Service Costing: Definition and Objectives

Service costing refers to the costing procedure used for determining the cost per unit of service rendered. The term defined as the cost of specific services and function. For example: Maintenance, personnel. Canteen etc. These may be called as services department, centers, or functions. It is a method to calculate the cost of services. At the end of specified period, the cost of operating a service center grouped under suitable headings. To find out the cost per unit of services the department divided the aggregate cost by the quantity of services rendered during a specified period. The cost is classified into the variable and fixed cost. Under this costing, costs are ascertained at the end of the specified period.

The conversion of basic of material into services involves many stages and process. Under the service cost, valuation of work-in- progress comparatively easy in relation to other types. Services organizations only engaged in providing services to the public. They do not produce any article/ tangible goods. The service organizations engaged in providing the variety of services so it is difficult to provide a common cost per unit.  It differs from organization to organization.

Definition of Service Costing

CIMA defines as “cost accounting for services or functions E.x: canteens, maintenance, personnel. These may be referred to as service centres, departments or functions”. It is also known as ‘operating costing’ is used for establishing costs of services rendered or services offered for sale and no items are produced.

It is used in service organizations like transport companies, hotels, hospitals, power generation, colleges, boiler houses etc. The method of costing is similar to output costing.

Services costing per unit

Objectives of Service Costing

  1. It is used for computing the related operating cost.
  2. To collect actual cost under different heads.
  3. To decide the definite policy either to use own source or hire from outside for providing services especially in case of transport costing.
  4. To help the concern to take appropriate decision for reducing the service cost.