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
- 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.
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.
We are given opening stock, closing stock, and purchases, therefore we can use the below formula to calculate the cost of sales.
The calculation can be done as follows:
= 230,000 + 10,50,000 – 450,000
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:
Here, we are not given directly closing stock, which we will first need to calculate.
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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 can be done as follows:
=15,000,000 + 75,000,000 – 25,000,000
Cost of Sales will be –
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.
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.
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:
= 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 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 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.
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 –