Explain the terms cost of goods sold and cost of sales?

COST OF GOOD SOLD (COGS).

An income statement figure which reflects the cost of obtaining raw materials and producing finished goods that are sold to consumers. Cost of Goods Sold = Beginning Merchandise Inventory + Net Purchases of Merchandise - Ending Merchandise Inventory.

For example:

Beginning Merchandise Inventory = $150,000

Net Purchases of Merchandise = $400,000

Ending Merchandise Inventory = $125,000

COGS =150,000 +400,000 -125,000 = $425,000.

In standard accounting practices, gross margin can be calculated by subtracting the cost of goods sold from total sales.

COST OF SALES

1. Manufacturing: The sum of direct material, direct labor, and factory overheads incurred in making a product.

2. Retail: The purchase price of merchandise.

Cost of goods sold is the collective cost of inentory items sold.

Cost of sales is the collective cost of the sales department.

Both terms are one and the same and are being used interchangeably. Cost of Good Sold are often used by trading & manufacturing entities whereas Cost of Sales can be used by trading, manufacturing or service entities.

They are comparable. The difference is that a business that sells tangible objects will tend to use the term “Cost of Goods Sold” because they are in fact selling goods; while a business that sells services would more likely use “Cost of Sales” as there is no tangible "goods" and hence no “inventory” either beginning or ending, but there are obviously costs associated with providing their service.