Introduction:

In this article, we will discuss the cost of goods sold and the cost of revenue and a brief introduction to the insurance sector. We will also discuss the relevant costs and cost of sales for the insurance sector, with components of cost sales for the insurance industry.

At last, we will conclude our discussion by emphasizing the importance of the cost of sales and the importance of the cost of sales for the insurance sector.

Cost of Goods Sold:

The cost of goods sold is a relevant cost for a business irrespective of sector or industry, this cost includes the all direct cost to sell the product or service. For the services business, we will use the term the cost of revenue rather than the cost of goods sold.

Because in services business is there no existence of physical goods and we provide the services against the sales revenue, so cost incurred to provide the services will be deemed to be the cost of revenue or cost of services.

Insurance Companies:

Insurance companies also fall in the service sector and the nature of the insurance business is to provide services to clients.  The insurance sector includes the companies that provide risk management services in the form of a contract to the clients.

The basic business of insurance companies is to provide the guarantee of payment against the uncertain loss of insurer. The insurer is the person or company which contracts the insurance institutes for the guarantee of uncertain loss and pay to the insurance company in terms of installment or insurance cost to insurance providers.

Cost of Sales for Insurance Companies:

Insurance companies’ business sector is services business and cost provided to render the services will be deemed as cost of revenue or cost of services rather than the cost of goods sold.

Because insurance companies don’t include the production of goods, although insurance companies provide insurance services against the production or manufacturing sector.

The cost of revenue for insurance companies is the cost incurred to perform the services to the insurer and any direct cost attached to deliver the services. There three main components of the cost of sales of the insurance sector, we will discuss all three components as follows.

Direct material:

For identifying the cost of services, it necessary for us to determine the Service. When service nature is identified then we have to consider the direct cost incurred to deliver the service. In the context of the insurance sector, direct material for delivering the services will be the direct material provided to the insurer.

Direct labour:

The direct labor for the insurance company is the insurance agents and other persons involved in prodding the services to insurers or clients excluding the fixes staff salaries.

Other variable Overheads:

Other variable overheads include the cost of transportation and services of any third party.

Conclusion:

Insurance companies can’t be able to determine the gross profit margins and price of service without identifying the cost of revenue, so it’s compulsory for companies to understand and implement the cost of sales for the financial evaluation of the company or sector.

The cost of sales will be subtracted from sales revenue in the statement of profit and loss, while we prepare the financial statement of an insurance company.