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What is the Cost of Sales?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 30 March 2014
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The cost of sales involves the identification of the expenses that are related to the manufacturing process. In particular, it addresses the expense associated with purchasing raw materials that are necessary to produce the products sold by the company. Sometimes referred to as the cost of goods sold or COGS, this number is often used as a means of determining the overall cost of creating the finished products that generate revenue for the company.

In terms of calculating the actual cost of sales, the data required to make an accurate assessment appears on the income statement for the company. Along with the cost of materials needed to produce a finished product, there are also other factors that figure into the overall number. While not every company will include the same elements in their calculation, there are several types of expenses that are highly likely to classified in this manner regardless of the size of the business enterprise.

Along with the cost of raw materials, the cost of sales usually will include any labor costs associated with producing the products sold by the business. Labor costs would include wages, tips, and the cost of benefits such as accrued vacation time and health insurance. Employees who are directly involved in the production of the finished goods, such as assembly line workers, are just about always included. In some instances, the salaries of supervisors are also included in the calculation.

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The cost of sales also often will include marketing, sales, and promotion expenses as well. This can encompass such expenses as the cost of maintaining in-house sales staffs, or the costs associated with outsourcing marketing and promotions functions to a public relations or advertising agency. Broadly speaking, this means that not only costs directly associated with production, but also costs associated with attracting consumers can also be properly considered to be part of the total.

Many corporations take the information provided by calculating the cost of sales very seriously. The mechanism can be a strong indicator of how much profit will be generated by each unit produced and sold by the company. At the same time, tracking this number can also be a powerful tool in managing available resources more responsibly, so that a maximum return utilizing a minimum or resources can be maintained.

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Discuss this Article

anon128314
Post 4

Marketing freebies and promotions are part of cost of sales as mentioned above. how it is presented in the income statement? is it a deduction to revenue or should it be added to the normal direct costs which are attributable to the generation of the product?

anon109004
Post 2

can you provide us the costs involved in sales promotion?

thank you.

LivHappyr
Post 1

Cost of Goods Sold is a very, very important term for accountants, especially those employed by large manufacturing corporations. The purchase cost of each product you buy at the store has a COGS price as a base price, plus other costs like mark-up, to reach that shelf.

Most consumers don’t think about what is involved with the cost for that item; we simply look for the lowest out of pocket cost.

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