Chapter 6 Service costing Copyright ª 2006 McGraw­Hill Australia Pty Ltd 6­ 1 What are service organisations? • … organisations that deliver help, utility or care, providing an experience, information or other intellectual content where the majority of the value is intangible rather than residing in any physical products Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 6-2 Differences between service and manufacturing businesses • Most services are intangible • Service outputs are often heterogeneous • Services are often consumed as they are produced • Services are perishable and cannot be stored • Some services entail some minor physical or tangible aspects Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 6-3 Other aspects of services • Retailers and wholesalers are part of the service sector – They have different characteristics to most service firms – Provide tangible goods as well as services • Services are produced outside the service sector – Most manufacturing firms provide a service component to their product – Upstream and downstream parts of the value chain may produce services Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 6-4 Cost classifications in service organisations Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 6-5 The value chain in service firms continued Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 6-6 The value chain in service firms • Upstream activities and costs – Only large service firms may have R&D and design activities • Downstream activities and costs – Marketing and customer support • Production and delivery activities and costs – Production and delivery may occur simultaneously – Direct labour may dominate and materials may not be significant • Upstream and downstream costs may be regarded as overhead costs for service costing purposes Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 6-7 The value chain for retailers and wholesalers • Upstream activities and costs – R&D and design unlikely to be relevant – Purchasing activities important • Production activities and cost – The sales transaction and (sometimes) distribution are included – Sales and distribution may occur at the same time • Downstream activities and cost – Marketing activities, delivery and customer support are important Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 6-8 Service production environments Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 6-9 Professional services • Staffed by professional staff who provide personal services and serve relatively few customers • The front office is more important than the back office • Examples: medical, legal, accounting, management consulting and architectural businesses Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 6-10 Mass services • Involve many customers, each one requiring limited staff time and limited customisation