Food for thought

What are service businesses?

Service businesses delivery help, care or utility and provide experience, information or other intellectual content. In contrast to manufacturing businesses that have the ability to store inventory, services are:

  • Generally consumed as they are produced
  • The value created is intangible rather than physical.
  • Direct labor dominates the costs
  • Most other costs are indirect or overheads.

Categorising service businesses

There are differences in the types of service businesses and although not set in stone, we can create general categories that can help a business think about the way costs are applied to the services offered.

  • Professional Service firms such as accountants, consultants and architects mostly involve people rather than products to service a (relatively) few number of customers. They generally require larger numbers of staff, as each member can spend a lot of time producing and delivering a customised service. Due to the relative low number of customers a detailed system such as job costing is feasible. The production process for each client is unique therefore reliable estimates can be obtained by assigning costs of resources to each service (Job)
  • Service shops such as hotels, cafes, restaurants and workshops generally processes more customers and require less staff as the services produced are less customised. They include a combination of both products and people. The level of direct labour costs are lower than professional services, however indirect costs can be higher. In this category the level services are customised can vary greatly and as a result the job costing method maybe suitable where the business has fewer customers. Where the volume of clients increases and the processes for delivering the service becomes more standardised, a hybrid costing system that uses both job and process costing features maybe more suitable.
  • Mass services include transport, telecommunication or couriers that generally use equipment rather than people. They focus on what is delivered, rather than how. Most products have very little customisation, customer contact time is limited and processes are generally repetitive. In mass service entities, tracking costs to each service is not usually feasible. Although labour costs can be high they are generally indirect. They focus on the provision of facilities, where equipment is a major input that also adds to indirect costs. Although these costs are indirect to the services themselves, these costs can usually be tracked to processes. Costs of services can be estimated quite reliably by averaging production process costs over the number of services provided using a process costing system.

Food for thought….

Have a great weekend!


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