Cost of sales

Welcome to today's session where we will explore the concept of cost of sales, also known as cost of goods sold or COGS. This is fundamental in managerial and financial accounting and is critical for tracking profitability. Essentially, cost of sales includes all costs directly related to producing or purchasing goods or services sold during a specific period. For retailers, it's the cost of buying inventory, while for manufacturers, it includes direct materials, labor, and manufacturing overhead. Service companies may not use this term as often, since most of their expenses are classified as period costs. The calculation of cost of sales depends on the business type. In manufacturing, it starts with beginning finished goods inventory, adds the cost of goods manufactured, and subtracts ending inventory, tracking production costs through various inventories. In retail or merchandising, cost of sales is calculated by adding purchases to beginning inventory and subtracting ending inventory. In all cases, the goal is to match the costs of goods sold with the revenue those sales generate. The method used to value inventory can have a significant impact on the reported cost of sales. Methods such as first in, first out, FIFO, last in, first out, or LIFO, mainly used in the USA, or weighted average cost are common. FIFO F assumes the oldest goods are sold first, thus assigning older costs to cost of sales, and newer cost to closing inventory. LIFO, in contrast, treats