You are required to understand the flow of money through your company in order to calculate the profits and debts accurately. In addition, if you don’t have knowledge of how to move your money then it will be hard to manage the cash flow. And, cost of sales is one of the most important matrices to track for this task (particularly at the time of selling products). Therefore, this blog will let you know about what is cost of sales and how to work out it. So, let’s start!
What is Cost of Sales?
The amount of money that a company uses in order to make a sale is known as the cost of sales. It is also known as COGS (Cost of Goods Sold). These sales are not similar to expenses. This is because the expenses are not directly linked to the individual sales as COGS do.
What to Include When Calculating COGS?
The COGS may include how much amount of money to pay for the following:
- Raw materials to make products
- Subcontractors providing the core service
- Materials for a builder
You should include these expenses even if you do not pay for them at the time of making a sale. It is also essential to know that a lot of company expenditures are allowable. Therefore, you can claim them and can reduce your tax liability.
The formula of Cost of Goods Sold
The formula of COGS is as follows:
By the following example, you will understand the formula better.
A company has £14,000 initial inventory. During the month, it has total purchases of £18,000, and at the end of the month, it has £5,000 ending inventory. Now, let’s calculate the COGS with the given figures:
Cost of Goods Sold = Initial Inventory + Purchases – Ending Inventory
Cost of Goods Sold = £14,000 + £18,000 – £5,000
Cost of Goods Sold = £27,000
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What is the Importance of Cost of Sales?
Knowing how much it costs on making a sale will assist you to figure out how efficiently your company operates, or where it needs more focus. It is also a vital part of working out a gross profit.
Gross Profit = Sales – COGS
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Now that you know what is cost of sales. We would sum up our discussion by saying that you must consider your initial inventory, purchases, and ending inventory when calculating your COGS. Use the formula we have provided in this article to work out the COGS. This formula will assist you to forecast your cash flow, figuring out your profit margins and maintaining the profitability of your company.
Disclaimer: This blog contains general information about what is cost of sales.