Service Cost Centre
In accounting, a Service Cost Centre (also known as an indirect cost centre, service department, or support cost centre) is a specific part of an organization where costs are incurred for supporting the production process, yet these costs cannot be directly traced to any single cost unit. Although essential to the production process, service cost centres do not directly handle the cost units (i.e., the final product or service).
Examples
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Stores Department:
- Function: Manages the inventory of raw materials and supplies.
- Cost Allocation: Costs related to storage, inventory management, and handling materials.
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Canteen:
- Function: Provides meals and refreshments to the employees.
- Cost Allocation: Costs related to food preparation, serving staff, and maintenance of the canteen.
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Boiler House:
- Function: Supplies steam needed for various manufacturing processes.
- Cost Allocation: Costs related to fuel, maintenance of the boiler, and operations staff.
Frequently Asked Questions (FAQs)
1. How is a service cost centre different from a production cost centre?
- Answer: A service cost centre supports production processes indirectly without handling the actual products or services, whereas a production cost centre is directly involved in the production of goods or services.
2. Are service cost centre expenses considered overheads?
- Answer: Yes, expenses incurred by a service cost centre are considered part of overhead costs as they are used to support the production process indirectly.
3. How are the costs from a service cost centre allocated?
- Answer: Costs from a service cost centre are allocated to production cost centres based on an appropriate basis such as machine hours, labor hours, or other activity drivers.
4. Can a service cost centre become a production cost centre?
- Answer: It is rare but possible if the nature of the work changes to directly involve it in the production process, such as when a testing department starts handling a part of production.
5. Is there software that helps manage service cost centres?
- Answer: Yes, many enterprise resource planning (ERP) systems and cost accounting software offer modules for managing service cost centres.
Related Terms with Definitions
-
Cost Centre:
- A part or location within an organization to which costs are traditionally allocated or apportioned for management analysis.
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Absorption Costing:
- A costing method that includes all the costs associated with manufacturing a product, including both direct and indirect costs.
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Overhead Costs:
- Indirect costs incurred by an organization that are not directly traceable to a single cost unit, including costs from service cost centres.
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Cost Unit:
- A unit of product or service for which costs are measured and allocated.
References to Online Resources
- Investopedia: Cost Centre
- AccountingCoach: Service Departments and Allocated Costs
Suggested Books for Further Studies
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“Cost Accounting: A Managerial Emphasis” by Charles T. Horngren, Srikant M. Datar, Madhav V. Rajan
- Provides an in-depth exploration of cost accounting principles, including service cost centres.
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“Management and Cost Accounting” by Colin Drury
- A comprehensive textbook covering various aspects of management and cost accounting, ideal for understanding the allocation and apportionment of indirect costs.
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“Accounting for Management Control” by David Otley and Kenneth Merchant
- Offers insights into management control systems, including the management of costs in diverse organizational settings.
Accounting Basics: “Service Cost Centre” Fundamentals Quiz
### 1. What is a service cost centre primarily designed to do?
- [x] Support production processes indirectly
- [ ] Directly handle the manufacturing of goods
- [ ] Replace production cost centres
- [ ] Track direct labor costs only
> **Explanation:** A service cost centre supports production processes indirectly without directly handling the manufacturing of goods.
### 2. Which of the following is an example of a service cost centre?
- [x] Boiler house
- [ ] Assembly line
- [ ] Packaging department
- [ ] Quality control line
> **Explanation:** A boiler house is a service cost centre because it supports the production process by providing steam but does not directly handle the cost units.
### 3. How are the costs from service cost centres typically allocated?
- [ ] Equally across all cost units
- [x] Based on appropriate activity drivers like labor hours or machine hours
- [ ] Not allocated but expensed directly
- [ ] Arbitrarily chosen basis without consideration of usage
> **Explanation:** Costs from a service cost centre are typically allocated based on appropriate activity drivers such as labor hours or machine hours.
### 4. Which department typically does NOT qualify as a service cost centre?
- [ ] Maintenance department
- [ ] Stores department
- [ ] Canteen
- [x] Production assembly line
> **Explanation:** The production assembly line is a production cost centre, as it directly handles the manufacturing of goods.
### 5. What is another term commonly used for a service cost centre?
- [ ] Direct cost centre
- [x] Indirect cost centre
- [ ] Profit centre
- [ ] Revenue centre
> **Explanation:** A service cost centre is also commonly referred to as an indirect cost centre because it supports production indirectly.
### 6. Which term refers to the costs incurred indirectly and allocated to service cost centres?
- [x] Overhead costs
- [ ] Direct costs
- [ ] Variable costs
- [ ] Fixed costs
> **Explanation:** Overhead costs are the indirect costs incurred and allocated to service cost centres.
### 7. Can charges from service cost centres be directly traced to a single cost unit?
- [ ] Yes, they always can.
- [ ] No, they are indirect and cannot be traced directly.
- [x] No, they are indirect but support cost allocation.
- [ ] Sometimes, but it depends on the activity driver.
> **Explanation:** Charges from service cost centres are indirect and cannot be directly traced to a single cost unit but support indirect cost allocation.
### 8. Why might it be necessary to have service cost centres in an organization?
- [x] To provide essential support functions that maintain production
- [ ] To directly generate revenue
- [ ] To eliminate direct costs
- [ ] To track company-wide sales
> **Explanation:** Service cost centres are necessary to provide essential support functions that maintain and facilitate the production process indirectly.
### 9. What happens to the costs accrued in a service cost centre in absorption costing?
- [ ] They are expensed out immediately.
- [x] They are allocated or apportioned to production cost centres.
- [ ] They are kept unchanged in financial records.
- [ ] They are recorded as liabilities.
> **Explanation:** In absorption costing, the costs accrued in a service cost centre are allocated or apportioned to production cost centres.
### 10. Which basis is NOT commonly used to allocate costs from a service cost centre?
- [ ] Machine hours
- [ ] Labor hours
- [ ] Space occupancy
- [x] Sales volume
> **Explanation:** Sales volume is not commonly used to allocate costs from a service cost centre. Bases like machine hours, labor hours, and space occupancy are more typical.
Thank you for learning about the essential concept of service cost centres in accounting. Keep enhancing your financial acumen to stay ahead in your career!
