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What Is the Connection between Cost of Sales and Cost of Goods Sold?

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  • Written By: Esther Ejim
  • Edited By: Kaci Lane Hindman
  • Last Modified Date: 29 September 2016
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Cost of sales and cost of goods sold are two different terms for the same concept. The connection between the two is the fact that they both refer to the costs accrued during the production a product or the marketing of goods by a company. Two factors that determine the total costs of goods include whether the goods where produced by the company and whether the goods were purchased by the company for resale.

When the goods are produced by the company, issues that will be considered in the analysis of the cost of sales and cost of goods sold include the money spent on purchasing the raw materials used to make the final product. Usually, businesses keep an inventory detailing or recording such expenditures with the aim of subtracting the cost of goods sold from the computation of the taxable income. The expenses on the transportation of the raw materials to the production or manufacturing plant is also a factor considered during an analysis of the cost of goods sold.

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Another factor that will be included in the list of expenditures for companies that manufacture their own products is the money spent on labor — from pre-production to the final stages of production. For example, a company that produces orange juice might include the money spent on labor needed to harvest the oranges, load them onto trucks, transport them to the factory, and operate the equipment needed to produce the orange juice. All of these factors are regarded as expenses geared toward the production of the final product, and they are deducted from the revenue derived from the sale of the product. As such, all of the costs involved in the production of the orange juice will be deducted from the income earned by the sale of the juice.

In the case of final products purchased for resale, issues under consideration include aspects like any discount given on the goods, any damage to the goods during the process of transportation from the manufacturer to the seller, and any money spent in fixing or refurbishing the goods. For instance, a company that sells used furniture might include the money spent on the purchase of the furniture from different sources, the money spent on transporting the items purchased, and the money spent on refurbishing old furniture to make it look better. Another factor that may be included is any extra materials purchased and used to fix the goods. For instance, a person selling used furniture might purchase material in order to change the cover on an old couch.

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