The following points highlight the seven main types of service costing. The types are: 1. Motor Transport Costing 2. Staff Canteen Costing 3. Hotel Costing 4. Boiler House Costing 5. Powerhouse Costing 6. Hospital Costing 7. Single or Output Costing.
Type # 1. Motor Transport Costing:
Objectives of Transport Costing are:
(a) To analyse operating costs such as cost of petrol, repair expenses, wages, etc.,
(b) To facilitate control of standing charges and running costs of the vehicles,
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(c) To assign costs to services rendered by each vehicle or group of vehicles,
(d) To compare the cost of using alternative models of transport with the cost of existing one,
(e) To fix the charges for using the service of internal transport or the charges for hiring out the vehicles,
(f) To compare the cost of running and maintenance of different vehicles.
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Collection of Cost Data:
A log book is maintained or daily log sheets are prepared for each vehicle. Log book or log sheet provides all the details required for controlling the vehicles. It indicates the kilometre run, load or passengers carried, hours used, and delays and the reasons for delays. It also gives details of supplies made to the vehicle (e.g. petrol, oil, grease).
Repair costs, when the vehicle is away from the garage, are recorded in the log book. Costs on repair by the company’s own staff are usually collected against each vehicle or for a group of similar vehicles. It is a good practice to maintain a repair ticket for each vehicle. A repair ticket shows the history of repairs.
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For internal use, transport costs are recovered using rate per hour or a rate per kilometre, determined based on the cost summary figures. Transport organizations fix rates for charging from their clients’ rate per ton-km or rate per passenger-km.
Ton-km and passenger-km are composite cost units and represent 1 km movement with 1 ton load or with one passenger as the case may be. If a vehicle has travelled 100 km with 15 ton load, the activity will be measured at 100 × 15, i.e. 1,500 ton-km. If a vehicle has travelled 100 km with 15 passengers, the activity will be measured at 1,500 passenger-km.
Cost Summary and Performance Report:
A meaningful analysis of service cost requires classification of expenses under the following three headings:
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(a) Fixed costs or standing charges,
(b) Operating and running costs, and
(c) Maintenance costs.
(a) Fixed Costs or Standing Charges:
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Standing charges are fixed costs that do not vary with the distance travelled by the vehicle or group of vehicles. Examples are insurance premium, tax, depreciation, part of driver’s wags, and interest on capital. It is inappropriate to apportion such charges to specific journeys.
(b) Operating and Running Costs:
Operating and running costs are incurred only when a vehicle is actually operated. Examples are cost of petrol, grease, and variable portion of driver wages. Those expenses vary, more or less, in direct proportion to the distance travelled by the vehicle or a group of vehicles.
(c) Maintenance Costs:
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Maintenance costs are semi-variable in nature and include costs of wear and tear. Examples are costs of repairs, costs of servicing, overheads, and costs of painting of the vehicles. The cost of hiring vehicles when companies own vehicles are under repair should also be included in the maintenance cost.
The cost of service by each vehicle or group of vehicles is compiled periodically in a cost summary and a performance report is presented before the management.
Type # 2. Staff Canteen Costing:
Most factory/office canteens are either fully or partly subsidized. Usually, the supervisor who is accountable to the personnel manager or to the works manager runs the canteen. The canteen normally provides main meals, snacks, and tea. The canteen supervisor is responsible for controlling costs and therefore collects costs in a manner that facilitates cost control.
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Costs are collected periodically under the following main account headings:
i. Provision – Meat, eggs, fish, vegetables, fruits, flour, rice, milk, vegetable oil, tea, coffee, sugar, soft drinks, etc.
ii. Labour – Supervisor, cooks, waiters, kitchen assistants, porters, etc.
iii.Services – Gas, power, electricity, steam, water, etc.
iv. Consumable stores – Table linen, cutlery, glass ware, crockery, cleaning materials, brushes, dustbins, etc.
v. Miscellaneous overheads – Rent and rates, depreciation, insurance premium, etc.
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Revenue for the canteen comes from the sale of meals and subsidy. Usually coupons of different colours are issued to workers, according to the type of meal (e.g. main meal, snacks, tea, etc.) provided.
Accumulation of cost with the objective of fixing prices for main meals, snacks, tea, etc. is difficult because it requires equating one type of food with another so that a common denominator can be obtained to determine the average cost per meal. However, if such a common denominator cannot be ascertained, cost per employee may be determined to facilitate control.
Although it is difficult to determine the cost per meal, the canteen supervisor with his experience estimates the cost involved for each type of meal provided. The canteen supervisor should have the knowledge of the number of meals that can be served with various combinations of meat, fish and vegetables, and how many cups of tea can be provided with one kilogram of tea or five litres of milk.
Type # 3. Hotel Costing:
The hotel operation can be divided into various cost centres such as:
(a) Laundry
(b) Housekeeping
(c) Restaurant
The cost of each cost centre is collected separately and cost per unit of output is determined for each cost centre. Cost unit for measurement of output might be different for each cost centre.
E.g., the ‘number of clothes washed’ is the most appropriate cost unit for a laundry, while for a restaurant, the number of meals provided is the most appropriate cost unit. The aim is to satisfy the information needs of the managers who are responsible for cost management in their respective areas.
Costs are collected under various ‘account heading’. Costs, which are incurred for specific cost centres, are assigned directly to those cost centres. Common costs are apportioned to various cost centres on some equitable basis.
In the hotel industry most costs are fixed, some of which cannot be influenced by the individual managers. Therefore, periodical cost reports should indicate ‘controllable costs’ and ‘uncontrollable costs’ separately. These reports compare actual costs and the budget with previous period’s costs.
Examples of account heading are rent, rates and taxes, depreciation, power for boiler, electricity, repairs and maintenance, and salaries and wages.
‘Bed-nights available’ and ‘bed-nights occupied’ are the possible cost units. Selection of the cost unit requires a careful consideration of cost-output relationships.
To fix tariff for accommodation or to fix a comprehensive tariff, costs are expressed as cost per ‘bed-night occupied’.
Type # 4. Boiler House Costing:
Costs to produce and use steam as shown in boiler house cost sheet are collected regularly by the cost office. The engineering department provides other statistical information (e.g. steam pressures, evaporation, metre readings, factory heating).
Costs may be grouped under the following headings:
i. Supervision – Salary of supervisors/engineers who are directly responsible to supervise boiler house operation and a proportion of the works manager’s salary.
ii. Labour – Coal handlers, stokers and ask removers.
iii. Maintenance – Repair and maintenance of plant and equipment including renewal of fire bars, replacement of fire irons, etc.
iv. Fuel – Coal, fuel oil, etc.
v. Water – The cost of purification and softening should be included.
vi. Fixed overhead – This includes rent, rates and taxes, depreciation, insurance, and possibly interest on the capital.
Type # 5. Powerhouse Costing:
Electricity can be generated by the use of either steam or fuel oil. If steam is used to generate electricity, the cost of electricity generated can be obtained from the steam production costs as well as other costs related to electricity generation.
The ‘Board of Trade Units’ is used as a cost unit for electricity generation.
Type # 6. Hospital Costing:
For costing purpose hospital services are divided into the following cost centres:
(a) Out patients department
(b) Wards
(c) Pathology centre
(d) Operation theatre
(e) Kitchen
(f) Laundry
(g) Cleaning
Costs are collected under natural account headings. Costs that can be identified with specific cost centres are assigned to them directly. Common costs are apportioned to various cost centres on some equitable basis. Fixed costs and variable costs are shown separately in the cost sheet.
Services are measured in terms of ‘bed-days available’ or ‘bed-days occupied’. However, as the service provided to patients vary a great deal, depending upon the illness, a single cost unit might not be appropriate to measure cost effectiveness at various cost centres. Therefore, it is preferable to use different cost units for different cost centres. E.g., for the operation theatre, cost can be expressed in terms of ‘each operation’.
Similarly, ‘inpatient day’ might be used as a cost unit for kitchen and laundry; ‘outpatient visit’ might be used as a cost unit for outpatient departments. Selection of the cost unit requires a careful consideration of all cost drivers.
E.g., to have better control, cost of operation theatre should be expressed in terms of ‘cost per standard operation’ and each operation, minor or major, should be converted into the number of standard operations. It is difficult to prescribe an appropriate cost unit for hospital services.
Type # 7. Single or Output Costing:
Unit Costing Principle:
Unit costing is used when products are identical.
It is logical to assume that identical cost units should have identical costs and therefore, cost per unit can be determined as:
Unit cost = Total cost/Number of units
Single or output costing method is used when the firm produces only one product or two or more grades of the same product.
When only one product is produced, ascertainment of cost per unit involves the collection and analyses of all costs incurred and then division of the total costs by the total production. Costs are collected element-wise and cost of each element is divided by the total production to determine the average cost per unit of each element. In this method work-in- progress is rarely considered because work-in-progress tends to remain constant.
Cost sheet prepared under this method shows the total cost and cost per unit. Figures for the previous period are shown for comparison and control.
Where several grades of products are produced, costs are apportioned to various grades on some equitable basis (e.g. market value of each grade).
Sometime, cost sheets are extended to show cost, income, and profit. The extended cost sheet is known as production account.
The fundamental difference between process costing method and output costing method is that the former is suitable for industries where the manufacturing process is continuous while the latter is used in industries where the manufacturing process is not continuous.
Output costing is suitable for assembly type production (e.g. automobile, wireless receiver, computer) and for industries, which produce homogeneous products (e.g. bricks, pencil, coal, sugar).