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Unformatted text preview: costs : These are the direct and indirect cost of providing service to
each customer plus customer related cost assigned to them. For example cost of express courier service to a client/customer who requests overnight delivery of some
agreement. (ii) Customer-line categories : These are the cost which are broken into the broad
segments of customers and not individual customer.
(iii) Company costs: These are those costs which are not allocated to either customer line
or individual customers but charge to company. The example is the cost of advertisement
to promote sale of service.
7.5 PRICING OF SERVICE SECTOR
In the chapter of pricing strategies and transfer pricing in this book we have discussed the
methods followed for pricing by manufacturing sector. The service sector follows a different
approach for pricing their service. Although a service has no physical existence it must be
priced and billed to customers. Most service organizations use a form of time and material
pricing to arrive at the price of a service. Service companies such as appliance repair shops,
automobile repair business arrive at prices by using two computations, one for labour and
other for materials and parts. As with a cost based approach a mark up percentage is used to
add the cost of overhead to the direct cost of labour, materials and parts. If materials and © The Institute of Chartered Accountants of India 7.8 Advanced Management Accounting parts are not part of service being performed, then only direct labour costs are used as basis
for determining price. For professionals such as accountants and consultants a factor
representing all overhead costs is applied to the base labour costs to establish a price for the
Motorcraft has just completed repair work on Car No. DL 6CB 2051 of Mr. X. The parts used to
repair the vehicle cost Rs. 500. The company’s 40% mark up rate on parts covers parts–
related overhead costs. Labour involved 9 hours of time from a Motorcraft service engineer
whose wages are Rs. 50 per hour. The current overhead work up rate on labour is 80%. You
are required to compute how much Mr. X will be billed for his car repairs.
Computation of the amount Mr. X should be billed for his car repairs. Parts charges:
Repairs parts used Rs. 500 Overhead charges
(40% of Rs. 500)
Total parts charges 200
700 Labour charges:
9 hours @ Rs. 50 per hour 450 Overhead charges
(80% of Rs. 450) 360 Total labour charges 810 Total billing amount 1510 Self Examination Questions
1. Mention the main characteristics of service sector. 2. Explain briefly the costing methods which are used in service sector for ascertaining the
costs of services rendered. 3. Write be short notes on :
(i) Customer costing in service sector. (ii) Pricing by service sector. © The Institute of Chartered Accountants of India...
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This document was uploaded on 09/24/2013.
- Fall '13