This system of costing applies to any service industry where a uniform or standard service is provided to customers. In theory it should be easier to cost services than, say, manufactured products, because there are no stocks and work-in-progress to be valued. In practice it may be
hard to define some services and to draw boundaries to separate one service from another. Without such definition it will be impossible to cost separate services.

Service costing is similar to process costing in that the total costs of providing the service over a period of time is divided by the quantity of services provided to get a unit cost. Transport or electricity businesses could divide their total costs for a period of time by the activity taking place during that time to lead to the average cost per passenger mile or the cost per kWh respectively.

Example
The running costs of a local swimming-pool amount to £16,000 per week. Last week
8,000 people used the pool. The average cost per swim is therefore £2. Where there is not a single homogeneous service provided, as with a swim, but a mixture of swims, saunas, exercise sessions and the like, then a detailed cost analysis not unlike product costing will be required. Activity-based costing techniques may be employed here to advantage. The actual unit cost of a service is used to help fix prices or other charges, but can also be used as a basis for cost control. For example, comparisons can be made with past unit costs or with pre-set targets, or by benchmarking with similar organizations.

Taken From : Accounting for Non-Accountants