How do you use the cost of sales formula?


Quick Answer

According to Investopedia, the cost of sales formula is used by adding the amount of purchases to an existing inventory, then subtracting the remaining amount of inventory at the end of a sales period. The resulting amount is the cost of sales. The cost of sales formula must be used for an individual sales period to be accurate.

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Full Answer

The cost of sales is the amount of direct costs attributed to making a product sold by a company, according to Investopedia. Direct costs include the materials and direct labor used to make a product. The cost of sales excludes indirect costs, such as distribution and sales force. Cost of sales differ between every company. As a company sells its product, the cost of sales is expended. If a company's inventory, including purchases, is worth $12 million at the beginning of a selling period, and is worth $9 million at the end of the selling period, then the company's cost of sales is $3 million.

The IRS explains that other costs may be calculated in direct costs. Other costs include containers or packaging used in the manufacturing of the product. This does not include shipping or selling costs. Freight-in costs on raw materials for manufacturing are also considered a direct cost. Overhead expenses such as heat, light, rent, power and insurance for the building the product is manufactured in are included in the direct costs.

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