Hi, I have a private investigator firm as a client. We are rewriting the chart of accounts and trying to determine the costs to be included in Direct Costs and therefore COS. It is obvious to include the investigators' costs in direct costs but we are unsure as to the following: 1. admin person who solely administors the investigators' jobs and writes their reports. 2. the manager who allocates the jobs and reviews the reports and sometimes actually does investigations. Putting the above in direct costs would make it easier for
Direct Costs of a Service Organisation
Answers
When developing cost reporting systems one must understand what their product is. This sounds like a simple question with a simple answer however surprisingly enough most don’t understand just how probing this question can be.
Short Answer; your client has a profession services firm, their product is TIME, yes time, they sell time. Therefore charging time to a job is critical in tracking labor cost, your single largest expense. Time falls into two main categories “Chargeable” and “Non-Chargeable” and two sub-categories for Chargeable, “Billable” and “Non-Billable”. Just because you charge time to a job doesn’t always mean you bill the customer, fixed fees agreements come to mind as an example.
So how do we report the cost of these employees on an Income Statement?
Usually the direct costing method is used, it’s a simple calculation (Actual Wage Rate * Actual Charged Hours) = Direct Labor Cost, this is clearly a COS and is part of the Gross Margin calculation, (side note I usually have a cost of employment adder to the wage rate, PR taxes, benefit cost etc.). The Non-Chargeable time is an administrative overhead expense and should be below the Gross Margin on the Income Statement.
This is very doable in the environment that you have describe, it will get much more complicated as the size and complexity of the organization grows.
Look into Activity Based Costing
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Thanks Thomas. Agree totally.
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