Service costing, Features, Types, Benefits, Example

Service costing is a method of cost accounting used to determine the cost of providing a service to customers. It involves the identification and analysis of all costs associated with providing a service, as well as the allocation of those costs to the specific service or services being provided.

Service costing is particularly relevant to businesses that provide services rather than physical products. It allows these businesses to accurately calculate the costs of providing each service, which can then be used to set pricing, assess profitability, and make informed decisions about resource allocation.

In service costing, the costs associated with providing a service may include both direct costs (such as labor, materials, and equipment) and indirect costs (such as overhead, marketing, and administrative expenses). These costs are then allocated to the specific service or services being provided, often using a variety of allocation methods (such as activity-based costing or direct allocation).

Service Cost Unit heading formula

The service cost unit heading formula is:

Total Cost of Service / Number of Units of Service

This formula calculates the cost per unit of service provided by a business. The total cost of providing the service includes all direct and indirect costs associated with delivering the service, and the number of units of service is the total quantity of the service provided.

For example, if a business provides consulting services and incurs a total cost of $100,000 in a given period, and provides 500 hours of consulting services during the same period, the service cost unit heading formula would be:

$100,000 / 500 hours = $200 per hour

This means that the business incurs a cost of $200 for each hour of consulting services provided. This information can then be used to determine pricing, assess profitability, and make decisions about resource allocation.

Application of Service Costing

Service costing can be applied in a variety of businesses and industries where services are the primary output. Here are some examples:

• Healthcare: Hospitals, clinics, and other healthcare providers can use service costing to determine the cost of each patient visit, surgery, or other medical service. This information can be used to price services appropriately and allocate resources more efficiently.
• Professional services: Lawyers, accountants, architects, and other professionals can use service costing to determine the cost of providing their services. This can help them set billing rates that reflect the true cost of delivering their services and ensure they are profitable.
• Transportation: Airlines, taxis, and other transportation companies can use service costing to determine the cost of providing transportation services. This information can help them set fares that cover their costs and remain competitive in the market.
• Hospitality: Hotels, restaurants, and other hospitality businesses can use service costing to determine the cost of providing services such as room service, housekeeping, or meals. This information can help them price their services appropriately and allocate resources more efficiently.

Forms of Service Costing with components

There are two forms of service costing, namely:

Single Costing:

In single costing, the cost of a single service or job is calculated separately. This is used when the service or job is unique and does not repeat frequently. The components of single costing include:

• Direct materials: The cost of materials that are directly used in providing the service.
• Direct labor: The cost of labor that is directly involved in providing the service.
• Direct expenses: Other costs that are directly related to providing the service, such as travel expenses, communication expenses, etc.
• Indirect expenses: Overheads that cannot be directly attributed to the service, such as rent, salaries of support staff, utilities, etc.

The total of these components gives the total cost of providing the service.

Operating Costing:

In operating costing, the cost of a service is calculated over a period of time, such as a week, month, or year. This is used when the service is provided repeatedly and the cost needs to be calculated for the entire period. The components of operating costing include:

• Direct cost: This includes the cost of direct materials, direct labor, and direct expenses incurred in providing the service.
• Indirect cost: This includes the cost of indirect expenses, such as rent, utilities, salaries of support staff, etc.
• Overheads: These are the costs that are not directly related to the service but are necessary for the operation of the business, such as depreciation, insurance, etc.

The total of these components gives the total cost of providing the service over the period.

Service costing has several benefits, including:

• Helps in cost control: Service costing helps in identifying the various components of costs that are incurred while providing a service. This information helps in controlling costs by eliminating or reducing unnecessary expenses.
• Helps in pricing: Service costing helps in determining the cost of providing a service, which is an essential factor in setting prices for services. By knowing the cost of providing a service, a company can set prices that are competitive and reasonable.
• Helps in decision making: Service costing provides valuable information that helps in decision making. It helps in identifying profitable services and those that are not, enabling companies to make informed decisions on whether to continue offering them or not.
• Helps in budgeting: Service costing helps in preparing budgets for service-related activities. By knowing the cost of providing a service, a company can prepare a budget that is realistic and achievable.
• Helps in performance evaluation: Service costing provides information on the performance of different services. This information is used to evaluate the performance of each service and identify areas that need improvement.
• Helps in resource allocation: Service costing helps in allocating resources efficiently. By knowing the cost of providing each service, a company can allocate resources to services that are profitable and eliminate or reduce resources allocated to services that are not profitable.

Example

In this example, the service being provided has a total cost of $27,000, which is comprised of $20,000 in direct costs and $7,000 in indirect costs. The service provider produced 1,000 units of the service, resulting in a cost per service unit of $27.