Cost of sales is the caption commonly used on a manufacturer's or retailer's income statement instead of the caption cost of goods sold or cost of products sold.
The cost of sales for a manufacturer is the cost of finished goods in its beginning inventory plus the cost of goods manufactured minus the cost of finished goods in ending inventory.
The cost of sales for a retailer is the cost of merchandise in its beginning inventory plus the net cost of merchandise purchased minus the cost of merchandise in its ending inventory.
The cost of sales does not include selling expenses or general and administrative expenses, which are commonly referred to as SG&A.
I believe that most states have sales tax exemptions for merchandise purchased for resale. Check with your state's sales tax department to see if you can obtain a resellers permit to avoid being charged the sales tax by your suppliers.
If you purchase an asset and the sales tax is required, the sales tax should be recorded as part of the cost of the goods or services received. For example, if you were required to pay sales tax on the new company car, the cost of the car will include the sales tax. If you purchased supplies and the cost of the supplies was subject to sales tax, the sales tax is part of the cost of the supplies. If you received services that were subject to the sales tax, the sales tax is a necessary part of the cost of the services.
Sales discounts are not reported as an expense. Rather, sales discounts are reported as a reduction of gross sales. In other words, Sales or Gross Sales minus Sales Discounts and Sales Returns and Sales Allowances = Net Sales.
A variable cost is a constant amount per unit produced or used. Therefore, the total amount of the variable cost will change proportionately with volume or activity. Generally, a product's direct materials are a variable cost.
To illustrate, let's assume that a bakery uses one pound of flour at a cost of $0.70 per pound for every loaf of bread it produces. If no bread is produced the total cost of flour is $0. If one loaf is produced the total cost of flour is $0.70. When 10 loaves are produced the total cost of flour is $7.00. At the volume of 30 loaves the cost of flour is $21 (30 loaves X 1 pound X $0.70 per pound).
An expense can also be a variable cost. For instance, if a company pays a 5% sales commission on every sale, the company's sales commission expense will be a variable cost. When the company has no sales the total sales commission expense is $0. When sales are $100,000 the sales commission expense will be $5,000. Sales of $200,000 will mean total sales commission expense of $10,000. Sales of $400,000 will result in total sales commission expense of $20,000.
Accountants define the cost of an asset as all of the costs that are necessary to obtain the asset and to get it ready for use.
If your state does not allow an exemption from sales tax for the asset you purchased, the sales tax should be recorded as part of the cost of the asset.
If a company sells $100,000 of product that is subject to a state sales tax of 7%, the company will collect $107,000. It will record sales of merchandise of $100,000 and will record a liability for sales tax of $7,000. In this situation the company is acting as a collection agent for the state by charging the $7,000 in sales tax. The company will have to remit the $7,000 to the state shortly after collecting the money. When the company remits the $7,000 to the state, the company will reduce its cash and its sales tax liability. In this situation the sales tax is not an expense and it is not part of the company's sales revenues.
If a company purchases a new delivery van for $30,000 plus $2,100 of sales tax, the company will record the truck as an asset at its total cost of $32,100. In this situation, the sales tax of $2,100 is considered to be a necessary cost of the truck and will be part of the depreciation expense recorded during the useful life of the truck.
In our state, sales tax is paid only by the end customer. In other words, a retailer does not pay sales tax on merchandise that is purchased for resale. To avoid the sales tax, the retailer furnishes the supplier with a reseller's certificate, which allows the supplier to not charge the sales tax.
If a sales tax is paid by the reseller and the sales tax could have been avoided, the sales tax would have to be expensed immediately. Costs that are not necessary cannot be recorded as assets.
If the sales tax could not have been avoided, then the sales tax would be part of the cost of the merchandise purchased. If the merchandise has not been sold, the entire cost will be reported as inventory, a current asset on the balance sheet. If the merchandise has been sold, then the entire cost will be reported on the income statement as the cost of goods sold.