Managerial Accounting Concepts to the Service Industry (100 Points) Many of the concepts in managerial accounting were first developed for the manufacturing environment. Do you think the same...

Different costs in service industry
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Different costs in service industry                                5
Costs in service Industry
Introduction
Cost accounting and managerial accounting is the field of accounting which associates with the allocation of different costs to the product or service. Since inception, it is considered that the costs are allocated usually to a manufacturing company which is not true. There are different costs like variable costs, fixed costs and mixed costs which are allocated to the service industry as well.
Costs and Cost behaviour
Cost behaviour is the way which alters the costs with the change in level of activity. In a service industry, the cost behaviour is analysed by the volume of services provided. As per the industry and the activity analysed, the costs are usually divided into three major ways in which they behave. These costs includes the variable costs, fixed costs and mixed costs (Wilson R 1997). In this paper, we will focus on analysing the costs for the law firm.
Variable costs
Variable costs are the costs which varies with the level of activities. In a manufacturing firm, the variable costs usually includes direct materials, and direct labor. These are the variable costs and varies with the production, some of the examples of variable costs includes cloth used in the garment, clay, timber used, direct labor hours. These costs are associated directly with the level of activity. At 0 level of activity, the variable cost of the service will be 0.
There are different variable costs that are associated with the service industry, the first being the labor or the contractual costs.
Considering an example of a law firm which performs different litigation work for their clients. The employees are paid on the basis of their billable hours i.e. all the employees have to work for certain hours and the wages of the hours worked is calculated on the basis of the hours worked by the employees.
Fixed costs
Fixed costs are the costs that remain fixed irrespective of the level of activity. These costs will be incurred by the company even if the company does not render any services to the clients. These costs are fixed. These costs includes the costs associated with rent expense, salary expenses. These expenses will be incurred without considering the number of cases or number of litigation hours by the company. The fixed costs is usually based on time period and is not affected by the output or the activity held by the company (Mastilak M. Christian, Xavier Univ, 2011)
Mixed costs
Mixed costs are the costs which are a mix of variable costs and the fixed costs. This costs has a proportion of variable costs and a proportion of fixed cost. A portion of the cost remains fixed and the other varies with the number of activity. Example: In a litigation firm, the company pays fixed salary to the employee. The company also has a system of bonus in which the company is given bonus, if the company handles more than 5 clients in a month. The bonus is calculated on basis of the number of clients above 5. Thus, the fixed proportion of salary is considered as the fixed costs and the bonus for the clients is considered as the variable costs. With the level of clients handled by the employee, the bonus of the employee will increase.
Job order costing
As per the costing systems, the company usually has two kinds of costing systems which includes job order costing and process costing.
Process costing is the method under which same service is provided or under the manufacturing company, identical products are manufactured by the company. Under this costing, the costs is allocated among all the products that has been manufactured over the period. Under service costing, the cost will be distributed to all the services that gas been rendered.
Job order costing is the kind of costing which is applicable to the costs for a specific jobs, contract or order. Under job order costing, the work is customized. The order or the job to perform is different.
Considering the example of a litigation firm, the company would follow a job order costing as the case of every individual is different. For job order costing these are different approaches that the company needs to follow. The company has to make different job sheets for different jobs that has been rendered by the company. First the company will chose a cost object and then identify the direct costs for the job. Under the litigation company, the direct costs will be the cost of the lawyer who is going to handle the case of the client. The costs that is identified is usually allocated on the basis of the base. For the litigation firm, the base of the cost allocation will be the level of the case and then number of hours the lawyer gives to the client. It can also be based on the number of hearings. As per the number of hearings or the hours put on the case, the indirect costs are allocated to a particular case.
Thus, the application of job order costing is same as that is for a manufacturing company. The only difference between the two is that the service organisation usually have no inventory or negligible inventory. The company does of cost of goods sold, but usually records cost of services. The tracing of direct materials is also not done under a service organisation as there is no inventory or products associated with the job. The company records the direct labor in tracing and prearing the timesheet as it is the most important part in a service organisation. The service organization records the predetermined overhead rate usually on the basis of the direct labor hours which is its allocation base (Boy’d L.H. 2013).
References
Wilson R.(1997) - Strategic Cost Management, Ashgate Publishing Limited, Vermont, 1997
Boy’d L.H. (2013) “the use of Cost Information for Making Operating Decisions”, Journal of Cost Management, May/June 2013 pp 13-19
Mastilak M. Christian, Xavier Univ., (2011) “Cost pool classification and judgment performance’, Accounting Review, Sept. 2011, issue 5