Many of the concepts in managerial accounting were first developed for the manufacturing environment. Do you think the same concepts, such as variable costs, fixed costs, mixed costs, and job order costing, can also be applied to the service industry? Why or why not? Focus on a particular service or service industry and illustrate your position with specific examples.
Your well-written paper should meet the following requirements:
• Be 3-4 pages in length, not including the cover or reference pages.
• Include introduction and conclusion.
• Use APA style in writing and references.
• Support your interpretation with evidence from the textbook and at least two scholarly, peer-reviewed journal articles
• Chapter 2 in Managerial Accounting (Warren, C. S., Reeve, J. M., & Duchac, J. (2016). Managerial accounting (13th ed.). Boston, MA: Cengage Learning. ISBN 9781285868806)
Managerial Accounting before 1950 was focused on the manufacturing product costs. The technology was also simple in evaluating the product-related cost. In 1977 the more complex managerial accounting method was introduced, and the company starts using the costs accounts to evaluate the product-related material and direct labor costs. In 1987 this managerial accounting was also used evaluating tool for internal processes. However, management accounting has become the most common concept used by manufacturing industries to differentiate between the company’s variable cost and fixed costs and identify product-related costs. Management accounting concepts not only useful in the manufacturing industry but also in the service industry. The services industry also uses this managerial concept for evaluating costs related to their services.
The manufacturing industry uses these managerial accounting models for its internal operations for evaluating variable product-related costs, mixed costs. The manufacturing industry is involved in manufacturing products, including the complete process of converting direct raw material into finished products by using different management techniques and other required resources. The manufacturing company engaged in providing the finished goods products to its clients. Whereas in the service industry, this industry is not engaged in the manufacturing of products and only provides services to different customers. Managerial concepts include a standards costing system that differentiates the product and period costs. This costing system can also be used in the service industry to evaluate service-related costs such as professional salaries and office supplies.
Managerial accounting concepts are used in both industries. If we take the example of a service industry-related example of a computer repair company, the direct materials will include the computers, supplies, and equipment used by the company to provide the services to the client. The direct labor cost will be the salary of the company’s professional in providing the repairing services. The company period costs will include rent, insurance expenses paid by the company during the year, and other advertising-related costs and termed fixed costs.
These costs change with the change in the activity level of the company in both industries. This activity may include the products produced and services provided by the service company. These costs usually include the direct raw material costs, direct labor costs, and overhead manufacturing costs in the manufacturing industry. These costs also include freight paid for the delivery of materials and other shipping costs. These costs not dependent on the output of the production and are constant per unit. In the service industry, the same management concepts will be applied to calculate the variable services-related expenses. The category of variable expenses is different in a repairing company, but the method applied is the same. This variable cost will include professional used for repairing the systems, traveling costs to client premises, and any other equipment costs that will be purchased for providing that service.
These costs are also incurred in both industries and evaluated by using managerial accounting concepts. These costs basically don’t depend on activity level or services provided by the company. These are fixed on an annual basis and incurred whether the company engaged in the production or not. In the case of the service company, whether the company provides repairing services to the customers. In both cases, these costs are of similar nature. They include salaries of administrative staff, office rent costs, regular fuel costs, depreciation costs, warehousing costs, and insurance costs. Another example includes leases on the building, which funds absorb. These costs can be overcome by increasing the industry’s production level or services by spreading these costs over the number of services provided or products produced.
This cost is the combination of the two components, fixed and variable costs. In other words, we can say that this cost cannot be avoided and change as the production level or the services provided by the company change. The mixed costs are incurred in both industries and cannot be avoided like the company’s fixed costs. In a manufacturing company, the mixed cost will include salary paid to employees plus commission. The salary paid is fixed costs of the company, whereas the commission will fall under variable cost. The commission will be paid if the employee will increase the percentage of sales, whereas the basic will be paid whether the sales are increased or not. If we look at the service industry, the automobile power and water company will be the best example. In automobiles, the fixed cost will be the insurance cost of the car, and changing rate of fuel will be the variable costs. In the case of power and water company offer a power supply fee program in which a fixed amount is charged in twelve months; it will increase or decrease with electricity usage.
This job order costing system is widely used by manufacturing organizations where the company is engaged in manufacturing various products. This concept is also helpful in the service industry. This job order costing system helps to identify the specific cost related to each product. This system is used by service industries like repair companies, law firms, hospitals, etc. in the case of computer repairing service company; this system can be used for evaluating each repair service-related expenses provided by the company, which may include professional experts expenses which identify the hours spent on each specific services, any equipment used, any traveling costs specific to each cost.
From the complete study of managerial accounting concepts, which include fixed costs, variables costs, mixed costs, and job order costs, it has been evaluated that for any internal business costing system of manufacturing and services organizations, managerial concepts are of high importance used widely. These concepts help both industries in identifying their variable costs related to products and services. Both industries can also use the concepts of the mixed cost for separating their variable and fixed costs. Managerial concepts are of great importance for running internal costing systems and forecasting future product or service-related expenses. These concepts are an integral part of all organization’s internal systems and provide guidance and help increase the efficiency of management’s performance. Whether there is a service-related company or a manufacturing company, both will need guidance in understanding the concepts of variable, mixed and other job costing systems.
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Hansen, D., & Mowen, M. (2006). Cost management. Mason, Ohio, U.S.A.: Thomson/South-Western.
Mitchell, P. (2018). Examples of Mixed Costs in a Service Business. Retrieved from https://smallbusiness.chron.com/examples-mixed-costs-service-business-37030.html