Principles of Cost Accounting 15 th edition Edward J. VanDerbeck © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 1

Chapter 9 Cost Accounting For Service Businesses and the Balanced Scorecard 2

Learning Objectives LO1Perform job order costing for service businesses. LO2Prepare budgets for service businesses. LO3Apply activity-based costing for a service firm. LO4Compare the results of cost allocations using simplified costing versus activity-based costing. LO5Prepare a balanced scorecard for various business entities. 3

Characteristics of a Service Business Little or no inventory. Little or no inventory. Labor costs often comprise three-fourths or more of the total costs. Labor costs often comprise three-fourths or more of the total costs. As of June 2009, service businesses employed roughly 85% of U.S. non-farm workers and this percentage is expected to grow. As of June 2009, service businesses employed roughly 85% of U.S. non-farm workers and this percentage is expected to grow. 4

Job Order Costing for Service Businesses When the amount and complexity of services provided varies substantially from customer to customer, a job order costing system should be used, just as the manufacturers of differentiated products use such a system. When the amount and complexity of services provided varies substantially from customer to customer, a job order costing system should be used, just as the manufacturers of differentiated products use such a system. 5

Job Order Cost Sheet The basic document used to accumulate costs for a service business. The basic document used to accumulate costs for a service business. Indicates labor time, labor rate, and the total cost for each labor category worked. Indicates labor time, labor rate, and the total cost for each labor category worked. Because direct labor cost is the single largest cost to the firm, the amount of direct labor cost determines the amount of overhead charged to each job. Because direct labor cost is the single largest cost to the firm, the amount of direct labor cost determines the amount of overhead charged to each job. 6

Budgeting for Service Businesses Revenue budget. Revenue budget. Labor budget. Labor budget. Overhead budget. Overhead budget. Other direct expenses budget. Other direct expenses budget. Budgeted income statement. Budgeted income statement. 7

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. 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. Remaining costs are separated into homogeneous cost pools and allocated to individual jobs via separate allocation bases for each pool. 8

Allocations Using Simplified Costing Versus Activity-Based Costing Activity-based costing is worthwhile to implement when different jobs use resources in different proportions. 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. Should be a cost/benefit decision as to whether to implement a more sophisticated costing system. 9

Simplified Job Costing for a Law Firm Client A Client B Professional labor cost: 50 hours X $50 50 hours X $50$2, hours X $50 75 hours X $50$3,750 Professional support: 50 hours X $25 50 hours X $251, hours X $25 75 hours X $251,875 Total $3,750 $5,625 10

Activity-Based Costing for a Law Firm Client A Client B Partner labor cost: 40 hours X $ hours X $100$4,000 5 hours X $100 5 hours X $100$500 Associate labor cost: 10 hours X $ hours X $ hours X $ hours X $37.502,625 Legal support: 50 professional hours X $20 50 professional hours X $201, professional hours X $20 75 professional hours X $201,500 Secretarial support: 40 partner hours X $25 40 partner hours X $251,000 5 partner hours X $25 5 partner hours X $25125 Total $6,375 $4,750 11

The Four Categories of a Balanced Scorecard Financial Financial Customer Customer Internal Business Processes Internal Business Processes Learning and Growth Learning and Growth 12

Financial Return on Investment (ROI) Return on Investment (ROI) Operating Income Operating Income Gross Margin Percentage Gross Margin Percentage Revenue from New Products Revenue from New Products 13

Customer Number of New Customers Number of New Customers Market Share Market Share Percentage of Products Returned Percentage of Products Returned Customer Satisfaction Surveys Customer Satisfaction Surveys 14

Internal Business Processes Percentage of On-Time Deliveries Percentage of On-Time Deliveries Percentage of Defect-Free Units Produced Percentage of Defect-Free Units Produced Time Taken to Replace Defective Products Time Taken to Replace Defective Products Time From Receipt of Order to Shipment Time From Receipt of Order to Shipment 15

Learning and Growth Employee Turnover Employee Turnover Number of Employee Suggestions Number of Employee Suggestions Percentage of Employees Trained in New Processes Percentage of Employees Trained in New Processes Percentage of Compensation Based on Employee/Team Performance Percentage of Compensation Based on Employee/Team Performance 16

Guidelines for a Good Balanced Scorecard To be effective the performance measures must be consistent with the company strategy. To be effective the performance measures must be consistent with the company strategy. There should not be too many performance measures. There should not be too many performance measures. Employees should be able to understand and have control over the performance measures by which they are evaluated. Employees should be able to understand and have control over the performance measures by which they are evaluated. 17