Calculate the selling costs In your business it will be very useful to know how much money your business spends on manufacturing and selling its products, as well as setting the appropriate selling price.
How do you know what the ideal price is for the product you are selling and how much you spend to produce it? The answer is in the selling costs. Learning to calculate them will be key to the operation of your business And that’s what I’m talking about in this article.
It is curious, but most entrepreneurs do not know in detail the numbers of their company, among them, selling costs. These are key to determiningfor instance, the price of your product and guarantee the operational profitability of your business. If you don’t know, you’re lost.
Next I will tell you why it is important to know in detail the selling costs of your business, in addition to giving you some tips to learn how to calculate them properly. Without a doubt, they will be a great tool for your entrepreneurship.
What are selling costs?
The definition of sales cost it is somewhat technical and, from the outset, it is important that you do not confuse them with the sale price. The selling costs refer to the total that you will have to pay to manufacture your product and put it at the point of sale.. That is, in the hands of your customers.
As you can see, this process includes aspects that go from the manufacturing process —including current inventories, supplies, labor and general manufacturing costs—. But also those related to .
If your company does not manufacture its own products—as in the case of a retail firm, for example— sales costs have to do with what you spend on the products you buy from your suppliers and then resell them through your sales channelswhether physical or through a .
Well, I told you that the definition was technical, but the most important thing is to understand what is cost of sales and what it represents for your business.
Of course, in order to get this figure, you need to have several budgets on hand, such as the one for and . They detail information that you will need to know, although I will talk about it later.
What are selling costs used for?
Selling costs are an excellent tool to know how much money you must invest to manufacture your products and put them in the hands of your client.. In turn, this information will lead you to establish the sales goal that you must achieve to cover this amount.
In addition, the costs of sale will give you the necessary information to set the most appropriate price for your product based on objective data and not on hunches.
Thus, when you sit down to negotiate, for example, with a distributor, by knowing your sales costs, you will know how much to stretch your profit margins without compromising your business. That is, to what extent can you continue to generate profits.
If your business resells products that others make, your selling costs will tell you what the ideal price to sell that item is for everyone to win—you and the manufacturer, of course.
If your company is a service company, the sales costs will help you to know how much you pay in rents, licenses, hourly wages, and set the appropriate price for your solutions.
What is the importance of selling costs?
Selling costs are of key importance in making business decisions. It’s that simple. Selling costs not only help you set the right price for your product or service, but also give you greater flexibility to adapt your business to unforeseen situations..
Imagine that one of your raw materials unexpectedly goes up in price and puts pressure on your profit margins. In such a complicated scenario, knowing the structure of your selling costs will allow you to take measures to minimize the impact. For example, make a marginal and temporary reduction in another department, while you look for a long-term solution.
In accounting terms, knowing your selling costs gives you greater balance and control between your fixed and variable costs, operating expenses and income.
So, it’s not just about having a good state in your sales costs, but about analyze all the factors it contains to make the best decisions. In business, information is decision power.
👀 Eye: Don’t confuse selling costs with . They are different things and in the article that we show you you will find more detailed information.
What is the cost of sales formula?
There are several ways to get the formula for selling costs. And yes: this is, perhaps, the most technical part of this article, but I will explain it briefly.
For a service or commerce company —a retail company, for example—, things are relatively simpler. In this case, just do the following exercise:
Cost of sales = beginning inventory (the product you have in stock) + purchased inventory (the products you bought in the period) – ending inventory (the inventory you kept after your sales).
In case your business manufactures its products, things get more serious. In this case you will have to incorporate elements that have to do with your manufacturing and operating costs. Something like that:
Cost of goods sold = beginning inventory + total manufacturing cost – ending inventory.
If you need more information for this calculation, I invite you to review our article where we explain it to you.
How are sales costs calculated? Examples to understand
For take out the cost of sales of a company with a manufacturing process in a certain period, you need to determine some of the following factors:
- Initial inventory
- Purchases of raw materials
- Workforce cost
- General manufacturing costs
- Storage and transportation
- Final inventory
What does each refer to? I’ll tell you in more detail:
Initial inventory value
It is, basically, the value of the products you have in stock at the beginning of the period, whether monthly or annual.
Purchase raw materials
What you spend on all the supplies you need to make your product.
Workforce cost
What you pay in salaries to your business staff.
General manufacturing costs
They are all the costs involved in producing your product. It includes the value of the equipment, payment of electricity, rent, etc.
Storage and transportation
You have to take your product to the point of sale, right? If you are starting your business, it is unlikely that you have a fleet of trucks. Instead, you will most likely make an alliance with a shipping company. Well, you must record that cost of transportation and derivatives.
Final inventory
Simply, it is the value of those products that were not sold in the period.
💡Tip: If you don’t know how to determine how much each item you sell costs you to produce—that is, your labor, inventory, and general manufacturing costs—I recommend learning how to make a and a . With this information it will be easier for you to calculate your selling costs.
Using the information to calculate selling costs
Include the greatest amount of information available in your calculation, because remember that each expense and cost must be reflected in the price of your product, since your profit margin depends on this. That is, your earnings.
As I commented, there are several types of selling costs, depending on the line of business. The idea is that you incorporate the elements that make the most sense for your operation. The following cost of sale examples They will help you get a clearer idea.
This example is from a manufacturer that starts the year with an inventory valued at 100,000 MXN.
- Throughout the period – one year, for example – he buys raw materials and supplies with a value of 80,000 MXN.
- Then, its total manufacturing cost – labor and general costs – is 150,000 MXN.
- He spent 20,000 MXN on transportation.
- At the end of the year, your stock is worth 50,000 MXN.
The formula to get the sales cost is like this:
Cost of Goods Sold (CV) = Beginning Inventory + Raw Material Purchased + Total Manufacturing Cost (of labor, overhead and overhead)
+ Transportation cost – Ending inventory
CV = 100,000 + 80,000 + 150,000 + 20,000 – 50,000
= 300,000
Now, Thanks to this calculation, the company knows how much money it must invest to manufacture the products it needs to sell in that period. This gives you the ability to set the most appropriate price to cover this cost and also ensure profitability.
In this example I had to simplify the extraction of each value. As I told you, you should delve into the costs that make up each of these factors to obtain as much detail as possible.
Selling costs: is it an asset or a liability?
Something that is often confused about the costs of sales is whether they are an asset or a liability for a business. The answer is neither one nor the other.
The sales cost It is simply the outlay or set of outlays your business makes to manufacture an item. In simple terms, a liability is a debt that a company has. An asset is property owned by a business—inventory of products or machinery, for example.
The costs of sale, although they are a disbursement, do not represent a debt. Therefore, they are not a liability.
What are the costs of sales in accounting?
As I said, selling costs reflect the expenses that a company must make to manufacture its product and put it at the point of sale. For this reason, companies report it in the income statement.
Selling costs are key to carry out financial analysis in your business and determine what expenses can be reduced or adjusted.
As you can see, Knowing the sales costs is strategic to keep a correct accounting and make better decisions.
In conclusion
now you understand better what is the cost of sales. Take the time and make your sales costs, as they will be a very useful tool to know how much money your business invests in a certain period to manufacture and sell its products.
This information will not only allow you to set the best price for your items, but also make financial decisions in key situations.
No matter what you’re selling, chances are you’ll need to explore online sales at some point. .
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