Activity-based costing is very important in the service industry. Activity-based costing is a costing based method that assigns overhead and indirect costs to related products and services. Besides, it recognizes the relationship between costa, overhead activities, and indirect costs to produce less than the traditional cost methods. However, some indirect costs are difficult to assign to a product. The service industry is an economic segment that provides certain intangible activities that fulfill a particular need. Therefore, companies within this industry perform tasks that are useful to their customers. Additionally, this industry is wide in nature and covers a large range of activities.
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THE ADVANTAGES OF ACTIVITY-BASED COSTING
Activity-based costing is advantageous since it provides realistic costs for manufacturing specific products hence reduces unwanted extra costs. It also allocates manufacturing overhead more accurately to products and processes that use the activity in the service industry. Moreover, it identifies inefficient processes and targets for improvement hence increase productivity. Besides, it determines the product profit margins more precisely hence a company can follow up its progress. Nevertheless, it discovers which processes have unnecessary and wasted costs. Lastly, it offers a better understanding and justification of costs in manufacturing overhead.
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CONTRIBUTIONS OF THE SERVICE INDUSTRY TO DEVELOPMENT
The service industry is an important aspect of every country’s economy. This is because it makes a direct and significant contribution to GDP and job creation. This, therefore, provides crucial input for the rest of the economy. Besides, it has a significant impact on the overall investment climate. With the help of activity-based costing, this industry uses activities like health, education, and water to directly achieve social development objectives. Additionally, many services are key inputs to all or most other businesses such as infrastructure services such as energy, telecommunications, and transportation.
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