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COGS Formula for Service Companies:
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Cost of Goods Sold (COGS) for service companies represents the direct costs associated with providing services to customers. Unlike manufacturing companies, service companies don't have physical inventory but still incur direct costs related to service delivery.
The calculator uses the COGS formula for service companies:
Where:
Explanation: This formula calculates the total direct costs incurred by a service company to deliver its services to customers.
Details: Accurate COGS calculation is essential for service companies to determine gross profit, set appropriate pricing, analyze profitability, and make informed business decisions.
Tips: Enter direct labor costs in USD, direct expenses in USD. All values must be valid non-negative numbers.
Q1: What is included in direct labor for service companies?
A: Direct labor includes wages, salaries, bonuses, and benefits for employees who directly provide services to customers.
Q2: What are examples of direct expenses?
A: Direct expenses may include materials used in service delivery, subcontractor costs, travel expenses directly related to service provision, and other costs directly tied to service execution.
Q3: How is COGS different for service vs product companies?
A: Service companies calculate COGS based on labor and direct expenses, while product companies include costs of raw materials, manufacturing labor, and overhead.
Q4: Why is COGS important for service companies?
A: COGS helps service companies understand their true cost of service delivery, set competitive pricing, and calculate accurate gross profit margins.
Q5: How often should service companies calculate COGS?
A: Service companies should calculate COGS monthly for accurate financial reporting and quarterly for comprehensive business analysis.