Service Costing and Unit or Output Costing - Methods of Cost Determination, Cost Management | Cost Management - B Com PDF Download

Service Costing

Service costing is that part of operation costing which is used in all organisation who provide services instead of producing of goods. For calculating the price of each service, it is very necessary to collect all the expenses relating to that services. We make a cost sheet in which we show all the cost relating to specific service. These costs are calculated on the time basis. Following are the main organisations who provide services 

1. Bus, Trucks and Rail - Transport services
2. Hosting and Domain - IT Services
3. Electricity Companies - Electricity services
5. Gas and Petrol Companies - Gas and Petrol services 

Service Costing Examples 

1. Salary
2. Insurance
3. Road Tax
4. Licence Fees 
5. Interest on Capital
6. Repairs
7. Depreciation
8. Petrol Expenses 
9. IT Service Related Cost

{*All companies who provide IT services must have to pay the expenses relating to IT services. Main examples are hosting and domain cost, cost of data server and other storage and power costs. }

Introduction

A manufacturing concern converts raw materials into finished products and sells them at a certain price. In the manufacturing process, it incurs different types of expenses such as manufacturing, administrative and selling and distribution expenses.

Concept and meaning

Output or unit costing is one of the important methods of costing under which cost of production and in turn the selling price unit are determined. This costing method is used by the manufacturing concern which produces homogeneous products such as sugar, cloth, cement and so on. A costing method used to ascertain unit cost output is called output-costing method.

Importance of output costing

A cost sheet is used to determine total and unit cost of a product under the unit cost method. The followings are the importance;

Simple: This method is very simple and easy to understand.

Determination of cost: It helps to determine the total and unit cost if production for a given period of time.

Fixation of selling price: It helps to determine the selling price of the product.

Elements of cost: It provides the detail information of the cost under different heading incorporating step-wise cost as well as total cost.

Comparison: It facilitates to compare the current cost with the previous period.

Corrective measures: It enables to find out the causes of variation if any and take corrective measures.

Tender sheet: It helps in the preparation of tender sheet for submitting tender price with fair degree of accuracy and reliability.

Decision making: It facilitates for making different types of decisions and formulation policy of the manufacturing concern.

Limitation of unit costing

Cost sheet is very importance method for determining the unit cost or total cost of production.

Not applicable for heterogeneous products: manufacturing concerns engaged in manufacturing different types of product cannot apply this method.

Not applicable for service sector: Services oriented concern like school, college, and hospital cannot apply this method.

Cost sheet or statement of cost

A cost sheet is a periodical statement, which is designed to show in detail all the elements of cost of good manufactured. The elements of costs are prime cost, factory cost, cost of production and total cost. In simple words, a statement which is designed to show the total cost as well as cost per unit of output for the given period of time is called cost sheet.

Components of cost sheet

Cost sheet is a statement, which collects the detail information about the cost of different cost centre for determining the total cost and unit cost of production. It is prepared for the specific period of time.

The main components of statement of cost are as follows;

Prime cost

Prime costs of product are the sum of direct costs, which varies in proportion to volume of production. Prime cost includes direct expenses like cost of materials, direct labour and direct expenses. These costs are directly identifiable with the product and constitute the major part of total cost of the product.

Factory cost

Factory cost are the total of prime costs and factory expenses. Factory expenses are also as factory, manufacturing or works overheads. They includes indirect expenses which are incurred inside the work place where manufacturing takes place.

Factory cost = prime cost + factory overhead

Cost of production

Cost of production includes factory costs and office and administrative overheads. Office overheads include all expenses incurred in performing administrative activities like planning, coordinating, staffing and controlling.

Cost of production = Factory cost +Office overheads

Total costs

Total costs are the sum of costs of production and selling and distribution overheads. Selling and distribution overheads are necessary for the promotion of sales.

Treatment or adjustment of stock

There are three types of stock, which are adjusted in the process of preparing statement of cost. They are as follows;

Stock of raw materials
Stock of work-in-progress or partly finished goods
Stock of finished goods

Stock of raw materials

Opening stock of raw materials value is added to the raw materials purchased and closing stock of raw materials value is subtracted therefrom in order to calculate cost of raw materials consumed. Cost of materials consumed is then considered as direct material cost.

Stock of work-in-progress

The stocks of work-in-progress are those units of commodities on which some work has been done but are in process of completion. These units can neither be treated as raw materials nor finished product, because such units requires further process to be completely finished products. Stock of work-in-progress may be both opening and closing.

Stock of finished goods

All types of overhead other than selling and distribution overhead are absorbed by finished goods. Therefore, stock of finished goods is adjusted after calculating cost of production.

Tender or quotation price

It is the price to be quoted for the supply of the particular product or for executing the work order as quotation invited. The manufacturer has to quote price of its product in advance. In the preparation of tender sheet, direct materials, direct wages and overhead are predetermined on the basis of the costs of the proceeding period. It takes into account the possible changes in price in future.

The overhead costs can be estimated by taking labour hour or machine hour basis. The basis of machine hour rate or labour rate is used for the absorption the overheads. In the preparation of tender sheet, the following steps can be taken:

The direct materials  direct wages, and overheads should be added along with any changes if any, to determine prime cost.
The other overhead should be absorbed on the basis of percentage of various years’ cost.

1.Absorption of factory overhead:

The factory overhead may be absorbed as a percentage on direct materials, direct wages and chargeable expenses.

% of factory overhead on direct wages =  

2. Absorption of office and administrative overhead:

The office and administrative overhead is absorbed as the same percentage of office and administrative overhead on factory cost

% of office and administrative overhead =  

3.Absorption of selling and distribution overhead

%  of selling and distribution overhead = 

Manufacturing account

Manufacturing account is the alternative method of determination of total cost and fixation of selling price. The manufacturing needs to ascertain the cost of goods manufactured and manufacturing profit or loss during the year. Therefore, an account is prepared for the purpose, which is known as manufacturing account. Generally, it is prepared by such concerns which do not have cost office and maintain any cost account.

Features of manufacturing account

The opening and closing stock of finished goods are not recorded because the purpose of preparation of the account is, to determined cost of goods manufactured and manufacturing profit during the specified period. This represent ledger account consisting of debit and credit side.
the difference between two sides will be cost of goods manufactured or manufacturing profit/loss based on the type of manufacturing account.

Importance of manufacturing account

Cost of goods manufactured and manufacturing profit/loss can be determined.
it helps to fix the selling price .
It assists to reduce and control the cost on manufacturing process.
Performance of manufacturing department can be evaluated by comparing profit/loss of current year.

Preparation of manufacturing account

Preparation of manufacturing account would depend upon the purpose that is sought to be obtained information therefrom. The purpose may be either to ascertain cost of manufactured or manufacturing profit or loss. However it is prepared in two different formats:

For showing cost of production
For showing manufacturing profit of loss