Cost of Service

Cost of goods sold is the carrying amount of goods which has been sold to the customer during the accounting period. It is very common for both manufacturing that purchase raw material and convert them to finished goods. For the trading company is the cost of purchasing goods that will be sold to the customer. What about the service business that only provides service to customers.

Cost of service is the cost of company need to spend to provide service to customers in the accounting period. It counts only the cost which directly related to the service, other overhead costs will be considered as operating expenses.

Cost of service is similar to cost of goods sold but mainly for the service company. The services company does not sell any goods, so they do not have cost of goods sold. They only have cost of service.

Example of Cost of Service

These are the examples of cost of services of some companies:

  • Lawyer:
  • Audit
  • Bookkeeper
  • Medical Consultant
  • Transportation and so on

Component of Cost of Service

Cost of services is the costs that are necessary to complete service for the customers. It is mostly referred to the staff salary who perform service. The materials which are necessary to complete the service also included in the cost of service too.

Industry Component of Cost of Service
Lawyer & Audit Mostly the staff’s salary
Transportation Staff Salary, Petrol and Plant depreciation
Medical Consultant Staff Salary and medicine. Medicine should be a small part only otherwise it will considered as sell medicine not consultant.

Cost of goods sold vs Cost of Service

Cost of Goods Sold Cost of Service
Company types For both manufacturing and trading company For only service company.
Component Consist of both direct material and direct labor. For trading companies, it is mainly the product cost. Mainly the payroll cost as we need the employee to performance service. However, it may consist of material too.
Formula COGS = Beg Inv + Purchasing – End Inv No exact formula, it bases on management judgement in different industries.