Service Costing or Operation Costing [Cost Accounting Notes for BCOM]

[Service Costing Meaning, Purpose of Service Costing, Limitations of Service Costing]

Service costing Meaning: 

Service costing is a method of determining the cost of providing a service. It involves breaking down all of the costs that go into providing a service and assigning those costs to each individual service provided. This can be useful for determining the price at which a service should be sold in order to cover costs and generate a profit.

Service costing is commonly used in the professional services industry, such as consulting, accounting, and legal services. It is also used in other industries that provide services, such as healthcare, education, and government.

Like unit costing, service costing is used to determine the cost of providing a service for a particular customer or project, to set prices for services, and to assess the efficiency and profitability of service processes. It is generally applicable to any industry where services are provided on a per-unit basis.

Steps in Application of Service Costing

To calculate service costing, the following steps are typically followed:

1. Identify all of the direct costs that go into providing a service. These may include labour, materials, and any other costs that vary with the number of services provided.

2. Determine the total direct costs for the period being studied (e.g. a month, a quarter, a year).

3. Calculate the total number of services provided during the same period.

4. Divide the total direct costs by the number of services provided to determine the cost of each service.

Purpose of service costing:

The main purpose of service costing is to determine the cost of providing a service to a customer. This information can be used for a variety of purposes, including:

1. Setting prices for services: By understanding the cost of providing a service, a company can set prices that will cover its costs and allow it to make a profit.

2. Identifying cost drivers: Service costing can help a company identify the factors that drive the cost of providing a service, such as labour, materials, and overhead. This information can be used to make decisions about how to reduce costs or increase efficiency.

3. Measuring performance: By tracking the cost of providing a service over time, a company can measure its performance and identify opportunities for improvement.

4. Making pricing decisions: Service costing can help a company make informed decisions about how to price its services, based on the cost of providing those services and the demand for them in the market.

There are also some limitations to service costing:

1. Complexity: Service cost calculations can be complex, especially if a company provides a wide range of services or has multiple cost drivers.

2. Difficulty in identifying costs: It can be challenging to accurately identify and allocate the costs of providing a service, particularly if those costs are indirect or difficult to measure.

3. Changes in demand: The demand for a service can fluctuate, which can make it difficult to accurately predict the cost of providing that service.

4. Lack of standardization: There is often a lack of standardization in the way that service costs are calculated, which can make it difficult to compare the costs of different services or compare the cost of providing a service to different companies.

Also Read: Important Questions for Upcoming Exams

Unit – 4: job, Contract and Process Costing

(These Questions are subject to modification, if necesary. Download DTS Application for complete notes)

Q. What is Job costing (2018) and Process costing? Distinguish between job costing and process costing. 2016SN, 2017

Q. Explain the features, advantages and disadvantages of job costing.

Q. What is process costing? What are the fundamental principles of Process Costing? Point out the advantages and limitations of Process costing.      2019

Q. Explainthe meaning and treatment of Normal, Abnormal loss and abnormal gain in Process Accounts. Distinguish between normal and abnormal process loss. 2017, 2019,2019SN, 2023

Q. What is contract costing? What are its features? Explain how profit is determined incase of an incomplete contract.

Q.What do you mean by Unit Costing? In which industries unit costing is applied? Explain its purposes and limitations.  2022

Q.What do you mean by service costing or operation costing? In which industries service costing is applied? Explain its purposes and limitations.

Q. Write short notes on: Cost plus contract, Escalation clause, contract costing vs job costing, Unit Costing

- Preparation of process accounts together with normal, abnormal loss and abnormal gain account, preparation of profit and loss account and costing profit and loss account, treatment of process finished stock and stock of raw material in process accounts. Follow examples of BASU AND DAS COST ACCOUNTING BOOK. 2013, 2016, 2018

- Preparation of contract account (Question bank given in Mobile application)

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