In order to calculate service revenue in accounting, one must multiply the cost of goods sold by the gross margin percentage. Gross margins can be estimated by dividing total materials and labor costs for a job by total revenue for that same job. Service revenues can also be estimated when multiplying average gross profit margin times sales dollars. This post will explain how to calculate service revenue, and the related costs of goods sold which are incurred in order to produce that service revenue.
What Is Service Revenue?
Service revenue is a result of providing services to customers. Services are something that can be counted in monetary terms. A business can track their revenue from providing a service by assessing whether or not they were profitable.
How Is Service Revenue Calculated?
The calculation of service revenue can be defined as the multiplication of the cost of goods sold by the gross margin percentage. Service revenues are also estimated when multiplying the average gross profit margins by sales dollars. These two methods will provide you with a general idea of your actual revenue numbers. The accurate calculation method will be discussed in this article.
Gross margin percentage can be obtained by dividing the total materials and labor costs for a job by the total revenue for that same job. If a project has $5,000 worth of expenses and the estimated gross margin is 75%, then its gross margin would be $3,750: ($5,000 / $7,500) x 100.
To estimate your service revenue, you will need to multiply the average gross profit margin by sales dollars. The average gross margin is calculated by dividing total gross profit by the number of jobs completed in a month or year. For example:
The total price of all jobs completed in January was $20,000. The total amount of expenses for the month was $7,000. This means that service revenue during January would be $13,000: ($20,000 – $7,000) x 100 = $200.
The complete calculation method requires you to divide your total materials and labor costs by your cost of goods sold percentage before multiplying it by 100. The cost of goods sold percentage is the total gross profit divided by the total revenue for a job:
Total materials and labor costs from all jobs completed in January was $26,000 ($5,000 + $7,500). The total amount of expenses during January was also $7,000. This means that the March’s cost of goods sold percentage is 86%: ($26,000 / $32,500) x 100 = 86.07%.
To calculate the service revenue during January, you will need to divide the total materials and labor costs by your cost of goods sold percentage: ($26,000 / 86.07%) x 100 = $30,380.
To complete the calculation, multiply the result by 100: 30,380 x 100 = $303,800. This is your January service revenue.
The Benefits of Calculating Service Revenue
Firstly, the service revenue calculation is a useful metric in determining profitability. This means that it helps to isolate the gross margin and show how much of a profit was made. The service revenue calculated is also helpful in assessing profitability because it takes into consideration the cost of goods sold and gross margin percentage.
Secondly, calculating service revenues are important for tax purposes as well. For example, the IRS might ask you for this information when filing your taxes.
Thirdly, this calculation helps you evaluate different strategies which are important when trying to grow your business. Lastly, calculating service revenue can help you forecast future sales based on the estimated average gross profit margin multiplied by sales dollars and understanding the total labor costs for the same job.”
Summary
The accounting calculation of service revenue is a complex one. It involves the cost of goods sold, gross margin percentage and more. In this article you’ve learned what to consider when calculating service revenues for your company from both an online perspective and brick-and-mortar business standpoint. We hope that these insights can help you calculate service revenue in the future with confidence!
