50service costing

Service costing can be used by companies operating in a service industry or by companies wishing to establish the cost of services carried out by some of their departments. Service organizations do not make or sell tangible goods. Service costing or function costing is a costing method concerned with establishing the costs, not of items of production, but of services rendered.

Specific characteristics of services are as follows. Simultaneity, intangibility, heterogeneity, perish-ability.

Consider the service of providing a haircut.

The production and consumption of a haircut are simultaneous, and therefore it cannot be inspected for quality in advance, nor can it be returned if it is not what was required.

A haircut is heterogeneous and so the exact service received will vary each time:not only will two hairdressers cut hair differently, but a hairdresser will not consistently deliver the same standard of haircut.

A haircut is intangible in itself, and the performance of the service comprise many other intangible factors, like the music in the salon, the personality of the hairdresser, the quality of the coffee.

Haircuts are perishable, that is, they cannot be stored. You cannot buy them in bulk, and the hairdresser cannot do them in advance and keep them stocked away in case of heavy demand. The incidence of work in progress in service organizations is less frequent than in other types of organization. Note the mnemonic “ship” for remembering the specific characteristics of services.