Cost of Sales: What It Is And How To Improve It

Cost of Goods - Complete Controller

The cost of goods sold is also alluded to as deals’ expense is the cost you cause to make your items or administrations. This expense incorporates direct material, direct work, and creation overheads.

Cost of sales: for some, the indicator of having a good business. For others, a slab is too severe, and for others, a headache. How to improve it? Hello, people in industry, professionals, and entrepreneurs. Today, we will talk about the cost of sales, how it affects us, and the alternatives we can use to improve it.

What is the cost of sales? Check out America's Best Bookkeepers

The cost of sales is the value of the products that we have sold. The definition relates to the direct price of manufacturing goods that the company sells. This amount of rate covers the material and labor price that businesses use directly to make the product. All direct expenditures, such as salesforce and distribution costs, etc., come under sales cost. This cost also does not include expenses such as overhead, sales, and marketing. 

Companies can deduct the revenues (sales) to evaluate the gross margin and profit with the exact amount of cost sales. As a result, you will have a higher cost of sales in lower margins. The accounting standards you use in your business calculation impact the change in the value of the cost of sales. 

The formula to calculate the cost of sales is.

  • COS = Initial Inventory + P – Final Inventory
  • Here, 
  • P = Purchasing during the period

What does the cost of sales include?

The cost of sales includes all the expenses we have had in the product until it has been sold. These include:

  • The cost of the raw materials with which we have produced (if applicable) the product
  • The cost of storage of the products
  • General manufacturing expenses and the cost of direct or indirect labor to manipulate the products
  • Depreciation expenses. Check out America's Best Bookkeepers

What is left out? The rest of the structure costs may be left out.

And the cost of sales in services?

In the case of services, it is more difficult to establish the cost of sales. Usually, it is about what it cost to give the service. Usually, in the services, there are the following components:

  • Materials
  • Workforce
  • General expenses

If you want to know how to assign it, we could say that it is all the cost generated in the work orders. If you do not have a system to manage work orders, you can have a starting point.

Why is it essential to separate the cost of sales from the general expenses?

Without wanting to enter accounting theory, it is essential to know what it costs us to sell and the rest of our structure.

Thus, we have two feasible options to improve our costs:

  1. Reduce structural costs that are not attributable to sales
  2. Reduce our cost of sales.

To reduce the structure’s cost, you can look at what is necessary to work in your company. Ask yourself:

  • Can I reduce my financing cost (if any)? Check out America's Best Bookkeepers
  • Is it possible to operate in cheaper offices (not warehouses)?
  • What if other expenses, such as supplies in my company?

Operating costs or infrastructure are usually “parrot chocolate” that is little compared to the business’s total costs. I strongly recommend that you read the following article on opportunity cost. Do not waste too much time on unimportant things, and I tell you sincerely. I am tired of seeing how people waste time and money, focusing on the wrong something.

Suggestions to reduce the cost of sales:

There are many ways to reduce the cost of sales, as many as ways to optimize sales. So, you can have an idea with real examples; I beg you to read the following post. It will make you open your eyes!

In the end, what you want is to save money, and it turns out that you have thought that the best way is to reduce the actual cost, which in many cases is the cost of sales. However, are you sure about it? Can you give your product or service with a lower price of sales?

To open your eyes, I leave this last article to the end. If you have not read the previous ones, read them, they are 10 minutes and clarify many things.

Check out America's Best Bookkeepers About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual bookkeeping, providing service to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud-hosted desktop where their entire team and tax accountant may access the QuickBooks™️ file, critical financial documents, and back-office tools in an efficient and secure environment. Complete Controller’s team of certified US-based accounting professionals provide bookkeeping, record storage, performance reporting, and controller services including training, cash-flow management, budgeting and forecasting, process and controls advisement, and bill-pay. With flat-rate service plans, Complete Controller is the most cost-effective expert accounting solution for business, family-office, trusts, and households of any size or complexity. Check out America's Best Bookkeepers