What is cost of sales? For many companies, cost of sales is the most important financial issue. The word “cost” means the price paid for goods or services. Some companies define cost of sales as the total of cash from orders received, to salary and inventory costs, less any profit. The actual or realized cost of sales, however, varies depending on a variety of factors.
The price of a product will be influenced by many factors. One such factor is the cost of materials. This includes the cost of raw materials, such as labor and raw material costs, as well as overhead costs, such as rent or utilities. The cost of production also affects the price of a product. While it may seem that the company is only paying for the actual product and nothing more, that is not necessarily true.
Inventory represents one of the final costs of production. Inventory represents the total amount of inventory you have, either on hand or on the shelf. Some companies hold excess inventory just in case the need arises. Other companies actually sell their products over to customers who don’t need all the stock they own. A third type of company maintains inventories but doesn’t manufacture the product. Examples include wholesalers and warehouses.
In order to determine cost of sales, a company must first establish fixed costs. Fixed costs are expenses that cannot be changed, regardless of business circumstances. Examples include salaries, materials and utility bills. Other fixed costs include transportation costs and fixed investment costs.
Variable costs refer to those variables that can be altered or controlled by the company, in order to change the final cost of sales equation. One such variable is the cost of shipping products to the customer. Often, the cost of shipping is included in the invoice a customer receives from a company. However, if the customer makes an adjustment to the delivery date, he will have an impact on the final cost of sales.
A third variable is the profit margin, which is often adjusted as a part of the inventory turnover rate. Many companies use profit margins to help determine whether they are making a profit. However, it can also have an indirect affect on what is the cost of sales equation. For example, if a company has a very low profit margin, there may be fewer items in inventory. Consequently, there may be less inventory to sell to customers at the end of the month.
One final variable is the cost of manufacturing fixed assets, such as equipment or property. This is a key consideration for companies operating within a tight manufacturing cost environment. The value of these assets can change as well. The final cost of sales equation is affected by all of these factors, as they relate to sales and inventory. It’s important to remember that these are only estimates, and can vary significantly from one business to the next.
What is cost of sales? It is an easy question to answer when looking at inventory management, and the calculation involved in determining an effective inventory management strategy. Managing sales and inventory costs appropriately will reduce costs, lead to increased profits, and increase productivity.
The four main perspectives on what is cost of sales include cost of capital, price, cost of goods sold, and fixed cost. The first two are technical issues affecting prices at the retail level, as well as overhead costs that would impact sales. Fixed cost refers to the cost of raw materials, labor, and marketing (such as advertising) related expenses. The second perspective, price, takes into account market price changes, wholesale and discount prices, as well as the effect of taxes and discounts. A third perspective, called cost of sales, considers the price difference between an order and the purchase price, and focuses primarily on the manufacturer’s profit margin.
Cost of sales considerations should always take inventory, raw material, and production costs into account. Sometimes it is difficult to determine whether the market price of a product is sufficient to cover the fixed cost of production. Many times, the answer is yes, however it may not be practical to obtain raw materials at below wholesale prices to service an order. It may also be impossible to sell items at below minimum cost to service an order.
What is cost of sales? To answer this question, consider a situation in which sales are slow, customers are loyal, and the company’s profits are expected to always exceed inventory costs. If inventory costs exceed profit and the profits are positive, the impact on the bottom line will always be negative. In this situation, what is the cost of sales is negative.