Cost of sales is the direct value of having manufactured a marketed product or service in a given period.
It is very important to emphasize the condition of direct value in the concept, since only those that directly affect the process of obtaining the good or service to be sold are taken into account.
Cost of sales in accounting
It is used to determine in a given period the amount that is supposed to sell a product or service for the company and thus be able to establish what level of income or sales are necessary to be able to alleviate them.
It is also useful in order to analyze which process involved in the product or service incurs more expense than others, and thus be able to set a sale price. Generally, they are expenses that we cannot totally dispense with, since some are proportional to the level of sales made. Several of them could be:
- Raw materials used.
Thus, depending on the activity of the company, this cost will be made up of different types of expenses, in which the most recurrent example to differentiate these expenses would be to compare the origin of the cost of sales of a supermarket and a company that sells services over the internet.
Cost of sales formula
In the first place, it is necessary to differentiate between two types of companies, on the one hand those that acquire merchandise, and on the other those that manufacture their own stocks.
Taking into account the above, the formula for the cost of sales of a company in a given period will be:
Companies related to the service sector have not been taken into account, since in these the way of calculating the cost varies depending on the specific activity of the company. There is a big difference between calculating the cost of sales of a software company and another in the hospitality sector for example.
In summary, the calculation is not as methodical in this type of company compared to one that sells goods or finished products.
Finally, it should be noted that to assign a value to both initial and finished products that are going to be sold, at an accounting level we can value them with different methods. These methods are closely linked to internal accounting. The most used are the FIFO method (from English first in, first out , which translated into Spanish would be “first in, first out”), PMP (Average Weighted Price) and LIFO (from English last In, first out , which translated would be “last in, first out”).