With cost of sales formula, you will obtain the actual sale amount of a good or service. Therefore, it is of the utmost importance to apply this calculation correctly for the benefit of your business.
If you are an entrepreneur, you have surely come across that, to start a business, you need to integrate a new series of concepts into your dictionary, for example: cost of sales formula.
Before entering fully into this concept, it is necessary Differentiate between cost of goods and cost of goods sold, since it is very common for these terms to be confused. Let us begin! π
What is cost of goods sold and how is it determined?
Once you have calculated the cost of the product, the next step is to establish the cost of salesthat is, the total amount invested by the company to produce the product or service in a certain period of time.
Are the expenses associated with its production, distribution and dissemination; is the money spent on business operations. cost of sales varies depending on whether the company is industrial or commercialbecause their processes are different.
For example: if your company manufactures bags for women, the budgeted cost of sales will include the value of materials directly used in the production of the products. If your company only sells bags, the calculation only includes the value invested in the merchandise in relation to sales made.
Now that you are clear about this difference, we are going to briefly develop the sales price concept in accounting for later learn to use the formula to calculate the cost of sales about the products or services offered by your business, in order to obtain their real cost of sale.
If you want to learn more about everything related to this topic, I recommend our article.
What is the cost of the product?
The product cost refers to how much does it cost you to produce your product or service is the money you invest to manufacture a good or produce a service.
To the cost of producing goods, services, or products at a certain time is also known as production cost.
To make it much clearer, we give you an example: If your business manufactures bags for women, it generates costs to produce them, including: raw materials, labor, indirect costs of the manufacturing process, etc. All of these make up the production costs or product cost. π
Sale price in accounting
The cost of sale it is what it costs your company to put a product on the marketMeanwhile he sale price is he monetary value a customer will pay for acquiring that product, good or service.
In a nutshell, It is the cost of sale plus profit. that you will obtain when selling your product or service. For it is necessary to take into account the fixed costs, variable costs and production costs.
The fixed are those that do not vary according to the number of units produced (example: rental of spaces, equipment, rental of machinery and infrastructure).
The variable costs They refer to those who vary according to the number of units produced (for example: raw material, commissions, among others), while those of production are directly related to the production of your products or provision of your services.
To know how much it costs you to put a product into circulation and its monetary valuewhether you have manufactured it or just sell it, it is important because will help you obtain the necessary profitability and lead a good one so that your business grows and works properly.
What is the cost of goods sold formula?
Very well! After all this learning, you already have what you need to fully enter the topic that interests us: cost of sales formula. π
There are different ways to apply it, here we will show you the most common for commercial and industrial companies.
For a trading company
Cost of sale = cost of purchase of the merchandise in the beginning inventory + cost of purchases made during the period β cost of the merchandise in the ending inventory
For an industrial company
Cost of sales = beginning inventory of finished goods + manufacturing cost of finished goods in a period β ending inventory of finished goods
How to apply the cost of sales formula?
Each formula has components that influence the calculation and depend on the type of business. Although each case is particular and should be thoroughly reviewed, here we explain the one of a commercial company so you can have a simple reference of the steps to follow:
- Know your starting inventory.
- Review your purchased inventory.
- Consider your ending inventory.
- apply the formula
Step 1: Know your inventory
It refers to the finished products with which you account (assets of your business), it is based on the cost that is registered of the inventory at the beginning of an accounting period.
Suppose your starting inventory is $20 MXN worth of merchandise.
Step 2: Review your purchased inventory
It is the cost of what you bought during the accounting period, and includes raw materials, purchases, supplies, wages, shipping and rent for your business.
Suppose that during the accounting period you acquired an inventory of $35 MXN.
Step 3: Consider your ending inventory
It refers to what you sold at the end of the accounting period and what you have in stock. These are the products you have available for sale at the end of this accounting period.
Suppose your ending inventory is $12 MXN.
Step 4: Apply the formula
Make your calculation according to the formula (in this case of a commercial company):
Cost of goods sold = beginning inventory + purchased inventory β ending inventory
CV = $20 + $35 β $12
CV = $43 MXN
How to calculate cost of sales in Excel?
This tool is excellent for implementing the cost of sales formula, as it allows you to automate the steps and reduce any errors.
Step 1: Create a new file
- Open Excel on your computer and create a new file.
- In columns A through D, write beginning inventory, purchases for the month, ending inventory, and cost of sales, respectively.
- Select cells A2, B2, C2 and D2, and click the button with the currency symbol to format them. If you want to change to euro, dollar or another currency, just click on the arrow next to the icon.
Step 2 β Fill and format the cells
- Fill in the values ββof each element in the corresponding cell. In the image below, we use the values ββfrom the example above (20 + 35 β 12).
- If you want to highlight the cell where the final sales cost value appears, select D3 and click the paint icon on the toolbar.
Step 3: Insert the formula
- Click D3 and type the equals symbol β=β.
- Select cell A2 and click +.
- Do the same with cell B2 and click β.
- Select cell C2 and click Enter.
Step 4: Calculate the cost of sale automatically
There you have it! Your cost of sale is calculated automatically. If you want to determine the cost of sale of other items, just copy the line and paste in the next one, changing the beginning and ending inventory values, in addition to the purchase of the month.
In summary
In addition to the use of cost of sales formula, here you learned other concepts to continue growing in your business, regardless of whether your company is industrial or commercial, whether you sell bags for women, skateboards or brooms for witches. ππ§π½
Remember the difference between product cost (how much it costs you to produce), sale cost (value that your company invests in total to produce), and sale price (what the customer will pay for your product), and start setting competitive prices for your product. This will certainly help strengthen your .
We invite you to try Tiendanube free for 30 days to help your business take off. it’s easy, fast and requires no technical knowledge. π
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