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Measuring Cogs In A Service Business

Posted by Anonymous on 200 Points
I am assisting a client with the design and launch of a dog training and boarding business and am struggling to conceive of how to measure COGS.

For the training side, we can simply apply the cost of paying a trainer. When we sell retail items off a shelf, the cost of the item would be COGS and the rent / depreciation would be an operating expense. For the lodging side it seems more difficult. Do I simply apply the cost of rent (or amount of depreciation if we own the space) for the portion of space alloted to kennels and runs?

  • Posted by Peter (henna gaijin) on Accepted
    I will give my understanding of the terms based on strict financial/accounting rules if you were filling out an income statement. But you may want to do things differently if you are using this info for other purposes than some income statement which you report to someone.

    COGS is direct labor and direct cost of materials involved.

    So for service, it is just the labor required to perform that service. Marketing, sales, administration, etc. do not get counted as COGS.

    For product sales, it is just what you paid to buy the product. If it is a made product, it is the cost of raw materials plus direct labor to build it.

    For lodging, it would just be any direct costs (person's labor for cleaning/walking/etc., cost of food, etc.). Rent, depreciation, and the like would fall under different categories, as they are more fixed costs.
  • Posted by mgoodman on Accepted
    Peter is right in his definition of COGS. Depending on the intended use of the information, though, you may want to throw some indirect labor or plant overhead into COGS too. It depends on how you allocate those costs when you do your accounting.

    I'm not an accountant, but I know that in a food processing operation, the guys who wash down the equipment between batches are considered "plant overhead," but their cost ultimately ends up in COGS.

    I suspect there's some room for interpretation and adjustment based on specifics of a situation. And it depends, of course, on what you're going to do with the numbers once you have them. That's why you should start from the objective and work backwards. Don't be a prisoner of convention. Your needs are the important driver of how you should do it.
  • Posted by ASVP/ChrisB on Accepted
    This presents an interesting conundrum. On one hand you want to know your COGS plus overhead recovery so you can apply a margin and set a selling price.

    On the other hand you also need to measure a range of operational parameters which can impact on strategic management of the business and measurement of marketing performance...

    Here’s a suggestion on one approach which would work:

    1. Identify all the capital costs (rental on the space if rented, or loan repayment/cost of capital if owned, plus depreciation on the facilities). Work this out for a whole year.

    2. Add in the cost of feeding, cleaning, exercising, utilities for the whole boarding kennel. (Labour and materials), again for the whole year.

    3. Divide this total by the number of kennels available, and divide by 365. This will give you a cost per available boarding kennel, per night.

    4. You can monitor this cost on a monthly basis and report it as one key operating statistic.

    5. Another key statistic is the occupancy rate. Measure the dog-kennel-nights sold, versus the dog-nights available per month.

    Report this figure monthly as a number of dog-nights sold per month, and also as a percentage. This represents the utilisation factor of the boarding kennels.

    This should provide you with the cost control and measurements of success that you need.

    Hope this helps.

    ChrisB

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