For assigning indirect costs (overhead...
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This document was uploaded on 09/24/2013.

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