The formula for calculating cost of sales is adding the starting inventory, inventory purchases and overhead expenses together and subtracting that number from inventory at the end of the year, according to Chron. This formula subtracts the sales cost from the amount earned through sales to determine the company's income.
Chron notes that the starting inventory includes the value of products that are currently on sale. The figure should be roughly the same as inventory value of the previous year. Owners should then add expenses that went toward purchasing merchandise. Unavailable products, raw materials and items for personal use should all be included. Overhead expenses should include utilities, wages and supplies. However, the overhead expense depends on the type of company, according to IRS guidelines. For example, retail and wholesale outlets must report overhead as a business expense and exclude those costs from the cost of sales.