Everhour tracks project expenses and receipts, while cost of goods calculations separate direct costs from operating expenses.
Estimate total cost by combining labor hours, materials, and overhead. Know your numbers before you send the proposal.
Indirect costs on top of labor + materials
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A cost of goods calculation answers how much direct product or service delivery cost belongs against the revenue you earned in the period. For U.S. small-business tax reporting, gross profit equals net receipts after returns and allowances minus cost of goods sold. Most service businesses with no merchandise income factor use net receipts as gross profit.
The answer matters before pricing, tax preparation, project review, and month-end reporting. A retailer needs the cost of inventory sold. A manufacturer needs direct labor, materials, freight-in, and allocable factory overhead. A project-based service business needs to decide whether subcontractor, delivery, or reimbursable production costs belong in direct costs or ordinary business expenses.
U.S. filers generally compute COGS with beginning inventory plus purchases, labor, materials, and other costs, minus ending inventory when merchandise production, purchase, or sale is an income-producing factor. Form 1125-A line 8 carries COGS to the income tax return. Inventory valuation generally uses cost, lower of cost or market, or another IRS-approved method.
Manufacturers can include direct and indirect production labor, materials and supplies, freight-in, and manufacturing overhead such as factory rent, utilities, depreciation, taxes, maintenance, and supervision. Office rent, sales software, advertising, bookkeeping, and owner draws do not become COGS just because they support the business. Those costs reduce profit later as business expenses.
Use this structure: beginning inventory + purchases + direct labor + materials + other production costs − ending inventory = COGS. Then subtract COGS from net receipts to find gross profit. The inventory inputs must cover the same accounting period as the receipts, or the result mixes costs from one period with sales from another.
Example: a small manufacturer starts with $18,000 in inventory, adds $42,000 in purchases, $16,000 in direct labor, $2,400 in freight-in, and $7,600 in factory overhead, then ends with $21,000 in inventory. COGS is $65,000. If net receipts are $118,000 after returns and allowances, gross profit is $53,000.
A one-time calculation is enough when you have clean period totals, settled inventory counts, and a narrow question such as gross profit for one month or one product line. Keep sales tax treatment separate. The United States has state and local sales taxes, no federal VAT or national sales tax, and buyer-imposed taxes collected and remitted by the seller generally stay out of gross receipts.
A managed workflow becomes necessary when receipts, expenses, reimbursable costs, and project budgets change throughout the month. Everhour Expenses lets teams log project costs with receipt images or PDFs, unit-based categories, budget inclusion controls, invoice integration, and expense reports, so profitability review starts from recorded costs instead of reconstructed spreadsheets.
This content is for general information only, may not be fully up to date, and is provided without any warranty or liability.
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Use beginning inventory plus purchases, labor, materials, and other costs, minus ending inventory, when merchandise production, purchase, or sale is an income-producing factor. For U.S. small-business tax reporting, gross profit is net receipts after returns and allowances minus COGS. Most service businesses with no merchandise income factor use net receipts as gross profit.
Manufacturing COGS can include direct labor, indirect production labor, materials and supplies, freight-in, and allocable manufacturing overhead. Factory rent, utilities, depreciation, taxes, maintenance, and supervision can qualify when they relate to production. Selling, administrative, and general office costs stay outside COGS and reduce profit later as business expenses.
Many service businesses have no merchandise income factor, so net receipts become gross profit for U.S. small-business tax reporting. A service firm can still track direct project costs for management reporting, such as subcontractors, reimbursable delivery costs, or billable materials, but tax COGS treatment depends on the business model and records.
State or local taxes imposed on the buyer and collected by the seller for remittance generally are excluded from gross receipts or sales. Taxes imposed on the seller and collected from the buyer are included in gross receipts. COGS handles direct production or purchase costs, while sales tax treatment follows the specific tax obligation.
Ending inventory represents goods still on hand at the end of the period, so those costs have not matched sold items yet. Subtracting ending inventory keeps unsold costs on the balance sheet instead of charging them against current-period receipts. A bad ending count overstates or understates both COGS and gross profit.
Everhour Expenses tracks project costs with receipt images or PDFs, unit-based categories, budget inclusion controls, invoice integration, and expense reports. Teams can review expenses by project, client, member, category, date range, and billable status before deciding which costs belong in direct cost analysis.
Everhour Reporting can compare billable and non-billable time, labor costs, revenue, profit margins, and actual hours against estimates by project. Reports can be filtered, grouped, exported to CSV, Excel/XLSX, or PDF, and scheduled for recurring delivery.
Log expenses with receipts, categories, budget rules, and invoice-ready records. Everhour Expenses keeps project costs visible for cleaner profitability reviews.
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