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Operations in Service Industry
Cost Management in Service Industry
Date: 01/10/10Submitted By:
Mrs. SheetalHajareKundan S Yadav , E 14
ffi . li k l with p ppli with ppli t t i q t ti ). / b kw t bli h Elements of cost management in service industry: Fixed costs: Fix p q ip ti t (t l ph t ti t ± h . i i .h wt pl bl t th t b b tt thi p it l p . t ( t . ltipl iq t t i i t . t th h thl i ti i f b i ti . ( t . f t p t t ffi h p t )i .C t i l . f it xp b tt ll th h t t l p ti xp / p h th w ll. b l Cost Management and pricing in Service Industry Lik th i t . i . l ti t it t t f it ti t i i th t will with th b i t t i . f tf . t l i t i t t h l : it t t / xp tb i t ll ffi i tl if it w t t f *B *A *U * R fl t *B * f w tif t t i i t xt h l it ll f l . t th i i i ti . q ipp l b i th i h ll b i th t b i p will b h t ffi i tl th i b k pt ffi i tl . th t if ¶t t i t i t ).t p i with th p th i i f k i f t lf i t. t t b i ti .f x . t i .Introduction M withi ll w th b i it p i t iz ti . f ti iti h l t l i ti it l w li k ti it . tiliti xp p t .
350 Cost incurred in providing room for one night by management: Rs. Commonly used pricing model in service industry: Price = cost + Markup Markup % on cost = (markup/cost)*100 Markup % on Price = (markup/price)*100 Example: Price of a hotel room per night:Rs. pricing of services would have to be done carefully to ensure that the same can be achieved. raw material. travel expenses etc. Firms that adopt this objective must work backwards from price and tailor cost to enable the desired margin to be delivered. Prices could be set at a level that reflects the average industry price. Pricing: The purpose of the business is to maximize profits and therefore. Other pricing objectives could be to help achieve the targeted sales. They include cost such as hourly pay for a contractor on a specific project.86% The various costs involved on a service business can be better understand with an example from hospitality industry. to maintain or enhance market share or to meet or prevent competition. Some available costs don¶t depend specifically on the number of product but are still variable such as advertising or promotion expenses. 250 Markup/profit = 350 ± 250 = 150 Therefore. Markup % on cost : (150/250)*100 = 75% Markup % on Price: (150/350)*100 = 42. . with small adjustments made for unique features of the company¶s specific offerings.Variable costs: Variabl t are expenses that do vary with the amount of servi e provided.
Often buildings and their associated costs are considered fixed. If nine more guests arrive to bring the total count to 60. If there are 60. An economic maxim is that ³in the long run all costs are variable. a count of 51 guests would require six staff. For instance. or additional night staff. or separate registration desks. referred to as step-variable or semi-variable. but in increments. the number of housekeeping staff needed is still only six. is for costs that change with volume. there are comparatively fewer additional costs up to 60. then 60 soaps would be used. . The next guest after that will require going to the next ³step´.´ In the example. f there are 50 guests. Variable Cost Variable costs are the total expense changes as volume changes.Example of a Hotel: The basis for each example is a hotel with 100 rooms. In the situation of a count of 51 guests. Interest and depreciation are other examples of fixed cost. they will use 50 soaps (one would hope). Why Variable Costs Are Important The goal of a business is to make a profit while providing a product or service. Step-Variable Costand Semi-Variable Cost An additional category. Costs over the Long Term An important distinction about the classification relates to the time period being discussed. If housekeeping staff can clean no more than 10 rooms each. or seven staff. Fixed Cost Costs are identified as fixed if they do not change as volume changes. whether there was one guest or one hundred. since they are not affected by small changes in volume. large changes in volume can necessitate adding rooms. Room supplies are a common variable cost. The supplies are directly related to the number of rooms that are filled. a late night registration desk would be attended by one person. An understanding of costs can help with the decisions needed to make that profit.
or activity centers. Activity Based Costing (ABC) is an alternative to the traditional way of accounting.based on the number of events or transactions that are taking place in the process of providing a product or service. A loyal customer is also a profitable customer. TYPICAL BENEFITS OF ACTIVITY-BASE COSTING: Identify the most profitable customers. A smaller hotel may pay for laundry at a rate per pound to an outside vendor. it may be worth making a one-time purchase of washing machines. And profits will follow a happy customer. This is why hotels can offer discount rates for additional guests. it is often better to convert variable to fixed cost. This situation is common for airlines. It assigns costs to products and services (cost drivers). Converting Variable to Fixed Costs When a business is growing. Activity Based Management can support managers to see how shareholder value can be maximized and how corporate performance can be improved. even at a lower rate. . it is best to convert fixed cost into variable. products and channels. Historically. in an organization. As it grows. Identify the least profitable customers.In this case. cost accounting models related indirect costs on the basis of volume. planning and control in both service and manufacturing organizations. Traditionally it is assumed that high volume customers are profitable customers. it benefits the hotel to add guests. ABC is a costing model that identifies the cost pools. As a result. condohotels and any service that has a large amount of variable cost. restaurants. products and channels. If volume is declining. Studies about customer profitability have unveiled that the above ideas are not necessarily true. ABC (Activity based accounting) model for service industry The rapid advancement of enormously expanding information technologies and vigorous global competition have caused the irrelevance of conventional management accounting systems (MAS) in providing useful information to assist management¶s decision making.
Easily identify the root causes of poor financial performance. Accurately predict costs.and detractors from. Equip managers with cost intelligence to stimulate improvements. one can arrive at customer's profitability. Determine the true contributors to. Deducting the product cost and the cost to serve each customer. . This method of dealing separately with the customer costs and the service costs. enables the identification of the profitability of each customer. Achieve better Positioning of products With the costing now based on activities. And Positioning the services accordingly. the cost of serving a customer can be ascertained individually.financial performance. Facilitate a better Marketing Mix Enhance the bargaining power with the customer. organizational structure and costs of resources. Track costs of activities and work processes. profits and resources requirements associated with changes in production volumes.
ABC has helped enterprises in answering the market need for better quality services at competitive prices.Continuous Improvement The implementation of ABC can make the employees understand the various costs involved. Activity Based Costing (ABC) is a dynamic method for continuous improvement. enterprises are able to improve their efficiency and reduce the cost without sacrificing the value for the customer. This has also enabled enterprises to model the impact of cost reduction and subsequently confirm the savings achieved. This will then enable them to analyze the cost. This is a continuous improvement process in terms of analyzing the cost. based on this. With Activity Based Costing any enterprise can have a built-in competitive cost advantage. the ABC method has contributed effectively for the top management's decision making process. and to identify the activities that add value and those that do not add value. Many companies also use ABC as a basis for a balanced scorecard. Overall. With ABC. to reduce or eliminate the non value added activities and to achieve an overall efficiency. improvements can be implemented and the benefits can be realized. so it can continuously add value to both its stakeholders and customers. Finally. . Analyzing the service profitability and customer profitability.