Cost of sales

Cost of sales (or Cost of goods sold) refers to your cost purchasing commodity from your suppliers and venders for resale. Delivery and freight charges are generally taken into account in this number (D. Needham,C.Davis 2011, page 78).

• Cost of sales figure for a period can be identified in various techniques. In some companies, the cost of goods sold is identified at time a sale has been made.
• Sales are closely matched with the cost of those sales and wherefore identifying the cost of sales figure for inclusion in the profit and loss account is not a difficulty .

Notwithstanding cost of sales is whenever an expense, not every expense qualifies as cost of goods sold. Cost of sales is buying the item you sell or the effective cost of producing. However, your company may need to pay additional costs, such as sales advertising and commission, to sell this item. The demarcation between cost of sales and other expenses is significant for determining gross margin, the difference between incomings and cost of sale. When calculating profit before taxation, you deduct cost of sales but not operating or other spendings (M. P. Holtzman 2013, page 36).

The count and formula

The calculation for cost of goods sold, including a full set of adjustments to stock and purchases, would be:

Cost of sales = Purchase + Opening stock + Carriage inwards - Returns outwards - Closing stock 

(R. Dransfield 2005, page 93).

Factors affecting the cost of goods sold

" The cost of goods sold bears a close relationship to your store's sales, but it will vary depending on things like whether you're paying more for your merchandise and not offsetting it with a substantially higher retail price, or markup, or if you have a big blowout sale that temporarily inflates your profit margins." (C. Davis 2011, page 78)

Deriving the cost of sales after the end of the accounting period

To understand how this is done, it is significant to identify that the cost of sales figure represents the cost of goods that were sold by the company during the span rather than the cost of goods that were bought by that company during the period. Side of the manufactures bought during a particular period may remain in the business, as reserve supplies, and not be sold until an afterday. To derive the cost of sales for a period, it is essential to know quantity of closing and opening inventories (stock, reserve supplies) for the period and the cost of manufactures bought during the period. (E. McLaney 2009, page 76)

Cost of sales — recommended articles

Stock turn — Net purchases — Inventory value — Purchase account — Closing stock — Baumol model — Factory price — Cost oriented pricing — Forward buying

References

• Anderson L.K. (2019), Accounting for Government Contracts--Cost Accounting Standards, LexisNexis
• Davis C.(2011),Start Your Own Clothing Store and More: Women's, Men's, Children's, Specialty, Entrepreneur Press
• Holtzman M.P. (2013), Managerial Accounting For Dummies, John Wiley & Sons, New Jersey
• McLaney E. (2009), Accounting, Pearson Education, London
• Morató E.A. (2000),Enterprise Creation and Procreation: A Basic Finance Handbook for Entrepreneurs, Rex Bookstore, Philippines
• Needham D.,Dransfield R. (2000), Advanced Business, Heinemann

Author: Edyta Pach