Service Overhead Account

Definition

The service overhead account is an account used in a job order cost system to record and accumulate the indirect costs associated with providing services to customers in a nonmanufacturing environment. These indirect costs, known as service overhead, are then allocated to individual jobs or projects based on an appropriate cost driver to ensure accurate costing and pricing decisions.

5 Must Know Facts For Your Next Test

1. The service overhead account is used to record and accumulate all indirect costs associated with providing services to customers in a nonmanufacturing environment.
2. Indirect costs recorded in the service overhead account may include items such as salaries for support staff, utilities, and depreciation on equipment used in the service department.
3. The service overhead account is different from a manufacturing overhead account, which is used in a manufacturing environment to record and accumulate indirect costs related to the production of goods.
4. Costs in the service overhead account are allocated to individual jobs or projects using an appropriate cost driver, such as direct labor hours or machine hours, to ensure accurate costing and pricing decisions.
5. Proper management and control of the service overhead account is crucial for maintaining profitability in a nonmanufacturing environment, as indirect costs can have a significant impact on the overall cost of providing services.

Review Questions

• Explain the purpose of the service overhead account in a job order cost system for a nonmanufacturing environment.
  • The purpose of the service overhead account in a job order cost system for a nonmanufacturing environment is to record and accumulate all indirect costs associated with providing services to customers. These indirect costs, such as salaries for support staff, utilities, and depreciation on equipment, cannot be easily traced to specific jobs or projects. By maintaining a separate service overhead account, these costs can be allocated to individual jobs or projects using an appropriate cost driver, ensuring accurate costing and pricing decisions.
• Describe the key differences between the service overhead account and the manufacturing overhead account in a job order cost system.
  • The key difference between the service overhead account and the manufacturing overhead account in a job order cost system is the type of environment they are used in. The service overhead account is used in a nonmanufacturing environment to record and accumulate indirect costs related to the provision of services, while the manufacturing overhead account is used in a manufacturing environment to record and accumulate indirect costs related to the production of goods. Additionally, the cost drivers used to allocate the overhead costs to individual jobs or projects may differ, as the nature of the indirect costs and the cost-benefit relationship may vary between service and manufacturing environments.
• Analyze the importance of proper management and control of the service overhead account in maintaining profitability in a nonmanufacturing environment.
  • Proper management and control of the service overhead account is crucial for maintaining profitability in a nonmanufacturing environment because indirect costs can have a significant impact on the overall cost of providing services. If these indirect costs are not accurately recorded, accumulated, and allocated to individual jobs or projects, the true cost of providing services may be underestimated, leading to inaccurate pricing decisions and potential losses. By closely monitoring and managing the service overhead account, managers can ensure that indirect costs are properly accounted for and that pricing decisions are based on a comprehensive understanding of the true cost of providing services. This, in turn, can help maintain profitability and competitiveness in the nonmanufacturing environment.

Related terms

Job Order Cost System: A cost accounting system that accumulates costs for individual jobs or projects, rather than for the entire production process.

Indirect Costs: Costs that cannot be easily traced to a specific job or product, such as rent, utilities, and administrative salaries.

Cost Allocation: The process of assigning indirect costs to individual jobs or products based on an appropriate cost driver.