# Service Costing in the IT Sector
## Context
The IT industry has individuals, groups of individuals, or companies that provide technical services to clients and raise bills for those services. Since the "product" is intangible (a service), traditional product costing doesn't apply — we use service costing to identify the cost of providing each project/service.
## Categories of Expenses in IT Service Costing
IT industry costs are typically classified into three buckets, each recovered differently:
### 1. Direct Salary of Employees Working on the Project
- Wages/salary of developers, testers, project managers etc. who are directly assigned to a particular client project.
- This is a direct cost — charged in full to that project.
### 2. Expenses Directly Related to the Project
Examples include:
- Depreciation of laptops/equipment used exclusively on that project
- Travel expenses incurred to visit the client's premises
- Software licences purchased exclusively for the project
These are also direct costs of the project.
### 3. General Overheads
- Examples: office rent, electricity, HR cost, common admin staff salary
- These cannot be traced to one specific project
- Recovery basis: they are absorbed on the basis of Direct Salary (i.e., apportioned in proportion to the direct salary cost of each project)
## Why Direct Salary as the Basis?
In IT services, the main resource consumed is human time. Direct salary is the closest measure of resources used by a project, so apportioning general overheads on that basis gives a fair allocation.
## Cost Statement Format (IT Project)
| Particulars | Amount |
|---|---|
| Direct Salary of employees on project | xxx |
| Direct project-related expenses (laptops dep., travel etc.) | xxx |
| General Overheads (absorbed on basis of Direct Salary) | xxx |
| Total Cost of Project | xxx |
| Add: Profit margin | xxx |
| Billing to Client | xxx |