Using SPSS Modeler to segment customers in a Telco scenario

Enterprise Data Types

All business enterprises have three varieties of physical data located within their numerous information systems.  These varieties of data are characterized by their data types and their purpose within the organization.

 

• Transactional Data

• Analytical Data

• Master Data

Transactional data supports the daily operations of an organization (i.e. describes business events). Analytical data supports decision-making, reporting, query, and analysis (i.e. describes business performance). While master data represents the key business entities upon which transactions are executed and the dimensions around which analysis is conducted (i.e. describes key business entities).
Transactional data supports the daily operations of an organization (i.e. describes business events). Analytical data supports decision-making, reporting, query, and analysis (i.e. describes business performance). While master data represents the key business entities upon which transactions are executed and the dimensions around which analysis is conducted (i.e. describes key business entities).

Transactional Data

Transactional data are the elements that support the on-going operations of an organization and are included in the application systems that automate key business processes. This can include areas such as sales, service, order management, manufacturing, purchasing, billing, accounts receivable and accounts payable. Commonly, transactional data refers to the data that is created and updated within the operational systems.  Examples of  transactional data included the time, place, price,discount, payment methods, etc. used at the point of sale. Transactional data is normally stored within normalized tables within Online Transaction Processing (OLTP) systems and are designed for integrity.  Rather than being the objects of a transaction such as customer or product, transactional data is the describing data including time and numeric values.

Analytical Data

Analytical data are the numerical values, metrics, and measurements that provide business intelligence and support organizational decision making. Typically analytical data is stored in Online Analytical Processing (OLAP) repositories optimized for decision support, such as enterprise data warehouses and department data marts. Analytical data is characterized as being the facts and numerical values in a dimensional model. Normally, the data resides in fact tables surrounded by key dimensions such as customer, product, account, location, and date/time. However, analytical data are defined as the numerical measurements rather than being the describing data.

Master Data 

Master data is usually considered to play a key role in the core operation of a business. Moreover, master data refers to the key organizational entities that are used by several functional groups and are typically stored in different data systems across an organization.  Additionally, master data represents the business entities around which the organization’s business transactions are executed and the primary elements around which analytics are conducted. Master data is typically persistent, non-transactional data utilized by multiple systems that defines the primary business entities. Master data may include data about customers, products, employees, inventory, suppliers, and sites. 

Refer: http://bi-insider.com/posts/types-of-enterprise-data-transactional-analytical-master/
 

Value Stream Mapping

Value stream mapping is a lean manufacturing or lean enterprise technique used to document, analyze and improve the flow of information or materials required to produce a product or service for a customer. Full definition.
———-
Value stream mapping is a paper and pencil tool that helps you to see and understand the flow of material and information as a product or service makes its way through the value stream. Value stream mapping is typically used in Lean, it differs from the process mapping of Six Sigma in four ways:
1) It gathers and displays a far broader range of information than a typical process map.
2) It tends to be at a higher level (5-10 boxes) than many process maps.
3) It tends to be used at a broader level, i.e. from receiving of raw material to delivery of finished goods.
4) It tends to be used to identify where to focus future projects, subprojects, and/or kaizen events.
———-
A value stream map (AKA end-to-end system map) takes into account not only the activity of the product, but the management and information systems that support the basic process. This is especially helpful when working to reduce cycle time, because you gain insight into the decision making flow in addition to the process flow. It is actually a Lean tool.
The basic idea is to first map your process, then above it map the information flow that enables the process to occur.

Tony Buzan (Mind Mapping) - How To Make the Most of Your Creative Mind :...

What is the difference between accounting and finance (and economics)?

Accounting:

Accounting is the preparation of accounting records. This includes measuring, preparation, analyzing, and the interpretation of financial statements. Accounting is also often referred to as the voice of business, the language of business, and the heart of business. Mostly because the financial documents derived from the accounting preparation are widely used among managers, investors, tax authorities, executives, and many others to see how the company is performing.

Bookkeeping is the method used to record all the financial transactions, essentially the day to day accounting operations. Luca Pacioli is often referred to as the “father of accounting” because he was the first to publish a book regarding the double entry method of bookkeeping. If you ever heard of debits and credits, those are bookkeeping terms.

There are many governing bodies and organizations. The International Accounting Standards Board (IASB) governs the general globe. Many countries often adhere to their own standards as well. Here in the United States, the Generally Accepted Accounting Principles (GAAP) guides the accounting field and its profession. Some characteristics of GAAP are Relevance, Timeliness, Reliability, Comparability, and Consistency. Accounting can further breakdown in sub-categories like Tax, Corporate, Audit, Management, and even Financial Accounting.

Finance:

Finance covers a huge array of subjects, but the three main terms when comparing to accounting would be: (1) the study of money and capital markets which deals with many of the topics covered in macro economics (2) management and control of assets and investments, which focuses on the decisions of individual and financial and other institutions as they choose securities for their investments portfolios, and (3) managerial finance (business finance) which involves the actual management of the firm, as well as profiling and managing project risks.

Managerial finance is probably the most important to all types of businesses, whether they are public or private, deal with financial services or are manufacturers. Managerial finance also involves analyzing the performance of the firm in order to forecast its future performance. It involves making decisions regarding working capital issues such as level of inventory, cash holding, credit levels, etc.

Economics:

Economics has two sections, microeconomics and macroeconomics. Microeconomics is study focusing at the firm level, while macroeconomics focuses more at the policy and regulatory levels. Accounting uses principles to justify many of its actions, while Economics uses assumptions to simplify a situation. Many economics decisions as based on certain assumptions. When the assumptions don’t hold then the specific decision may also be affected.

The key principles for economics are opportunity cost, diminishing returns, the marginal principle, spillover, and the reality principle.

Refer:http://thefinancepig.com/2008/03/21/what-is-the-difference-between-accounting-and-finance-and-economics/

Operations - Competitive Priorities (AKA Process Performance Objective)

1. Cost
2. Quality

•  Consistent Quality - On-specification Product
•  Top Quality - Superior Design / Durability etc.,

3. Time (Speed & Dependability)

•  Quick Delivery
•  On-Time Delivery - Important requirement for Just-In-Time (JIT)
•  Time-to-Market for New Product or Service Development and to market the same.

4. Flexibility

•  Customization
•  Variety
•  Volume Flexibility

Operations Strategy - Competitive Priorities

What is the difference between preferred stock and common stock?

Preferred and common stocks are different in two key aspects. 

First, preferred stockholders have a greater claim to a company's assets and earnings. This is true during the good times when the company has excess cash and decides to distribute money in the form of dividends to its investors. In these instances when distributions are made, preferred stockholders must be paid before common stockholders. However, this claim is most important during times of insolvency when common stockholders are last in line for the company's assets. This means that when the company must liquidate and pay all creditors and bondholders, common stockholders will not receive any money until after the preferred shareholders are paid out.

Second, the dividends of preferred stocks are different from and generally greater than those of common stock. When you buy a preferred stock, you will have an idea of when to expect a dividend because they are paid at regular intervals. This is not necessarily the case for common stock, as the company's board of directors will decide whether or not to pay out a dividend. Because of this characteristic, preferred stock typically don't fluctuate as often as a company's common stock and can sometimes be classified as a fixed-income security. Adding to this fixed-income personality is the fact that the dividends are typically guaranteed, meaning that if the company does miss one, it will be required to pay it before any future dividends are paid on either stock.

To sum up: a good way to think of a preferred stock is as a security with characteristics somewhere in-between a bond and a common stock.

Fortune 100 - Vision & Mission

Understanding the fundamental difference between Mission and Vision is critical to anyone aspiring to become a business leader. I found the following presentation with the Fortune 100 companies vision & mission statements. Please click the below.

Fortune 100 - Vision & Mission Statements

Financial Ratios

Pleae click the link ---> Financial Ratio Analysis Spreadsheet

What is Strategic Planning, Really?

Overview of the Strategic Planning Process

Project Planning with Sticky Notes

Profit Center vs Cost Center

A profit center is a unit of a company that generates revenue in excess of its expenses. It is expected that, through the sale of goods or services, the unit will turn a profit. This is in contrast to a cost center, which is a unit inside a company that generates expenses with no responsibility for creating revenue. The only expectation a cost center has is to lower expenses whenever possible while staying with a specific budget that is determined at the corporate level.

Beyond that simple definition, the term "profit center" has also come to represent a form of management accounting that is organized around the profit center concept. Companies that have adopted the profit center system have organized all of their business units as either profit centers or cost centers, and all company financial results are reported in that manner. Adopting a profit center system often requires a radical shift in corporate philosophy and culture, but it can yield great returns in net before tax (NBT) profits. According to an article in Business Solutions, the data collection company Data Recognition, Inc. made the shift to a profit center-based system and was pleased with the results. "We saw the importance of evaluating, individually, areas of our business that are distinctly different," said Steve Terry, the company's vice president of systems. "The profit centers have allowed us to better identify specific gains and losses. And that's critically important for a growing business."

All companies, no matter what size, have both cost and profit centers (although, if it is a single-person company, that company would really have profit and cost activities, since all business "units" are the same person). For example, in most companies, units such as human resources and purchasing are strictly cost centers. The company has to spend money to operate those units, and neither has any means of producing a profit to offset those expenses. They exist solely to make it possible for other areas of the company to make money. However, without those two departments, the company could not survive. Examples of profit centers would be the manufacturing units that produce products for sale to consumers or other businesses. The sale of those products generates a profit that offsets the expense of creating the products.

All companies have profit centers and cost centers, but not all companies organize their accounting practices around the profit center concept. In fact, most companies do things the time-honored way, producing overall profit and loss statements for the company as a whole, without making each business unit accountable for generating a profit.

TURNING A COST CENTER INTO A PROFIT CENTER

A cost center may actually provide services that could generate a profit if they were offered on the open market. But in most corporate environments, cost centers are not expected to generate a profit and operation costs are treated as overhead. Departments that are typically cost centers include information technology, human resources, accounting, and others. However, the complacent acceptance that some departments will always be cost centers and can never generate a profit has changed at some companies. They recognize that cost centers can turn into profit centers by taking the services they used to automatically provide to the company's other business units and making those services available for a fee. The company's other business units are then required to pay for the services they used to get for free. But in return, they are allowed to go outside the company and contract with another firm to provide those services. Likewise, the former cost center may be allowed to sell its services to other companies. The expectation is that this free market system will improve performance through increased competition while increasing profits by turning former cost centers into profit centers.

"When a business firm becomes a corporate community of entrepreneurs who buy, sell, and launch new products and services internally as well as externally, it gains the same creative interplay that makes market economies so advantageous," said management professor William E. Halal when discussing making the move to profit center-based operations in USA Today Magazine.

As an example of how a cost center may be turned into a profit center, consider a company's information technology (IT) department. This department may provide such services as computer-aided design, network administration, or database development to other units of the company. These services have value, and they are important to the company's overall success, but they do not generate a profit. IT may charge the "cost" of its services back to the department that requested them, but it does not make a profit because it charges only for its actual costs incurred, without adding an extra margin for profit. The unit that requested the services absorbs the cost as part of its overhead; or, in some companies, the cost is not charged back and is simply part of the company's overall overhead.

There are two ways that the IT department could make the switch from cost center to profit center. First, instead of writing off its services to overhead or charging them at cost, the IT department could be allowed to bill other departments for its services at going market rates. The profit earned for the services would exceed the cost of providing the services. While all the money in this transaction would stay within the company, thus making it seem to be a meaningless way of creating a profit for the IT department, it is done for two reasons. One is to ensure that the IT department remains competitive with outside vendors providing the same services, and the other is to ensure that the company's other business units do not waste money on needless IT expenditures. Paying competitive market rates prevents the operating units from wasting money, thus making them more competitive.

If the IT department is turned into that type of profit center, it is considered to be a "zero profit center." In that situation, the department is expected to compete with outside vendors for the company's information technology budget. If a division of the company selects the IT department as its technology provider, it has done so because it feels it cannot purchase the same quality services for a lower price from an outside vendor. It will not actually "pay" the IT department for its services, but it will be charged by the IT department for services rendered, and those charges will be subtracted from the division's budget. Thus, the IT department does not really take in any revenue, but neither does it cost the company any money because the division that utilized its services would have had to spend money to hire an outside vendor. This, then, creates a zero profit center. Such a business model forces the IT department to be more competitive in its pricing and to provide high quality work if it hopes to survive as an operating unit.

The second way the IT department could become a profit center is if the company determined that the department was one of the best in the industry, better in fact than some companies that existed just to provide IT services. The company could then allow the department the freedom to sell its services to outside customers. Thus, the department would still operate as a cost center in its dealings with other units inside the company, but it would operate as a profit center when it provided services to outside companies. This method of operation has become far more common in the 1990s and beyond, as companies seek new revenue streams that have low start-up costs.

If the IT department exists only as a cost center, it faces enormous pressure to provide services at the lowest possible costs. Because it does not generate profits, it must constantly fight to remain in existence and must fight off attempts to slash its budget to free up cash for the company's profit centers. Just as the company's senior management could decide that the IT department was good enough to operate as a profit center by soliciting outside clients, so too could it decide that the department is behind the times and is not providing adequate services. This would result in management choosing to shut down the department and contract with an outside vendor for the company's IT needs.

PROFIT CENTERS AND THEIR CHANGING ROLE IN INDUSTRY

In large companies, especially manufacturing companies, it has become a fairly common occurrence to break the company into small pieces, with each piece operating as a profit center that has to compete for business. In this manner, a large business can suddenly find itself operating as a small business. For example, say the Acme Company produces a finished product that is composed of five smaller parts. Instead of operating as one large company that produces all five parts needed for the finished product, Acme has decided to split into six separate units—one that assembles and sells the finished product, and five smaller companies that each produce one of the parts needed for the finished product. Beyond Acme, there are other companies that produce those same five parts needed to produce the finished product.

Each of the five part manufacturers is now operating as a separate profit center, reporting to Acme's corporate office. Each has to determine its own methods of operation, and each has to determine how it is going to show a profit. There may be internal agreements in place that mandate that each of the five units will continue to work together to produce the finished product, or Acme may throw things wide open by stating that there is no corporate mandate forcing the five divisions to continue to work together.

If the latter model is chosen, the corporation may have decided that, while the company could continue making steady—but small—profits if it kept using the five units together as it had for decades, there was a chance that the company could make huge profits if it made each of the five units accountable for its own bottom line and opened up the manufacturing process to both internal and external competition. In such a radical environment, it was conceivable that one of the five units could go bankrupt and cost the company money, but senior management believed that the hugely increased profits in the other four units, and the resulting higher profit margin realized by the sale of the finished product, would more than offset the loss of one unit.

Thus, each of Acme's five units, formerly divisions within the larger company that were not accountable for directly generating profits, were now separate entities that had to show a profit to continue operating. Each of the units had gone from a cost center mentality—buying materials to produce part of a product that showed up on the company's overall bottom line—to a profit center mentality, responsible for showing a profit based solely on the production and sale of its one part. As part of the shift to becoming a profit center, each of the five units would also be free to sell its part on the open marketplace. Acme might make that freedom a restricted one that prevented sales to a direct competitor, or it might take the full plunge and make the unit a fully stand-alone company that was free to sell its part to any other company in the market, including direct competitors. That decision would dictate whether Acme's move was a small one, designed to encourage each of its five units to think creatively and work harder to perform at a high level, or a large one, designed to change the very core of the company's business in a bid for higher profits.

PROFIT CENTERS AND SMALL BUSINESSES

When operating a small business, it may not be practical to use the profit center concept initially because the business is so small. Fewer employees mean fewer business units, which means fewer opportunities to create profit centers. In addition, in a small business, the president or the chief financial officer is probably monitoring financial results very closely, which means that he or she knows exactly where profits and losses are occurring. However, as a small business begins to grow, establishing profit centers often makes sense. Data Recognition, Inc. found that switching to profit centers made sense as the company increased in size. "Establishing profit centers, and generating daily profit/loss statements, has allowed us to better identify, and correct, our weaknesses," said vice president Steve Terry.

Even without adopting the profit center accounting concept, the idea of profit centers has value for small businesses in that they should always be looking for new ways to generate revenue. When operating a small business, there are essentially two ways to create a new profit center. The first method is to create an extension of the original business—a new product related to existing products, or new services that build on services that are already offered. The second method is to create an entirely new business altogether that can operate using the first business's corporate infrastructure (at least initially) and that can be operated at the same time as the original business.

The rapid spread of the World Wide Web has created an unprecedented method for creating new profit centers. Almost every company today has a Web site to dispense public relations information and to make it easier for customers to contact the company, but more and more firms are recognizing that there is money to be made on the Web. Most corporate Web sites begin life as a cost center, since they are initially just used to disseminate information, but most can be transformed into a profit center.

When seeking new profit centers, small business entrepreneurs should avoid business models that have regularly failed on the Web. These include setting up an entertainment site that attempts to charge a fee for that entertainment; relying on advertising as a revenue stream, as banner advertisements are proving to be quite unsuccessful in bringing in new customers; charging subscription or other visitor fees; and biting off more than you can handle by attempting to establish business-to-business sales that may not be achievable.

Read more: http://www.referenceforbusiness.com/small/Op-Qu/Profit-Center.html#ixzz2p0CH8sIu

Business function chart

BUSINESS FUNCTIONS CHART

Good companies meet demands, great companies create demands.

Internal functions are those which are part of the company. 

External functions are those which are supplied by an outside agency.

This chart is a simplification. Not all companies can be easily categorised, and some will have specialist functions which are not included here, but is nevertheless provides a useful starting point for graduates considering a career in business.

Specialised businesses will have functions not mentioned here, for example retailers will have staff working as merchandisers.Some companies will not have all the functions listed, for example service and finance companies will not normally have research and production departments.

Some functions such as Market Research and PR may be internal, external or both. A small company will probably hire an external agency when it needs these functions. A large company may well have in-house market research and corporate PR staff, but will still outsource much of the work that is of a specialist nature.

PRODUCING

Research & Development

Develops products. Designs & conducting experiments & tests. Interprets data. Manages projects. Writes reports. Keeps up to date with new developments.

Production & Quality

Manages the production process. Plans production schedules. Ensures that machinery, staff & materials are efficiently utilised. Monitors health & safety & environmental issues. Liaises with marketing, research & finance.

Distribution/Logistics

Manages all the supply chain processes from raw materials to where the end product is used. Coordinates supply, distribution & storage of goods. Manages transport & distribution centres including drivers & warehouse staff.

SELLING

Sales

Demonstrates & presents products to customers. Manages budgets. Learns about new products. Makes sure that the product meets the customers requirements. Writes tenders & proposals.

Marketing

Coordinates all the elements involved in successfully promoting & selling a product: market research, pricing, packaging, advertising, sales, distribution. Involves forecasting, budgeting & planning, implementation of plans.

SUPPORT FUNCTIONS

FINANCE - Management Accountant

Provides the information required for the financial protection & planning of companies. Prepares accounting records & management information.

Computing

Designs, implements & maintains computer systems to meet requirements of users. Provides computing support for staff. Maintains databases & networks.

HR/Personnel

Recruits & selects new staff. Involved with contracts of employment, job descriptions, training, management development, industrial relations & disciplinary matters.

Buying/Purchasing/Procurement

Locates & maintains relationships with suppliers, of products. Negotiates prices, delivery dates & product specifications. Works with managers to anticipate future demands.

EXTERNAL SERVICES

Chartered Accountants

Visits clients as part of an audit team; reviews their business operations & financial records to establish the validity of the company's accounts. Advises on tax liability & other matters.

Management Consultants

Identifies & investigates, problems concerned with policy, organisation, procedures & methods of organisations. Recommends appropriate action & helps to implement this.

Recruitment Agency

Matches job-seekers with employers' vacancies. Assesses candidates' skills & employers' requirements.

Advertising

Liaises with & advises clients on all aspects of marketing communications; presents proposals to clients; manages advertising spend budget; keeps clients up-to-date on their own & competitors activities.

Market Research

This can be done by the marketing department inside a company, or by an external market research agency. Plans market research projects on behalf of the client. Analyses the problem. Drafts proposals. Prepares questionnaires & survey methods. Briefs interviewers. Analyses data & presents it to client. Prepares reports.

Public Relations

All aspects of media & public relations for clients: e.g. corporate brochures & exhibition stands. Answers enquiries. Prepares press releases, organises press briefings, conferences & PR campaigns.

Refer: http://www.kent.ac.uk/careers/workin/business-functions.htm

Restricted Stock Unit

Definition of 'Restricted Stock Unit'

Compensation offered by an employer to an employee in the form of company stock. The employee does not receive the stock immediately, but instead receives it according to a vesting plan and distribution schedule after achieving required performance milestones or upon remaining with the employer for a particular length of time. The restricted stock units (RSU) are assigned a fair market value when they vest. Upon vesting, they are considered income, and a portion of the shares are withheld to pay income taxes. The employee receives the remaining shares and can sell them at any time.

For example, suppose Madeline receives a job offer. Because the company thinks Madeline's skill set is particularly valuable and hopes she will remain a long-term employee, it offers part of her compensation as 500 RSUs, in addition to a generous salary and benefits. The company's stock is worth $40 per share, making the RSUs potentially worth an additional $20,000. To give Madeline an incentive to stay with the company and receive the 500 shares, it puts them on a five-year vesting schedule. After one year of employment, Madeline will receive 100 shares; after two years, another 100, and so on until she has received all 500 shares at the end of five years. Depending on how the company's stock performs, Madeline may actually receive more or less than $20,000.

The RSUs, thus, give Madeline an incentive not only to stay with the company long term, but to help it perform well so that her shares will become more valuable. In fact, Madeline decides to hold the shares until she receives all 500, at which point the company's stock is worth $50 and Madeline receives $25,000, minus the value of the shares that were withheld for income taxes and the amount due in capital gains taxes. However, if Madeline had left the company after 18 months, she would have received only the 100 shares that vested after year one. She would have forfeited the remaining 400 shares to the company.

Jaypee, GMR, GVK, JSW, Lanco and Videocon - Cumulative Debt set to Increase

Their cumulative debt climbed 15 % to `6.3 lakh crore last fiscal

New Delhi (PTI): The country's ten leading business houses, including Reliance Group, Vedanta, Essar and Adani, have seen their total debt levels soar by 15 per cent to over Rs 6 lakh crore during the last fiscal while profitability continues to remain under pressure, a research report said on Monday.

The cumulative debt of these groups, which also include Jaypee, GMR, GVK, JSW, Lanco and Videocon, is likely to further increase in the current fiscal because of rupee depreciation and delays in projects being undertaken by many of them, Credit Suisse said its annual House of Debt report for India.

According to the report, the collective debt of these ten groups rose to Rs 6,31,025 crore at the end of last fiscal ended March 31, 2013, from Rs 5,47,361 crore a year ago.

"For most of them the debt increase has outpaced capex and asset sales are yet to take off. The rising stress is visible with some loans of Lanco, JPA, and (Anil Ambani-led) Reliance groups already being restructured," it said. "The largest increases have been at groups such as GVK, Lanco and ADA where the gross debt levels are up 24 per cent year-over-year. Asset sales- key for de-leveraging for most of these - have still not taken-off; only GMR and Videocon have had some success on that front," Credit Suisse said. The report also warned of additional asset quality stress of banks because of growing debt levels of big business houses.

While large corporate NPLs (non performing loans) are still low, the overleverage in the large corporate segment is high and is a potential source of additional asset quality stress for banks, it said, while adding that corporate asset quality issues are likely to persist for the banking sector. Observing that the rupee weakening could cause further pain going further, the report said that delays in power projects being undertaken by many of these groups could result in more of their debt being restructured.

However, companies such as Adani Power, Reliance Power and GMR Infra would see their operating capacities double if the projects were to come on stream as expected. "Many corporates' loans are 40-70 per cent foreign currency denominated; therefore, the sharp depreciation in the rupee is adding to their debt burden. Adani Enterprise and Reliance Comm have the largest percentage of borrowings through forex loans," it said.

Digital Marketing Case Studies

Digital Marketing Case Studies -

http://www.digitaltrainingacademy.com/casestudies/

What is Cost of Goods Sold for a Service Business?

What is Cost of Goods Sold for a Service Business?

When it comes to a service business, Cost of Goods Sold (COGS) doesn’t quite make sense.  If you want to be precise, COGS is only used for product based businesses.

So what if you operate an IT service company, what is your COGS?  What if you develop and sell software, what is your COGS?
Rather than using the term cost of goods sold, it would be best to use a similar term — Cost of Revenue.

Cost of Revenue for Service Based Businesses

Now I want to dive deep into exactly what Cost of Revenue is and what it is not.  I also want to help you determine your cost of revenue on a per unit basis.

Definition: “The total cost of manufacturing and delivering a product or service. Cost of revenue information is found in a company’s income statement, and is designed to represent the direct costs associated with the goods and services the company provides. Indirect costs, such as salaries, are not included.”

To Be Included in Cost of Revenue

Raw Materials – Service based businesses don’t have “raw materials” but if you were a product based business, you would include all raw materials used to produce the product in cost of revenue.

Direct Labor – Direct labor should be included in cost of revenue.  Let’s say you own a junk removal business, and you get a job to clean up an old building.  It will be a 3 hour job for your team of 3 guys.  Each guy is paid $10 per hour.  Your employees wages is considered cost of revenue, so in this scenario you would have $90 in direct labor costs that would be included in your cost of revenue.

Shipping Costs – Let’s say you own an accounting firm that audits companies.  At the end of the audit you print your report and mail copies to each member of the client’s board of directors.  If you end up paying $100 to ship your report to the board, that $100 should be included in cost of revenue because it is a necessary expense that you incur as part of your service.

Sales Commissions - Sales commissions are another common expense that should be included in cost of revenue.  You only incur sales commission expenses when you generate revenue through a sale of your product or service; therefore, sales commissions should be included in your cost of revenue.

A common rule of thumb when determining what is cost of revenue and what is not, is to simply ask yourself, “Would I incur this expense if I did not make a sale today?”

Not to Be Included in Cost of Revenue

Now I will go through a list of expenses that you would incur whether or not you sold a product or service.  These expenses should not be included in cost of revenue.

Salaries – Employee salaries are not directly tied to revenue, in other words, your employees are paid the same salary each month whether they sell more or less goods and services.

Rent – Your rent expense is another overhead cost that is not included in cost of revenue.

Phone Service – The phone bill will arrive each month whether you sell 100 widgets or 1,000,000 widgets; therefore, it is not to be considered part of your cost of revenue.

Utilities – Now this might be up for debate because your utilities might go up or down based heavily upon your sales volume, but even if you did not sell any product or service next week wouldn’t you still turn the lights on? 
Wouldn’t you still heat or call your office building?  In general your utilities are not considered as past of Cost of Goods Sold or Cost of Revenue.

Cost of Revenue Per Unit

Once you have determined which expenses to include in cost of revenue, you should come up with your cost of revenue per unit.  Cost of Goods Sold per unit and Cost of Revenue per unit is the model we use with our ProjectionHub application.

Essentially you need to breakdown each expense that your cost of revenue is comprised of into a unit cost.  
For example:
Let’s say you own a tree service company.  Let’s go through the cost of revenue for one day-long tree service job.  Your cost of revenue might look like this:

Sales Commission – You might have a sales representative who secured the job for you, who you will need to pay a commission.  Let’s assume you give a 15% sales commission.

Fuel Costs – You have to drive out to the job site with a fleet of 3 vehicles and equipment.  This is an expense that you would only incur if you got the job; therefore, it should be included in cost of revenue.  The job site is 50 miles away, so each vehicle will drive a 100 mile round trip.  So 300 miles at .50 cents a mile is $150.

Direct Labor – Lastly, you will have direct labor costs.  Let’s assume it takes a team of 5 to complete the job in 8 hours. You pay them each $10 per hour.
Now that you have identified your 3 items that make of cost of revenue, you need to bring this down to cost of revenue per unit.  The unit that most service businesses use is hours.  Let’s say you charge the client $300 per hour.  Your cost per hour would look something like this:

5 workers x $10 = $50 per hour
15% of $2,400 job = 360 sales commission / 8 hours = $45 per hour
$150 / 8 hours = $18.75 per hour

Add that together and you get $113.75 per hour as your cost of revenue.
$300 – $113.75 = $186.25 is your gross profit.
There you have it.  That is how you calculate both cost of revenue and gross profit for a service based business.

Refer: http://www.projectionhub.com/financial-projection-blog/what-is-cost-of-goods-sold-for-a-service-business/

Cost of Labor

Definition of 'Cost Of Labor'

The sum of all wages paid to employees, as well as the cost of employee benefits and payroll taxes paid by an employer. The cost of labor is broken into direct and indirect costs. Direct costs include wages for the employees physically making a product, like workers on an assembly line. Indirect costs are associated with support labor, such as employees that maintain factory equipment but don't operate the machines themselves.

Investopedia explains 'Cost Of Labor'

When manufacturers set the price of a good they take the cost of labor into account. This is because they need to charge more than that good's total cost of production. If demand for a good drops or the price consumers are willing to pay for the good falls, companies must adjust their the cost of labor to remain profitable. They can reduce the number of employees, cut back on production, require higher levels of productivity, reduce indirect labor costs or reduce other factors in the cost of production.