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Salary Costs in a services company

Should they be considered in cost of sales or operating expenses?

Answers

Topic Expert
Keith Perry
Title: Consulting CFO and Business Operations A..
Company: Growth Accelerator
(Consulting CFO and Business Operations Advisor, Growth Accelerator) |

One approach is to have time-tracking. Spend time on a client = cogs. Spend time making coffee = ops. Point is to maximize billable hours (aka cogs) so you'll need to measure it.

Ted Monohon
Title: VP -Finance / Controller
Company: Fantex
(VP -Finance / Controller, Fantex) |

Salaries are typically an operating expense in a services company for GAAP purposes. COGS typically is used in a company that produces a product, not a service.

You can obviously look at it from a managerial or finance perspective as a cost of a "billable hour" but I haven't really seen it done that way.

Len Green
Title: Performance Improvement Consultant and E..
Company: Haygarth Consulting LLC
LinkedIn Profile
(Performance Improvement Consultant and ERP Strategist, Haygarth Consulting LLC) |

Anon
If your salaried staff include folk who deliver a revenue generating service (e.g. field service work like maintenance, equipment installation, consulting services) and you need to measure project/job/order margins, I think that's part of COGS (or COSS=cost of SERVICES sold). Admin staff (including management, finance, HR, IT, sales, marketing..) are more likely part of operating/general overhead.

For internal management reporting, I would use cost center segregation to help separate COSS from admin salaries, plus chargeable time applied to the revenue activity (project/job/order).

For external reporting, follow your CPA's advice.

Depending on your organization, there are also techniques to choose from in allocating salary costs (loaded vs not) to each project/job/order, e.g. a blended rate per job category vs a specific rate for each person (the latter can mean you may end up disclosing salary details of individuals.

Regards
Len

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