Page 7 - DCOM206_COST_ACCOUNTING_II

Cost Accounting – II

Notes The aim of this unit is to enable the students to understand the meaning of service costing and its
implications for management.

1.1 Meaning of Service Costing

The Terminology of CLMA defines Service Costing as the cost of specific services and functions,
e.g., maintenance, personnel, canteen, etc. These may be referred to as service centres,
departments or functions.

Service costing involves the method of determination of the cost of services. At the end of
specified periods, collection of operating costs takes place and the aggregate of these costs is
duly divided by the quantity of services provided in the period. This gives the cost per unit.

Note This method of costing is applicable to activities that render a service.

The word ‘service’ as used in this context is worth noting. It means services rendered by various
departments within the organisation or organisations providing services to outside firms namely
personnel’s maintenance, canteen, hospitals, boiler house, captive power units, computer services
department, hotels, electricity companies, road maintenance, water supply, goods transport,
transport of passengers, educational institutions, accounting firms, management consultancy
firms etc.

Did u know? Service costing is also called ‘Operating Costing’,
Service organisations/internal service departments render a variety of services. Owing to the
peculiarities of services, different cost accounting treatment is required.

1.2 Features of Service Organisations

Service organisations possess its number of features which distinguish them from other
organisations. The main features are:
1. Definition of cost unit difficulty: Service organisations provide a wide variety of services,
this could range from catering services, transport services, public utility services to
professional services. Consequently it generally becomes difficult to define the cost unit.
2. Labour intensive activities: These organisations employ a large number of people for
running the business. The manpower cost incurred is much higher in relation to machine
related cost.

3. Services cannot be stored: It can be said that services is like a perishable commodity. Once
a service has been rendered, it cannot be stored. It has to be used or else it is wasted.
4. Major inputs cannot be stored: The major input in such industries is labour. The firm
should utilise their services. In the absence of this, labour remains idle. The efforts of idle
labour cannot be stored and utilised as and when required.

5. Intangible products: Service organisations do not produce tangible goods. Instead, they
are engaged in providing services to the public.

2 LOVELY PROFESSIONAL UNIVERSITY