![]() ![]() ![]() Cost of Goods Sold per unit and Cost of Revenue per unit is the model we use with our ProjectionHub application.Įssentially you need to break down each expense that your cost of revenue is composed of into a unit cost. Once you have determined which expenses to include in the cost of revenue for a service company, you should come up with your cost of revenue per unit. Utilities – Now this might be up for debate because your utilities might go up or down based heavily upon your sales volume, but even if you did not sell any product or service next week wouldn’t you still turn the lights on? Wouldn’t you still heat or call your office building? In general your utilities are not considered as past of Cost of Goods Sold or Cost of Revenue. Phone Service – The phone bill will arrive each month whether you sell 100 widgets or 1,000,000 widgets therefore, it is not to be considered part of your cost of revenue. Rent – Your rent expense is another overhead cost that is not included in cost of revenue. Salaries – Employee salaries are not directly tied to revenue, in other words, your employees are paid the same salary each month whether they sell more or less goods and services. These expenses should not be included in the cost of revenue for a service company. ![]() Now I will go through a list of expenses that you would incur whether or not you sold a product or service. You only incur sales commission expenses when you generate revenue through a sale of your product or service therefore, sales commissions should be included in your cost of revenue.Ī common rule of thumb when determining what is cost of revenue and what is not, is to simply ask yourself, “Would I incur this expense if I did not make a sale today?” What Is Not Included In Cost Of Revenue For A Service Company Sales Commissions – Sales commissions are another common expense that should be included in the cost of revenue for a service company. If you end up paying $100 to ship your report to the board, that $100 should be included in cost of revenue because it is a necessary expense that you incur as part of your service. At the end of the audit you print your report and mail copies to each member of the client’s board of directors. Shipping Costs – Let’s say you own an accounting firm that audits companies. Your employees wages is considered cost of revenue, so in this scenario you would have $90 in direct labor costs that would be included in your cost of revenue. It will be a 3 hour job for your team of 3 guys. Let’s say you own a junk removal business, and you get a job to clean up an old building. Raw Materials – Service based businesses don’t have “raw materials” but if you were a product based business, you would include all raw materials used to produce the product in cost of revenue.ĭirect Labor – Direct labor should be included in the cost of revenue for a service company. Indirect costs, such as salaries, are not included.” What Is Included In Cost of Revenue For A Service Company Cost of revenue information is found in a company’s income statement, and is designed to represent the direct costs associated with the goods and services the company provides. “The total cost of manufacturing and delivering a product or service. I also want to help you determine your cost of revenue for a service company on a per unit basis. Now I want to dive deep into exactly what Cost of Revenue is and what it is not. What is Cost of Revenue for Service Based Businesses Rather than using the term cost of goods sold, it would be best to use a similar term - Cost of Revenue. So what if you operate an IT service company, what is your COGS? What if you develop and sell software? How do you determine the cost of goods sold for a service business? If you want to be precise, Cost of Goods (COGS) is only used for product based businesses. When it comes to the cost of goods sold for services, the cost of goods sold for a service business doesn’t quite make sense. What Is The Cost Of Goods Sold For A Service Business? ![]()
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