How to calculate cost of sales

Cost of sales (calculation)

You can choose one of multiple cost-of-sales formulas depending on whether you’re a service business, a retailer, or a manufacturer.

Service cost of sales formula

Service businesses tend to count up all their input costs, including the employees that deliver services and the facilities where they’re based. Back-office employees are not included in the cost of sales.

Retailer cost of sales formula

Cost of sales formula used by retailers for inventory accounting. An ecommerce business may choose to add shipping and transaction fees, as they are a characteristic of every sale.

Manufacturer cost of sales formula

Manufacturers add up all the costs on their product’s journey to the customer. Be aware that some choose not to count warehousing or freight.

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This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.