Cost of Sales

What is the Cost of Sales?

Cost of Sales can be referred to as those costs which are directly attributable to the production of the goods that shall be sold in the firm or in an organization. It can be calculated by adding the cost of the goods purchased or manufactured to the opening stock of that period and subtracting the closing stock of that period where, cost of goods manufactured includes the cost of direct and indirect material, direct and indirect labor and overhead manufacturing costs.

Cost of Sales Formula

Cost of Sales = Beginning Stock + Purchases made During the Period – Closing Stock
Cost-of-Sales-Formula

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Source: Cost of Sales (wallstreetmojo.com)

 

Examples

You can download this Cost of Sales Formula Excel Template here – Cost of Sales Formula Excel Template

Example #1

Inventory limited reported goods sales numbers this quarter. The Gross profit was reported 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: 230000.00
  • Purchases: 1050000.00
  • Closing Stock: 450000.00

The calculation can be done as follows:

Example 1.1png

= 230,000 + 10,50,000 – 450,000

Example 1.2png

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. were appointed as the internal auditors of the company. He wanted first to calculate the gross profit of the company 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: 5.00
  • Sales: 100000000.00
  • Opening Stock: 15000000.00
  • Purchases: 75000000.00

Solution

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

Average Inventory 

Cost of Sales Formula Example 2.1png

Inventory Turnover RatioInventory Turnover RatioInventory Turnover Ratio is a measure to determine the efficiency of a Company concerning its overall inventory management. To calculate the ratio, divide the cost of goods sold by the gross inventory. 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 below formula

Closing Stock

Example 2.2png

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:

Cost of Sales Formula Example 2.3png

=15,000,000 + 75,000,000 – 25,000,000

Cost of Sales will be –

Cost of Sales Formula Example 2.4png

Example #3

XYZ, a newly listed company in 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 income statement. From the below statement, you are required to compute the cost of sales.

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

Solution:

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

Purchase Cost 

Example 3.1png

Purchases =51,22,220

Total of raw material and labor cost for raw material, we shall take it as purchase cost, which is 32,33,230 + 18,88,990, which equals to 51,22,220.

The calculation can be done as follows:

Cost of Sales Formula Example 3.2png

= 11,88,990 + 51,22,220 – 12,12,887

Example 3.3png

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 which evaluates how efficient the firm or an organization is in managing its supplies and labor in the process of production.

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

Recommended Articles

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 downloadable excel template. You can learn more about financial analysis from the following articles –

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