Service providers in general
The focus is on the individual work performed by the company’s own employees for a customer order. The main task is to charge the performance-related cost center costs to the customer orders according to cause. To do this, it is often necessary for employees to record their working hours per order on a daily basis. Based on this activity recording, these times are multiplied by the planned proportional cost rate per hour of the cost center providing the service and charged directly to the customer order. This procedure is the prerequisite for determining the contribution margin I of a customer order, as well as the absolute contribution margins achieved by a service group.
Material taken from the warehouse is charged to the customer order at standard purchase price. If material for a customer order comes directly from an outside supplier, the bill is recorded at actual price in the accounts payable department and charge directly to the customer order.
This applies above all to workshops and craft businesses of all kinds (e.g. car repair shops, heating fitters, plumbers, tailors). The costs of inventory management and procurement cannot be allocated to the individual sales order according to cause.
If other providers procure services for the execution of the customer order, these are order-specific external services (e.g. software licenses, design drafts, expert opinions, transportation services, laboratory tests). Also such positions are recorded in accounts payable and assigned directly to the customer order.
As in industrial operations, also service providers need to cover their fixed costs and to generate profit. The main focus here is on the customer order, rarely on an individual item. The sum of all contribution margins has to cover all fixed costs plus the EBIT needed.
If new products are developed in service companies that are subsequently made available to customers for use over several years, it should be considered from an operational perspective whether the project costs incurred should be capitalized, i.e. added to fixed assets and depreciated in subsequent years. These considerations are mainly necessary when developing application programs (software for sale) and consulting modules if the development costs are to be covered by the contribution margins of the subsequent years of use. In financial accounting, an attempt may be made to write off the total expenditure for such a project in the year in which it is created in order to save taxes in the short term.
Transportation companies
In airlines, railroad companies, local public transport and direct transportation from the supplier to the recipient, the following cost types are the most important:
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- Personnel costs
- Fuel and energy consumption
- Maintenance of the means of transportation
- Distance or time-dependent imputed depreciation.
Only in the case of direct transportation for a single client from the point of departure to the point of arrival is it possible to determine the proportional costs and thus the contribution margin I of a transport order according to the origin. The time spent by drivers and attendants as well as the miles driven can be measured and evaluated, which makes it possible to determine the proportional costs and the contribution margin I of the transport.
In air, sea, rail or bus transport the transportation options are usually offered according to a timetable or flight plan. The proportional costs arise when the transportation offer is executed. Whether the seats on the train, flight or public transport are well or moderately utilized has little influence on the proportional costs as the personnel deployment remains largely the same and energy consumption changes only insignificantly.
However, if the proportional costs of the unit produced (a flight or a train) remain more or less the same, the net revenue can be increased without significant additional costs by increasing the utilization of the available seats or transport areas. On trains that run between 0900 and 1130 and between 1400 and 1630, a large proportion of seats are often unoccupied. In particular American airlines and railroad companies in Europe recognized this and therefore advertise time-restricted offers at lower than usual prices (see the real examples in “Customer profitability, seller productivity, p. 76”. This approach is known as Revenue Management. On one hand the lower sales prices can increase the absolute contribution margin volume and on the other hand they reduce capacity bottlenecks on flights or trains with a high “Load Factor”.
Like in production also service companies should thus know the proportional costs of their services. This is the only way to determine which services contribute how much to covering fixed costs and profit.