Cost Drivers Examples In Service Industry

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ABC has the same objectives in service firms as in manufacturing organizations. ABC can prove very useful to many service organizations such as airlines, insurance companies, banks, hos­pitals, hotels, railways, financial service firms. In these service organizations managers need accurate information about the cost of service being provided by them. Online casino real money free play. Further, such service firms require to use this information to improve their operations and to fulfill the needs of their customers in a more cost effective manner.

Examples of Cost Drivers Let's take a minute to look at some common costs drivers that affect businesses: Direct labor: this is exactly what the name indicates - the employees needed to work for a. A cost driver rate is the amount of indirect or variable cost assigned to each unit of cost driver activity. For example, you may apply indirect overhead to direct labor hours as $50 dollars per hour. In this case, for each hour of direct labor required for production, the company would then allocate $50 of indirect overhead costs to the.

Cost Drivers Examples In Service Industry List

Kaplan and Cooper suggest that service companies are ideal candidates for ABC, even more than manufacturing companies. Earlier, service organizations were government-owned or operated in highly regulated, protected and non-competitive environment. Thus, service organizations were not under any pressure to improve profitability by eliminating non-value added or non-profit activities. The prices of services were simply increased to cover cost increases. No efforts was made to design a cost system that accurately measures the costs and profitability of individual services.

Cost Drivers Examples In Service Industry Pdf

However, due to privatization, deregulation and increasing competition, the service organizations need to have cost and management accounting systems which can help them to accurately measure cost and resulting profitability for their services, customers and markets. Therefore, ABC would prove advantageous to service organizations to understand their cost base and to make decisions on value-added/non-value added activities. Kaplan and Cooper illustrate the use of ABC in banks for product and customer profitability analysis.

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The following are some of the activities and cost drivers in bank as identified by Kaplan and Cooper:

Drury and Taylers after making survey of UK Companies have concluded that service organi­zations are more likely to implement ABC systems. They found that 51% of the financial and service organizations surveyed, compared with 15% of manufacturing organizations, had implemented ABC.

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A cost driver:
  • Is any factor whose change causes a change in the total cost of a related cost object. Hence a change in the level of cost driver will cause a change in the level of the total cost of a related cost object.

Examples of cost driver used in the following business units:

  • Research & Development :- Number of research projects, technical complexities of the projects
  • Design of products, services & process:- number of products in design, number of parts per product,
  • Marketing:- number of advertisement run, number of sales personnel, sales revenue
  • Distribution:-number of items distributed, number of customers, weight of items distributed
  • Customer services:-numbers of service calls, hours spent in servicing of products.

Cost Drivers Examples In Service Industry Examples

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