## Formula to Calculate Cost of Sales

Cost of Sales formula 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 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.

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

- Inventory that is sold by the company will appear in the profit and loss statement under the Cost Of Goods Sold account. The beginning stock for the year is the stock which 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 that are made by a retail or a manufacturing firm shall be added to the beginning stock.
- At the end of the current reporting period, the products or the merchandise that was not sold those shall be subtracted from the total of the beginning stock and any new or additional procurements or purchases.
- The resultant or the final number which is 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 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.

Use the following data for calculation of the cost of sales

Calculation of Cost of Sales can be done as follows:

= 230,000 + 10,50,000 – 450,000

**Cost of Sales will be –**

**Cost of Sales = 8,30,000**

Therefore, the cost of sales will be 830,000.

#### Example #2

**AMC limited recently reported its numbers. The shareholders have asked for an internal audit 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:**

**Solution**

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

**Average Inventory **

Inventory Turnover Ratio = Sales /Average inventory

5 =100,000,000 /Average inventory

Average Inventory = 100,000,000 / 5

**Average Inventory = 20,000,000**

Now, we can calculate closing stock using below formula

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 of Cost of Sales can be done as follows:

=15,000,000 + 75,000,000 – 25,000,000

**Cost of Sales will be –**

**Cost of Sales =65,000,000**

Therefore, the cost of sales will be 65,000,000.

#### Example #3

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

**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 **

**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.

Calculation of Cost of Sales can be done as follows:

= 11,88,990 + 51,22,220 – 12,12,887

**Cost of Sales will be –**

**Cost of Sales = 50,98,32**

Therefore, the cost of sales will be 50,98,323.

### Relevance and Uses

The Cost of Goods Sold or the Cost of Sales is a vital metric on the financial statements of the company as this figure is subtracted from the firm’s sales to determine its gross profit. The gross profit 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 Cost Of Goods Sold or Cost of sales is a 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 the cost of goods sold or cost of sales 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.

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