Chapter9

Chapter 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 activitybased 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 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 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 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   