Are Wages Part Of Cogs For Service Business

Definition:

Cost of Appurtenances Sold, (COGS), can too be referred to as toll of sales (COS), cost of revenue, or production cost, depending on if it is a production or service. Information technology includes all the costs directly involved in producing a product or delivering a service. These costs tin include labor, material, and shipping. The idea backside COGS is to measure out all costs (which are variable) directly associated with making the production or delivering the service.

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Example:

Let'south assume you get-go a delivery company and line up a few customers. In the first total calendar month of functioning y'all do $10,000 worth of business (this becomes our acquirement line). For that month nosotros as well had expenses, including the cost of gas for the delivery truck in the amount of $2,000, and the salary of the driver at $3,000. These costs are direct related to our service and fall into the Cost of Goods Sold (COGS) line. In that location are more line items that would be included in COGS, only you become the idea. All other expenses not direct related to the production or service goes under a category chosen Operating Expenses such as your receptionists' or accountants' salary. The top part of our income statement (with our COGS line) would wait like this:

COGS COS Example

Volume Excerpt:

(Excerpts from Fiscal Intelligence, Chapter viii – Costs and Expenses)

If yous suspect that rule [what goes into COGS/COS] is open to a ton of interpretation, you're on the coin. The accounting department has to make decisions well-nigh what to include in COGS or COS and what to put somewhere else.

Some of these decisions are easy. In a manufacturing company, for example, the following costs are definitely in:

The wages of the people on the manufacturing line
The toll of the materials that are used to make the product

And enough of costs are definitely out, such every bit:

The cost of supplies used past the accounting department (paper, etc.)
The salary of the human resources manager in the corporate part

Ah, but then there's the gray expanse—and it's enormous. For example:

What nearly the salary of the person who manages the plant where the product is manufactured?
What about the wages of the institute supervisor?
What about sales commissions?

Are all of these directly related to the manufacturing of the product? Or are they operating expenses, similar the cost of the Hour managing director? There's the same ambiguity in the service environment. COS in a service company typically includes labor associated with delivering the service. Simply what nigh…