Cost of sales refers to the costs associated with producing the sales.

In a standard manufacturing or distribution company, this is about the same as the cost of the goods sold. In a services company, this is more likely to be personnel costs for people delivering the service, or subcontracting costs.

This term is commonly used interchangeably with “cost of goods sold,” particularly when it is for a manufacturing, retail, distribution, or other product-based company. In these cases it is traditionally the costs of materials and production of the goods a business sells.

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 compensation paid to the consultants plus costs of research, photocopying, and production of reports and presentations.

In standard accounting, costs of sales or costs of goods sold are subtracted from sales to calculate gross margin. These costs are distinguished from operating expenses, because gross profit is gross margin less operating expenses. Costs are not expenses.

For more on costs of goods sold, see our article on the LivePlan blog: What Are Direct Costs?

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At Bplans, it's our goal to make it easy for you to start and run your business. The Bplans glossary of common business terms will help you learn about key small business and entrepreneurship topics.