Service Transaction Costs

Definition

The term service transaction cost refers to those business expenses associated with providing services to a customer.  Service transaction costs generally fall into three categories: initial indirect costs, direct costs, and indirect costs.

Calculating these costs is important in an ever-growing economy that depends on companies in the services sector such as management consulting, engineering and architecture, entertainment, as well as the legal and accounting professions.

Explanation

While some companies sell products, others sell services.  Whether a transaction is categorized as a product or service depends on whether or not the product or service is incidental to the sale.

For example, a customer might purchase equipment that needs to be installed onsite by the seller.  The equipment is a product, and the installation is a service.  In this example, the company is really selling a product, since the installation would be deemed incidental to the sale.  However, if the customer also purchases a maintenance contract on the equipment, the transaction would involve both a product (the equipment) and a service (the maintenance contract).

Accounting conventions dictate service costs should be charged to expense in the same accounting period in which the revenue associated with the service is recognized as being earned.  These costs fall into three broad categories:

  • Initial Direct Costs: those that are directly associated with negotiating and completing a service agreement.
  • Direct Costs:  those that have both a beneficial and casual relationship to the service performed.
  • Indirect Costs: includes all other costs not categorized as initial direct and direct.

Related Terms

indirect costs, direct costs, initial direct costs