Cost of sales is the total direct cost of producing or buying the goods, or delivering the services, that a business sold during a period. It is another name for cost of goods sold (COGS), which explains in full how the figure is calculated from beginning inventory, purchases and ending inventory. Cost of sales is deducted from revenue to arrive at gross profit.
How the term is used
The two terms are generally interchangeable, but usage differs by industry and country. Manufacturers and retailers in the United States usually say cost of goods sold, because their main costs relate to physical inventory. Service businesses, software companies and many companies reporting under IFRS prefer cost of sales or cost of revenue, since they sell services as well as, or instead of, goods. A consulting firm's cost of sales, for example, is mainly the salaries of staff who work directly on client projects.
What is included depends on the business and its accounting policies. For a manufacturer it covers direct materials, direct labor and manufacturing overhead for the units sold. For a retailer it is mainly the purchase cost of goods sold plus inbound freight. Some companies include items such as store occupancy or warehouse costs in cost of sales, while others report them as operating expenses, so gross margins are not always directly comparable between companies.