In the manufacturing industry, the cost of goods sold (COGS) will be direct, labour coat, direct material cost and production-related overheads.
But when it implemented in the service industry, it doesn’t make sense because the Cost of goods sold is only useable for the production industry.
In the service sector, we can use the term cost of revenue rather than using cost of goods sold. It is sometime also called cost of services.
In this article, we will be discussing detail the cost of goods sold, in other words, the cost of service or cost of revenue for the consulting company.
Cost of Revenue for Consulting Businesses:
Now we will discuss the cost of revenue exactly and how it will help you to assess the cost per unit.
“Cost of delivering and manufacturing of a service, in financial statement, cost of revenue is reporting in income statement after the sales revenue headline. It is the direct cost to render the service.”
You can see the total cost of revenues of the entity for specific period of time in the entity’s income statement. However, you cost not see the cost of revenue or cost of service per services in this report.
Yet, you might be able to the margin that entity performing compare its competitor or industry.
Components of Cost of Revenue:
The component of cost of services for the consulting business is different from another type of business especially trading or manufacturing where the component is direct material and direct labor.
In consulting business where most of the direct costs are related to the consulting team or professional staffs, the cost of services are quite different.
In the following points, we will discuss the components of cost of revenue.
Direct labour involved in rendering the service, if we talk in context of Consultancy Company than direct labour cost would be consulting team working in the office or onsite fieldwork to provide services consulting services to its clients and their supporting staff.
However, the cost or salary of supporting staff are sometime scope out of the cost of services. They are records under the general and administrative expenses.
Direct material relates to consultant services:
For Consultancy business, direct material will Suppliers Services, index-tracking, Photocopying, contracting, suppliers negotiating, and ongoing audits. These are some common examples of raw material for consultancy business and might be changed according to services offering the business.
If all the above expenses incurred due to rendering or providing the service specifically then these all expenses will be included in the cost of revenue.
All shipping cost to transfer the service-related material will also include in Cost of Revenue sold.
In the context of consultancy company carriage incurred for delivering the service at the client’s workplace of delivering the service to the client should be included in cost of revenue.
Commission paid for sales revenue would also deem the cost of revenue in the service industry. If we explain this concept in the consultancy business, then sales commission will be “commission paid to any agent for promoting the sales revenue”.
However, sometime these kind of expenses are consider as general expenses and it is not include in the cost of services.
Not be Included in Cost of Revenue:
Now we will discuss the expenses that are not part of cost of revenue.
Fixed salaries will not be included in the cost of revenue. If salaries vary on the volume of service, then it will be the cost of revenue; otherwise, it should be deemed other operation or fixed expense.
For example, the salary of the administrative staff will not include the cost of services. But the salary of the consulting staff will be charged to the cost of services.
Fixed rental expenses will also not be included in cost of revenue and it is normally records as general and administrative expenses. Rental expenses are fixed it does not mater if the services are going up or down.
If phone services don’t base on service rendered, mean it is no fluctuation or changes with the volume of services provided, then it should not be included in the cost of revenue.
Now it is a debatable matter whether utilities are the cost of sales or not. If Utility expenses based on your revenue volume then it will of cost of revenue otherwise, it will be other operation coast and will be considered indirect utility expenses.
Cost of Revenue per Unit:
When it is decided the nature of expenses; whether it is the cost of revenue or not, then we have to allocate the cost of revenue per unit. We will use the same model of Cost of goods sold, mean will allocate the cost of revenue according to per service rendered.
Consultancy business doesn’t sell goods so Cost incurred for rendering services would be deemed as Cost of Revenue rather than Cost of sales, for consulting companies Cost of Revenue will be remuneration paid consultants (Variable Cost).
Cost of Revenue will be deducted from the sales revenue of the company. The cost of sale distinguishes from operating expenses because gross profit will be calculated after deducting the operating expenses.