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Questions and Answers
What is a primary reason service costs are often not integrated into the accounting ledger?
What is a primary reason service costs are often not integrated into the accounting ledger?
- Service costs are always recorded in cost of goods sold.
- Service firms do not track any expenses.
- Service costs cannot influence profitability.
- Service costs are hidden in operating expenses. (correct)
Which costing system is most appropriate for heterogeneous services?
Which costing system is most appropriate for heterogeneous services?
- Process costing
- Hybrid costing
- Job costing (correct)
- ABC costing
Under AASB 102, which type of service firms need to account for work-in-process?
Under AASB 102, which type of service firms need to account for work-in-process?
- Firms that complete all jobs within one accounting period
- Firms involved in long-term projects like engineering or consulting (correct)
- Firms with no inventory
- Firms with standardized service offerings
Which of the following is NOT a purpose of understanding service costs?
Which of the following is NOT a purpose of understanding service costs?
What are accumulated costs of jobs in service firms primarily used for?
What are accumulated costs of jobs in service firms primarily used for?
What is the main focus of service firms compared to manufacturing firms?
What is the main focus of service firms compared to manufacturing firms?
What aspect must be analyzed before the implementation of Activity Based Costing (ABC)?
What aspect must be analyzed before the implementation of Activity Based Costing (ABC)?
Which of the following is NOT one of the four hierarchies of cost in Activity Based Costing?
Which of the following is NOT one of the four hierarchies of cost in Activity Based Costing?
How do service firms differ from manufacturing firms in terms of output?
How do service firms differ from manufacturing firms in terms of output?
Why is it necessary to revisit the learning objectives (LOs) after completing a unit?
Why is it necessary to revisit the learning objectives (LOs) after completing a unit?
Which statement accurately describes the consumption of services in comparison to manufactured goods?
Which statement accurately describes the consumption of services in comparison to manufactured goods?
What is one significant challenge of applying traditional costing systems to service firms?
What is one significant challenge of applying traditional costing systems to service firms?
What is one of the key features of service firms regarding their customer interactions?
What is one of the key features of service firms regarding their customer interactions?
What distinguishes service costs from manufacturing costs regarding work in progress?
What distinguishes service costs from manufacturing costs regarding work in progress?
Which classification of service costs helps managers assess which costs will fluctuate with activity levels?
Which classification of service costs helps managers assess which costs will fluctuate with activity levels?
In terms of cost objects, how are direct costs different from indirect costs?
In terms of cost objects, how are direct costs different from indirect costs?
What classification of cost indicates whether a manager has control over it?
What classification of cost indicates whether a manager has control over it?
How are upstream and downstream costs related in a value chain?
How are upstream and downstream costs related in a value chain?
Which costing system is primarily used for specialized services that cater to individual customer needs?
Which costing system is primarily used for specialized services that cater to individual customer needs?
What aspect of service delivery highlights the simultaneity of production and consumption?
What aspect of service delivery highlights the simultaneity of production and consumption?
Which factor does NOT categorize service costs?
Which factor does NOT categorize service costs?
Which costing system is primarily used when each client has specific loan requirements?
Which costing system is primarily used when each client has specific loan requirements?
What is the main characteristic of services that use process costing?
What is the main characteristic of services that use process costing?
Why is Activity Based Costing (ABC) suitable for service firms?
Why is Activity Based Costing (ABC) suitable for service firms?
In hybrid costing, what does the term 'non-customized' refer to?
In hybrid costing, what does the term 'non-customized' refer to?
What challenge does process costing present in mass services?
What challenge does process costing present in mass services?
What is one way that service cost calculations help increase profitability?
What is one way that service cost calculations help increase profitability?
What role does overhead cost play in service costing?
What role does overhead cost play in service costing?
What is a key benefit of using the four hierarchies of cost in Activity Based Costing?
What is a key benefit of using the four hierarchies of cost in Activity Based Costing?
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Study Notes
Service Firm Costing
- Service firms provide essential services in most economies.
- Service costing is crucial for enhancing customer and shareholder value.
- Service firms differ from manufacturing firms in terms of output tangibility, output homogeneity, production and simultaneous consumption of service, and the perishable nature of services.
- Cost Classification:
- Behavior: Variable Costs and Fixed Costs
- Traceability: Direct Costs and Indirect Costs
- Controllability: Controllable Costs and Uncontrollable Costs
- Value Chain: Upstream and Downstream Costs
- Costing Systems for Services:
- Job Costing: Used for customer-based, heterogeneous professional services.
- Process Costing: Used for mass-produced, homogeneous services.
- Hybrid Costing: Used for services with combined elements of job and process costing.
- Activity-Based Costing (ABC): Used for detailed cost analysis of services, especially in the presence of significant overhead costs.
- ABC uses four hierarchies of cost: unit, batch, product, and facility.
- Key Considerations for Service Costing:
- No inventory to value, so the influence of external reporting requirements is less relevant.
- Individual service costs may not always be accumulated separately in the general ledger.
- Costs are typically hidden in operating expenses, not in cost of goods sold (COGS).
- Service costs may not be integrated into the accounting ledger, which makes concepts like overhead over/under-absorption less relevant.
- Some service firms, like law firms, may have work-in-progress.
- Usefulness of Service Costs:
- Assessing service profitability.
- Deciding which services to produce, refine, or withdraw.
- Setting service fees and planning and controlling costs.
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