Service Costing

Questions & Solutions

Question:
What is Service Costing? Explain the important/salient features of Operating costing.
Solution:
Service Costing:
Service Costing is a costing method used to compute the costs of services rendered. Thus, it is a method of costing applied
to undertakings which provide services rather than production of commodities. Service Costing is also known as
“Operating Costing’.
Service may be performed internally and externally. Services are termed as internal when they have to be performed on
inter-departmental basis in factory itself e.g. Power house services, canteen service etc.
Services are termed as external when they are to be rendered to outside parties. Public utility services like transport, water
supply, electricity supply, hospitals are the best example for the service costing.
Important/salient features of Operating costing:
The costing in a service industry can be better understood with the help of the following characteristics:

1) Intangible Products: Service costing deals with the operating cost of products which does not have any physical
form but satisfies consumer needs and wants.
2) Collection of Cost Data: The documents used for service costing of products include cost sheet, bills payables,
daily log sheet, etc.
3) Unique and Standard Service: The services so offered by such organizations are specialized and exclusive.
4) Less Working Capital: The service costing involves less working capital since the direct cost of raw material and
other direct expenses is comparatively low.
5) Cost Per Unit: The cost per unit is mainly calculated in service costing. Here, the cost unit is determined by the
type of service industry the business belongs to, and it usually differs from company to company. Like, in the case
of goods transport it is ‘tonne-miles’; whereas, in boilers, it is ‘per cubic centimetre-litre’.
6) Internal or External Service: The service costing can be performed internally, to determine the operating cost of
the supporting activities in manufacturing industries. Else, it can be carried out externally, by the companies
dedicated to rendering such services.
7) Cost Classification by Behaviour: In the operating cost sheet format, all the business costs are classified
according to their behaviour, i.e., fixed costs, semi-variable costs and variable costs.
8) Periodic or Order Wise Computation: The service costing records the overheads at regular intervals, i.e.,
monthly or yearly but for operating cost of vehicles like tractors and JCB machines, order wise computation is
adopted.
 Service Costing
Questions & Solutions
Question:
Discuss the nature and characteristics of service costing.
Solution:
The nature and characteristics of service costing are as follows:
1) Operating costing method is related to provide various types of services to customers.
2) Costs are generally computed period-wise and order-wise.
3) In operating costing, standing or fixed, maintenance and running charges are calculated.
4) The services of a industry or organisation may be sold to the public or may be used within the organisation, and
5) The demand for the services of enterprises or organisations or industries adopting operating cost method for costing
fluctuates.
Question:
Discuss service department cost classification.
Solution:
Costs in service department are classified into : -
1) Fixed Costs: This type of cost do not change either increase or decrease of production or services rendered only
upto certain level in respect of volume of time. For example, in case of transport service: salaries of drivers,
conductors, office staff etc., buildings/garage rent, insurance, transport licence, taxes, etc., these costs are termed as
Standing Charges.
2) Semi-Variable Costs and Variable Costs: If the costs are increased or decreased with a change in the volume of
services rendered but not in the same proportion as the change in the volume of services are termed as Semi
Variable Costs. If the costs are increased or decreased in direct proportion to change in the volume of services
rendered are termed as Variable Costs. These costs are termed as running costs or Operating Costs or Maintenance
costs. For example, tyres, petrol/diesel/CNG, repairs lubricating oil, painting, servicing, depreciation etc. It may be
noted that depreciation is a semi variable cost and usually treated either fixed or operating cost depending on
method of change depreciation. Hence, the above classification is not a matter of rule. It will be guided by the
nature of expenditure.
Question:
Discuss the Scope of service costing.
Solution:
The service costing or operating costing has a special application to undertakings which provide service to public as a
whole. For example, transport companies, gas and water works, electricity supply companies, hospitals, cinemas, schools
etc. provide public service of a special type to the public. They are called as public utilities. Similarly, within an
organisation ancillary services like repairs and maintenance, canteens, internal transport purchasing and stores. Thus
operating or services costing is necessary for both internal and external services. The cost of providing services internally
can be compared by such costing with services bought from outside source. Thus scope of service costing is very wide due
to nature of service provided.
Question:
Discuss the cost unit of service costing.
Solution:
Cost Unit:
A cost unit is a quantitative unit of product or service in relation to which costs are ascertained.
The cost units vary from industry to industry. For example, in goods transport industry, cost per ton kilometer is to be
ascertained while in case of passenger transport, cost per passenger kilometer is to be ascertained. Costs units may be
single or composite.
The cost unit, which uses only one single parameter for measurement of the service cost, is termed as a simple/single cost
unit.
 Service Costing
Questions & Solutions
The most commonly used cost unit in service costing is the composite cost unit. Here, the measurement of two parameters
is combined to form a single cost unit.

Question:
Name five different types of organizations where service costing method may be applied and state the cost unit used
in each such organization.
Solution:
 Service Costing
Questions & Solutions
Study Material: Institute of Chartered Accountants of India (ICAI)
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Study Material: Institute of Company Secretaries of India (ICSI)

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Miscellaneous
Question:

You may be noted that as per the above calculation, first calculate total distance covered, then calculate
passenger kilometre covered. In case of a truck, instead of passengers total capacity in terms of
tons/gallons/litres are to be taken into account.
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