Service sector costing

ACCA F2 - Management Accounting

Service sector organisations hold minimum/no inventory (in value). In other word, service sector organisations are wholly dependent on (human resources and their competency) human competency. Their performance is key for the operation. Overhead proportion for service organizations are likely to be higher as compared to manufacturing. Use of advanced technology can pull down overhead cost. Customer service is the sole intention of service organisations. Some examples include, deposit/withdrawal counter service in bank, health service by hospital, studies to pupil in schools and universities.

The natures of service offered are:

Heterogeneity (output differs - different specification required) Eg. no two students/lecturers are equally comparable in all respect

Perishability (cannot carry stock) - interactive classes can only be attended when scheduled

Simultaneity (produced and consumed at same time) - participants receive the lecture in the classes when delivered

Intangibility (not-tangible) - knowledge gained in the class is intangible

Labor is prime cost for service industry. There are different approaches of service costing.

Job costing: Allocate costs to distinct identifiable service.  E.g. a professor may involve in taking lecture, writing article, preparing question and other jobs

Process costing: Allocate cost to distinct identifiable process. E.g. a study program consist of one or more semesters, costing for each semester is process costing

Customer costing: Allocates cost to customer needs. E.g. different students may undertake a set of different courses, costing for each student is customer costing

The main motive of service sector organisation is to deliver value to its customer. Their prime intention may be/may not be to make profit. Unlike goods, identifying the unit of customized service provided is difficult. Therefore, not all financial and not financial ratios are always relevant to all different service industries. Therefore, service sector ratios are distinctive in their features. E.g. pass rate of students

Most organisations deliver service to outside customers. Eg. University offering different programs. However, organisations also provide services for internal use (i.e. captive consumption). E.g. Information Technology service offered by university.

Costing of service sector