What is Cost of Sales?

What is Cost of Sales?

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The cost of sales is a term commonly referred on the income statement of both the manufacturer and the retailer and is the representation of the expenses associated with the making or the purchasing of that particular product that has been sold to any customer. This cost of sales is generally used by the companies in order to calculate the gross margin of their companies.

Understanding the cost of sales

In simple words the cost of sales is basically the summation of all the costs that was used so as to create a product or some kind of service that has been sold. It is represented in the income statement at the top as a subtraction forms the net sales.  Thus the resulted obtained from this calculation is the value of the gross margin which is finally earned by the entity that is reporting.

Meaning of the cost of sales for the various entities

While the term ‘cost of sales’ is generally used by the retailers, for the manufactures the more preferred term if the ‘cost of goods sold’. Although both the terms are on and the same but there is still a slight difference between the two.

For a manufacture- for the manufacturers the cost of sales basically refers to the cost of the finished foods in its beginning inventory plus the cost of goods that has been manufactured subtracting the cost of those finished good in their ending inventory. This is also referred to as the cost of goods sold.

For retailers- for the retailers the cost of sales refers to the cost of product in the beginning of the inventory in addition to the net cost of the merchandise that has been purchased and subtracting the cost of that same merchandised in the ending inventory.

How to calculate the cost of sales?

The formula to calculate the cost of sales is given as-

Cost of Sales= Beginning inventory+ purchases – ending inventory

Now here one ting which is important to note is that the cost of sales does not include the selling, administrative or the general expenses.

Thus the cost of sales is the value of the direct cost that is attributed to the production of the overall goods which sold in any particular company. Here the amount may include the pricing of the used material as well as the direct labor cost. So in this way the various sub categories of the cost of sales include factors like direct materials, direct labor, overhead as well as the cost of commissions associated with it.


Thus to determine the performance metrics of any particular company the cost of sales pays an important role in it.  It helps in measuring the various factors which included the ability of any entity to be able to design, source and manufacture product which is also affordable in terms of cost.