Cost Accounting

Meaning and Explanation of Service Costing

Service costing refers to the costing procedure used for determining the cost per unit of service rendered. The term service costing is defined as the cost of specific services and function. For example- maintenance, personnel. Canteen etc. These may be called as services department, centres, or functions.

what is service costing

Service costing is a method to calculate the cost of services. At the end of the specified period, the cost of operating a service centre grouped under suitable headings. To find out the cost per unit of services, the department divided the aggregate expenditure by the quantity of services rendered during a specified period. The cost is classified into the variable and fixed cost. Under the service costing, costs are ascertained at the end of the specified period.

The conversion of basic material into services involves many stages and process. Under the service costing, valuation of work-in-progress comparatively easy in relation to other types. Services organisations only engaged in providing services to the public. They do not produce any article/ tangible goods. The service organisations involved in offering a variety of services, so it is difficult to provide a common cost per unit.  It differs from organisation to organisation.

Where is it used?

Service costing is used by service organisations and departments within organisations rendering services to others department.

Services organisations: – Service organisations are those organisations which are engaged in the rendering of services to the public to earn profits. Examples of such organisations are hotels, transport firms, power generations and distributions firm, educational institutions, consultancy firms- accounting and management, law, airlines, and shipping.

Internal services: – Departments that provide the services to the production as well as to other departments. For Example- hospital, canteen, captive power generation, water supply, maintenance service and boiler house.

Below is the list of cost per unit used by different groups of service –

Types of services organisationsCost unit



Water supply


Power generation and distributions( electricity board)

Road maintenance

Passengers transportations( bus, railways)

Goods transport ( public carriers, goods trains, trucks, etc.)

Computer departments


Per room per day bed nights, etc

Per patience-per bed,  per operation

Per meal served, per number of staffs

Per kiloliters

Per Kg of steam supplied

Per kilowatt-hour

Per kilometre road maintained

Per passengers- km

Per tonne-km- quintal-km

Per computer time provided to user departments

Full-time equivalent students

Each type of organisation will have to decide what kind of cost unit is the most appropriate for its purpose, considering the nature of business. Whatever cost is decided upon, the calculation of cost per unit is done in a similar fashion to output costing, i.e.:

Cost per Service Unit = Total Costs Per Period / Number of Service Units Supplied in the Period

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