What is Cost of Sales ?: Definition, How to Calculate It, Examples and MORE

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A very frequent question is What is the Cost of Sale? The truth is that this is a very important factor, which must be taken into account when marketing a product. This is different from the sale price and its calculation is not similar either. The latter refers to the cost plus the profit for the product sold.

But don’t worry if you don’t get it right off the bat! Today we will be explaining what the cost is, what the selling cost is, what are the expenses that make up this cost and how to estimate it. Additionally, we will give you some examples so that you have no doubts about it. So, if you are interested in all this, keep reading!

What is Cost?

The cost or cost It is a very important aspect in a company, company or undertaking. Anyone who is going to offer a product, whether it is a good or a service, must be very up to date on what the costs are in order to achieve their objective of marketing.

This is different from the price and, in case you didn’t know, it is also different from the expense. Of course, all these concepts are related to each other. All must be taken into account in the accounting, since they all play an important role in the sale of the product.

In economics, is defined at cost as that monetary investment in which is incurred in the process of producing a good or service. This cost can be divided into several, such as:

  • Fixed costs: this cost does not depend on the productive capacity of the company and does not vary over time. For example, rental cost or wages. These must be paid month to month, regardless of the production of the company.
  • Variable costs: unlike the other, this one does vary depending on the quantity produced. The most common examples are labor, packaging, and raw materials. To some extent, the inclusion of labor increases production.

The sum of these costs results in the total cost of the company.

There are also the direct costs or the indirect costs. The former are required to produce and reach the final product, while the latter, although necessary for production, are not related to the final product. For example, the raw material and the rent of the premises.

Finally, there is the production cost which includes direct and indirect costs. If to this are added other expenses involved in the sales process, such as storage, then the cost of sale.

What is the Cost of Sale?

As you could see in the previous section, costs can be classified into several types. Either based on time (fixed and variable) or based on the final product or production (direct and indirect). From the latter arises the cost of production, which is an intrinsic part of the Cost of Sale, which we will talk about next.

Without further ado, the cost of sale It is the one that makes up the expenses that had to be made in order to have the product in hand, ready to be sold. It is the capital invested to produce or acquire the good to be marketed, in a given period.

This includes the costs of producing it and the expenses necessary to put it up for sale. For example, the payment to the managers of sale, storage or collection, raw materials, and so on. In reality, the elements that are included in the calculation of the cost of sale will depend on the type of company that it is and the good and / or service that it sells.

To understand a little better, you can ask yourself the question How much did I spend to have this product ready for sale? This will give you the cost of sale. Basically, they are all the costs that you had to incur in order to put your final product in the hands of the public.

What Expenses make up the Sales Costs?

The Costs and expenses They are closely related and therefore we must take into account what is the difference between the two. Costs are understood to be all the expenditure of money necessary to produce a product, while the expenditure is all the expenditure of money that is allocated to the activities involved in the production of the good and / or service.

Knowing this, we can talk about the expenses involved in determining the cost of sale. As we told you before, these will depend on the type of company that is managed, since the expenses of a goods company are not the same as one that sells services.

Some examples of expenses involved in the cost of sale are the following:

  • Working capital
  • Supplies
  • Raw material.
  • Storage.
  • Packaging.

However, there are many that can be had. The important thing is that you analyze well what expenses you incur in order to sell the product, without adding the profit or profit margin. We are talking about the net cost.

How is the Cost of Sale Estimate Made?

Now that you know the cost theory, we can move on to explain how to calculate the cost of sale. We will indicate the simplest method that exists, so that you will be able to do it yourself. Let’s see!

commercial enterprise

In general, the formula you should use if it is a commercial enterprise to do the calculation is the following:

Cost of Sale (CV) = Initial Inventories (Products) + Net Purchases – Final Products

Industrial company

On the other hand, the industrial company You have to use another formula for calculating the cost of sales. In this sense, we refer to the following:

Cost of Sales (CV) = Initial Inventory of Finished Products + Manufacturing Cost of Finished Products in a period – Final Inventory of Finished Products.

With these formulas you will be able to obtain your cost of sale. On the other hand, there are also other formulas based on inventory, which can be periodic or fixed.

Periodic Inventory

In this case the formula would be the following:

(1) Merchandise available for sale = Final Inventory + Gross Purchases – Returns on purchases

(2) Cost of Sale = Goods available for sale – Final Inventory

Fixed Inventory

You must calculate the quantity of products purchased (each purchase corresponds to a quantity) and the initial inventory. Additionally, you take the unit value of each purchase or of the products in inventory. Finally, the total value is obtained by multiplying the unit value by the quantity (P x Q).

With the total quantities on hand (Inventory + Purchases) and the total value of the purchases (the sum of each P x Q) the average cost of the product is obtained. You just have to divide the latter by the first.

Average Product Cost = Total value of purchases / Total quantities on hand

If a quantity Y of product is sold, then the cost of sale is as follows:

Cost of Sale = Average Cost of Product x quantity sold Y

In the end you can use the best one you like or use both. Take a good look at its components and see which one is best for you.

In the same way, you can see numerical examples how to calculate costs through periodic or fixed inventories.

Examples of Cost of Sale

Finally, we can talk about some Examples of Cost of Sale. We are talking about the elements that make up the cost of sale, which we will mention below.

  • Workforce: human capital is responsible for managing sales. Both the strategies and the sale itself must be remunerated. The costs include the salaries of these people.
  • Raw material: the necessary products for the elaboration of the final good constitute a cost. For example, to design a shirt you need cotton, polyester, thread, etc. These are direct costs.
  • Services: Another cost that is diluted in the commercialization process is the costs of services. We are talking about electricity, water, internet and / or gas. They are indirect costs, just like labor.
  • Technology: machinery is also counted, especially regarding its use and repair is about.
  • Transportation and / or storage: having to carry the product from one place to another also constitutes a cost of sale, as well as storage if it is contracted.

These are the inherent costs in the sales process. They are needed to achieve commercialization. However, these are not the ones that are contained in the formulas that we mentioned above. Before refers to final products in inventory, initials and purchases.

We hope we have helped you with what you were looking for. Now you have a new concept that will help you with what you need.

Until next time!

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