While reviewing a firm’s net profit, it is critical to comprehend both the cost of goods sold (COGS) and the sales. Both phrases relate to a company’s finances and assist you in making future strategic investment decisions. Although these names are frequently employed interchangeably, there are several key distinctions between them.
Sales vs Cost of Goods Sold
The main difference between the cost of goods sold and sales is that the former relates to the corporation’s cost of producing items from parts or raw materials. Meanwhile, the latter is the overall cost of a business producing a thing or service for sale.
Sales examine the direct and indirect expenses involved in selling products and services. It indicates the number of items sold. Sales appear just before the EBIT margin in an income statement. The number of sales will always be more than the cost of goods sold as it also incurs additional costs. It cannot be excluded from tax.
The cost of goods sold examines the direct costs associated with a company’s manufactured items and is always lower than the number of sales. In an income statement, it appears after revenue. It shows the total number of manufactured goods. The cost of goods sold can be excluded from tax.
Comparison Table Between Sales and Cost of Goods Sold
| Parameters of Comparison | Sales of Goods Sold | Cost of Goods Sold |
| Analysis | It examines the direct and indirect expenses involved with a company’s selling of products and services. | It examines the direct costs associated with a company’s manufacturing of items. |
| Location in Income Statement | Appears just before the EBIT margin | Appears after revenue |
| Quantification | Always More | Always lower than the sales |
| Calculation | It indicates the number of items sold. | It shows the number of goods manufactured by a firm. |
| Tax deduction | Cannot be excluded from tax | Can be excluded from tax |
What is Sales of Goods Sold?
The total of all expenditures incurred to generate a product or service that has been sold to customers is referred to as sales. It assesses a company’s capacity to conceptualize, source, and build a product at a fair cost. The terms “cost of sales,” “cost of goods sold,” are identical. However, specific firms may choose one word over the others depending on their industry. When a company sells both products and services, its financial statements may include both expenses of sales and costs of items sold.
Because many of the same elements are present in both, the cost of sales is strongly tied to the cost of the product. However, the cost of sales shows on an income statement, but product cost appears as inventory on a balance sheet.
The cost of sales includes all costs directly related to the production or sale of goods. Direct labour and direct supplies are always included in the cost of sales. In certain circumstances, the cost of sales may include the cost of commissions received by specific workers if such employees are directly responsible for selling the product to clients.
What is Cost of Goods Sold?
The cost of goods sold is the entire cost of manufacturing all of an organization’s commodities sold. It can contain expenditures such as staff and prime resources, but it excludes expenses that occur after the product is developed, such as costs associated with the distribution or the direct sale of the specific product. When a corporation sells services rather than items, the cost of goods sold includes labor costs as well as unpaid taxes and benefits for all employees.
The cost of products sold is considered an expense and is recorded on the income statement of a business. Subtracting the cost of products sold from the total net sales of the firm yields the net profit. Knowing the cost of products sold is usually a top priority for any firm because it is the primary tool used in calculating the proper pricing for a sold item.
With the goal of making an after-sale profit for the organization, the pricing must include the cost of items sold, as well as additional indirect charges such as distribution costs, taxes, and other fees. If the price is higher than the sum of all these costs and expenses, the organization will earn from selling that specific product or service.
Main Differences Between Sales and Cost of Goods Sold
- Sales examine the direct and indirect expenses involved with a company’s selling of products and services. On the other hand, the cost of goods sold examines the direct costs associated with a company’s manufacturing of items.
- Sales appear just before the EBIT margin, and the cost of goods sold appears right after the revenue.
- Sales always tend to be more whereas costs of goods sold tend to be lesser.
- Sales indicate the number of items sold, whereas the cost of goods sold shows the number of goods that have been manufactured by a firm.
- Sales cannot be excluded from taxes, whereas the cost of goods sold can be excluded from taxes.
Conclusion
Companies frequently record the cost of goods sold (COGS) or cost of sales (and occasionally both) on their balance sheets, causing misunderstandings regarding what the two acronyms signify. There is a fundamental distinction between the cost of goods sold and the cost of sales. In the accounting profession, the two names are frequently used interchangeably.
The entire accumulated cost incurred by a firm to develop an item or service for its consumers to purchase is referred to as sales. Sales, like COGS, comprise all direct expenses related to the goods and services. While the cost of sales might provide information on the operational expenses of creating an item or service, it can also be useful in another way.
For example, if sales expenses continue to climb but revenue stays stable, this might imply an increase in input costs. The cost of goods sold (COGS) is the cost of a company’s production of a product from parts or raw materials. It can also refer to the expense of purchasing and reselling things. COGS are classified into two types: direct costs and indirect expenses. Analyzing a firm’s direct cost of produced items might help you predict its future inventory since the company can produce more goods when raw materials are scarce.
References
- http://eccsf.ulbsibiu.ro/RePEc/blg/journl/829nassirzadeh&saei&salehi&bayegi.pdf
- https://www.jstor.org/stable/239100