What is the Cost of Sales?

Cost of Sales Formula

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  • Inventory sold by the company will appear in the profit and loss statement under the Cost Of Goods SoldCost Of Goods SoldThe Cost of Goods Sold (COGS) is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, direct labour cost and other direct costs. However, it excludes all the indirect expenses incurred by the company.
  • read more account. The beginning stock for the year is the stock that is leftover from the prior year—that is, the merchandise or the product which was not sold in the prior year.Any new or additional purchases or productions made by a retail or a manufacturing firm shall be added to the beginning stock.At the end of the current reporting periodCurrent Reporting PeriodA reporting period is a month, quarter, or year during which an organization’s financial statements are prepared for external use uniformly across a period of time in order for the general public and users to interpret and evaluate the financial statements.read more, the products or the merchandise that was not sold shall be subtracted from the total of the beginning stock and any new or additional procurements or purchases.The resultant or the final number derived from the above calculation will be the cost of sales, or in other words, it will be the cost of goods sold for the reporting period.

Examples

Example #1

Inventory limited reported goods sales numbers this quarter. The Gross profit was reported as better than in the previous quarter. The company reported 230,000 as of the opening stock, 450,000 as closing stock, and 10,50,000 as net purchases. You are required to compute the cost of sales for inventory limited.

Solution:

We are given opening stock, closing stock, and purchases; therefore, we can use the below formula to calculate the cost of sales.

  • Opening Stock: 230000.00Purchases: 1050000.00Closing Stock: 450000.00

The calculation can be done as follows:

= 230,000 + 10,50,000 – 450,000

Example #2

AMC limited recently reported its numbers. The shareholders have asked for an internal auditInternal AuditInternal audit refers to the inspection conducted to assess and enhance the company’s risk management efficacy, evaluate the different internal controls, and ensure that the company adheres to all the regulations. It helps the management and board of directors to identify and rectify the loopholes before the external audit.read more as they believe the management has conceded certain facts. Mr. J & Co. was appointed as the internal auditors of the company. He wanted first to calculate the company’s gross profit via production records. He first wanted to calculate the cost of sales based on available information. You are required to compute the cost of sales. He was given the following details:

  • Inventory Turnover Ratio: 5.00Sales: 100000000.00Opening Stock: 15000000.00Purchases: 75000000.00

Solution

Here, we are not given directly closing stock, which we first need to calculate.

Average Inventory 

Inventory Turnover RatioInventory Turnover RatioInventory Turnover Ratio measures how fast the company replaces a current batch of inventories and transforms them into sales. Higher ratio indicates that the company’s product is in high demand and sells quickly, resulting in lower inventory management costs and more earnings.read more = Sales /Average inventory

5 =100,000,000 /Average inventory

Average InventoryAverage InventoryAverage Inventory is the mean of opening and closing inventory of a particular period. It helps the management to understand the inventory that a business needs to hold during its daily course of business.read more   = 100,000,000 / 5

  • Average Inventory   = 20,000,000

Now, we can calculate closing stock using the below formula

Closing Stock

Average Inventory =Opening stock + Closing stock/  2

20,000,000 = 15,000,000 + Closing stock /  2

Closing stock= 40,000,000 – 15,000,000

  • Closing Stock=25,000,000

Calculation can be done as follows:

=15,000,000 + 75,000,000 – 25,000,000

Cost of Sales will be –

Example #3

XYZ, a newly listed company on the stock exchangeThe Stock ExchangeStock exchange refers to a market that facilitates the buying and selling of listed securities such as public company stocks, exchange-traded funds, debt instruments, options, etc., as per the standard regulations and guidelines—for instance, NYSE and NASDAQ.read more, has reported below the income statement. From the below statement, you are required to compute the cost of sales.

  • Revenue: 9568000.00Opening Inventory: 118899.00Raw Material: 3233230.00Labor Cost for Raw Material: 1888990.00Selling Expenses: 2399081.00Administrative Expenses: 1099.91.00Closing Stock: 1212887.00Net Profit: -1454269.00

We are given opening and closing stock here, but we are not given the net purchase figure directly. First, we shall calculate the purchase cost.

Purchase Cost 

Purchases =51,22,220

We shall take the total raw material and labor cost for raw material as purchase cost, which is 32,33,230 + 18,88,990, which equals 51,22,220.

= 11,88,990 + 51,22,220 – 12,12,887

Relevance and Uses

Cost of Sales is a vital metric on the financial statements of the companyFinancial Statements Of The CompanyFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more as this figure is subtracted from the firm’s sales to determine its gross profit. The gross profitGross ProfitGross Profit shows the earnings of the business entity from its core business activity i.e. the profit of the company that is arrived after deducting all the direct expenses like raw material cost, labor cost, etc. from the direct income generated from the sale of its goods and services.read more is a type of profitability measure that evaluates how efficient the firm or an organization is in managing its supplies and labor in production.

Because the cost of sales is the cost of conducting the business, this can be recorded at the expense of the business in the face of the profit and loss statement. Knowledge of this cost shall help the investors, analysts, and managers estimate the firm’s bottom-line figure. Businesses or companies try to keep their sales cost low so that the net income can be reported as higher. If the Cost Of Goods Sold increases, the company’s net profit would decrease. While this movement can be beneficial for income tax purposes, the company or the firm will have low profit for its investors or shareholders.

This article has been a guide to the Cost of Sales and its definition. Here we discuss the formula to calculate the cost of sales along with practical examples and a downloadable excel template. You can learn more about financial analysis from the following articles –

  • Opening StockJournal Entries of COGSJournal Entries Of COGSThe most common COGS are outlined in the Cost of Goods Sold journal entries. Inventory, or ready-to-sell products, is recorded as an asset on the balance sheet. When inventory is sold, it becomes an expense, which we refer to as Cost of Goods Sold (COGS).read moreCalculate Cost of Goods ManufacturedCOGS Formula