Start: http://www.treasury.nsw.gov.au/__data/assets/pdf_file/0012/7410/tpp07-3.

pdf

http://www.doh.gov.za/docs/reports/2002/findc-report02.pdf

http://www.apptio.com/downloads/resource-center/datasheets/service-costing.pdf

COSTING YOUR SERVICE

One of the most critical things you must do when setting up a service business is to charge you time out at
an appropriate amount.

Many small businesses can find themselves in a situation where they simple are not changing enough,
and therefore are making no money.

Many service businesses tend to charge by the hour, rather than a flat fee.

A flat fee can be used, however, when you know almost exactly how long a job will take to do. An
example of this might be a hairdresser, who knows through experience how long a haircut will take.

For many service businesses, though, it can be hard to work out exactly how long a job will take, hence
the usefulness of an hourly rate.

When working out an hourly rate, the first thing to consider is how many chargeable hours you (and
your staff) can achieve.

Say, for example, you normally work a 40 hour week. Not all of the time is productive. There will be
down time for things such as morning and afternoon teas, administration work, doing estimates for
clients etc.
As well, you need to allow time for holidays, sick leave, etc.

So, an example of calculating changeable hours might be.

Assume two owners and one staff member.

Total hours 40 hrs x 52 weeks x 3 people = 6240

Less non chargeable time:

Annual holidays – 8 hours x 15 days x 3 =360

Statutory holidays – 8 hours x 11 days x 3 = 264

Sick leave – 8 hours x 5 days x 3 = 120 (744)
__________________________

Available hours 5496

Less: Non-Productive time eg 25% (1374)

______

Total Chargeable Hours Available 4122

(If you have staff that have regular training, studying commitments (or you do) this needs to be added to
the above non-chargeable time)
Many of you will look at the above and think “No, that’s not right – I won’t have three weeks holiday a
year – I’ll make do with one week”. Well, that may well happen, but you do have to work on the worst-
case scenario.

Once you’ve done this, the next step is to work out the overheads of your business.

If you’ve just started up in businesses, you will probably find it helpful to talk to people like your
Chartered Accountant, Bank Manager etc to get some estimates of costs.

Below is an example of what your overheads might be:

Wages – Staff 18,000

Accountancy & Sundry 2,000

Repairs 1,200

Power and Light 2,500

Vehicle Expenses 3,600

Printing & Stationery 2,200

Insurance 2,000

ACC Levies 1,800

Advertising 2,000

Cleaning 1,000

Legal Fees 800

Rent & Rates 12,000

Telephone & Postages 1,900

Interest 900

Drawings – 2 owners 80,000

______

131,900

So, your chargeout rate will be:

Total Overheads 131900 = $ 32.00 per hour

Total Chargeable Hours 4122

Be very wary about making your charge out rate too low.

For example, you might look at the $32.00 rate above, and say “I’ll make it $30.00 an hour”. By doing
that, you would lower the amount you the owner made by over $8000!

Often, if a service business is unprofitable, it all goes back to a low charge out rate.

There can be other reasons too, like too much unproductive/wasted time, not charging for all jobs, etc.

The charge out rate you work out will need to be updated regularly, as overheads change.

If you don’t do this, it will eat into the amount of money you make out of your business.
For example, if your rent goes up 10%, this needs to be adjusted for.

You also need to adjust if you take on more staff – as this will alter the chargeable hours and the
overheads.

Of course, at the end of the day, you do need to consider what the “market” will bear ie. Is your hourly
charge out similar to other businesses in your industry?

If the answer is no, than I suggest you talk to your Chartered Accountant, and get them to review your
rate.

Service Costing 

Unit costing is the method of costing used when the cost units are identical. Identical cost units should have
identical costs and this concept of equality of costs is the basic feature of unit costing. 

It may be noted that process costs, output costing and service costing are the sub-divisions of unit costing
method. 

Service Costing – Nature and Problem: 

Service or operating cost is the cost of providing services. Service costing is the term applied to describe the
system used to find the cost of performing a service such as transport, gas or electricity. Service costs are
particularly suitable for the costing of road and rail transport services an they are also utilized by electricity
undertaking, hospitals, canteen, boiler house, etc. the method of costing is different from that used in
connection with production, and the difference lies chiefly in the manner of assembling the cost data and
finally in its allocation to cost units. The principle of service or operating costing is to accumulate costs under
suitable headings and to express them in terms of the unit of service rendered. 

Service Costing In Different Undertakings: 

Service costing is similar to output costing. All costs are suitably classified under fixed and variable. These
costs are then collected, analyzed and expressed in terms of an appropriate cost unit. The classification of
costs into fixed and variable is very important, as it draws management’s attention to the fixed costs to
which they are committed regardless of the units of service ultimately given. It also indicates the change in
the cost structure due to change in the operating level. 
Transport Costing: 

In transport undertakings most of the statistical data required for cost finding and cost control purposes are
obtained from Daily Log Report.

All repairing and maintenance work are recorded on repair tickets and are then costed. 

In order to prepare a Transport Cost Sheet for a transport undertaking the costs may be subdivided as
under:- 

a) Wages and running costs: - These include cost of petrol, oil, grease, wages of assistants and drivers, etc. 
b) Maintenance charges: - These include repairs and overhauling of vehicles, garage charges, tyres, etc.

c) Fixed charges: - These fixed expenses include insurance, license, depreciation, etc.

The statistical data regarding costs, maintenance and performance are helpful in preparing a performance in
respect of each vehicle.

In order to compare the operating efficiency for each period, the total costs thus arrived at are divided by
the bases such as number of hours or days, number of kilometers run, number of commercial ton-
kilometers, etc. Costs per unit thus obtained are compared with the past result. A monthly Vehicle Cost
Sheet and Performance Statement are generally used in many transport undertakings.

Cost control is always possible by means of comparison of actual performance with the budgeted
performance. Various control measures, viz., securing the optimum use of vehicles, regular maintenance as
a planned operation, avoidance of loading and unloading delays prevention of overlapping and duplicated
journeys, planned replacement of vehicles, etc., may be instituted. 

Where transport department is treated as service department all costs are collected and apportioned to
other departments on the basis of commercial ton-kms. The haulage of incoming material might be charged
as an addition to cost of raw material, and the haulage of fabricated goods to customers becomes a part of
distribution overhead. 

Generally, commercial ton-km, is obtained by multiplying the total tonnage carried by the kilometers
traveled and dividing the product by two. This is done where the vehicles return empty as is found in most
cases.

Industrial Visit to Adhunik Transport Organization Limited 

Introduction:

The visit was made to Adhunik Transport Organization Limited. The company was established in the year
1988 as an organization. In 1991, it got the status of a limited company after reaching the minimum
turnover level. The company currently has a turnover of approximately Rs. 10 Crores. The company is a
member of Bombay Goods Transport Association (BGTA) AND Indian Bank Association (IBA), which is very
essential for the smooth conduct of their business activities. BGTA checks all business malpractices and IBA
is needed for regulating payments within different states. The company has its 17 branches all over the
country, along with 3 agencies in certain remote areas. The company also provides warehousing facilities to
companies like Philips-India and Colgate. The company is involved in delivery of goods all over the country. 
Number of vehicles: 

The company has owned as well as dedicated trucks and trailers. 

Owned Vehicles 

8 HCVs- Heavy Commercial Vehicles 

4 Trailers 
Dedicated Vehicles 

25 LCVs- Light Commercial Vehicles 

Dedicated Vehicles are delivery trucks, which are made according to certain specifications, operated under
the name of another company for which they give a minimum amount of business and certain running costs
are borne by that company. 

The company has its LCVs dedicated to ELBEE Delivery Services. They are used for delivering goods given
by ELBEE. The driver charges and maintenance charges are borne by Adhunik Transport. Other expenses
are borne by Elbee. The advantage to Elbee is that its capital is not blocked. The advantage to the company
is that it does not have to look for customers and keeps getting a minimum amount of business. 

No. of Employees: 

The company has on an average 8 office staff members per branch. There are 30 staff members in the head
office in Mumbai. The salaries of these employees vary from Rs. 2,000- Rs. 10,000 depending upon the
nature of the job they do. 

Measurement of Materials is done in tons. 

COSTS: 

FIXED COSTS 

Salaries 54,00,000 
Insurance 8,00,000 
Transport Permits (Every 5 yrs) 1,00,000 
Administrative Overheads 2,11,00,000 
Taxes 
Depreciation 30,00,000 
Interests 34,00,000 
TOTAL 3,38,00,000 

VARIABLE COSTS 

Maintenance (Per Vehicle) 

HCV 10,000 
LCV 6,000 
TRAILERS 15,000 
Wages 
Drivers 2,000 
Cleaners 1,200 
Transit Expenses 500-1,500 
TOTAL 35,000 
Approx 

Notes: 

· There are 2 drivers and 1 cleaner for every long journey. 

· In case of short journeys, there is only 1 driver and 1 cleaner. 
· The maximum distance covered in a day is 300kms. The average distance covered 225-280kms. 

· THE CUSTOMERS ARE CHARGED: 

Rs. 1.20 PER KM PER TON (For HVC) 

Rs. 1.00 PER KM PER TON (For LVC) 

· The Profit-Margin is between 10%-20%. 

Contents 
- What is Service Costing? 

- What is Transport Costing?

- Industrial Visit to Adhunik Transport Organization Limited

- Industrial Visit to Chawla Transport

SERVICE-BASED COSTING

a concept from ITIL could make a huge difference this budget

cycle
copyright 2009 N. Dean Meyer and Associates Inc.

Well, here it is budget season for many. And for too many, it's a
frustrating game with little value added. But there's hope.

ITIL version 3 references the concept of "service costing" or "service-

based costing." For those few organizations that really understand and
embrace service-based costing, budgeting is a valuable business
planning and client negotiation process.

More on the financial management processes within ITIL....

But to make it work, they've had to extend the concept well beyond
the limited view of ITIL.

Why Service Costing is Invaluable

With service-based costing, organizations calculate the full cost of their

products and services. They propose a budget that includes not just
the expected "keep the lights on" services, but also the many things
clients have requested and the many good ideas their IT entrepreneurs
generate for better serving the business.

In the process of developing such a budget, the managers define their

businesses and their service catalogs. They forecast business volumes,
both assured and speculative. Then they plan how they'll fulfill those
business scenarios, defining the staff, contractors, and vendors they
will need; the direct and indirect expenses they will incur; and the
capital investments required. They set aside time and money for
business improvements, customer relations, and innovation. And they
determine their prices.

From there, budget negotiations become a matter of deciding what the

organization's clients will and won't buy. It shouldn't be surprising to
learn that their clients step forward (without any "training" or
preparation) and defend IT projects. Yes, clients defend the IT budget!

And afterwards, everybody understands exactly what the IT budget

does and does not pay for. Service-based costing solves the notorious
problem of managing expectations, builds a perception of the value
the business receives from the IT budget (or from allocations), and
engenders trust through transparency.

Furthermore, knowing the cost of products and services is prerequisite

to any sensible resource governance (eg, portfolio management or
demand management) process. Clients need to understand how much
is in their "checkbooks" and what things cost before they can
meaningfully manage their demands.

In addition to a budget for products and services, service-based

costing produces rates based on the full cost of IT products and
services. These rates are the ideal benchmarks for competitive
(outsourcing) comparisons.

And added benefit that's of great interest to many CIOs is the impact
of the process on leadership development. These organizations find
that the experience of business/budget planning turns IT managers
into real entrepreneurs.

What Service Costing Is

Service-based costing solves numerous governance and client

relationship problems. But let's be clear about what it really takes to
gain these benefits.

First, although ITIL tends to focus on the services side of the business,
and specifically the processes that deliver services to clients, the
concept of service-based costing applies to every nook and cranny of
an IT organization. We need to know the full cost of all IT's products
as well as services.

Second, and again despite ITIL's biases, the concept is not limited to
products and services sold to clients. It's equally important to
understand the cost of products and services sold to peers within IT.
In fact, unless you account for all of your IT costs, it's impossible to
calculate the real cost of clients' purchases.

Let me give you an example. Infrastructure engineers spend a lot of

their time tuning, repairing, enhancing, and otherwise nursing the IT
infrastructure, which in turn is used to produce services like network
connectivity, applications hosting, and email. But remember that
infrastructure engineers also spend time on applications development
teams. If you lump all the engineer costs into the cost of those
services, you'll over-burden the services (making them look
uncompetitive) and under-price applications.

Like the infrastructure engineers, most groups in IT serve others

within IT as well as clients. All costs have to be allocated accurately to
produce a clear picture of what an application or service costs.
Shortcuts like putting all indirect costs in pools and assigning them
directly to client products and services introduce distortions, which in
some cases turn out to be quite significant.

Also consider that, from a leadership point of view, ignoring internal

products/services makes many critical people feel like second-class
citizens and misses an opportunity to ignite their entrepreneurial
spirits.

Full Costs

To be meaningful, all costs must be associated with products and

services. If any are left out, prices will be artificially low. Meanwhile,
costs that aren't embedded in prices have to be covered by an
allocation or core budget, defeating the purpose of service-based
costing in the first place.

The Full-cost Maturity Model (FMM) explains all the details.

Direct costs (labor and vendor costs specific to that project or service)
are straightforward to assign to products and services. But there are
four layers of indirect costs that must be allocated to just the right
products and services:
 1. Unbillable time: A person's salary buys, say, 40 hours per
week. But, of course, not all of those hours are available to work
directly on the products/services. Time must be set aside for
holidays, personal leave, training, administration, proposal
writing, client relations, process improvement, innovation, etc.
These are just examples of the many "unbillable activities" that
are necessary to sustain the business but not directly "billable" to
a specific product or service. (The list is available to readers on
request.) The cost of these unbillable hours must be embedded
in the price of each group's products and services.

2. External indirect costs: A group spends money on tools,

training, rent, and other expenses necessary to stay in business.
These, too, must be spread across the group's products/services.

3. Internal indirect costs: When one group within IT serves

another, the costs of that service must be spread into the
receiving group's products and services. For example, the costs
of help-desk support for infrastructure-based services is
embedded in the costs of the various services. Computer time for
development may be spread into the products and services of the
applications engineering group.

There are myriad cases of one group within IT supporting

another, each representing an internal indirect cost. Rather
than simplistically pooling these costs and assigning them
to client-facing products and services, the costs must flow
through this maze of internal customer-supplier
relationships to wind up within just the right products and
services, and in just the right proportions.

4. Overhead: When a group within IT provides services to all its

peers, the cost of that service is spread into everybody's
products/services. Examples include the time the CIO spends
supervising IT; the IT business office that does finance,
procurement, and HR for its peers; and IT's use of services like
email.

Once indirect costs are amortized, three types of products/services

remain:

* Client: Products/services sold to clients. This includes mass-

market services that everybody buys, like desktop connectivity
and email, as well as products/services like ERP that are sold to
consortia of clients. These represent the bulk of the budget.

* Subsidy: Products/services sold to the corporation as a whole.

IT is funded to deliver these services for the greater good --
things that its competitors (decentralization and outsourcing
vendors) don't have to do. This category includes products and
services like policy coordination, "consumer report" services (like
 recommending standard configurations of PCs), and non-IT
activities like participation in corporate task forces and
community-action programs. These products and services must
be priced in their own right, never imbedded in the cost of client
services. Otherwise, they would make IT appear uncompetitive.

* Venture: Budget items like capital for infrastructure which

enhance the IT business, akin to loans from a bank. Clients
should never be asked to pay for IT's infrastructure; if they do,
they'll think they "own" the servers and networks that IT
manages and fight any attempts at enterprise capacity
management. Instead, the corporation should fund
infrastructure, and the depreciation should be embedded in the
cost of client services which utilize that infrastructure.

Once an organization achieves true service-based costing, its prices

can be fairly compared to outsourcing; clients can be empowered to
decide what they'll buy; and entrepreneurs within IT can manage their
businesses in a sustainable manner.

Whew, That's Hard!

Doing a great job of service-based costing is hard. Sure, the payoff is

huge. But it takes lots of effort and a steep learning curve.

Fortunately, it's not something you have to do all at once. You can
take a step, and then build on that success over time.

As explained above, it makes no sense to define "a step" as doing

service-based costing for a subset of the IT business. In that regard,
it's all or nothing. But the process can be simplified by cutting back on
its granularity.

The Full-cost Maturity Model defines five levels of detail of service-

based costing:

Level 1, Transparency: All costs are associated with high-level

product/service bundles. Builds trust and some business planning
skills.

Level 2, Allocations: Those high-level bundles are divided by

client business unit as a basis for fair allocations.

Level 3, Demand management: Bundles are not broken down

into individual products/services, at the level of granularity that
supports clients purchase decisions. This leads to sensible budget
discussions, and is prerequisite to portfolio management.

Level 4, Accuracy: All internal buy-sell relationships are

mapped, and billable-time ratios are adjusted to the unique
 needs of each line of business within IT. This produces more
accurate costs for fair comparisons to benchmarks.

Level 5, Rates: With some additional planning of what

constitutes a useful price list, rates are extracted from the same
data-cube as is the budget. This is prerequisite to chargebacks,
and the best way to compare internal costs to outsourcing.

The Full-cost Maturity Model helps organizations determine how much

effort they need to put into service-based costing, and provides an
evolutionary path forward that consistently evolves their planning and
costing skills. While ITIL tells you to do it, FMM tells you how.

What's Next?

For those organizations committed to ITIL, developing a service

catalogand service-based costing are generally on the "to do" list. Let's
recognize that these are not independent efforts; they're two
outcomes of developing a budget and rates for products/services.

Service-based costing deserves to be a high priority on that "to do"

list. As a change initiative, it addresses many critical objectives.
Implementing a full-cost model is implementing ITIL... and activity-
based budgeting... and governance... and a culture of
entrepreneurship, customer focus, and teamwork.

Knowing the full cost of your products/services is the basis for sensible
business planning, budgeting, demand/portfolio management,
benchmarking, and investment decision making. It's fundamental to
managing an IT business within a business.

Up....