What is the difference between “Selling costs” and “Cost of Sales”?

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“Cost of sales” if said in a phrase then it basically is, manufacturing cost of units sold in a particular period or simply cost.

On the other hand “selling costs” include such costs that are incurred to make things available for sale.

Important thing to understand here is that even after incurring cost of sales, you cannot sell the goods unless business incurs selling costs.

Here it will be good we define finished goods also. There are many ways to define finished goods according the production process and business practices in a particular situation. But going specific and ignoring exceptions then finished goods are such goods that are completely manufactured.

But being completely manufactured does not mean that goods are also in salable condition.

Net Realizable Value (NRV) means what business has realized on selling an inventory. It is calculated by deducting selling costs from sales value. The reason why only selling costs are deducted out of the sales revenue is that users of financial information might be interested in knowing that how much additional cost was incurred before the revenue (that business has generated) was actually made possible to be generated. As without selling costs, business might have not generated any revenue at all.

For example, to drive a car, you have to give ignition. Without ignition, you cannot drive a car. Same way, to generate revenue and to earn profits ultimately, you have to incur selling costs. Otherwise, you will not be able to get any profits out of the value you have added into the manufactured goods by incurring manufacturing costs.

While valuing the closing inventory for financial reporting purposes, we compare the cost (manufacturing cost) and NRV of the inventory and as per IAS 2, inventory is to be valued at “lower of cost and NRV”.

4 COMMENTS

  1. I have a question!? When cacnluatilg consolidated retained earnings in the consolidated statement of financial position, do I use the post acq reserves or the net assets of the sub at reporting date less at acq date then give the parent their share after adjustments

  2. i would like you to be sending me accounting stuffs to enable me gain some knowledge and also update myself in the field of accounting. for example, things like overhead allocations, substance over form, cost of sales v selling cost etc.

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