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Costing in Service Industry

Service Sector Costing

1. Importance of Service Sector

  • Contributes over 61 % of GDP (up from 59 % two years ago)
  • Generates ~25 % of government tax revenue via service taxes
  • Includes banking, insurance, transport, healthcare, tourism, telecom, IT/BPO, education, sports, culture, non‑profits, etc.

2. Why Cost Data Matters in Services

  • Pricing decisions:
    • Railways: AC vs. non‑AC coach operating cost
    • Hospitals: Cost of bypass heart surgery
    • IPL: Ticket pricing
  • Costing approach:
    • Many use job costing (e.g., L&T airport construction)
    • Some use operating costing (a hybrid system suited to continuous operations)

3. Operating Costing Example: Shatabdi Express

  • Cost object: Train number/name
  • Direct costs:
    • Staff salaries & allowances (driver, guard, TTEs, attendants)
    • Consumables (fuel, catering supplies)
    • Depreciation (engine, coaches)
  • Allocated costs:
    • Electricity: by distance traveled
    • Corporate overhead: by distance or passenger‑km
  • Station charges (per station passed, halted, originated, terminated)
    • Basic pass‑through charge for all trains
    • Halting charge for stops
    • Origination & termination charges at start/end stations

4. Core Costing Steps (Applies to Services)

  1. Establish cost object (train, surgery, policy, loan)
  2. Accumulate costs under relevant cost objects
  3. Assign direct costs based on actual usage
  4. Allocate common (overhead) costs using logical bases

5. Process Costing (can be used in Financial Services)

  • End products: Identical units (insurance policies, deposit accounts)
  • Workflow: Papers/processes move through stages (each = cost center)
  • Cost drivers: Time per policy/application, staff resources
  • Outcome: Cost per policy (e.g., ₹2,400) or per loan application

6. Hospital Case Study: United Medicare

6.1 Departments & Cost Objects

  1. Revenue‑earning:
    • Reception & Records
    • Consulting (resident & visiting)
    • Surgical (OR hours + doctor fees)
    • Testing & Scanning (outsourced equipment rent)
    • Stores (drugs + 10 % markup)
    • Hospitalization (room‑days + doctor fees)
  2. Support:
    • Administration (accounts, HR, maintenance, transport, housekeeping)
    • Outsourced: Canteen, Security

6.2 Data Collection

  • Volumes & revenues:
    • 500 registrations @ ₹100
    • 2,000 resident consults @ ₹200
    • 6,000 visiting consults (+₹100 markup) → ₹1 million net
    • 60 operations / 200 OR‑hrs @ ₹5,000/hr + consumables
    • 50 rooms, 40 occupied → 1,200 room‑days @ ₹1,000/day
  • Costs:
    • Salaries (110 employees) = ₹2.15 million
    • Stationery & consumables = ₹0.277 million
    • Equipment depreciation = ₹0.807 million
    • Building depreciation = ₹0.150 million
    • Admin dept.: ₹0.850 million + ₹0.012 million share of building

6.3 Allocation of Admin & Building Costs

  • Potential bases: Employees, salary cost, revenue, floor‑area
  • Chosen base: Revenue (departments generating more revenue consume more admin services)
  • Revenue split:
    • Hospitalization: 46 %
    • Surgical: 39 %
    • Others: 15 %

6.4 Final Cost & Profitability

  • Cost summary per service:
    • Registration: Cost ₹237 vs. ₹100 charge → loss
    • Consulting: Profitable
    • Surgery: Cost ₹5,471/hr vs. ₹5,000 charge → loss
    • Room‑day: Cost ₹1,349 vs. ₹1,000 charge → loss
    • Stores: Markup 10 % vs. cost driver 25 % → under‑recovery
  • Overall result: Net loss ~₹94,219 for the month
  • Target: 20 % profit margin (≈25 % markup on cost)
  • Recommendations:
    • Raise surgical & room‑rent rates
    • Increase service volumes
    • Implement cost control (e.g., staff rationalization)
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