Page 7 - DCOM206_COST_ACCOUNTING_II
P. 7

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
   2   3   4   5   6   7   8   9   10   11   12