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AN EVALUATION OF COSTING TECHNIQUES IN SERVICE ORIENTED ORGANIZATION

CHAPTER ONE

INTRODUCTION

1.1         Background of the Study

The evaluation of costing techniques in service-oriented organizations is a critical area of study, addressing the unique challenges and methodologies pertinent to accurately capturing costs in sectors where intangible products dominate. Unlike manufacturing firms that produce tangible goods, service-oriented organizations such as healthcare providers, educational institutions, financial services, and consulting firms deliver services that are often individualized and heterogeneous. This intangibility and heterogeneity necessitate specialized costing techniques to ensure accurate cost allocation, pricing, and financial performance evaluation.

Traditional costing methods, such as job costing and process costing, are less effective in service settings due to the difficulty in tracking and assigning costs to individual service units. This inadequacy has led to the adoption and adaptation of various costing techniques tailored to the specific needs of service organizations. One prominent method is Activity-Based Costing (ABC), which assigns costs to activities based on their use of resources. ABC helps service organizations better understand the true cost of delivering services by identifying and quantifying all activities involved, thus providing a more accurate reflection of resource consumption (Kaplan & Anderson, 2004).

Another significant approach is Time-Driven Activity-Based Costing (TDABC), which simplifies the ABC model by estimating the costs of resources required for activities based on time equations. This technique is particularly useful in service sectors where time is a critical factor, such as healthcare and consulting, allowing for more precise cost management and resource allocation (Kaplan & Anderson, 2007). TDABC has been praised for its ability to provide a clear picture of cost behavior and enhance decision-making processes regarding service delivery and operational efficiency.

Moreover, service organizations often employ process costing when services are homogeneous and delivered in continuous processes, such as in call centers or IT support services. This method averages costs over a large number of units, thus providing a straightforward approach to cost allocation. However, its applicability is limited to scenarios where service delivery processes are consistent and uniform (Drury, 2018).

The adoption of these costing techniques in service-oriented organizations also intersects with the strategic goals of these entities. Accurate costing not only aids in setting competitive prices but also in budgeting, financial planning, and performance evaluation. It enables organizations to identify cost drivers, eliminate inefficiencies, and optimize resource use, ultimately contributing to improved profitability and sustainability (Horngren, Datar, & Rajan, 2015).

In addition to traditional and modern costing methods, advancements in technology and data analytics have introduced new dimensions to cost management in service sectors. Big data analytics and machine learning algorithms are

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