Cost Accounting

Meaning and Explanation of Service Costing

The term “service costing” refers to the method of calculating the cost per unit of service given. It also refers to the price of particular functions.

For instance, maintenance, personnel, and canteen. These are sometimes referred to as service departments, centres, or functions.

Service costing is a way to calculate the cost of services. After the prescribed term, the cost of operating a service centre is categorised into appropriate themes.

To figure out the cost per unit of services, the department divided the aggregate spending by the number of services delivered for a certain time. The cost is divided into variable and fixed costs. Under the service costing, charges are ascertained at the completion of the allotted period.

The conversion of raw materials into services needs various procedures and processes. Under the service costing, appraisal of work-in-progress is comparably straightforward compared to other categories.

Services firms are exclusively involved in delivering services to the public. They do not manufacture any article/ tangible items. The service firms are involved in offering a range of services, so it is hard to identify a standard cost per unit. It varies from organisation to organisation.

Where is Service Costing Used?

Service costing is used by service organisations and departments that render services to other departments.

Services organisations: – Service organisations are those organisations that are engaged in the delivery of services to the public to gain profits. Examples of such businesses are hotels, transport firms, electricity generating and distributions firm, educational institutions, consultancy firms- accountancy and management, legal, airlines, and shipping.

Internal services: – Departments that provide the services to the production as well as to other departments. For Example- hospital, canteen, captive power generation, water supply, maintenance service and boiler house.

Below is the list of costs per unit used by different groups of services –

Types of services organisationsCost unit
HotelsPer room per day bed nights, etc
HospitalPer patience-per bed,  per operation
CanteensPer meal served, per number of staffs
Water supply
Per kiloliters
Computer departments
Per computer time provided to user departments
CollegesFull-time equivalent students
BoilerhousePer Kg of steam supplied
Power generation and distributions( electricity board)
Per kilowatt-hour
Road maintenance
Per kilometre road maintained
Passengers transportations( bus, railways)
Per passengers- km
Goods transport ( public carriers, goods trains, trucks, etc.)Per tonne-km- quintal-km

Each type of organisation will have to decide what kind of cost unit is the most appropriate for its purpose, considering the nature of the business. Whatever cost is decided upon, the calculation of cost per unit is done in a similar fashion to output costing, i.e.:

Cost per Service Unit = Total Costs Per Period / Number of Service Units Supplied in the Period

Types of Service Costing

When we think about services, our minds immediately think of the numerous intangible items we use daily. But did you know that each service has a unique set of cost units and factors that must be considered during the computation process?

This is because every one of these services is distinct and entails an array of different types of overheads. The price of services varies depending on the type of service organisation and can be divided into the following categories:

Transport Costing

Costing in the transportation industry serves a variety of purposes. These objectives can be classified according to the type of transportation service provided by an organisation:
• Private Transport: When a vehicle is hired separately for private tours, service costing is employed to establish the hiring fees.
Passenger Transport: It also determines the cost of transportation, per passenger, up to a specified distance in the case of public or private passenger transport businesses.
Goods Transport: When discussing items transport services, the cost of transporting a specified quantity of goods over a specified distance is also determined using service pricing.
The common aims of transportation costing are to compare the costs of two distinct cars or groups of vehicles and to determine whether to utilise an alternate mode of transport or one’s own vehicle.

Power Generation and Distribution Costing

Water, gas, and sunshine are used to generate electricity in the powerhouses, which convert the energy into electricity. Electricity generation services are mostly comprised of fixed costs, such as interest on capital,  repairs and maintenance (including administrative expenses), depreciation, and variables such as steam consumption, labour wages, lubricants and coal (to name a few examples).

Boiler House Costing

Power and energy-producing units rely on the boiler house for support services in the form of steam, which is utilised in air conditioning, power generation, and air compression, among other things. In addition to fuel (coal or oil), direct and indirect labour, water and its processing, indirect material (tools, service material), maintenance, and fixed costs, boiler services also include the following overheads: (rent, taxes, administration expenses, etc.)

Canteen Costing

Canteens are found in government organisations, factories, businesses, offices, colleges, schools, and even hospitals, and they serve a variety of affordable foods such as meals, refreshments, snacks, and other snacks to the personnel, students, and patients at these establishments.

The canteen manager or supervisor maintains control over expenditures and does service costing in order to determine the revenue generated by these commercial enterprises.

Among the expenses associated with canteen services are the costs of materials, labour, services, consumable products, and other overhead expenses.

Hospital Costing

Medical institutions such as hospitals, health centres, nursing homes, medical camps, and clinics must analyse the costs of the services they provide, which can be accomplished through the use of service costing techniques.

The hospital’s fixed costs include labour wages, maintenance fees, rent, administrative expenses, and other overheads. Variable costs include supplies and equipment. In addition, variable charges such as medications, bed charges, doctor fees, and other fees are included in the overall cost.

Hotel Costing

As hotels provide accommodation as a service, they incur a substantial maintenance cost in addition to the set cost. Depreciation, staff salaries, interest on capital, and taxes are all examples of fixed costs. Variable costs include utility bills, temporary staff salaries, etc.

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