Cost Accounting for Service Businesses

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Presentation transcript:

Cost Accounting for Service Businesses Chapter 9 Cost Accounting for Service Businesses

Learning Objectives Perform job order costing for service businesses. Prepare budgets for service businesses. Apply activity-based costing for a service firm. Compare the results of cost allocations using simplified costing versus activity-based costing.

Characteristics of a Service Business Typically have little or no inventory. Labor costs often comprise 75% or more of the total costs. Approximately 90% of jobs created in the U.S. in the past 20 year have been in service industries.

Job Order Costing for Service Businesses When the amount of complexity of service provided varies from customer to customer, a job order costing system should be used.

Job Cost Sheet The basic document used to accumulate costs for a service business. Will indicate labor time, labor rate, and the total cost for each labor category worked. Other direct costs may be traced to the individual jobs.

Budgeting for Service Businesses Revenue budget. Labor budget. Overhead budget. Other direct expenses budget. Budgeted income statement.

Activity-Based Costing in a Service Firm Firms that use activity-based costing attempt to shift as many costs as possible out of the indirect cost pool and into direct cost pools that can be specifically traced to individual jobs. Remaining costs are separated into homogeneous cost pools and allocated to individual jobs via separate allocation bases for each pool.

Activity-Based Costing vs. Simplified Costing Activity-based costing is worthwhile to implement when different jobs use resources in different proportions. Should be a cost/benefit decision as to whether to implement a more sophisticated costing system.

Simplified Job Costing for a Law Firm Client A Client B Professional labor cost: 50 hours X $50 $2,500 75 hours X $50 $3,750 Professional support: 50 hours X $25 1,250 75 hours X $25 1,875 Total $5,625

Activity-Based Costing for a Law Firm Client A Client B Partner labor cost: 40 hours X $100 $4,000 5 hours X $100 $500 Associate labor cost: 10 hours X $37.50 375 70 hours X $37.50 2,625 Legal support: 50 hours X $20 1,000 75 hours X $20 1,500 Secretarial support: 40 hours X $25 5 hours X $25 125 Total $6,375 $4,750