Cost of sales is of key importance when making business decisions, it's that simple. Not only do they help you set the right price for your product or service, but they also give you greater flexibility to adapt your business to unforeseen situations .
Imagine that one of your raw materials suddenly increases in price, affecting your profit margins. In such a scenario, knowing the structure of your sales costs will allow you to take measures to minimize the impact .
For example, making a marginal and temporary reduction in another department, while you look for a long-term solution.
In accounting, understanding these elements gives phone data you more precise control over fixed and variable costs , operating expenses, and revenues.
It's not just about maintaining financial balance, but about understanding the factors that influence them in order to make better decisions. In business, information is decision-making power .
note : Cost of sales is not the same as sales expenses . These are two different concepts and in this article we will clarify this information in more detail.
What is the formula for cost of sales?
There are several ways to apply the cost of sales formula , so we will get into the more technical part of this article. Take note!
For a commercial company
cost of sales formula for trading company
Cost of sales = cost of purchase of merchandise in beginning inventory + cost of purchases made during the period – cost of merchandise in ending inventory
For an industrial company
cost of sales formula for industrial company
Cost of sales = beginning inventory of finished goods + cost of manufacturing finished goods in a period – ending inventory of finished goods
Read more: How to define the selling price of a product?
How to apply the cost of sales formula?
Each formula has components that influence the calculation and depend on the type of business. Although each case is unique and should be reviewed thoroughly, here we explain the case of a commercial company so that you can have a simple reference of the steps to follow:
Know your initial inventory.
Review your purchased inventory.
Consider your ending inventory.
Apply the formula
Step 1: Know your inventory
It refers to the finished products you have (assets of your business), and is based on the cost of inventory recorded at the beginning of an accounting period.
Let's say your initial inventory is $20 pesos worth of merchandise.
Step 2: Review your purchased inventory
It is the cost of what you purchased during the accounting period, and includes raw materials, purchases, supplies, salaries, shipping costs, and rent for your business.
Suppose that during the accounting period you acquired inventory worth $35 pesos.
Step 3: Consider your ending inventory
This refers to what you sold at the end of the accounting period and what you have in stock. These are the products you have available for sale at the end of this accounting period.
Let's say your ending inventory is $12 pesos.
Step 4: Apply the formula
Perform your calculation according to the formula (in this case for a commercial company).