Manufacturing involves joining together direct materials, direct labor, and overhead to produce a new product. The good produced is tangible and can be inventoried and transported from the plant to the customer. A service is characterized by its intangible nature. It is not separable from the customer and cannot be inventoried. Traditional cost accounting has emphasized manufacturing and virtually ignored services. Now, more than ever, that approach will not do. Our economy has become increasingly service oriented. Managers must be able to track the costs of services rendered just as precisely as they must track the costs of goods manufactured. In fact, a company’s controller may find it necessary to cost both goods and services as managers take an internal customer approach.
The range of manufacturing and service firms can be represented by a continuum as shown in Exhibit 5-1. The pure service is shown at the left. The pure service involves no raw materials and no tangible item for the customer. There are few pure services. Perhaps an example would be an Internet cafe. In the middle of the continuum and still very much a service is a beauty salon, which uses direct materials on customers when performing the service, e.g., hair spray and styling gel. At the other end of the continuum is the manufactured product. Examples include automobiles, cereals, cosmetics, and drugs. Even these, however, often have a service component. For example, a prescription drug must be prescribed by a physician and dispensed by a licensed pharmacist. Automobile dealers stress the continuing service associated with their cars. And how would we categorize food services? Does Taco Bell provide a product or a service? There are elements of both.
The range of manufacturing and service firms can be represented by a continuum as shown in Exhibit 5-1. The pure service is shown at the left. The pure service involves no raw materials and no tangible item for the customer. There are few pure services. Perhaps an example would be an Internet cafe. In the middle of the continuum and still very much a service is a beauty salon, which uses direct materials on customers when performing the service, e.g., hair spray and styling gel. At the other end of the continuum is the manufactured product. Examples include automobiles, cereals, cosmetics, and drugs. Even these, however, often have a service component. For example, a prescription drug must be prescribed by a physician and dispensed by a licensed pharmacist. Automobile dealers stress the continuing service associated with their cars. And how would we categorize food services? Does Taco Bell provide a product or a service? There are elements of both.
Four areas in which services differ from products are intangibility, inseparability, heterogeneity, and perishability. Intangibility refers to the nonphysical nature of services as opposed to products. Inseparability means that production and consumption are inseparable for services. Heterogeneity refers to the greater chances for variation in the performance of services than in the production of products. Perishability means that services cannot be inventoried but must be consumed when performed. These differences affect the types of information needed for planning, control, and decision making in the production of services. Exhibit 5-2 illustrates the features associated with the production of services and their interface with the cost management system.
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