ICAI Notes: Service Costing | Cost and Management Accounting for CA Intermediate PDF Download

 Page 1


    
 
 
CHAPTER 
12 
 
LEARNING OUTCOMES 
 
SERVICE COSTING 
 
? Discuss the cost accounting method for service sectors. 
? State the units used in different service sectors. 
? State the KPIs used in different service sectors. 
? Calculate the costs for different service industries. 
 
  
© The Institute of Chartered Accountants of India
Page 2


    
 
 
CHAPTER 
12 
 
LEARNING OUTCOMES 
 
SERVICE COSTING 
 
? Discuss the cost accounting method for service sectors. 
? State the units used in different service sectors. 
? State the KPIs used in different service sectors. 
? Calculate the costs for different service industries. 
 
  
© The Institute of Chartered Accountants of India
COST AND MANAGEMENT ACCOUNTING 
 
12.2 
 
Service Costing
Application of Service 
Costing
Service Costing vs 
Product Costing
Methods of Ascertaining 
Service cost unit
Composite Unit
Equivalent Unit
Service Cost Statement
Costing of Services:
(i)Transport 
(ii) Hotels & Lodges 
(iii) Hospitals
(iv) IT & ITES 
(v) Toll Roads
(vi) Educational Institutes
(vii) Insurance 
viii) Financial Institutes
(ix) Others
CHAPTER OVERVIEW 
© The Institute of Chartered Accountants of India
Page 3


    
 
 
CHAPTER 
12 
 
LEARNING OUTCOMES 
 
SERVICE COSTING 
 
? Discuss the cost accounting method for service sectors. 
? State the units used in different service sectors. 
? State the KPIs used in different service sectors. 
? Calculate the costs for different service industries. 
 
  
© The Institute of Chartered Accountants of India
COST AND MANAGEMENT ACCOUNTING 
 
12.2 
 
Service Costing
Application of Service 
Costing
Service Costing vs 
Product Costing
Methods of Ascertaining 
Service cost unit
Composite Unit
Equivalent Unit
Service Cost Statement
Costing of Services:
(i)Transport 
(ii) Hotels & Lodges 
(iii) Hospitals
(iv) IT & ITES 
(v) Toll Roads
(vi) Educational Institutes
(vii) Insurance 
viii) Financial Institutes
(ix) Others
CHAPTER OVERVIEW 
© The Institute of Chartered Accountants of India
SERVICE COSTING 
    
 
 
12.3 
1. INTRODUCTION 
Service sector, being a fastest growing sector and having a significant contribution 
towards the GDP in India, is a very important sector where the role of the cost and 
management accounting is inevitable. The competitiveness of a service entity is 
very much dependent on a robust cost and management accounting system for 
competitive pricing and identification of value adding activities.  Providers of 
services like transportation, hotels, financial services & banking, insurance, 
electricity generation, transmission and distribution etc. are very much cost 
conscious and thrive to provide services in a cost-effective manner. Irrespective of 
regulatory requirements to maintain cost records and get the records audited, 
service costing becomes integral and inseparable part of each service entity. In this 
chapter we will be discussing how costing is done in service sectors like 
Transportation, Toll roads, Electricity generation, transmission and distribution, 
Hospitals, Canteen & Restaurants, Hotels & Lodges, Educational institutes, Financial 
institutions, Insurance, Information Technology (IT) & Information Technology 
Enabled Services (ITES) etc.  
Service costing is also known as operating costing. 
1.1 Application of Service Costing 
Internal: The service costing is required for in-house services provided by a service 
cost centre to other responsibility centres as support services. Examples of support 
services are Canteen and hospital for staff, Boiler house for supplying steam to 
production departments, Captive Power generation unit, operation of fleet of 
vehicles for transport of raw material to factory or distribution of finished goods to 
the market outlets, IT department services used by other departments, research & 
development, quality assurance, laboratory etc.  
External: When services are offered to outside customers as a profit centre in 
consonance with organisational objectives as an output like goods or passenger 
transport service provided by a transporter, hospitality services provided by a hotel, 
provision of services by financial institutions, insurance and IT companies etc.  
In both the situation, all costs incurred are collected, accumulated for a certain 
period or volume, recorded in the cost accounting system and then expressed in 
terms of a cost unit of service. 
© The Institute of Chartered Accountants of India
Page 4


    
 
 
CHAPTER 
12 
 
LEARNING OUTCOMES 
 
SERVICE COSTING 
 
? Discuss the cost accounting method for service sectors. 
? State the units used in different service sectors. 
? State the KPIs used in different service sectors. 
? Calculate the costs for different service industries. 
 
  
© The Institute of Chartered Accountants of India
COST AND MANAGEMENT ACCOUNTING 
 
12.2 
 
Service Costing
Application of Service 
Costing
Service Costing vs 
Product Costing
Methods of Ascertaining 
Service cost unit
Composite Unit
Equivalent Unit
Service Cost Statement
Costing of Services:
(i)Transport 
(ii) Hotels & Lodges 
(iii) Hospitals
(iv) IT & ITES 
(v) Toll Roads
(vi) Educational Institutes
(vii) Insurance 
viii) Financial Institutes
(ix) Others
CHAPTER OVERVIEW 
© The Institute of Chartered Accountants of India
SERVICE COSTING 
    
 
 
12.3 
1. INTRODUCTION 
Service sector, being a fastest growing sector and having a significant contribution 
towards the GDP in India, is a very important sector where the role of the cost and 
management accounting is inevitable. The competitiveness of a service entity is 
very much dependent on a robust cost and management accounting system for 
competitive pricing and identification of value adding activities.  Providers of 
services like transportation, hotels, financial services & banking, insurance, 
electricity generation, transmission and distribution etc. are very much cost 
conscious and thrive to provide services in a cost-effective manner. Irrespective of 
regulatory requirements to maintain cost records and get the records audited, 
service costing becomes integral and inseparable part of each service entity. In this 
chapter we will be discussing how costing is done in service sectors like 
Transportation, Toll roads, Electricity generation, transmission and distribution, 
Hospitals, Canteen & Restaurants, Hotels & Lodges, Educational institutes, Financial 
institutions, Insurance, Information Technology (IT) & Information Technology 
Enabled Services (ITES) etc.  
Service costing is also known as operating costing. 
1.1 Application of Service Costing 
Internal: The service costing is required for in-house services provided by a service 
cost centre to other responsibility centres as support services. Examples of support 
services are Canteen and hospital for staff, Boiler house for supplying steam to 
production departments, Captive Power generation unit, operation of fleet of 
vehicles for transport of raw material to factory or distribution of finished goods to 
the market outlets, IT department services used by other departments, research & 
development, quality assurance, laboratory etc.  
External: When services are offered to outside customers as a profit centre in 
consonance with organisational objectives as an output like goods or passenger 
transport service provided by a transporter, hospitality services provided by a hotel, 
provision of services by financial institutions, insurance and IT companies etc.  
In both the situation, all costs incurred are collected, accumulated for a certain 
period or volume, recorded in the cost accounting system and then expressed in 
terms of a cost unit of service. 
© The Institute of Chartered Accountants of India
COST AND MANAGEMENT ACCOUNTING 
 
12.4 
1.2 Service Costing vs Product Costing 
Service costing differs from product costing (such as job or process costing) in the 
following ways due to some basic and peculiar nature.  
(i)  Tangibility: Unlike products, services are intangible and cannot be stored, 
hence, there is no inventory for the services. 
(ii)  Cost units: Use of Composite cost units for cost measurement and to express 
the volume of outputs. 
(iii)  Material vs Employee cost: Unlike a product manufacturing, employee 
(labour) cost constitutes a major cost element than material cost.   
(iv)  Traceability of costs: Indirect costs like administration overheads are 
generally have a significant proportion in total cost of a service as unlike 
manufacturing sector, service sector heavily depends on support services and 
traceability of costs to a service may not economically feasible.  
2. SERVICE COST UNIT AND KPI 
To compute the Service cost, it is necessary to understand the unit for which the 
cost is to be computed.  All the costs incurred during a period are collected and 
analyzed and then expressed in terms of a cost per unit of service. 
One specific issue with service costing is the difficulty in defining a realistic cost 
unit that represents a suitable measure of the service provided. The cost unit to be 
applied needs to be defined carefully and frequently, a composite cost unit may be 
deemed more appropriate.  
For example, Hotels may use the ‘Occupied Room Days’ as an appropriate unit for 
cost ascertainment and control.  
Other typical cost unit that may be used include: 
Service industry Unit of cost (examples) 
Transport Services Passenger- km., (In public transportation) 
Quintal- km., or Tonne- km. (In goods carriage) 
Electricity Supply service Kilowatt- hour (kWh) 
© The Institute of Chartered Accountants of India
Page 5


    
 
 
CHAPTER 
12 
 
LEARNING OUTCOMES 
 
SERVICE COSTING 
 
? Discuss the cost accounting method for service sectors. 
? State the units used in different service sectors. 
? State the KPIs used in different service sectors. 
? Calculate the costs for different service industries. 
 
  
© The Institute of Chartered Accountants of India
COST AND MANAGEMENT ACCOUNTING 
 
12.2 
 
Service Costing
Application of Service 
Costing
Service Costing vs 
Product Costing
Methods of Ascertaining 
Service cost unit
Composite Unit
Equivalent Unit
Service Cost Statement
Costing of Services:
(i)Transport 
(ii) Hotels & Lodges 
(iii) Hospitals
(iv) IT & ITES 
(v) Toll Roads
(vi) Educational Institutes
(vii) Insurance 
viii) Financial Institutes
(ix) Others
CHAPTER OVERVIEW 
© The Institute of Chartered Accountants of India
SERVICE COSTING 
    
 
 
12.3 
1. INTRODUCTION 
Service sector, being a fastest growing sector and having a significant contribution 
towards the GDP in India, is a very important sector where the role of the cost and 
management accounting is inevitable. The competitiveness of a service entity is 
very much dependent on a robust cost and management accounting system for 
competitive pricing and identification of value adding activities.  Providers of 
services like transportation, hotels, financial services & banking, insurance, 
electricity generation, transmission and distribution etc. are very much cost 
conscious and thrive to provide services in a cost-effective manner. Irrespective of 
regulatory requirements to maintain cost records and get the records audited, 
service costing becomes integral and inseparable part of each service entity. In this 
chapter we will be discussing how costing is done in service sectors like 
Transportation, Toll roads, Electricity generation, transmission and distribution, 
Hospitals, Canteen & Restaurants, Hotels & Lodges, Educational institutes, Financial 
institutions, Insurance, Information Technology (IT) & Information Technology 
Enabled Services (ITES) etc.  
Service costing is also known as operating costing. 
1.1 Application of Service Costing 
Internal: The service costing is required for in-house services provided by a service 
cost centre to other responsibility centres as support services. Examples of support 
services are Canteen and hospital for staff, Boiler house for supplying steam to 
production departments, Captive Power generation unit, operation of fleet of 
vehicles for transport of raw material to factory or distribution of finished goods to 
the market outlets, IT department services used by other departments, research & 
development, quality assurance, laboratory etc.  
External: When services are offered to outside customers as a profit centre in 
consonance with organisational objectives as an output like goods or passenger 
transport service provided by a transporter, hospitality services provided by a hotel, 
provision of services by financial institutions, insurance and IT companies etc.  
In both the situation, all costs incurred are collected, accumulated for a certain 
period or volume, recorded in the cost accounting system and then expressed in 
terms of a cost unit of service. 
© The Institute of Chartered Accountants of India
COST AND MANAGEMENT ACCOUNTING 
 
12.4 
1.2 Service Costing vs Product Costing 
Service costing differs from product costing (such as job or process costing) in the 
following ways due to some basic and peculiar nature.  
(i)  Tangibility: Unlike products, services are intangible and cannot be stored, 
hence, there is no inventory for the services. 
(ii)  Cost units: Use of Composite cost units for cost measurement and to express 
the volume of outputs. 
(iii)  Material vs Employee cost: Unlike a product manufacturing, employee 
(labour) cost constitutes a major cost element than material cost.   
(iv)  Traceability of costs: Indirect costs like administration overheads are 
generally have a significant proportion in total cost of a service as unlike 
manufacturing sector, service sector heavily depends on support services and 
traceability of costs to a service may not economically feasible.  
2. SERVICE COST UNIT AND KPI 
To compute the Service cost, it is necessary to understand the unit for which the 
cost is to be computed.  All the costs incurred during a period are collected and 
analyzed and then expressed in terms of a cost per unit of service. 
One specific issue with service costing is the difficulty in defining a realistic cost 
unit that represents a suitable measure of the service provided. The cost unit to be 
applied needs to be defined carefully and frequently, a composite cost unit may be 
deemed more appropriate.  
For example, Hotels may use the ‘Occupied Room Days’ as an appropriate unit for 
cost ascertainment and control.  
Other typical cost unit that may be used include: 
Service industry Unit of cost (examples) 
Transport Services Passenger- km., (In public transportation) 
Quintal- km., or Tonne- km. (In goods carriage) 
Electricity Supply service Kilowatt- hour (kWh) 
© The Institute of Chartered Accountants of India
SERVICE COSTING 
    
 
 
12.5 
Hospital Patient per day, room per day or per bed, per opera-
tion etc. 
Canteen Per item, per meal etc. 
Cinema Per ticket. 
Hotels Guest Days or Room Days 
Bank or Financial 
Institutions 
Per transaction, per services (e.g. per letter of credit, 
per application, per project etc.) 
Educational Institutes Per course, per student, per batch, per lecture etc. 
IT & ITES Cost per project, per module etc. 
Insurance  Per policy, Per claim, Per TPA etc. 
The costing should be comprehensive enough to show the effects like off-season 
and peak-season demand, full time, part time, etc. 
Key Performance Indicator (KPI) 
Key Performance Indicators (KPIs) are the quantitative and qualitative factors which 
are commonly used to assess the performance of an organization which are 
important to achieve its goal. Like calculation of cost for a cost unit, calculation of 
cost or revenue per KPI helps to the performance against industry standards. For 
example, in case of Telecom industry Average Return per User (ARPU) is a key 
indicator, shows average revenue generated from a user of its services. The list 
below shows few important KPIs for some Service Industries: 
Industry KPI Meaning 
Transportation 
Number of Shipments,  This logistics metric monitors the 
number of orders that are shipped out 
of the warehouse. 
Truck Turnaround Rate 
(Truck Turning), 
The time from when a delivery truck 
enters the warehouse to collect or 
deliver products to when it exits the 
facility. 
Lead Time (Order Cycle 
Time) 
The amount of time in between order 
placement by customer and receipt of 
order. 
© The Institute of Chartered Accountants of India