Amity Business School

Service Costing:
INTRODUCTION:
Operating costing is the method of determining the cost of specific
services. In this method, operating costs are collected periodically and the
total operating cost is divided by the quantity of services rendered during
the period to arrive at the cost per unit. This applies to activities that
provide a service rather than a tangible product.

EXAMPLES:
Transport Companies ( Shipping, Railways, Airways, Roadways.)
Catering Services ( Hotels, Canteen, Cafeteria)
Public Utility Services ( Gas, Electricity, Hospitals, Educational
Institutions)
Professional Services ( Accounting firms, Consultants, Real Estate firms)
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OPERATING COSTING Contd……

The Main characteristics of service organizations are:

• Activities are usually labour- intensive
• Cost unit is usually difficult to define; and
• Major inputs and outputs cannot be stored.
COST UNIT
It is a quantitative unit of product or service in relation to which
costs are ascertained. The importance of selecting the right
cost unit cannot be over-emphasized. Selection of the cost
unit is essential for meaningful cost comparison, Cost
analysis, cost control, cost reduction and decision making.
The selection of cost unit for tangible products is relatively
easy as compared to the selection of the cost units for
service activities.
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Examples of the cost units for services:

Transport Ton- Kilometer, Passenger KM, KM Travelled

Hotel Bed- nights available, occupied, meals

College/Schools Students hours, full time/part time student hours

Hospitals Patient bed days, occupied, per operation, per visit

Electricity Kilowatt-hours

Swimming pool Bathers attended, Hours of opening

Canteen Meals provided, Ingredients of Dishes

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• Numerical based on the services costing:

Operating costing.doc
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Module 1: Reconciliation of Cost & Financial Accounts

The need for reconciliation arises due to the following reasons:

• To find out the reasons for the difference in the profit or loss
in cost and financial accounts.
• To ensure the mathematical accuracy and reliability of cost
accounts in order to have cost ascertainment, cost control
and to have a check on the financial accounts.
Reasons for the difference:
1. Differing Treatment of Items:
• Basis if Inventory Valuation
• Recovery of Overheads
• Depreciation
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2. Items appearing only in Financial Accounts:
• Purely Financial Charges: such as –
i) Losses of capital assets
ii) Interest of Bank loans, debentures etc.
iii) Penalties payable for late completions
iv) Damages payable by Law etc.
• Purely Financial Incomes: Such as-
i) Interests, dividends, Rents etc.
ii) Profits made on capital assets. Etc.
• Appropriations of profit: Such as-
i) Taxation ii) Funds iii) Reserves iv) Written offs
3. Items appearing only in Cost Accounts
For example: Notional interest/ Rent etc.
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PROFORMA RECONCIALTION STATEMENT

Particulars Plus Items Minus Items
Profit as per cost accounts:
Add:
Purely financial incomes not recorded in cost books.
Notional items of expenses included only in cost books.
Depreciation over charged in cost books
Over absorption of overheads in cost books
Over- valuation of opening stock in cost books
Under- valuation of closing stock in cost books
Less:
Purely financial charges shown only in financial accounts.
Appropriations of profit appearing only in financial accounts.
Depreciation under-charged in cost accounts
Under-absorption of overheads in cost accounts
Under-valuation of opening stock in cost books
Over-valuation of closing stock in cost books
Profit as per financial accounts
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Objective questions:
1. Cost and financial accounts are