[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. 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
- 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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