What is cost of sales?
Cost of sales - also known as Cost of Goods Sold (COGS) - refers to the direct cost of producing goods or services. This figure heavily influences the profitability of a business.
The expenses included in the cost of sales vary depending on the type of business. For example:
Retailers incur costs when they buy products from suppliers and include this in their cost of sales.
Manufacturers have production costs, including inventory, overhead, and labour expenses and include this in their cost of sales.
Service providers include the labour and materials required to fulfil their service in their cost of sales.
Cost of sales vs. cost of goods sold
Cost of sales and COGS are different terms that represent the same measurement — what it costs a business to produce its goods or services. Companies that offer tangible goods tend to use “COGS”, whereas companies that offer services opt for “cost of sales”.
Factors influencing cost of sales
Calculating the cost of sales includes several factors, including:
Sales volumes: The revenue generated from selling goods and services.
Inventory value: The value of goods the company has yet to sell.
Project hours value: Total cost of time spent on a project, usually in terms of wages and other expenses.
Labour costs: The wages paid directly to employees and others rendering services or producing goods.
Materials costs: The cost of your product's primary components, such as rubber for car tyres, steel for bicycles or plastic for sunglasses.
Overhead costs: Indirect expenses like production facility rent or insurance protecting valuable equipment.
Calculating the cost of sales
Every business model has unique variables that influence how you calculate your cost of sales.
Goods-based businesses
For these companies, COGS generally consists of inventory and labour associated with the inventory. A simple formula that can help you find the cost of sales is:
Sales Income – COGS = Gross Profit
For those businesses that buy and sell stock and apply appropriate costing methods, a simplified method of calculating COGS is:
Cost of Sales = Opening Inventory Value + Value of Purchases – Ending Inventory Value
Service-based businesses
When it comes to services, calculating cost of sales can become a little complex. The costs of providing services primarily include salaries and wages, materials and attributable overheads. However, for an accurate figure you must also account for ongoing projects that haven’t been billed or completed.
Here’s the cost of sales formula for services:
Cost of Sales = Value of Total Project Hours – Value of Hours on Unfinished Projects
Why monitor cost of sales?
Keeping track of the cost of sales is essential for any company that sells goods or services. Knowing how much sales cost your business will allow you to:
Track gross profit margins: Comparing costs with sales income determines profitability of products or services.
Stock efficiently: You may be able to reduce your cost of sales by reducing your inventory carrying costs.
Optimise pricing: Establishing competitive yet profitable prices requires understanding your underlying costs.
Inform investors: Along with sales, revenue and other key metrics, the cost of sales contributes significantly to profitability and to a company's overall valuation.
Make better decisions: Cost of sales data is useful for determining product prices and identifying ways to reduce costs.
How to reduce the cost of sales
1. Streamline operations for enhanced productivity
Streamlining operations can prevent delays and their associated costs. The more efficient your processes, the less costs you incur in employee time or excess stock or materials, for example.
Look to refine your sales processes and automate recurring tasks to save time and improve accuracy.
2. Harness technology to improve sales outcomes
Automation and other technology can save time and resources, reduce errors and help increase sales. Additionally, technology can help you identify customer behaviours and needs, improve customer satisfaction and increase sales.
An integrated business management platform that includes project management, customer relationship management and accounting software will help you run more efficiently, helping you to decrease your cost of sales.
3. Optimise IT expenditures
Move from desktop software to cloud-based solutions that meet your requirements. With software-as-a-service offerings, all aspects of data and software management are included in your subscription fee, so you don’t need to pay for these services separately.
Choose cost-effective cloud-based solutions that meet your requirements and make sure you’re not paying for more functionality than you need. In addition, make sure your team knows how to use the software effectively to maximise its return on investment.
4. Strengthen customer relationships
Solid customer relationships aren't just about future sales — they're an opportunity for cost savings. Having satisfied customers reduces the expenses tied to attracting new ones.
Engage your customers directly, using feedback and surveys to understand their needs and preferences. By aligning your offerings with these needs, you can build and maintain relationships with these brand advocates.
Track your cost of sales with MYOB
With MYOB’s business management platform, you can seamlessly connect time tracking and jobs management software to your accounting system. This means you can track your workflow, income and expenses and have the data to calculate your cost of sales.
MYOB brings together all the key workflows that you need to run your business. With integrated software to help you manage your customers, projects, suppliers, employees, finance, accounting and tax, MYOB has you covered. Cloud-based, you pay for the features and functionality you need today, but have the ability to scale your software to meet tomorrow’s needs.
Check out our plans and pricing and get started with MYOB today!
Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.
MYOB is not a registered entity pursuant to the Tax Administration Act 1994 and therefore cannot provide taxation advice to clients. If you have a query concerning taxation including filing your GST returns or annual tax statements, then you should consult with your accountant or other registered tax adviser.