Service Costing, Overhead Costing and Marginal costing

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Outline•Service organisations•Value chains•Service production environments•Costing systems for services•Estimating service costs and the flow of costsin service firms•Uses of service costing•Retail and wholesale costing•What are overhead costs?•Allocating indirect costsOutline (cont.)Outline (cont.)••Allocating overhead costs to productsAllocating overhead costs to products••Evaluating the allocation alternatives Evaluating the allocation alternatives••Issues in estimating overhead ratesIssues in estimating overhead ratesService OrganisationsService Organisations•
•Organisations that:Organisations that:
-deliver help, utility or caredeliver help, utility or care
-provide an experience, information or other provide an experience, information or otherintellectual contentintellectual content••The majority of the value is intangible rather The majority of the value is intangible rather than residing in physical productsthan residing in physical products••Service organisations dominate many Service organisations dominate many economieseconomiesDifferences Between Service and ManufacturingDifferences Between Service and Manufacturing BusinessesBusinesses••Most service outputs are intangibleMost service outputs are intangible••Service outputs are often heterogeneousService outputs are often heterogeneous••Services are consumed as they are producedServices are consumed as they are produced••Services are perishable and cannot be storedServices are perishable and cannot be stored••Some services include some physical or Some services include some physical or tangible aspectstangible aspectsOther Aspects of ServicesOther Aspects of Services••Merchandising firms (such as retailers and Merchandising firms (such as retailers and wholesalers) are part of the service sectorwholesalers) are part of the service sector••The value chain for most business includes a The value chain for most business includes a customer service segmentcustomer service segment••Many companies outsource services due to Many companies outsource services due to technological advances or cost reductiontechnological advances or cost reductionFlow of Costs in Service FirmsFlow of Costs in Service Firms••Often no inventory to valueOften no inventory to value••Costs are generally shown as a line item in Costs are generally shown as a line item in operating expenses, not in cost of goods soldoperating expenses, not in cost of goods sold••Costs in upstream or downstream areas may Costs in upstream or downstream areas may be included as overhead costsbe included as overhead costs••Individual service costs are usually not Individual service costs are usually not accumulated separatelyaccumulated separately••Service costing systems are created to Service costing systems are created to support management needs rather than support management needs rather than financial reportingfinancial reportingValue Chain in Service FirmsValue Chain in Service FirmsValue Chain in Merchandising FirmsValue Chain in Merchandising FirmsProfessional Service FirmsProfessional Service Firms••Staffed by professional staff who provide Staffed by professional staff who provide individual services to customersindividual services to customers••Relatively few customersRelatively few customers••Most activity is in the front officeMost activity is in the front office•
•Service delivery involves people more than Service delivery involves people more than equipmentequipment
-Examples: medical, legal, accounting, management Examples: medical, legal, accounting, management consulting, engineering and architectural businessesconsulting, engineering and architectural businessesMass Service EntitiesMass Service Entities••Many customers, requiring limited staff time and Many customers, requiring limited staff time and limited customisationlimited customisation••Staff are mainly nonStaff are mainly non–professionalprofessional••Most of the value is in the back officeMost of the value is in the back office•
•The service may involve equipmentThe service may involve equipment
-Examples: bus companies, post offices, electricity Examples: bus companies, post offices, electricity suppliers and public service organisationssuppliers and public service organisationsService ShopsService Shops•
•A midway between professional and mass A midway between professional and mass service businesses in terms of the number of service businesses in terms of the number of customers, staff time and degree of customers, staff time and degree of customisationcustomisation
-Examples: hotel chains, banks, cafés, print shops and Examples: hotel chains, banks, cafés, print shops and car repair workshopscar repair workshopsTypes of Service EntitiesTypes of Service EntitiesFactors Affecting the Decision to Implement ServiceFactors Affecting the Decision to Implement Service CostingCostingJob, Process and Hybrid Costing in Service EntitiesJob, Process and Hybrid Costing in Service EntitiesJob Costing Systems for Professional Service FirmsJob Costing Systems for Professional Service Firms••Professional service firms have limited Professional service firms have limitedmaterial or equipment and produce nomaterial or equipment and produce noinventoriesinventories••Job costing is suitable for professional Job costing is suitable for professionalservice firmsservice firms••Relatively few clientsRelatively few clients••Production process is ‘client’ uniqueProduction process is ‘client’ unique••Professional labour is the primary costProfessional labour is the primary cost••Labour cost can be traced to jobLabour cost can be traced to job••Job billing may be usedJob billing may be usedProcess Costing Systems for (Some) Mass ServicesProcess Costing Systems for (Some) Mass Services••Produced in large quantitiesProduced in large quantities••Production processes are repetitiveProduction processes are repetitive••Different services consume similar resourcesDifferent services consume similar resources••Substantial indirect labourSubstantial indirect labour••Costs tracked directly to productionCosts tracked directly to productionBUT scope for discretion in service provisionBUT scope for discretion in service provision means process costing may be less accurate means process costing may be less accurate than in a manufacturing settingthan in a manufacturing settingHybrid Costing Systems for Service Shops and (Other)Hybrid Costing Systems for Service Shops and (Other) Mass ServicesMass Services••Suitable for some service shops and some Suitable for some service shops and some mass service entitiesmass service entities••Varying degrees of customisation, Varying degrees of customisation, standardisation of processes and traceability of standardisation of processes and traceability of costscosts••Costing systems will vary on a continuum Costing systems will vary on a continuumfrom job costing to process costingfrom job costing to process costingWhen Should Firms Estimate Their Service Costs?When Should Firms Estimate Their Service Costs?••There are no external reporting requirements to There are no external reporting requirements to estimate service costsestimate service costs••Service costing systems should be Service costing systems should be implemented where benefits exceed costsimplemented where benefits exceed costs•
•Cost and benefits are influenced by: Cost and benefits are influenced by:
-complexity of the costing systemcomplexity of the costing system
-accuracy of the service cost informationaccuracy of the service cost information
-relevance of service cost informationrelevance of service cost information

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