The difference between cost of sales and production cost
Posted: Sat Feb 01, 2025 9:16 am
The cost of sales of an enterprise is a more general concept, an integral part of which is the production cost. In addition to direct costs for the production of goods or services, the company has commercial costs. In total, these expenses make up the actual cost of sales.
Sometimes the share of financial costs (product promotion, advertising, etc.) may exceed other items. At the same time, even if the enterprise's technological processes are relatively cheap, there is a possibility that the business will be unprofitable, for example, if the costs of selling a product are significantly higher than the costs of its production. That is why the cost of sales is one of the main key performance indicators. It is used to analyze the company's profitability.
When calculating, the cost of production is usually not subject to comparison with income. As a rule, the entire continuous production process is conventionally divided into separate stages, the costs of which are analyzed. This approach allows you to find reserves and increase the financial efficiency of manufacturing products. For example, improve logistics, cooperate with suppliers of material and technical assets offering lower costs with unchanged quality, etc.
The total cost of production is compared with sales revenue, which makes it possible to determine the profit and profitability of the company.
Increase Your Profits by 10X: 5 Key Metrics You Must Track
Alexander Kuleshov
Alexander Kuleshov
General Director of Sales Generator LLC
Read more posts on my personal blog:
After working with over 300 online projects , I can guarantee: monitor these metrics weekly and your company will not only survive, but also increase its profits by 10 times!
In the context of sanctions and azerbaijan email list crisis, knowing the ROI of your advertising decides whether your business will be successful. Tracking these 5 critical indicators is the key to your prosperity.
What you get for free:
5 Key Metrics to Increase Profits by 220%
The Secret ROI Formula: Instant Advertising Efficiency Calculator
Anti-crisis Solutions Matrix: Find the Perfect Strategy for Your Business in 15 Minutes
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Relationship between cost of sales and revenue
Revenue is understood as the total income of an enterprise from the sale of manufactured goods or services. The coefficient can be calculated using a simplified method. To do this, you need to find the product of the cost of a unit of product and the quantity of goods sold for a certain reporting period.
To determine a company's profit, the cost price is subtracted from the total sales revenue. If the company's income exceeds the total expenses, it can be said that the company is commercially successful. Otherwise, losses are recorded.
Read also!
"Sample proposal for cooperation: just follow the instructions!"
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Components of cost of sales
Cost of sales is a complex concept. To have a complete understanding of this metric, it is necessary to understand that its structure and value are influenced by many factors depending on the specifics of the company. Therefore, you should not expect ready-made options for determining this indicator. How to calculate the cost of sales? Here are the main typical expense items:
material and technical assets consumed directly in the production cycle;
depreciation of fixed assets;
wage fund with repayment of all obligations;
marketing and advertising;
logistics and warehousing;
rental of premises;
payment for licenses, patents;
overhead costs not directly related to production.
Overheads
Source: shutterstock.com
It is obvious that the value and structure of the indicator are constantly changing in dynamics, and in different reporting periods the total amount of the full cost of sales will differ for the following reasons: the presence of raw material stocks, an increase in the turnover rate, equipment wear and tear, etc.
Timely calculation of the relevant value of this metric significantly simplifies strategic planning and helps identify reserves for reducing costs.
Sometimes the share of financial costs (product promotion, advertising, etc.) may exceed other items. At the same time, even if the enterprise's technological processes are relatively cheap, there is a possibility that the business will be unprofitable, for example, if the costs of selling a product are significantly higher than the costs of its production. That is why the cost of sales is one of the main key performance indicators. It is used to analyze the company's profitability.
When calculating, the cost of production is usually not subject to comparison with income. As a rule, the entire continuous production process is conventionally divided into separate stages, the costs of which are analyzed. This approach allows you to find reserves and increase the financial efficiency of manufacturing products. For example, improve logistics, cooperate with suppliers of material and technical assets offering lower costs with unchanged quality, etc.
The total cost of production is compared with sales revenue, which makes it possible to determine the profit and profitability of the company.
Increase Your Profits by 10X: 5 Key Metrics You Must Track
Alexander Kuleshov
Alexander Kuleshov
General Director of Sales Generator LLC
Read more posts on my personal blog:
After working with over 300 online projects , I can guarantee: monitor these metrics weekly and your company will not only survive, but also increase its profits by 10 times!
In the context of sanctions and azerbaijan email list crisis, knowing the ROI of your advertising decides whether your business will be successful. Tracking these 5 critical indicators is the key to your prosperity.
What you get for free:
5 Key Metrics to Increase Profits by 220%
The Secret ROI Formula: Instant Advertising Efficiency Calculator
Anti-crisis Solutions Matrix: Find the Perfect Strategy for Your Business in 15 Minutes
We have prepared all the documents and templates with formulas for you. And yes, it is FREE:
Download documents for free
Already downloaded
153438
Relationship between cost of sales and revenue
Revenue is understood as the total income of an enterprise from the sale of manufactured goods or services. The coefficient can be calculated using a simplified method. To do this, you need to find the product of the cost of a unit of product and the quantity of goods sold for a certain reporting period.
To determine a company's profit, the cost price is subtracted from the total sales revenue. If the company's income exceeds the total expenses, it can be said that the company is commercially successful. Otherwise, losses are recorded.
Read also!
"Sample proposal for cooperation: just follow the instructions!"
Read more
Components of cost of sales
Cost of sales is a complex concept. To have a complete understanding of this metric, it is necessary to understand that its structure and value are influenced by many factors depending on the specifics of the company. Therefore, you should not expect ready-made options for determining this indicator. How to calculate the cost of sales? Here are the main typical expense items:
material and technical assets consumed directly in the production cycle;
depreciation of fixed assets;
wage fund with repayment of all obligations;
marketing and advertising;
logistics and warehousing;
rental of premises;
payment for licenses, patents;
overhead costs not directly related to production.
Overheads
Source: shutterstock.com
It is obvious that the value and structure of the indicator are constantly changing in dynamics, and in different reporting periods the total amount of the full cost of sales will differ for the following reasons: the presence of raw material stocks, an increase in the turnover rate, equipment wear and tear, etc.
Timely calculation of the relevant value of this metric significantly simplifies strategic planning and helps identify reserves for reducing costs.