Cost of Goods Sold

[WDI]

I provide a service, residential building design. I've never used Cost of Goods Sold because I didn't have a "good" or product to sell and didn't realize I could. I have always recorded items that might be considered COGS as regular expenses. Example, payment to an engineer for work on a specific project. The bottom line was the same regardless.

Now, I am converting my business to selling pre-drawn plans online through publishers, and I want to understand what can be included as COGS. Some items seem obvious, like errors and omissions insurance required by publishers, or amounts paid for photorealistic renderings not done in house. But what other items should I include? Some plans are based on prior work for which I've already been paid, so I can't count my hours for those, but what about hours pertaining just to new plans? I don't pay myself a salary, so how would that work?

[Lucia-B-EA]

Cost of Goods Sold is the COST of what you deliver to your customer; what goes into what you sell.  However, when it is a service, sometimes this can be hard to distinguish.  A great rule of thumb to consider is "would I have spent money on this -service-product-expense- if I was not servicing my client?  If the answer is NO, then it is probably a Cost of Goods Sold/Service. 

It is also good to remember that these costs would be VARIABLE to a degree. They would, after a certain point, vary incrementally with the growth or decline of clients serviced.

Therefore, if you are providing an architectural service, the typical costs are things like:

• merchant service fees (for CC, DR, check) processing
• architectural drawings/renderings
• model building
• photographer costs

E&O Insurance, your salary and even software like Adobe would be regular operating expenses.  You would have these costs in-house, even if you did not have any clients.  FIXED Costs are rarely Cost of Goods/Services Sold.