18859sm_finalnew_cp7

Has 25 professionals who work for clients 5 partners

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Unformatted text preview: and 20 associates). The average budgeted total compensation per professional for 1999 is Rs. 1,04,000. Each professional is budgeted to have 1,600 billable hours to clients in 1999. Dua and Associates is a highly respected firm and all professionals work for clients to their maximum 1,600 billable hours. All professional labour costs are traceable to jobs on a per hour basis. The budgeted indirect cost (legal support) in 1999 is Rs. 22,00,000. The indirect costs are allocated to the jobs using professional labour hours as the allocation base. In this example for ascertaining the cost of job company consider single direct cost rate (i.e. Professional labour) and single indirect cost rate. © The Institute of Chartered Accountants of India Costing of Service Sector 7.5 The job costing method example given above uses single direct cost and single indirect cost for computing the cost of the job. The use of single direct cost and single indirect cost is likely to overstate job with more professional hours and understate the jobs with less professional hours. This requires refinement of costing system. The refinement in costing system means changes in existing costing system that results in a better measure of the way the jobs uses the resources of the organisation. Many organisations in service sector for refining their costing system are using activity based costing (ABC). Activity based costing focusses on activities as the fundamental cost objects. It uses the cost of these activities as the basis for assigning costs of services to jobs. For understanding the implementation of ABC in service sector consider the above example. In the above example Dua and Associates for refining its costing method reviewed its work activities and collected information about how each litigation work vary in their use of resources. They identified that the direct costs are of the following five categories. These are: 1. Professional Partner labour 2. Professional Associate labour 3. Office support labour. 4. Phone/fax/photocopying : Traced on as identified basis or per monthly billing from third parties. 5. Travel : Traced on as identified basis, per monthly billing from third parties. Similarly, indirect costs are identified into two categories. These are: 1. General support: The allocation base is budgeted professional labour hours. 2. Out of town support: The allocation base in law firm is lawyer days at non-local site. With refined costing system service organisation has more accurate cost information for services. This helps them to adjust their pricing policies for services 7.4.2 Process costing method in service sector : In this method the cost of service is obtained by assigning costs to masses of units and then computing unit costs on an average basis. Let us explain this with an illustration. Illustration The loan department of a Canara Bank performs several functions in addition to home loan application processing task. It is estimated that 25% of the overhead costs of lo...
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This document was uploaded on 09/24/2013.

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