How Are Selling Expenses Figured Out Monthly?

by Scott Shpak, studioD

Selling expenses, often called cost of goods sold, refer to costs and purchases needed to create products or deliver services for which consumers pay your small business money. The difference between sales revenue and sales expenses determine gross profit, from which overhead is deducted to calculate net profit. Most businesses figure out selling expenses monthly, but it can also be done weekly or quarterly.

Defining Cost of Goods Sold

Your selling expenses are all costs that vary with sales activity. For example, a company that manufactures bolts spends more on raw materials and labor when producing 10,000 units compared to producing 5,000. However, salespeople work 40 hour weeks, so their salaries are paid regardless of sales level for a period. A cleaning business uses detergents, sponges and cloths to provide services, so the products consumed in a month contribute to selling expenses. COGS may include raw materials, direct labor, packaging and shipping.

Calculating Direct Labor

For many businesses, direct labor is the largest component of producing goods and services. Direct labor refers only to those employees who work directly, and only counts the hours on which employees engage in activities related to goods and services sold. For example, a worker may spend four hours in the morning printing customer work in a photo shop, then work four hours answering customer calls. Only the worker's time printing is direct labor. Regular hours, shift premiums, overtime hours, payroll tax and other benefit costs are included in the direct labor expense.

Inventory and Material Costs

Most businesses use inventory as a basis for calculating material COGS. The basic formula is: beginning inventory + purchases - ending inventory = COGS. This equation suits some businesses, but others that store an inventory of finished goods prior to selling may use a variation called change in inventory accounting. The equation is essentially the same, but it looks at inventory increases and decreases. Its formula is: purchases + inventory decrease - inventory increase = COGS. The change in accounting method may be used in a company with an extensive product line or to total results from a number of locations or departments. Changing inventory costs and cost flow may also affect inventory COGS calculations.

Miscellaneous Direct Costs

Any expense that varies with sales volume could be considered part of the selling expense. Packaging materials are one example, and shipping may also be variable. There is some discretion, however, since one truck, partially filled, may cost the same when completely filled. Similarly, a company that uses delivery routes that make stops daily, regardless of sales volume, would count shipping as a fixed expense.

The Income Statement

Monthly selling expenses are usually communicated as part of an income statement, which can vary in complexity, but includes the basic sections of revenue and expenses. Single-step income statements include only revenue and expenses. Multiple-step income statements are more common, and include COGS as a separate line item. A common format for such an income statement is: * Sales * Selling expenses (COGS) * Gross Profit * Operating expenses (overhead) * Net Profit (loss) Other income, such as interest on investments or rental income, adds to the net profit to calculate net income.

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