Cost accounting in service organization

Created by Fouzia ghani (CA 476319)

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ABSTRACT:

With rising prices and increased competition, service companies are

finding that knowing the costs of their products and services is vital to
their health, if not to their existence. However, many of these
companies have found their cost accounting systems less than
satisfactory. This author points out that many service companies use
traditional product cost techniques, which are inappropriate for them.
He explains why these techniques fail and describes a system of
unique costs that should be successful.

Introduction:

Types of Costs in Cost Accounting

Although there are many types of costs that businesses can incur depending on their
industry, below are a few of the most common costs involved in cost accounting.

Direct Costs
A direct cost is a cost that's directly tied to the production of a product and typically
includes direct materials, labor, and distribution costs. Inventory, raw materials, and
employee wages for factory workers are all examples of direct costs.

Indirect Costs
Indirect costs can't be directly tied to the production of a product and might include the
electricity for a factory.

Variable Costs
Costs that increase or decrease with production volumes tend to be classified
as variable costs. A company that produces cars might have the steel involved in
production as a variable cost.

Fixed Costs
Fixed costs are the costs that exist to keep the company running and don't fluctuate with
sales and production volumes. The lease on a factory building or equipment would be
classified as fixed costs.

Operating Costs
Operating costs are the costs to run the day-to-day operations of the company.
However, operating costs—or operating expenses—are not usually traced back to the
product being manufactured and can be fixed or variable.
Practical study of organization:

Alternatively, cost accounting is meant for those who are inside the organization and are
responsible for making critical decisions. There is no legal requirement for cost
accounting—unlike financial accounting for publicly traded firms.

Cost accounting is distinct and separate from general financial accounting, which is
regulated by generally accepted accounting principles (GAAP) and is critical for creating
financial statements.1

Cost accounting is helpful because it allows executive management of companies to

understand how to use its resources more effectively by tracking and measuring them
and studying their effects.

Data collection methods:

Inclinometer data collection

A recorder was placed on the trunk between the shoulder blades and one on each
upper arm over the medial deltoid. Workers came in before their shift for
instrumentation and calibration, then were measured during their regular work tasks
for the duration of the shift. Data were downloaded to a computer and backed up on
a hard drive at the end of the shift.

Observation data collection

Researchers video-filmed the workers continuously during one half of the shift. This
involved following the workers while they performed their regular work tasks and
endeavouring to capture their trunk and shoulder postures.

Questionnaires data collection

Prior to starting their work shift, workers filled out a short questionnaire regarding
their current perceived fatigue and body pain. After the work shift was completed,
the workers filled out a post-shift questionnaire which repeated the fatigue and body
pain questions, as well as including items on the amount of time spent performing
specific postures and tasks during that particular shift.

. Strengths are the method’s distinctive

features or competences at a higher level
compared to other
methods applied mainly for the same
purpose, namely the company’s efficient
management, which ensures a
certain advantage over them.
2. Weaknesses are features that the method is
lacking or which are only poorly represented
in comparison
to the other studied methods.
3. Opportunities represent external exposure
obtained by taking advantage of various
information provided
by that method, in order to profitably exploit
the arising opportunities.
There are opportunities for each method and
these must be identified to timely determine
the strategy for
their fructification or they can be created,
especially on the basis of results arising
from various interpretations
given to information in the economic context.
4. Threats are exposures to negative elements
or to elements with negative impact, which
may occur during
a method, in other words, situations or events
that may have a material adverse effect on the
manager’s ability to
effectively manage the entity in order to
fully achieve its objectives, thus decreasing
its economic and financial
performance. Similar with opportunities,
threats of different nature and causes may
occur according to the
company’s specific activities and its
competitive environment. Timely
apprehension of threats allows adoption of
appropriate measures in order to avoid or
minimise their impact.
. Strengths are the method’s distinctive
features or competences at a higher level
compared to other
methods applied mainly for the same
purpose, namely the company’s efficient
management, which ensures a
certain advantage over them.
2. Weaknesses are features that the method is
lacking or which are only poorly represented
in comparison
to the other studied methods.
3. Opportunities represent external exposure
obtained by taking advantage of various
information provided
by that method, in order to profitably exploit
the arising opportunities.
There are opportunities for each method and
these must be identified to timely determine
the strategy for
their fructification or they can be created,
especially on the basis of results arising
from various interpretations
given to information in the economic context.
4. Threats are exposures to negative elements
or to elements with negative impact, which
may occur during
a method, in other words, situations or events
that may have a material adverse effect on the
manager’s ability to
effectively manage the entity in order to
fully achieve its objectives, thus decreasing
its economic and financial
performance. Similar with opportunities,
threats of different nature and causes may
occur according to the
company’s specific activities and its
competitive environment. Timely
apprehension of threats allows adoption of
appropriate measures in order to avoid or
minimise their impact.
SWOT of Cost Accounting
Often, the simplest and most important objective of cost accounting is to determine
selling prices. A business that sells sandwiches, for example, would need to track the
cost of bread, lettuce, sandwich meats, mustard, and other ingredients. Otherwise, it
would be difficult to calculate how much to charge for a sandwich.

Cost accounting is also used to help with cost controls. Firms want to be able to spend
less on their inputs and charge more for their outputs. Cost accounting can be used to
identify inefficiencies and apply the necessary improvements needed to control costs.
These controls can include budgetary controls, standard costing, and inventory
management.

ANNEX:
https://www.researchgate.net/publication/314826994_Developments_on_SWOT_analysi
s_for_costing_methods
https://sheridancollege.libguides.com/c.php?g=384447&p=2606161