I work in small businesses accounting (not an accountant), so take my view with a grain of salt. But labor is its own category, separate from COGS. Contractors show up as indirect expense.
I’ve never heard of any kind of worker or contractor in Capital Expenses/Balance Sheet. That’s wild.
Generally Accepted Accounting Principles don’t let you put t labor wherever you choose to ‘categorize’ them.
But you can pay consultants and buy services from “third-parties”, which moves the expense, as I described, from payroll to indirect expenses. This falls into that funny gray area for contractors—looks like a duck…
As I said, I could be mistaken and I'm willing to defer to your expertise. What I'm trying to understand is this. Is it possible for a company--say a tech unicorn--to have a high gross margin and a low COGS, and yet pay some of its employees--maybe engineers in R&D--astronomical compensation that somehow isn't reflected in the gross margin and/or COGS? While we're at it, is it further possible for such a company to have a high gross profit margin and yet fail to make a profit? I ask because I'm trying to square the claim about the high gross margins and I guess efficiency of San Francisco tech companies, with reports in the popular press about tech unicorns like Twitter and Pinterest losing money quarter after quarter.
I think it's because you are looking at companies that are in rapid growth mode. In those cases, you would likely have negative Net Income because you are investing all revenue into growing the business. More mature tech businesses that are IP-based, have high gross margins and profits.
This follows into other industries with high IP-based costs rather than traditional asset-based costs. We see high margins from investment firms, consultants, banks, and SaaS companies. Basically, companies who rely on their employees knowledge to deliver products. We tend to see lower margins from auto manufacturers, construction, textile, and chemicals. The type of companies that require large asset investments and maintenance on machines and factories.
This is why Apple has pushed so hard into their "Services" offerings. The margins are incredibly high (and more predictable) compared to building and selling physical phones and computers. I can build the service once and sell it to 100 million people. For phones, I have to build each one before selling it.
Whatever the reason, the outcome is the same: companies held aloft on a cushion of easy money, untethered to market forces, free to pay arbitrary salaries to people easily outcompeting their neighbors who aren't so blessed.
I’ve never heard of any kind of worker or contractor in Capital Expenses/Balance Sheet. That’s wild.
Generally Accepted Accounting Principles don’t let you put t labor wherever you choose to ‘categorize’ them.
But you can pay consultants and buy services from “third-parties”, which moves the expense, as I described, from payroll to indirect expenses. This falls into that funny gray area for contractors—looks like a duck…