Cost of Sales is a business cost directly attributed to selling or manufacturing a specific product.

These costs include materials, production staff wages, packaging and certain overheads.  Here are five facts to help you understand this integral part of business accounting: 1. Cost of Sales helps you gauge profit or loss Cost of Sales figures help you match expenditure with income to get an accurate figure for profit or loss:

Sales – cost of sales = gross profit (before deducting expenses)

2. What does it include? Direct labour, direct materials, allocated overheads (such as the cost of a production manager directly managing the staff who work on these products). In other words, the specific cost of producing a product. 3. Also relevant for the service industry The Cost of Sales equivalent for a service company is Cost of Services, and includes such items as travelling costs to deliver the services, sales commissions, and freelancer wages. 4. Essential for correct pricing Knowing the Cost of Sales figure is vital for pricing goods and services correctly. That’s because without detailed information about how much it’s costing to produce these goods, it’s impossible to price with any certainty. 5. Used as a measurement of efficiency The Cost-to-Revenue Ratio compares operating costs with revenue to demonstrate how efficiently or otherwise the business is operating. Colour Accounting™ offers hands-on, interactive financial literacy training courses designed for non-financial managers and business owners. Get to grips with your business accounts. You won’t look back.  Discover more here.]]>