Title TOPIC 6 PRODUCT COSTING.pdf ✅

Uses of batch costing Batch costing is appropriate in following circumstances: ➢ Where similar number of items are made for each order. ➢ Where a business produces a single item to meet customer’s specifications but where the product being made contains components that are also used in other products. Such components will be made in batches. Service Costing Service costing is a costing method concerned with establishing the cost, not for items of production, but the cost of services provided. It is also called operation or function costing. Service organisations do not make or sell tangible goods. Profit seeking service organisations include accountancy firms, law firms, transport companies, hair salons, banks and hotels. Non-profit organisations include hospitals, schools and libraries. THE USE OF SERVICE COSTING Service costing is used in: ➢ External Services: provided by a company in a service industry, for example car hiring services, transport services, courier services, etc. ➢ Internal Services: carried out by internal departments of a company, for example the costs of the vans or lorries used in distribution departments, the costs in computer departments or costs for staff canteens. FEATURES OF SERVICE COSTING 1. Intangibility: Output is ‘intangible’ rather than a tangible product. 2. Perishability: Services are not ‘storable’ and cannot be bought in bulk. 3. Simultaneity: Service is performed and consumed simultaneously. 4. Heterogeneity: Nature and output is never standardized as human input is a major element of a service 5. Cost nature: In a service industry sector a higher proportion of costs incurred are indirect as compared to direct 6. Composite cost units: More than one cost units like cost per patient/night, cost per passenger/mile. SERVICE COSTING COMPARED WITH PRODUCT COSTING ➢ Labour element in service costing is more prominent than material used ➢ There is no standardized process for recording of material, labour and other expenses. These all vary subject to nature of service ➢ Not all services are revenue generating; customer service centres, distribution facility, libraries etc are main examples. So purpose of service costing may not, necessarily, be establishing a profit or loss attributable to that service but rather to provide the