TARGET COSTING In Service Industry

TARGET COSTING In Service Industry

1. Characteristics of Service Industries

   • "H I P S"
     • H
       • HETROGENEITY
         • Services mainly involves people and because people are all different ,the service received may vary depending upon the person who is performing it .Standardisation is expected by the customer but it is very difficult to maintain. For Example same quality cannot be expected from the junior in terms of senior
     • I
       • INTANGIBLE
         • Unlike goods a service cannot be physically touched
     • P
       • PERISHABILITY
         • Unused capacity cannot be stored for future use
     • S
       • SPONTANEITY
         • Unlike goods , a service is consumed at the exact time when it is produced .No service exists until it is experienced by the customers

2. Problems using target costing in service industry

   • When the service is only at the concept stage, it is very difficult to determine the likely sales volume and the price that potential customers will be prepared to pay, so it is harder to get a realistic assessment of the external marketplace.
   • In service industries the cost is almost entirely made up of labour. So if the costs need to be reduced to achieve the target cost, the only way of achieving this is to either reduce the amount of time spent or to use lower grade staff, both of which are likely to reduce the value of the service and hence the revenue will fall and so the costs must fall still further etc.
   • It is not unusual in service industries for each service to be unique as it is tailored to suit the particular customer’s requirements. This would mean the target costing approach would need to be re-addressed for every instance of the service (ie for each customer).