Chapter 9

Cost Accounting for Service

Businesses and the Balanced

Scorecard

Learning Objectives

LO1 Perform job order costing for service businesses.

LO2 Prepare budgets for service businesses.

LO3 Apply activity-based costing for a service firm.

LO4 Compare the results of cost allocations using simplified costing versus activity-based costing.

LO5 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 1,875

Total $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 $25 125

Total $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