What is a cost of sales?

As a business owner, whether you’re a sole trader or a director/partner in a limited company, there are going to be many business terms you’re going to quickly become accustomed to. The term we’re going to be looking at today is ‘direct cost of sales’. This is an important term to know as it specifically refers to how much your company needs to spend to provide a service to design and manufacture a product.

 

For example, if your business sells products what would constitute direct costs of sales would include the cost for all of the raw materials, machinery costs and of course the labour and shipping costs. Take for example one of your employees who is hired to work on the production of metal fabrication, you would need to calculate her wages (which would be flat-rate most of the time unless she is working overtime), and then on top of that you’re going to want to add the costs of running the machinery, any utilities and also the cost of the raw materials and there you have your direct costs.

 

You’ll also want to know the difference between both direct costs and indirect costs. It may seem quite simple to tell the difference between the two however there are a few grey areas that the two share so it’s important to ensure you’re clear. Indirect costs are costs that are involved in producing your products however a strict link can’t be made between the two. However, a direct cost would be directly linked to your business and the products/services that you offer.

 

It’s important that as a business owner you know what your direct costs of sales are as this will need to be reported as a figure on your income statement. However there are several different ways of calculating your direct cost of sales and it can get confusing, that’s why it’s advisable to employ the services of an accountant to keep on top of your direct costs of sales and other important figures so that you can focus on other areas of your business.

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