COGS stands for Cost of Goods Sold.
Since we have been learning to account, we have been taught that COGS is applicable for the product industry, which relates to selling products or goods, be it manufacturing or wholesale business. But, for sure, none of us has associated the COGS concept in the service business accounting.
You will be surprised to know that many of our online billing software users have applied the COGS concept in their service business. This exclusive blog post will share a few examples of how COGS makes sense for the service business industry.
Here we go!
What is COGS?
COGS is referred to as Cost of Goods Sold in business accounting. It includes the total cost or expenses incurred for determining the final price of the goods or products on which they can be sold or sold.
It includes direct labor costs, raw materials, transport, and commission. COGS doesn’t include the overhead costs, but many businesses consider it for understanding the total expense after each product.
COGS for product industry
The product industry refers to the industry where the business sells tangible goods. For the product industry, COGS is a fundamental concept in business accounting. It includes all the applicable costs for producing the final product, including the beginning inventory and current purchases.
Businesses generally invest in cloud accounting software for managing inventory, cost of goods sold, and other income statements. In addition, it helps the business owner in getting accurate financial insights.
Let’s now understand the concept of COGS for the service industry. How do professionals or consultants consider the cost of goods sold while offering their services to the clients?
How does COGS make sense for the service industry?
The service-based business must also calculate the COGS to understand the income earned. In service business accounting, COGS is often referred to as Cost of Revenue.
Let me share a few examples to understand how professionals or service-based businesses calculate the cost of goods sold while offering services.
Example 1: Lawyer or a law firm
Let’s consider ABC as a law firm. First, ABC has to meet various clients to discuss their cases as a law firm. During each visit, the law firm or the lawyer has to offer coffee or tea to their clients; it requires printing different papers, and each case needs sticky notes, pens, and legal pads.
These items are counted as the cost of revenues at the end of each year while calculating the final profit or income.
Example 2: Software agency
Software development companies also incur costs or expenses at the end of each year while working on different projects. For example, the company needs to purchase various software development tools or apps for designing an app. These companies do not have inventory or expense sheet maintenance while maintaining their books of accounts. Instead, they use the cost of revenues by calculating the on-hand applications and tools after service delivery.
Online accounting software helps maintain the list of expenses that the company has incurred during each project. In addition, it helps determine the total cost of purchased tools, including the validity left while amounting to the costs of revenues for the said year or project.
Hence we can assume that service-based business also needs to calculate the COGS for determining the perfect income value at the end of each project or year.
Different service-based companies calculate the cost of revenues despite not having any inventory or stock to maintain. It includes law institutions, financial institutions, digital marketing agencies, software development companies, freelancers and designers, real-estate firms, and education institutes.
Below are some of the costs recorded by the service-based businesses to calculate the cost of revenue
- Employee labor or wages
- Commission paid to sales executives or representatives
- Material or supply cost for stationery
- Travel expenses
- Coffee and tea expenses
Business accounting needs accurate expense recording for determining the actual income value. Downloading cloud accounting software helps service-based professionals or businesses to maintain direct and indirect expenses. Nevertheless, downloading the expense sheet is quick and easy using an online billing software like Moon Invoice.
Why is calculating COGS important for businesses?
The cost of goods sold is very important to determine the gross profit. And for any business, it is a must to get an accurate gross profit value for determining the success or failure of the ongoing project or production. So here is a simple formula to calculate the gross profit.
Gross Profit = Total Revenue – Cost of Goods Sold (COGS)
The primary motto of any business is to survive with a good profit margin. And for understanding the actual profit margin or percentage, it is important to calculate the profit. If the service or product-based firm keeps the list of expenses and inventory, it helps them calculate the accurate gross profit on each service or product.
Our online accounting software helps businesses understand gross profit or profit by-products by downloading accurate income statements. The formulas are inserted in the app to help businesses get perfect business insights, including profit and loss reports, profit by product reports, balance sheets, expense sheets, and sales reports. We can sum up by saying that the cost of goods is essential for businesses to easily calculate the gross profit value.
What’s the experts opinion for COGS?
Accounting and business management experts recommend both product and service-based businesses to calculate the cost of goods sold by getting gross profit value. We have been talking to different business professionals from various industry niches, and they are quite convinced to have successfully noted down the cost of goods sold for working on the expenses per project or product. Lesser COGS = higher the profit margin. So, if the firms start working on cost-cutting of the expenses, it shall help them earn more profit.
Cost of Goods Sold = 6000 USD
Revenue = 15000 USD
Gross Profit = Revenue – Cost of Goods Sold= 9000 USD
Likewise, if the COGS increases to 8000 USD, the Gross Profit will reduce to 7000 USD.
Hence, for understanding the total cost of goods or revenue, it is important to have records of each expense associated with your service or product business.
How Moon Invoice helps service businesses?
Service businesses can easily record the expenses incurred for their clients, including the coffee and tea, stationery usage, fuel expenditure, and sales commission, by recording expenses under the ‘Expense’ tab using the Moon Invoice app.
Our online accounting software is designed to help service-based businesses record expenses, download income statements, and send invoices on the go! We offer different subscription plans to our users as per their needs and market size. Check out all our subscription plans to choose the most appropriate business accounting plan for your business.
Connect with our accounting experts to understand more about COGS for service-based industries. Also, please write to us your opinion and ideas for the same at firstname.lastname@example.org.