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Chapter 9. Cost Accounting for Service Businesses and the Balanced Scorecard. Learning Objectives. LO1Perform job order costing for service businesses. LO2Prepare budgets for service businesses. LO3Apply activity-based costing for a service firm.

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Chapter 9

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Chapter 9

Cost Accounting for Service Businesses and the Balanced Scorecard

Learning Objectives

LO1Perform job order costing for service businesses.

LO2Prepare budgets for service businesses.

LO3Apply activity-based costing for a service firm.

LO4Compare the results of cost allocations using simplified costing versus activity-based costing.

LO5Prepare 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

Activity-Based Costing for a Law Firm

The Four Categories of a Balanced Scorecard

  • Financial

  • Customer

  • Internal Business Processes

  • Learning and Growth


  • Return on Investment (ROI)

  • Operating Income

  • Gross Margin Percentage

  • Revenue from New Products


  • 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

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