BM1805

SERVICE COSTING AND RETAIL INVENTORY METHOD

Service Costing
This refers to the cost procedure used for determining the cost per unit of a service rendered. It involves
the method of determining the cost of specific services and functions like maintenance and personnel
services, among others. This method of costing is used by the following organizations:
• Service organizations. These are businesses that render services to outside entities apart from
their organization. Examples of these include power generation and distribution firms, hotels,
transport firms, educational institutions, consultancy or law firms, accounting and management,
airlines, and shipping.
• Internal services. These pertain to a division of an organization that renders services to other
departments within the organization. Examples of these include hospitals, canteen, water supply,
and maintenance services.

The following are the features of service costing:

o Cost classification. The costs are classified into variable and fixed. In case additional service is
provided, variable cost will be affected.
o Periodical ascertainment of costs. The costs are determined periodically (generally at the end of
specific periods).
o Multiple stages and processes. The conversion of basic materials into services involves many
stages and processes.
o Valuation of work-in-progress. The valuation of work-in-progress is comparatively easy in relation
to other types.
o Intangible products. Services are provided to the public instead of tangible goods.
o Cost unit differs. Service organizations provide a wide variety of services, which results to
different cost units. A cost unit is a quantitative unit of product or service in relation to the type
of service organization where the cost is determined. The costs incurred during a period are duly
collected, analyzed, and expressed in terms of cost unit. The following are the different types of
cost units:

Types of Services Organizations/Departments Cost Unit

Good transport (public carriers, trucks, and trains) per ton-km or quintal-km
Passenger transportation (bus, railway) per passenger-km
Power generation and distribution (electricity boards) per kilowatt hour
Hospitals per operation
Hotels per room, per day bed nights
Canteens per number of staff, per meals served
Water supply per kiloliters
Boiler houses per kg of steam supplied
Road maintenance per km of road maintained
Captive power generation unit per kilowatt hours
Consulting firms per client hours
Computer department per computer time
Machinery maintenance per maintenance hours

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EXAMPLE 1: Scalar Logistics incurs a total cost of P38,000 in transporting goods from January 1 to January
7, 201A. The management desires to determine the cost per quintal-km associated in the transport of
their goods. The following data is available:

Date Quantity in quintal Distance in km

January 1, 201A 50 100
January 3, 201A 10 200
January 5, 201A 30 150
January 7, 201A 25 300

PROCEDURE:
• Step 1. Calculate for the total quintal-km.

Quantity in Distance in Total quintal-km

Date
quintal km (Quantity in quintal X Distance in km)
January 1, 201A 50 100 5,000
January 3, 201A 10 200 2,000
January 5, 201A 30 150 4,500
January 7, 201A 25 300 7,500
TOTAL 19,000 quintal-km

• Step 2. Calculate for the cost associated per quintal-km using the following formula:
𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐
𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑝𝑝𝑝𝑝𝑝𝑝 𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞 − 𝑘𝑘𝑘𝑘 =
𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞 − 𝑘𝑘𝑘𝑘
38,000
=
19,000

= P2 per quintal-km

KEY POINTS: The total cost incurred by Scalar Logistics based on per quintal-km transport of goods is
P2

EXAMPLE 2: A truck starts with a load of 12 tons of goods from station X. It unloads 4 tons at station Y and
the rest of the goods at station Z. It reaches back directly to station X after getting reloaded with 4 tons
of goods at station Z. The distance from X to Y, Y to Z, and Z to X are 50 km, 100 km, and 120 km,
respectively. Determine the absolute ton-km and commercial ton-km.

PROCEDURE:
• Step 1. Calculate for the absolute ton-km.

Weight in tons
Absolute ton-km
Station Distance in km (Total weight – Weight
(Distance in km X Weight in tons)
of unloaded goods)
X 50 12 600
Y 100 8 800

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Z 120 4 480
TOTAL 1,880 ton-km

KEY POINTS: Take note that the travel between any two (2) stations is to be treated separately. The
distance in km are given in the problem while the weight in tons is calculated by deducting the
weight of unloaded goods on a particular station from the total weight. Based on the problem, the
weight of the truck at the starting point or station X is 12 tons. After unloading 4 tons at station Y,
the remaining weigh of the truck will be 8 tons. Also, the weight in tons at station Z is 4 tons since
the truck has been reloaded based on the given problem.

• Step 2. Calculate for the commercial ton-km using the following formula:

𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑡𝑡𝑡𝑡𝑡𝑡 − 𝑘𝑘𝑘𝑘 = 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 × 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑘𝑘𝑘𝑘 𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡

12 + 8 + 4
= × 270
3
24
= × 270
3
= 8 × 270

= 𝟐𝟐, 𝟏𝟏𝟏𝟏𝟏𝟏 𝒕𝒕𝒕𝒕𝒕𝒕 − 𝒌𝒌𝒌𝒌

KEY POINTS: Take note that in computing for commercial ton-km, the trip is treated as a whole.
The average load is calculated by getting the average of the sum of stations X, Y, and Z while the
total km trip is the total distance in km of the three (3) stations in the given problem.

Retail Inventory Method

This method is used by retailers that resell merchandise to estimate their ending inventory balances. This
is based on the relationship between the cost of merchandise and its retail price. Although the retail
inventory method is a quick and easy way to determine an approximate ending inventory balance, below
are some of the issues associated with it:
• The method is only an estimate.
• The method only works for a consistent markup across all products sold.
• The method assumes that the historical basis for the markup percentage continues into the
current period.
• The method does not work if an acquisition has been made, and the buyer holds large amounts
of inventory at a significantly different markup percentage from the rate used by the purchaser.

The following are the terms associated in the retail inventory method:
• Product cost percentage. This is the percentage increase in relation to a product's cost and selling
price.
• Cost of Sales. This is the accumulated total of all costs used to create a product or service, which
has already been sold.
• Sales markdown. This is the decrease in value of a product’s original retail price and its actual
selling price.

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EXAMPLE: Black Aroma Enterprise sells coffee roasters for an average of P200. The cost per unit incurred
by the company in acquiring the coffee roaster is P140. The beginning inventory of the company for
February 201A has a cost of P1,000,000 with additional purchases amounting to P1,800,000 during the
same month. The total sales of the enterprise for the given month is P2,400,000.

PROCEDURE:
• Step 1. Determine the goods available for sale by getting the sum of the beginning inventory and
additional purchases for the given month.
𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑓𝑓𝑓𝑓𝑓𝑓 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 = 𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 + 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎
= 𝑃𝑃1,000,000 + 𝑃𝑃1,800,000
= 𝑷𝑷2,800,000

• Step 2. Determine the product cost percentage.

𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 𝑝𝑝𝑝𝑝𝑝𝑝 𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 = × 100
𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝
𝑃𝑃140
= 𝑃𝑃200 × 100

= 0.7 × 100
= 𝟕𝟕𝟕𝟕%
• Step 3. Determine the cost of sales by multiplying the total amount of sales to the product cost
percentage.
𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 = 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑜𝑜𝑜𝑜 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 × 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝
= 𝑃𝑃2,400,000 × 70%
= 𝑷𝑷𝑷𝑷, 𝟔𝟔𝟔𝟔𝟔𝟔, 𝟎𝟎𝟎𝟎𝟎𝟎

• Step 4. Calculate for the cost of ending inventory by deducting the goods available for sale to the
sales cost.
𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 = 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑓𝑓𝑓𝑓𝑓𝑓 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 − 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 cost
= 𝑃𝑃2,800,000 − 1,680,000
= 𝑷𝑷𝑷𝑷, 𝟏𝟏𝟏𝟏𝟏𝟏, 𝟎𝟎𝟎𝟎𝟎𝟎

• Step 5. Identify the new product cost percentage if an accumulated markdown promo amounting
to P50,000 was given to the customers for the said month.
𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 = 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑜𝑜𝑜𝑜 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 − 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎
= 𝑃𝑃2,400,000 − 50,000
= 𝑷𝑷𝑷𝑷, 𝟑𝟑𝟑𝟑𝟑𝟑, 𝟎𝟎𝟎𝟎𝟎𝟎

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𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 = × 100
𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎
𝑃𝑃1,680,000
= 𝑃𝑃2,350,000 × 100
= 0.715 × 100
= 𝟕𝟕𝟕𝟕. 𝟓𝟓%

KEY POINTS: It is a usual practice in the retail industry to provide discounts through product
markdown during lean seasons or product increases in peak seasons to manage sales and profits. But
the value of the goods as a cost remains the same, while the retail value of the products changes thus
either increasing or decreasing the product cost percentage, in which this case presented a higher
product cost of 71.5% than the regular 70% rate given the markdown in sales, hence lowering the
estimated profit of the company.

REFERENCES
Lalitha, R. & Rajasekaran, V. (2010). Cost accounting. India: Pearson.

Rante, G. A. (2016). Cost accounting. Mandaluyong City: Millenium Books, Inc.

The Retail Management Advisors, Inc. (n.d.). Markdowns. Retrieved on December 04, 2018, from
http://www.the-retail-advisor.com/markdowns.html

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