This is a method of costing employed to ascertain the cost of providing a service e.g. road transport undertakings, electricity supply, canteen services, airways services etc.
In general, the unit of cost in service costing may be predetermined as follows:
In some cases, composite cost units may be applied e.g. in transport undertakings the cost unit may be cost per passenger per kilometer or cost per ton per kilometer; in hotels, the composite cost unit may be cost per occupied beds per night etc.
Whatever cost unit is decided upon, the calculation of cost per unit is done in a similar fashion as follows:
In service costing, costs are classified into:
i. Fixed cost-these are normally expressed on a per annum basis.
ii. Operating/running costs – are all variable costs.
iii. Maintenance costs- may be semi variable.
The following data relates to a motor running company.
The vehicle runs on average 20km/hr. Interest on capital (on the cost of the vehicle) is charged at the rate of 5% per annum. Estimated life of the vehicle is 200,000 km. Annual distance covered is 60,000 km. The cost of the vehicles is ksh. 5,000,000. Drivers wages is ksh. 600 per hour. Petrol per gallon ksh. 500. Repairs cost per km is ksh. 25. Tyre allocation per km is ksh. 10.
Other annual expenses include: License ksh.100,000
Insurance ksh. 110,000
Garage rent ksh. 80,000.
Supervision and salaries ksh. 150,000 The vehicle runs 20km/gallon
Compute the cost/km run the vehicle.
Note in the above case; the cost unit is a km. Annual distance covered = 60,000km
a) The average length of stay in Mt. Sinai Health Centre
b) The bed occupancy percentage in Angels of Mercy hospital
c) The cost per in-patient day for both hospitals
d) The cost per out-patient attendance for both hospitals
e) Comment on the results
(Consider one year to have 365 days)
Recommended texts for further reading
Costing T. Lucey
Costing, An Introduction, Colin Drury Wheldon‟s, “Costing Simplified”
Colin Drury, “Management and Cost Accounting”
Bhabatosh Banerjee, “Cost Accounting Theory and Practice”