How to Calculate Cost of Services Sold

by Kirk Thomason; Updated September 26, 2017

Like any business, a company that sells services to consumers needs to track costs. Services companies often have lower cost of goods sold when compared to merchandise companies. Other costs — such as labor — are often higher, however. Figuring the cost of services sold allows a company to determine the gross profit for a specific accounting period. High gross profit indicates a company is efficient when spending capital on the items needed to directly earn revenue from services sold.

Step 1

Use a cost report to document the costs associated with services sold. The report should list all items used for one job, unless multiple jobs fall under one project.

Step 2

Determine the amount of materials needed to complete the service. Materials include physical items used in part to complete the service. The cost is the direct amount paid for the direct material.

Step 3

Write down the hours required to complete the service on the cost report. All employees directly involved with the service should be on the report.

Step 4

Multiply each employee’s hourly wage against their hours worked to complete the service. This is the total labor hours for the project.

Step 5

Add incidental items to the cost report. These items may be on hand at the company but are necessary to complete the project.

Step 6

Total all costs on the cost report. The total should represent the complete cost for the service completed for a customer.

Tips

  • Different cost calculation methods are possible. Companies can typically use whatever method they deem most accurate for reporting costs. Failure to record all costs accurately can lead to misrepresented financial statements.

References

  • "Cost Management: Strategies for Business Decisions"; Ronald Hilton, et al.; 2006

About the Author

Kirk Thomason began writing in 2011. In addition to years of corporate accounting experience, he teaches online accounting courses for two universities. Thomason holds a Bachelor and Master of Science in accounting.