Cost of Sales (also referred to as cost of goods sold [COGS]) is a very important financial performance metric, as it tracks your ability to manufacture/deliver goods and services at a reasonable cost.
As your Cost of Sales represents the direct costs related to the manufacturing of goods/services that are sold to your customers, what is included in the Cost of Sales section all depends on which industry you operate in.
What should be included in your Cost of Sales?
Business owners often get stuck on what should be included in their cost of sales.
A simple way to break this down:
- If you stopped paying for a certain expense, could you continue to manufacture the goods or deliver your services?
Yes – not included in cost of sales.
- If you failed to pay for a specific expense would this cause production/delivery of services to grind to a halt?
Yes – included in your cost of sales.
For your industry:
To get a real understanding of your margins, in this flyer we share which expenses you should include in your industry Cost of Sales.
Specific to each of the following:
- Professional Services (legal, finance, real estate, architects, etc.)
Click on the images below to expand:
Need to add any expense items to your Cost of Sales?
If you want to allocate any of your expenses to a Cost of Sales item, changes can be made in the chart of accounts in your datafile.
How to calculate Cost of Sales
The Cost of Sales formula:
Beginning Inventory + Purchases – Ending Inventory = $COS figure
For example, let’s imagine that a company has $25,000 of inventory on hand. Throughout the course of the month, the company spent around $7,000 on raw materials, wages, and delivery. With $13,000 worth of inventory at the end of the month, you can use the cost of sales formula to calculate your company’s cost of sales during the month:
Cost of Sales = $25,000 + $7,000 – $13,000 = $19,000
Why is Cost of Sales so important?
Whilst calculating the Cost of Sales is relatively simple, knowing this number will help to assess how effectively you are managing the manufacturing/service delivery process and help you ascertain the business’s overall gross profit margin.
The cost of sales formula is vital in understanding your business’s financial performance in greater depth.
How can Walsh Accountants help?
Understanding how to calculate the cost of sales is so important as it gives you the information you need to stay on top of your business’s financial health.
If you don’t understand the internal movement of your capital, cash flow becomes extremely difficult to manage.