A Cost Statement for the Provision of Services
Chapter Six
Syllabus topic 3, "Prepare Cost sheet/statement for production of goods and providing of services"
Pages 14 to 16 of 82
In one line
A service has no stock and no work-in-progress, so its cost statement has no stage adjustments; the work is in choosing the cost unit and in splitting costs into fixed, variable and semi-variable.
Why the format changes
A manufacturer's cost sheet is shaped by three stocks. A service cannot be stored: a hotel room unsold last night is gone, a bus seat unfilled is gone.
So the three stock adjustments disappear, and with them most of the structure. What replaces it is a different question: cost per what?
CAS-4 covers the provision of services as well as the production of goods - its full title is the cost of production, acquisition or supply of goods or provision of services - and its requirement, in our own words, is that the cost statement disclose the elements of cost and the basis on which they were determined.
Choosing the cost unit
A simple unit counts one thing: per bed, per student, per call.
A composite unit multiplies two, because one alone would not compare like with like. A lorry carrying 2 tonnes for 100 kilometres and one carrying 10 tonnes for 20 kilometres both run 100 and 20 kilometres, but they do different amounts of work.
| Service | Cost unit |
|---|---|
| Goods transport | Tonne-kilometre |
| Passenger transport | Passenger-kilometre |
| Hospital | Patient-day |
| Hotel | Room-day, or occupied bed-day |
| Electricity | Kilowatt-hour |
| Education | Student-year |
| Canteen | Meal served |
| Water supply | Kilolitre |
State the unit before computing anything. An answer that computes a total cost and divides by the wrong quantity has done all the work and lost the marks.
The three classes of cost
| Class | Behaves | Examples in transport |
|---|---|---|
| Fixed, or standing | Does not change with activity | Insurance, road tax, garage rent, driver's monthly salary, depreciation on a time basis |
| Variable, or running | Changes with distance or usage | Diesel, tyres, lubricants, depreciation on a mileage basis |
| Semi-variable, or maintenance | Has a fixed part and a variable part | Repairs and maintenance, supervision |
Depreciation can be either, and the question decides. Charged over the asset's life it is fixed; charged per kilometre run it is variable. Read which the question gives.
The format
| Particulars | Amount |
|---|---|
| A. Fixed or standing charges | |
| Insurance, tax, garage rent, salaries, licence | x |
| Total fixed charges | x |
| B. Variable or running charges | |
| Fuel, lubricants, tyres, mileage depreciation | x |
| Total variable charges | x |
| C. Semi-variable or maintenance charges | |
| Repairs, supervision | x |
| Total semi-variable charges | x |
| Total cost | x |
| Cost per unit = total cost divided by the number of cost units | x |
Worked example
Konkan Carriers runs one lorry. In the year to 31 March 2027 it made 60 trips, each carrying 8 tonnes a distance of 250 kilometres out, returning empty. Costs for the year were: insurance and road tax Rs 84,000; driver's and cleaner's wages Rs 3,00,000; garage rent Rs 60,000; diesel Rs 5,40,000; tyres and lubricants Rs 96,000; repairs Rs 1,20,000; depreciation Rs 2,40,000, charged on a time basis. Compute the cost per tonne-kilometre.
A Cost Statement for the Provision of Services
Step 1: the cost unit.
| Working note | Computation | Units |
|---|---|---|
| WN 1. Loaded tonne-kilometres | 60 trips at 8 tonnes for 250 km | 1,20,000 |
The return journey is empty and earns nothing, so it produces no tonne-kilometres. The lorry runs 500 kilometres a trip, but only 250 of them carry a load.
Step 2: the cost statement.
| Particulars | Amount, Rs |
|---|---|
| Insurance and road tax | 84,000 |
| Driver's and cleaner's wages | 3,00,000 |
| Garage rent | 60,000 |
| Depreciation, charged on a time basis | 2,40,000 |
| Total, being fixed or standing charges | 6,84,000 |
| Particulars | Amount, Rs |
|---|---|
| Diesel | 5,40,000 |
| Tyres and lubricants | 96,000 |
| Total, being variable or running charges | 6,36,000 |
| Particulars | Amount, Rs |
|---|---|
| Fixed or standing charges | 6,84,000 |
| Variable or running charges | 6,36,000 |
| Repairs, being semi-variable | 1,20,000 |
| Total, being the total cost for the year | 14,40,000 |
Cost per tonne-kilometre is Rs 14,40,000 divided by 1,20,000 tonne-kilometres, which is Rs 12.00.
Three things to check.
The empty return is excluded from tonne-kilometres. Including it would give 2,40,000 units and halve the cost to Rs 6, which is the error the question is set to catch. The cost of the return journey is still in the statement - the diesel was burnt - but it produced no output.
Depreciation is fixed here because the question says it is charged on a time basis. Had it been per kilometre, it would have moved to running charges, and the total would be unchanged but the analysis wrong.
Repairs are shown separately as semi-variable, because the format has three classes and a marker looks for all three.
What it does NOT mean
There are no stock adjustments. A service cannot be stored.
A composite unit is not optional. Cost per kilometre alone would treat a full lorry and an empty one as the same.
Fixed does not mean unavoidable. It means it does not vary with the level of activity in the period.
Quick revision
- A service has no stock and no work-in-progress, so the cost sheet's stage adjustments do not apply.
- Choose and state the cost unit first. Composite units multiply two measures: tonne-kilometre, passenger-kilometre, patient-day, room-day.
- Three classes: fixed or standing, variable or running, semi-variable or maintenance.
- Depreciation is fixed on a time basis and variable on a mileage basis - read which the question gives.
- Cost per unit = total cost divided by the cost units actually produced, and an empty return journey produces none.
- CAS-4 covers the provision of services as well as the production of goods.
A Cost Statement for the Provision of Services
Test yourself
1. Why does a service cost statement have no stock adjustments? Because a service cannot be stored: there is no closing stock of finished units and no work-in-progress to carry forward.
2. Give the cost unit for goods transport, a hospital and a hotel. The tonne-kilometre, the patient-day and the room-day or occupied bed-day.
3. A lorry carries a load out and returns empty. Which journey produces cost units? Only the loaded journey. The return costs money and produces no tonne-kilometres, so its cost is included in the statement and its distance is excluded from the units.
4. Under which class does depreciation fall? Fixed where it is charged on a time basis and variable where it is charged per kilometre run; the question decides.
Answer in one sentence
How is a cost statement for a service prepared? By choosing and stating an appropriate cost unit, often a composite one such as the tonne-kilometre or patient-day, classifying the costs of the period into fixed or standing, variable or running, and semi-variable or maintenance charges, totalling them without any stock or work-in-progress adjustment, and dividing that total by the number of cost units actually produced.
The rest of this subject
These notes are cut from the University's printed syllabus. Open the syllabus itself, or the past papers, for the same subject.