Question

In service organisations different costing systems may be appropriate for different types of services. Provide an example of a service organisation that may be suited to each of the following costing systems, and in each case, explain your choice: i) job costing ii) process costing iii) some form of hybrid costing

Answer 1

Costing refers to the technique of ascertaining the costs. In order to ascertain the costs, different methods of costing are applied for different industries depending upon their nature and type of manufacturing. The different costing methods include Job costing, Process costing, Hybrid costing, Operation costing etc.

1. Example of Service organisations that use Job Costing: Accounting firms, Advertising firms, dress tailoring firms etc would use Job costing method for determining the cost of their service output. Job costing method is more appropriate for situations where the service rendered are of the nature of distinctly identifiable services. The accounting works, electician works etc involves rendering of distinct services depending upon the requirements of customers. Therefore, Job costing will be the best suited costing method that could be applied for such organisations.

2. Example of Service organisations that use Process Costing: The service organisations that render services like Retail banking, Postal delivery, Credit Card etc would likely use Process costing method for preparing their Cost data. Such services involves assigning of similar services to mass customers where a uniform costing method is required for accounting uniform activities across different stages of rendering service output. Process costing system would likely serve the need where it assigns costs to masses of similar units and determines unit wise costs on an average basis.

3. Example of Service organisations that use Hybrid Costing: Some services are rendered to masses on an identical basis, as well as customized according to order by way of modifications beyond a baseline activity. Such activities combines the elements of both Job costing as well as Process costing. The best method for recording costs in such situations is Hybrid costing where it combines the use of Job costing as well as Service costing for identifying the cost of services.

For example, Mechanical work showroom exclusively for Harley Davidson motorcycles. It involves rendering of identical services over a baseline product, (that is repairing exclusively for Harley Davidson) and also individual modifications that are made (like assembling works) which are beyond the baseline level of processing and also distinct depending upon the needs of customers. Hybrid Costing will be most appropriate in such situations.