COST ACCOUNTING

TOPIC:
SERVICE COSTING IS THE COST OF PRODUCING AND
MAINTAINING A BUSINESS.
SUBMITTED BY:-

AMIT RAJ

BCOM LLB SEM -IV

ROLL NO. -07

GUIDED BY:-

MR. RAJEEV DUTRAJ

ASST. PROF OF MANAGEMENT

Indian Institute of Legal Studies

Dagapur, Matigara, Siliguri, Darjeeling, West Bengal 734010

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 ACKNOWLEDGEMENT

With profound gratitude and sense of indebtedness I place on record my sincerest thanks
to Mr. Rajeev Dutraj, Asst. Prof In Management, Indian Institute of Legal Studies, for his
invaluable guidance, sound advice and affectionate attitude during the course of my
studies.

I have no hesitation in saying that she molded raw clay into whatever I am through his
incessant efforts and keen interest shown throughout my academic pursuit. It is due to her
patient guidance that I have been able to complete the task.

I would also thank the Indian institute of Legal Studies Library for the wealth of
information therein. I also express my regards to the Library staff for cooperating and
making available the books for this project research paper.

Finally, I thank my beloved parents for supporting me morally and guiding me throughout
the project work.

________________ Amit Raj

Teacher’s Signature Student’s Signature

Date: __/__/____ Date: / / ____

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 SYNOPSIS

1. INTRODUCTION
Service costing is applicable for those understanding or services cost centre under any
enterprise, which provides generated services. These types of services may be needed for internal
as well external purposes. Services generated for internal purpose means ancillary services
provides by sections and department to the production department under a manufacturing
concern as canteen, builder house, electronic generation department services etc. the services
generated for external purposed are directly related to the public utility services provides to the
public. As transport services, inutility services, distribution services, etc.
2. RESEARCH METHODOLOGY
The research methodology used is completely doctrinal which includes books, and
websites.
3. OBJECTIVE OF THE STUDY
The aim and objective of this project is to study that how service costing is the cost of
producing and maintaining a business.
3.1 Scope of the study
The main scope of this project is to find the :-
3.1.1.Definition of Service Costing
3.1.2. Application of Service Costing
3.1.3. Forms of Service Costing.
3.2 Research Question
3.2.1 What are the application and forms of Service Costing.
3.2.2 How service costing is the cost of producing and maintaining a business?
3.3 Data Collection Process
The research methodology used is completely doctrinal which includes books, and websites.

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 CONTENT

S.NO TOPIC PG.NO.

01 Introduction 05
02 Service cost unit 06
03 Features of Service costing 07

04 Objectives of Service costing 08

05 Application of service costing 09
06 How are services classified under service costing? 10
07 Selection of cost under Service costing 11
08 Conclusion 13

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 CHAPTER 1:
INTRODUCTION

Service costing is the technique of finding the total operating cost and cost per services of
services organization i.e. transportation, hospital, hotel, school and college, cinema hall and
power house, library, drinking water etc.
Service costing is applicable for those understanding or services cost centre under any
enterprise, which provides generated services. These types of services may be needed for internal
as well external purposes. Services generated for internal purpose means ancillary services
provides by sections and department to the production department under a manufacturing
concern as canteen, builder house, electronic generation department services etc. the services
generated for external purposed are directly related to the public utility services provides to the
public. As transport services, inutility services, distribution services, etc.
According to institute of cost and management accountants (ICMA),
London,"Service costing applied where standardized services are provides by a undertaking or
by the service cost center within undertaking."
According to wheldon, "operating services is a until costing as applied to the costing of
services."
Thus, services costs are the cost of providing and operating services in a particular sector.
In short, it is considered generally by inducting services instead of producing goods. It is the
method of costing which provides information how to calculate operating cost.

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 CHAPTER 2:
SERVICE COST UNIT

All the costs incurred during a period are collected and analyzed and then expressed in
terms of a cost per unit of service.
The cost unit to be applied needs to be defined carefully and it is frequently a composite figure
such as tonne-kilometer, kilowatt-hour, patient day etc. The costing should be comprehensive
enough to show the effects like off-season and peak-season demand, full time, part time, etc1.
The service costs are usually collected under the following headings:
(1) Standing charges (fixed costs), and
(2) Running expenses (variable costs).
The cost per unit is calculated as follows:

Price for the service is fixed by adding a markup to the cost per unit. The cost per unit of service
is used for control of costs by comparing costs month by month or period by period etc. Any
discrepancies over the normal are investigated for corrective action.

1
http://www.accountingnotes.net/cost-accounting/service-costing/service-costing-definition-and-application-and-
formula-cost-accounting/10509 [last seen on 3rd feb,2019]

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 CHAPTER 3:
FEATURES OF SERVICE COSTING
The basic features of Service costing are presented below.

1. Uniform service is provided to all the customers.

2. The costs are classified into fixed and variable.

3. The fixed and variable cost classification is necessary to ascertain the cost of service and the
unit cost of service.

4. There is no physical stock of article if an undertaking renders a service.

5. If a cost center is operating for an undertaking, there is no sale of service but render the
service. In other words, if a cost center is operating for public, it sells its service to the public.

6. The cost unit may be simple in certain cases or composite or compound in other cases like
transport undertakings.

7. Total costs are averaged over the total amount of service rendered.

8. The costs are collected from the authentic documents like daily log sheet, operating cost sheet,
boiler house cost sheet, canteen cost sheets etc.

9. Operating cost is the cost of rendering service.

10. Service costing is the method of ascertaining costs.

11. The productive enterprises can quote prices by ascertaining cost data2.

2
kfknowledgebank.kaplan.co.uk › ACCAPEDIA [last seen on 4th feb,2019]

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 CHAPTER 4:
OBJECTIVES OF SERVICE COSTING

The objectives of Service costing are listed below:

1. To supply the information through which the efficiency in rendering service is improved.
2. To provide a basis for fixing accurate quotation and fare.
3. To ensure that the services are provided in proper time.
4. To control the fuel consumption and its expenses.
5. To ensure that the service equipments are properly maintained.
6. To provide cost comparison between own service and alternative service i.e. hiring.
7. To compare the cost of one service center with another.
8. To determine the apportionment cost if the services are provided within an organization.
9. To decide the price that can be charged for use of vehicle.
10. To control the cost of maintenance and repairs.
11. To select efficient and suitable routing of vehicles to reduce the costs to production
departments that uses the service.
12. To avoid the under utilization of capacity and idle time of the work force.
13. To absorb the fixed costs proportionately and systematically that is allocated to the units of
services3.

3
https://edurev.in/studytube/Operating-Costing-or-Service-Costing-Methods-of-Co/88099f25-81c5-405c-9fc5-
20cc1dede1ec_t [last seen on 4th feb,2019]

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 CHAPTER 5:
APPLICATION OF SERVICE COSTING

Service costing is applied to the operations concerned in an organization which provide

services to production departments. For example, Canteen for the staff, Hospital for the 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, computer department services used by other departments etc4.

When services are offered to outside customers with a profit motive and it is the business
of the organization in offering services, like Transport organization, Hotel business, Power
generation company etc., Service Costing is applied. The method of costing is similar to Output
Costing. All costs incurred during a period are collected and analyzed and then expressed in
terms of a cost unit of service.

Service costing is applied by an organization, which provides service to the public as a

whole instead of manufacturing an article, and sells the same. For example, Transport
undertaking electricity, theatre, hospitals, schools and the like. Similarly, the same type of an
organization or cost center renders service to production departments. For example, Electricity,
powerhouse, canteen and the like 5.

The service cost in operating cost should be find out to understand whether an
organization or cost center render services to others or sell the services to the general public. If
the services are sold, the operating expenses and the extent of services rendered are taken into
consideration to find out the service cost. On the other hand, if the services are sold, the service
expenses should be apportioned to the production department on a suitable basis 6.

4
http://www.accountingnotes.net/cost-accounting/service-costing/service-costing-7-types-of-service-costing-
cost-accounting/16616 [last seen on 18th march,2019]
5
https://accountlearning.com/operating-costing-meaning-features-application-
th
objectives/#Selection_of_Cost_under_Operating_Costing [last seen on 4 march,2019]
6
https://accountlearning.blogspot.com/2010/10/concept-and-meaning-of-service-costing.html [last seen on 5th
march,2019]

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 Generally, the basis may be the extent of service availed by the production departments.
It may also become necessary to compare the cost of such a service with the cost of an outside
service for deciding whether it is profitable to buy a service from outside rather than make the
same available from within an organization.

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 CHAPTER 6:
HOW ARE SERVICES CLASSIFIED UNDER SERVICE COSTING?

The services may be classified into two categories under Service costing, namely

1. Internal service and

2. External service.

Internal service refers to rendering service to the production departments within an organization.
External service refers to providing services to the general public uniformly. The object of both
internal service and external service is the same7.

7
http://www.accountingnotes.net/cost-accounting/service-costing/service-costing-definition-and-application-and-
formula-cost-accounting/10509 [last seen on 6th march.2019]

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 CHAPTER 7:
SELECTION OF COST UNDER SERVICE COSTING

Cost is expressed in terms of the unit of service rendered. Though, operating cost is
relating to units of costing the cost unit is not as tangible as a job or a contract. Any person
cannot easily select a cost unit. Thus, the selection of cost unit requires more skill, technical and
statistical talent on the part of the cost accountant 8.
The cost unit may be simple cost unit or composite cost unit. There is only one variable
in the simple cost unit. For example, per bed in case of hospitals, a cup of tea or coffee in case of
canteen, per room or per bed in case of lodge and the like. Two or more variables have a close
relationship in the composite cost unit. Costs are collected in terms of composite cost units. For
example, per tone km in case of transport (truck), per man show in case of cinema theatres, per
passenger km in case of transport (passenger) and the like. Hence, the selection of suitable cost
unit depends upon the nature of service9.

The following table gives a clear picture on the cost unit along with the nature of service
of the undertaking10.

Nature of Service Undertaking Cost Unit

Goods Transport service (Lorry, goods train, air transport of goods, trucks etc. Per tone km.

Passenger Transport service (Bus, Mini Bus, Train, Boat, Passenger train, air trans rt Per Passenger
etc. km.

Per bed, per

Hos itals patient, per day

8
https://smallbusiness.chron.com/profit-production-cost-affect-business-41985.html [last seen on 8th
march,2019]
9
https://www.investopedia.com/ask/answers/041415/what-are-different-types-costs-cost-accounting.asp [lasr
seen on 8th march,2019]
10
https://accountlearning.com/operating-costing-meaning-features-application-
objectives/#Selection_of_Cost_under_Operating_Costing [last seen on 8th march.2019]

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 Kwh, Horse
Electricity Supply power

Man-men/cup of
Canteen Service tea or coffee

Cubic
Boiler House centimeters

Road Maintenance Per Km

Running Hour,
Private Transport (private car, private aeroplane etc) Trip Km

Hotel Per room, per bed

Per point, per

Street lighting lamp

Gas Cubit meters, Kg

Water Supply Gallons, Liters

Cinema theatres Per man show

In case rail transport, more number of cost centers are functioning since the rail transport
has more number of and complicated activities. For example, repairs and maintenance, routes,
stations, go downs, yards, wagons, engines and the like. There is no method of costing except
Service costing applicable to rail transport.

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 CHAPTER 8:
CONCLUSION

Service costing is an extension and refined form of process costing. It is also more or less
very similar to single or output costing. The Service costing gives more emphasis on providing
services rather than the cost of manufacturing an article. The services provided may be for sale to
the general public or they may be provided within an organization.
The Service costing is also called as service costing, period costing or terminal costing.
Service costing means rendering service to the public or to an organization for which cost is
accumulated and calculated. Period costing means the costs data collected and calculated for a
specific period. Terminal costing means a bus or truck of a transport undertaking chartered for a
specific trip.

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 BIBLIOGRAPHY
WEBSITES
 http://www.accountingnotes.net/cost-accounting/service-costing/service-costing-
definition-and-application-and-formula-cost-accounting/10509

 https://edurev.in/studytube/Operating-Costing-or-Service-Costing-Methods-of-
Co/88099f25-81c5-405c-9fc5-20cc1dede1ec_t

 http://www.accountingnotes.net/cost-accounting/service-costing/service-costing-7-
types-of-service-costing-cost-accounting/16616

 https://accountlearning.com/operating-costing-meaning-features-application-
objectives/#Selection_of_Cost_under_Operating_Costing

 https://www.investopedia.com/ask/answers/041415/what-are-different-types-costs-
cost-accounting.asp

 https://smallbusiness.chron.com/profit-production-cost-affect-business-41985.html

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