Cost of Sales

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Cost of sales refers to the direct costs attributable to the production of the goods or supply of services by an entity. It is also commonly known as the “cost of goods sold (COGS)”.

Cost of sales measures the cost of goods produced or services provided in a period by an entity. It includes the cost of the direct materials used in producing the goods, direct labor costs used to produce the good, along with any other direct costs associated with the production of goods. In case of services cost of sales includes the labor cost or salaries of the employees and other directly attributable costs.

Cost of sales does not include indirect expenses such as distribution costs and marketing costs. It appears on the income statement and is deducted from the sales revenue for the calculation of gross profit (or gross margin).

The exact costs included in the calculation of cost of sales will differ from one type of business to another. The cost of sales attributed to a company's products or services are expensed as the company sells these goods.

As the cost of sales does not include overhead costs, it has a higher proportion of variable cost than the operating costs. Some fixed costs, such as labor costs, might be included in the cost of sales. But in most of the cases, the cost of sales consists almost entirely of variable costs.

Because inventory may be revalued, the cost of sales in a particular period reflects both any revaluation of inventory and the methods of allocating the cost of inventory such as first in, first out (FIFO), and average cost. The methods of allocation of overhead costs to particular products will also affect the cost of sales.

There are several ways to calculate cost of sales. The basic, and commonly used, method is described here. This method starts with the opening inventory for the period and adds the total amount of purchases made during the period and then deducts the closing inventory. This calculation gives the cost of the inventory sold by the entity during the period. 

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Quote Thandeka, 24 August, 2015
Can i include the machine hire as a coast of sales of Civil Construction company?
Quote Guest, 21 June, 2016
Yes, provided that the machine rented was solely rented to aid in the production of that product.
Quote Guest, 9 December, 2016
Can i include " Repair and maintenance of vessels " as a COS for a shipping company?
Quote Guest, 7 March, 2019
isn't the labor costs is a type of variable cost? How can it be a fixed cost?
Quote Guest, 10 April, 2019
Do we need to add the Manager's salary in the cost of sales ( service sector )
Quote jane, 11 September, 2019
does this include FREIGHT cost?
Quote Guest, 7 February, 2020
Trans Rights
Quote Guest, 17 August, 2020
How about lease expense on clinic premises for Hospita company, does it pertains to cost of service also?
Quote Guest, 30 January, 2021
Wages of labour and cost of labour - When you allocate it in cost of sales and when in cost of production
Quote Guest, 22 February, 2021
Hi. I am doing a delivery service business. I am wondering whether my delivery workers full time and part time salaries are included inside direct cost under cost of service delivery. Is this correct? Or is my delivery workers salaries full time & part time supposed to be under operating expenses (indirect cost)? Please help me because I am confused. thank you.
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