Cost of sales
A cost of sales (COS) is an expense you incurred in order to make a sale.
COS and expenses are often used with the same meaning but are vastly different in the function they serve. As stated above, a COS is cost to your business that you had to spend in order to get that sale.
Cost of sales can vary greatly from month to month as sales go up or down. They can be in proportion to the sales for a particular period. Therefore, if you make sales – you will have cost of sales. If you do not make sales, you will not (or have a minimal amount).
Calculating Gross Profit using COS
A cost of sale is vital in calculating your gross profit and can be used in the calculation in profit per sale.
- Some examples are:
- Bread or veggies as a grocery store.
- Hair dye as a hairdresser.
- Metal for a gate manufacturing company
For some businesses, gross profit is a vital calculation and therefore cost of sales is an important part of it. these businesses are normally in the manufacturing sector but there are some hospitality entities that use this calculation too. Because the cost of sales figure is proportional to the sales figure, it can be used in the gross profit per sale. If this is used, there are various other expenses that are taken into account, for example, wages or additional machinery rented to make such a sale. This is all dependent on the sale being made and the entities policy on the calculation of the gross profit.
Expenses.
An expense, on the other hand, is a cost to the business that occurs whether or not you make any sales at all. Expenses are in the calculation of nett profit.
Expenses are broken down into 2 categories:
- Fixed
- Variable.
For more about expenses read more here.
This article was updated in January 202