Avoiding the overhead cost trap: Towards an advanced management accounting method for servitized firms

Abstract

During the process of servitization, industrial companies may become lured into an overhead cost trap, meaning that costs for service delivery are invoiced not directly but indirectly by the product price, which leads to an overpriced product on the one hand and inferior service delivery on the other. This cost trap diminishes the competitiveness of the product and results in an underdeveloped service business. Therefore, this chapter develops several management accounting methods for service offerings to help manufacturers avoid the overhead cost trap. In addition to traditional methods, such as life cycle costing, more advanced accounting methods on the service business (e.g., function point analysis) and firm (e.g., balanced scorecard) levels are adapted to the needs of servitized manufacturers. In summary, this chapter aims to present suitable management accounting methods and thereby support manufacturers in professionalising their service businesses.