## Service Costing (Operating Costing)

### What Is Service Costing?

Service costing accumulates and expresses costs in terms of a cost unit of service for organisations that provide services rather than tangible goods.

#### Two Applications

Application	Examples
Internal (support services to other departments)	Canteen, hospital, boiler house, captive power, fleet, IT, R&D, quality assurance
External (services offered to outside customers as profit centres)	Transport, hospitality, financial services, insurance, IT companies

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### Service Costing vs Product Costing

Dimension	Service Costing	Product Costing
Tangibility	Intangible; cannot be stored → no closing stock	Tangible; can be inventoried
Cost unit	Composite cost units (e.g., passenger-km)	Simple physical unit (kg, piece)
Dominant cost	Employee/labour cost	Material cost
Indirect cost tracing	Heavy admin overheads; often not traceable	More traceable to individual products

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### Cost Units by Industry

Industry	Cost Unit
Transport — passengers	Passenger-km
Transport — goods	Tonne-km or Quintal-km
Electricity supply	Kilowatt-hour (kWh)
Hospital	Patient-day, Room-day, Per bed, Per operation
Canteen	Per item, Per meal
Cinema	Per ticket
Hotel	Guest-days, Room-days
Bank / Finance	Per transaction; per service (LC, application, project)
Education	Per course, Per student, Per batch, Per lecture
IT / ITES	Cost per project, Cost per module
Insurance	Per policy, Per claim, Per TPA

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### Key Performance Metrics by Sector

#### Transportation

Metric	Meaning
No. of Shipments	Orders shipped from warehouse
Truck Turnaround Rate	Time from truck arrival to departure at warehouse
Lead Time (Order Cycle Time)	Time from customer order placement to receipt
OTIF (On-Time and In-Full)	% of orders delivered on schedule and in full quantity

#### Hotel Industry

Metric	Meaning
CPOR (Cost per Occupied Room)	Average cost per occupied room
Occupancy Rate	Occupied rooms ÷ Total available rooms
RevPAR (Revenue per Available Room)	Average revenue per available room-day

#### Hospital / Healthcare

Metric	Meaning
Bed Occupancy Rate	Proportion of beds in use at any time
Staff-to-Patient Ratio	Staff count per patient over a period
Average Treatment Charge	Average amount charged per treatment

#### IT & ITES

Metric	Meaning
Gross Burn Rate	Rate of cash consumption for operating expenses
CAC (Customer Acquisition Cost)	Cost to attract one new customer
CLV (Customer Lifetime Value)	Net profit over a customer's entire lifecycle
MRR (Monthly Recurring Revenue)	Monthly subscription/renewal revenue
Churn Rate	% of subscribers cancelling per period
Cost per Feature	Cost of a specific software feature based on usage

#### Telecom

Metric	Meaning
ARPU (Avg. Revenue per User)	Revenue generated per user
SAC (Subscriber Acquisition Cost)	Cost to gain a new subscriber
Network Operating Cost	Expenditure on maintaining the telecom network

Worked example

### Example 1

Computing Cost per Tonne-km: A transport company operates 4 trucks. In one month:

Total distance covered = 8,000 km
Average load per trip = 10 tonnes
Total operating cost = ₹1,60,000
Total tonne-km = 8,000 km × 10 tonnes = 80,000 tonne-km
Cost per tonne-km = ₹1,60,000 / 80,000 = ₹2 per tonne-km

This composite unit captures both distance and load — a truck travelling 100 km with 5 tonnes contributes 500 tonne-km, same as 50 km with 10 tonnes.

### Example 2

Hotel Metrics: Hotel with 100 rooms. July (31 days):

Total available room-nights = 100 × 31 = 3,100
Rooms occupied on average = 70 per night
Total room revenue = ₹9,30,000
Total room operating cost = ₹6,20,000

Calculations:

Occupancy Rate = 70/100 = 70%
RevPAR = ₹9,30,000 / 3,100 = ₹300 per available room-night
Occupied room-nights = 70 × 31 = 2,170
CPOR = ₹6,20,000 / 2,170 = ₹285.71 per occupied room

### Example 3

Hospital Cost per Patient-Day: Monthly costs = ₹36,00,000. Beds = 240. Average bed occupancy = 75%.

Patient-days = 240 × 75% × 30 = 5,400
Cost per patient-day = ₹36,00,000 / 5,400 = ₹666.67

⚠️ Common exam mistakes

Using simple 'per km' cost for transport instead of composite tonne-km or passenger-km — the composite unit captures both distance AND capacity utilised, which is essential for meaningful cost analysis.
Confusing RevPAR with CPOR — RevPAR is a revenue metric per available room (including vacant rooms); CPOR is a cost metric per occupied room only.
Applying product costing logic to service costing — in services, labour dominates and there is no closing stock to carry forward costs into the next period.
Treating the cost unit as optional in service costing — the composite cost unit is the foundation; without it, cost comparison across periods or between operators is meaningless.
Mixing up ARPU (revenue per user) with SAC (cost to acquire a user) in telecom — ARPU measures ongoing value; SAC measures one-time acquisition investment.

Reference:

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Service Costing - Concepts, Cost Units, and Industry-Specific KPIs

Worked example

⚠️ Common exam mistakes