Service Business Costing: Cost Accounting Approach for the Service Industry

136 Pages·2013·1.36 MB·English

by  Markus B. Baum (auth.)

Service Business Costing
Markus B. Baum
Service Business Costing
Cost Accounting Approach
for the Service Industry
Foreword by Dr. Kerry Sullivan
RESEARCH
Markus B. Baum
Mainz, Germany
MBA Dissertation, University of Surrey, England, 2012
ISBN 978-3-8349-4443-6 ISBN 978-3-8349-4444-3 (eBook)
DOI 10.1007/978-3-8349-4444-3
Library of Congress Control Number: 2012947016
The Deutsche Nationalbibliothek lists this publication in the Deutsche Nationalbibliografie;
detailed bibliographic data are available in the Internet at http://dnb.d-nb.de.
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Foreword

The costs associated with service provision are often problematic especially in
areas where there is significant pressure on pricing. With a growing emphasis on
outcomes pricing, the need to understand and control the costs that arise is
paramount. Service companies often have high overheads and traditional costing
methodologies are not providing adequate solutions in an outcomes based
environment. In using a value chain analysis approach this thesis offers an insight
into a more efficient method of dealing with the real costs of a project.

The core of the content after a brief examination of the traditional costing models
relates to the use of value chain analysis in providing a systemic evaluation for the
allocation of costs as applied to management consultancy. The result is a
proposed hybrid model-costing model for a service business which can enhance
practice and provides a potential methodology that is adaptable across other
service providers. A clearer understanding of costs is essential today and the
process suggested offers a thoughtful route through this important aspect of a
service business.

Dr Kerry Sullivan
Surrey University

V
Acknowledgements

Though only my name appears on the cover of this paper, many people have
contributed to its finalisation. I owe my deepest gratitude to everyone who made
this work possible. Thank you so much!

First, I would like to express my deepest gratitude to my supervisor (MBA-
Programme) Dr Kerry Sullivan of the University of Surrey, Guildford, United
Kingdom. Kerry gave me the most freedom possible to develop this study and
book with my own ideas and styles. With his thorough experience in corporate
finance and in academic research, his guidance and support contributed
significantly to this book.

I am also grateful to the board members and my Corporate Finance team
members of the firm J&M Management Consulting AG (Mannheim, Germany) for
funding and supporting my study and research project.

Most importantly, this work would not have been possible without my wife Sandra
who gave me so much encouragement, love and patience, especially when our
son and daughter were born. I also owe special thanks to my parents, parents-in-
law, my brother and his wife for their support and help.

Special acknowledgement also goes to my new friends Marco Hackstein, Marcel
Mehling and Jörg Dickerboom, whom I have come to know through the MBA study
at the University of Surrey and from whom I have learned so much. Many thanks
for making my studies so valuable and for the exciting and enjoyable experience.
This book is my recently deceased stepfather Fabri dedicated. Thank you that you
were my biggest fan.

Markus B. Baum

VII
Brief Contents

Contents xi
List of Tables xv
List of Figures xvii
List of Abbreviations xix

1 Introduction ................................................................................................ 1
2 Theoretical background and literature review .......................................... 19
3 Methodology ............................................................................................ 42
4 Action research: value chain analysis of the firm ..................................... 51
5 Design and development of a costing approach ...................................... 74
6 Conclusion and recommendation ............................................................. 93
7 References............................................................................................... 97
APPENDIX A .................................................................................................. 107
APPENDIX B .................................................................................................. 113

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Contents

Contents xi
List of Tables xv
List of Figures xvii
List of Abbreviations xix

1 Introduction ................................................................................................ 1
1.1 Target group of the study: management and IT-Consulting firms ...... 3
1.1.1 Definition and purposes of management consulting ............... 3
1.1.2 History of consulting ................................................................ 5
1.1.3 Consulting market ................................................................... 7
1.1.4 Purpose statement .................................................................. 9
1.2 Research objectives ........................................................................ 16
1.3 Design of the study .......................................................................... 18
2 Theoretical background and literature review .......................................... 19
2.1 The value chain and service value chain ......................................... 19
2.2 Value chain analysis ........................................................................ 20
2.3 Service profit chain analysis ............................................................ 22
2.3.1 Strength of the models .......................................................... 24
2.3.2 Weaknesses of the models ................................................... 25
2.3.3 Opportunities and threats for consulting firms ....................... 25
2.4 Introduction to cost accounting ........................................................ 27
2.5 Absorption costing model ................................................................ 29
2.5.1 Strength of the model ............................................................ 30
2.5.2 Weaknesses of the model ..................................................... 30
2.5.3 Opportunities for consulting firms .......................................... 30
2.5.4 Threats for consulting firms ................................................... 31
2.6 Variable costing model .................................................................... 31
2.6.1 Strength of the model ............................................................ 33
2.6.2 Weaknesses of the model ..................................................... 33
2.6.3 Opportunities for consulting firms .......................................... 33

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2.6.4 Threats for consulting firms ................................................... 34
2.7 Activity based costing model ........................................................... 34
2.7.1 Strength of the model ............................................................ 35
2.7.2 Weaknesses of the model ..................................................... 36
2.7.3 Opportunities for consulting firms .......................................... 37
2.7.4 Threats for consulting firms ................................................... 38
2.8 Job order costing model .................................................................. 38
2.8.1 Strength of the model ............................................................ 39
2.8.2 Weaknesses of the model ..................................................... 39
2.8.3 Opportunities and threats for consulting firms ....................... 39
2.9 Process costing model .................................................................... 40
2.10 Target costing model ....................................................................... 40
3 Methodology ............................................................................................ 42
3.1 Research strategy ........................................................................... 42
3.2 Research design .............................................................................. 44
3.3 Data collection and analysis ............................................................ 47
3.4 Ethics ............................................................................................... 49
4 Action research: value chain analysis of the firm ..................................... 51
4.1 Course of actions ............................................................................. 51
4.2 Definition and development phases................................................. 53
4.2.1 Introduction / overview of the corporate structure (functions) 53
4.2.2 Hypothetical definition of main processes/operations ........... 55
4.2.3 Hypothetical definition of supportive processes/operations .. 60
4.2.4 Development of the value chain ............................................ 62
4.3 Verification phases .......................................................................... 65
4.3.1 Verification hypothetical definition ......................................... 65
4.3.2 Value chain analysis process map ........................................ 65
4.4 Analysis phases............................................................................... 70
4.4.1 Activity analysis and cost driver analysis .............................. 70
4.4.1.1 Marketing ................................................................. 70
4.4.1.2 Sales ........................................................................ 70
4.4.1.3 Knowledge management and quality management.. 70
4.4.1.4 Staffing ..................................................................... 71
4.4.1.5 HR ............................................................................ 71

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4.4.1.6 Delivery .................................................................... 71
4.4.1.7 Finance .................................................................... 71
4.4.1.8 IT .............................................................................. 72
4.4.1.9 Internal communication ............................................ 72
4.4.1.10 Business support and reception ............................ 72
4.5 Interpretation and transfer phases ................................................... 72
5 Design and development of a costing approach ...................................... 74
5.1 Objectives of the new model ........................................................... 74
5.2 Evaluation and selection of the different costing models ................. 74
5.3 Design of the cost accounting approach .......................................... 75
5.3.1 Service business costing model ............................................ 75
5.3.2 Service business costing model for a consulting firm ............ 81
5.4 Design of the project costing model ................................................. 87
5.4.1 Turnover of the project .......................................................... 88
5.4.2 Provisions and reductions ..................................................... 88
5.4.3 Income from internal allocations ........................................... 88
5.4.4 Work in progress / not billed service ..................................... 88
5.4.5 Total income of the project .................................................... 88
5.4.6 Personnel direct costs – external resources ......................... 89
5.4.7 Personnel direct costs – internal resources .......................... 89
5.4.7.1 Direct allocation ........................................................ 89
5.4.7.2 Proportional allocation .............................................. 90
5.4.8 Other material direct costs .................................................... 90
5.4.9 Personnel overhead cost allocation – external resources ..... 91
5.4.10 Personnel overhead cost allocation – internal resources ...... 91
5.4.11 Other material overhead cost allocation ................................ 91
5.4.12 Financing cost ....................................................................... 91
5.4.13 Cost reductions from internal allocation ................................ 92
5.4.14 Total overhead cost allocation of the project ......................... 92
5.4.15 Total cost of the project ......................................................... 92
5.4.16 Net project result ................................................................... 92
6 Conclusion and recommendation ............................................................. 93
7 References............................................................................................... 97
APPENDIX A .................................................................................................. 107

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