Cost of service can be applied to an individual customer or as an average cost of service for a group of similar customers.
Each customer has each cost of service but similar customers & services we should use average cost for each customer for management purpose.
Cost of service = material + labour + overhead
Example
ABC Company is research company, and now company got a project for researching market demand of Product A, new brand.
Estimated cost of service for this researching project as follows.
Material ……………….$10,000
Labour…………………..$20,000
Overhead…………………$5,000
Assume fee from this project is $40,000
Required:
- Calculate cost of Service ( research project)
- Calculate gross profit (loss) from this project
Solution
1.Calculate cost of service
Cost of service = 10,000 + 20,000 + 5,000=$35,000
2.Gross Profit (Loss) from this project
Gross Profit (loss)= fee – cost of service = $40,000-$35,000=$5,000
Note: Please note that it is gross profit ( $5,000), so it is not net profit for this project because we excluded other operation costs such as admin and marketing expense.