Cost of sales (COS) is a financial metric that represents all the costs that go into providing a service or product to a customer. It is also known as cost of goods sold (COGS) and is used interchangeably with it. The cost of sales includes direct labor, direct materials such as raw materials, and overhead thats directly tied to a production facility or manufacturing plant. It is a key part of the performance metrics of a company, as it measures the ability of an entity to design, source, and manufacture goods at a reasonable cost.
The following are some examples of costs that are included in the cost of sales:
- Buying inventory or raw materials
- Wages spent on making products or delivering services
- Lease and energy costs associated directly with production or delivering the work
The cost of sales is calculated as beginning inventory plus purchases minus ending inventory. It is subtracted from total revenue to yield gross profit. Understanding the cost of sales helps businesses calculate how profitable each transaction has been. It is important to note that cost of sales does not include any general and administrative expenses or any costs of the sales and marketing department.
Different businesses may have different views about what to include in their cost of sales. For example, some businesses may focus solely on production or service delivery when calculating it. The most important thing is to settle on a definition that works for the business and apply it consistently.
In summary, cost of sales is a financial metric that represents all the costs that go into providing a service or product to a customer. It is calculated as beginning inventory plus purchases minus ending inventory and is subtracted from total revenue to yield gross profit.
