Cost of Sales

Chapter 11: Forecast Your Sales - Page 11.3

Cost of Sales

Cost of sales, sometimes called Cost of Goods Sold (COGS) or direct costs, is traditionally the costs of materials and production of the goods a business sells. Cost of Sales or COGS belongs in accounting in the month in which the goods or services are actually sold, regardless of when they were purchased.

For a manufacturing company this is materials, labor, and factory overhead. For a retail shop it would be what it pays to buy the goods that it sells to its customers. For service businesses, that don't sell goods, the same concept is normally called "cost of sales," which shouldn't be confused with "sales and marketing expenses." The cost of sales in this case is directly analogous to cost of goods sold. For a consulting company, for example, the cost of sales would be the remuneration paid to the consultants plus costs of research, photocopying, and production of reports and presentations.

The illustration below shows how a second part of the same forecast makes assumptions for unit costs and uses them, along with unit sales assumptions above, to calculate direct cost of sales.

Units-Based Costs of Sales

The sales forecast multiplies unit forecasts by unit cost forecasts to calculate projected cost of sales.

This example shows two months of a forecast that actually includes 12 months and then annual projections for a two-year period. The first year column totals the sales of the first 12 months.

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