Product costing in service organizations

Abstract

Conventional wisdom and empirical evidence suggest that in manufacturing businesses product costs are used for various purposes, including inventory valuation, product pricing and mix decisions and for management planning and control. In this paper the validity of these three specific uses in the service sector are explored in five large for profit service organizations. The first of our three conclusions is that inventory valuation was not a major issue in these five service organizations, as the inherent perishability of their services mean that they cannot be stored. Second, only two of the five organizations used full product costs for pricing decisions. Third, in all five organizations costs were planned and controlled via responsibility centres linked to functional activities rather than products/services, which did not seem to be a useful unit of analysis. This paper suggests that a closer alignment of a service organization's responsibility centres with its value chain might be a source of competitive advantage, and that more case study research is needed in this area