What is cost of sales?
Cost of sales is the total of all direct costs incurred by a business in producing or delivering the goods and services it sells during a given accounting period. It is reported as a line item on the profit and loss (P&L) statement and is subtracted from revenue to calculate gross profit.
Cost of sales is closely related to — and often used interchangeably with — cost of goods sold (COGS). The key distinction is that “cost of goods sold” typically applies to businesses that manufacture or sell physical products, while “cost of sales” is a broader term that also encompasses businesses selling services. Both are required to be reported in financial statements under Australian accounting standards.
What does cost of sales include?
Cost of sales captures the direct costs tied to production or service delivery:
- For product-based businesses: raw materials, direct labour, freight-in costs, and manufacturing overheads
- For service-based businesses: wages for staff directly delivering the service, and other costs directly tied to fulfilling client work
Cost of sales does not include indirect costs such as marketing expenses, administrative overheads, or management salaries — these are recorded separately as operating expenses.
How to calculate cost of sales
The standard formula is:
Beginning inventory + Purchases during the period – Ending inventory = Cost of Sales
Why cost of sales matters
A lower cost of sales relative to revenue results in a higher gross profit margin, giving the business more resources to cover operating expenses and invest in growth. Regularly reviewing your cost of sales helps identify inefficiencies, renegotiate supplier pricing, and ensure your products or services are priced appropriately for the Australian market.