Difference Between Sales and Cost of Goods Sold

Edited by Diffzy | Updated on: September 22, 2022

       

Difference Between Sales and Cost of Goods Sold Difference Between Sales and Cost of Goods Sold

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Introduction

It is important to understand the cost per unit of goods sold (COGS) and the sales when analyzing a company's net profit. These terms are used to assess a company's financial situation and aid future strategic investment decisions. These names are often used interchangeably, but there are some key differences.

Sales of Goods Sold vs. Cost of Goods Sold

The cost of goods sold differs from the cost of goods to be sold. It refers to the cost of manufacturing items from raw materials or parts. On the other hand, the latter is the total cost of a business producing a product or service.

Sales cover the indirect and direct expenses of selling products and/or services. This indicates the number sold. The sales figure appears just before the EBIT margin on an income statement. Because it incurs additional costs, the number of sales will always exceed the cost of goods sold. It cannot be exempted from tax.

The cost of goods sold is a measure of the direct costs of manufacturing items for a company and is always less than the number of sales. It is shown after revenue in an income statement. It is the total number of manufactured goods. Tax can be exempted from the cost of goods sold.

Difference Between Sales and Cost of Goods Sold in Tabular Form

Table: Sales of Goods Sold vs. Cost of Goods Sold
Parameters for Comparison
Sales of goods Sold
Cost of Goods Sold
Analysis
It analyzes the indirect and direct expenses associated with selling products and services.
It analyzes direct costs associated to a company's production of items.
Location in Income Statement
Appears just before the EBIT margin
Appears after the revenue margin
Quantification
The quantification is always more than the other factors
The quantification is always lower than the sales
Calculation
It shows the number of products sold in the given period of time.
It indicates the number of products a company has produced in the given period of time.
Deduction of tax
Taxes cannot be exempted under the sales of goods sold
Excluded from tax under the cost of goods sold

Independent income statements are incomplete without net sales and cost-of-goods sold (COGS), which require knowing the sales expense to determine. Both cost of sales and cost of goods sold is important in determining an organization's capabilities and benefits in producing goods or services. These measurements are comparable, and they are equally important for private enterprises. However, the expense or cost for sales definition is quite unique in comparison to the cost for goods sold.

Both cost of goods sold (or cost of sales) are terms that are often used in conjunction. Both the cost of goods sold as well as the cost of sales are used to record the expenses incurred to create products, buy merchandise, offer assistance, or offer end clients any other services. These sums are included in the income statement after-sales income. It is important to note that sales costs are not tax-deductible. However, sales costs are tax-deductible.

A cost analysis or cost examination of an organisation is fundamental and must be done before making investment or venture decisions. When you decide to invest in any company, the costs of sales and the price of goods sold should be thoroughly examined.

What is the definition of sales of goods sold?

Sales is the sum of all expenses incurred in order to create a product/service that has been sold. It measures a company's ability to source, design, and manufacture a product at an affordable cost. Both "cost of sales" and "cost of goods shipped" are the same. Some firms might choose to use one term over another depending on the industry. If a company sells both services and products, its financial statements might include sales expenses and the costs of selling them.

The cost of selling a product is closely tied to its cost because many of the same elements can be found in both. The income statement shows the cost of sales, while inventory appears on a balance.

All costs directly associated with the production and sale of goods are included in the cost of sales. The cost of sales includes direct labour and supplies. If a worker is directly responsible for selling the product, commissions may be included in the cost of sales.

The meaning of the cost of goods sold:

The cost of goods sold (COGS) is a measure of all the expenses that a private company incurs to produce and sell its products and services. The cost of goods sold includes overhead, materials, storage and the wholesale price of products that are resold elsewhere.

Cost of goods sold model costs could include the purchase of metals by an independent company for use in its electronic products, the leasing of a private enterprise for its office or payments that a private company makes for its employees. While it is important to recognize the cost and expense of goods sold, the cost of goods sold does not refer to sales but could be used to describe all business tasks.

The cost of goods sold and sales are important because they reflect the operating costs or working costs behind manufacturing processes. Cost of sales also shows how much money a company is investing in its sales. A business can also subtract the cost or expense of sales from its sales income to get the net benefit.

A company that compares every value with its income will better understand the variances in the main concern. If the price of goods sells increases as income decreases, it is possible to see that input costs increase. This could be used to prove that one is being compensated for raising his costs. The income of one could increase many times.

Examples of the cost to sell goods include

  • Direct work.
  • Office leases can have overheads and higher costs.
  • Raw materials and components that are not refined.
  • All parts and provisions are required to produce the goods or services.
  • Any service or product that is resold at a discount.
  • Storage, containers, and compartments.

What is the Cost of Goods Sold?

The total cost of producing all the commodities sold by an organization is called the cost of goods sold. This can include expenditures like staff and prime resources. However, it does not include expenses that occur after a product has been developed. For example, costs associated with the distribution or direct sales of the product. If a company sells services, it includes all labour costs and unpaid taxes.

The cost of products sold can be considered an expense. It is included on a company's income statement. The net profit is calculated by subtracting the cost of products from the total net sales. Because it is the main tool for pricing a product, knowing the cost of products is a priority for most firms.

The pricing must reflect the actual cost of the items sold as well as any indirect costs such as taxes and distribution costs. The organization will make more from the sale of a specific product or service if the price is higher than the sum of all costs and expenses.

What is the Cost of Sales?

According to monetary specialists, the cost or expense of selling is the direct and indirect costs that a private company incurs in order to sell its goods and services.

Here's how to calculate the cost of sales:

Cost of sales = cost for finished goods in your inventory at the beginning and cost for goods made during your accounting period. This is your end inventory cost.

Imagine a private company spending Rs. 1,001 on finished merchandise from the initial stock, and Rs. 2,000 for product manufacturing during the current bookkeeping period. If the merchandise cost for the final stock is Rs. 1,500, the price of sales is Rs. 1,000 + Rs.2,000 - Rs. 1,500 = Rs.1,500.

The formula for the cost of goods sold

It is easy to calculate COGS. Use the COGS formula to calculate the cost of goods sold.

COGS = Ending Inventory + Beginning Inventory

Are you unsure where to find the information needed to complete the formula? Here's the breakdown:

Inventory at the beginning: The amount of inventory that remains from the previous period (e.g. month, quarter etc.).

Purchases made during the period: The cost of the items you bought during the accounting period

End of inventory: All inventory that was not sold during the period

Once you have all the information you need, you can calculate your cost of goods sold. You can calculate your cost of goods sold weekly, monthly or quarterly depending on your business goals.

How Business COGS are important

Why is it so important for your business to know the cost of goods sold? Your COGS can provide a wealth of information including

  • What is your profit for a given period?
  • You can change your pricing
  • You are spending too much to produce the product/service

There is a difference between sales and cost of goods sold

Below are the key points that distinguish between sales and costs of goods sold.

1. Significance

  • The monetary value of the income an entity earns by selling its products or services is called sales.
  • The total cost of goods sold is the sum of all expenses incurred by an entity to produce the goods.

2. Accounting classification

  • A revenue is the amount of money that an entity makes from sales. It is also called income.
  • The cost of goods sold is the sum of many costs. It is therefore classified as an "expense".

3. Financial statements presentation

  • The credit side of the profit-and-loss account records sales and reports them.
  • The profit and loss account does not include the cost of goods sold. This is actually calculated by taking into account several costs that are recorded in the profit-and-loss account.

4. Accounting Entry

  • Sales are usually accounted for using one accounting entry.
  • The cost of goods sold cannot be accounted for in one accounting entry. For different components of the cost of goods sold, separate accounting entries are used.

5. Complexity of calculations

  • It is easy to calculate total sales. This is done by adding the total units sold to the per-unit sales price for each unit.
  • Calculating the cost of goods sold is more complicated because it involves a combination of many different components. This could also include the allocation of expenses.

6. Impact on profitability

  • Profitability is directly related to sales. Profitability is directly related to sales.
  • Profitability is inversely related to the cost of goods sold. Profitability is affected by the cost of goods sold.

7. Relationship

  • If the value of sales exceeds the cost of goods sold, then an entity has made a gross profit.
  • A gross loss is when the cost of goods sold exceeds the value of sales made.

8. Utility

  • Analyzing sales data can be useful for profitability analysis, as well as in determining sales and marketing strategies to maximize sales.
  • Analyzing the cost of goods sold can be useful for pricing decisions and for determining cost control and cost reduction policies.

9. Control

  • You can control the sales value of your company by changing sales prices or increasing sales volume through marketing campaigns.
  • Implementing cost control policies and cost reduction strategies can help to reduce the cost of goods sold.

Main differences difference between sales and cost of goods sold in points

Here are some of the main and primary differences between sales and cost of goods sold:

  1. The sales department examines the indirect and direct expenses associated with a company's sale of products or services. The cost of goods sold, on the other hand, examines the direct costs of a company's production of items.
  2. The sales appear right before the EBIT margin and the cost per unit of goods sold immediately after.
  3. Sales tend to be higher than costs, but the cost of goods sold tends to be lower.
  4. The number of items sold is indicated by the sales, while the cost of goods sold indicates the quantity of goods manufactured by the firm.
  5. Taxes cannot be exempted from sales, but they can be excluded from the cost of goods.

Conclusion

Thus we conclude the topic on the difference between sales and the cost of goods sold. Companies often record the cost of goods sold (COGS) or the cost of sales (or both) on their balance sheet. This can lead to confusion about what these acronyms mean. The cost of goods sold is different from the cost of sales. The two terms are often interchangeable in the accounting profession.

Sales are the total cost of developing an item or service that a company incurs to sell it to its customers. Like COGS, sales include all expenses directly related to the products and services. The cost of sales can provide information about the operating expenses associated with creating an item or service but it can also be used in other ways.

If sales expenses keep rising but revenue remains stable, it could indicate an increase in input cost. The cost of goods sold (COGS), is the cost for a company to produce a product using parts or raw materials. It may also include the cost of buying and selling things. COGS can be divided into two types: indirect expenses and direct costs. An analysis of a company's direct costs of producing items can help predict its future inventory. This is because the company can produce more products when raw materials are scarce.

References

  1. http://eccsf.ulbsibiu.ro/RePEc/blg/journl/829nassirzadeh&saei&salehi&bayegi.pdf
  2. https://www.jstor.org/stable/239100

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