Chapter 9 Cost Accounting for Service Businesses and

Chapter 9 Cost Accounting for Service Businesses and the Balanced Scorecard

Learning Objectives LO 1 Perform job order costing for service businesses. LO 2 Prepare budgets for service businesses. LO 3 Apply activity-based costing for a service firm. LO 4 Compare the results of cost allocations using simplified costing versus activitybased costing. LO 5 Prepare a balanced scorecard for various business entities.

Characteristics of a Service Business § Typically have little or no inventory. § Labor costs often comprise 75% or more of the total costs. § Approximately 90% of jobs created in the U. S. in the past 20 year have been service industries.

Job Order Costing for Service Businesses § When the amount of complexity of service provided varies from customer to customer, a job order costing system should be used.

Job Cost Sheet § The basic document used to accumulate costs for a service business. § Will indicate labor time, labor rate, and the total cost for each labor category worked. § Other direct costs may be traced to the individual jobs.

Budgeting for Service Businesses § § § Revenue budget. Labor budget. Overhead budget. Other direct expenses budget. Budgeted income statement.

Activity-Based Costing in a Service Firm § Firms that use activity-based costing attempt to shift as many costs as possible out of the indirect cost pool and into direct cost pools that can be specifically traced to individual jobs. § Remaining costs are separated into homogeneous cost pools and allocated to individual jobs via separate allocation bases for each pool.

Activity-Based Costing vs. Simplified Costing § Activity-based costing is worthwhile to implement when different jobs use resources in different proportions. § Should be a cost/benefit decision as to whether to implement a more sophisticated costing system.

Simplified Job Costing for a Law Firm Client A Client B Professional labor cost: 50 hours X $50 $2, 500 75 hours X $50 $3, 750 Professional support: 50 hours X $25 1, 250 75 hours X $25 Total 1, 875 $3, 750 $5, 625

Activity-Based Costing for a Law Firm Client A Client B Partner labor cost: 40 hours X $100 $4, 000 5 hours X $100 $500 Associate labor cost: 10 hours X $37. 50 375 70 hours X $37. 50 2, 625 Legal support: 50 hours X $20 1, 000 75 hours X $20 1, 500 Secretarial support: 40 hours X $25 1, 000 5 hours X $25 Total 125 $6, 375 $4, 750

The Four Categories of a Balanced Scorecard § § Financial Customer Internal Business Processes Learning and Growth

Financial § § Return on Investment (ROI) Operating Income Gross Margin Percentage Revenue from New Products

Customer § § Number of New Customers Market Share Percentage of Products Returned Customer Satisfaction Surveys

Internal Business Processes § Percentage of On-Time Deliveries § Percentage of Defect-Free Units Produced § Time Taken to Replace Defective Products § Time From Receipt of Order to Shipment

Learning and Growth § § § Employee Turnover Number of Employee suggestions Percentage of Employees Trained in New Processes § Percentage of Compensation Based on Employee/Team Performance