By dividing the costs of selling to the total value of sales – and then multiplying the result by 100, you will get the ratio you were looking for. So, the formula should look like this: (Cost of selling / Total value of sales) x 100.
Expense to Sales Ratios 317 Corporate Finance
Cost of sales ratio formula
The formula for calculating the cost of sales ratio is:
(Sales cost) multiplied by (Sales value) by 100
Add your beginning inventory to the period’s purchases, then deduct that amount from your ending inventory to determine your cost of sales.
Multiplying the average selling price per good or service by the quantity of those goods or services sold will yield the total amount of sales.
Multiplying by 100 turns your figure into a percentage.
What is cost of sales ratio?
A financial ratio called the cost of sales compares a company’s revenue to the costs associated with its sales activity. The cost of sales ratio is typically expressed as a percentage. The cost of sales ratio may go by other names in business and finance, such as:
Other financial ratios and statistics can be calculated with the help of the cost of sales ratio. Finding the gross margin ratio, or how much money is left over after deducting sales from the cost of goods sold, is the first step. Additionally, it is used to determine gross markup, or how much more you charge for goods or services than it costs to buy or produce them.
How to calculate cost of sales ratio
Use the following steps to calculate the cost-of-sales ratio:
1. Create a budget
Business managers can create budgets that best reflect the company’s financial outlook by doing so annually, quarterly, or both. With the aid of budgets, decision-makers can have a clear understanding of where they want their profits or costs to be for the planning cycle, how they plan to get there, and what they intend to spend and earn during that time frame.
This ratio is frequently used to determine your actual cost of sales, but it can also be used to determine projections. To determine whether the actual cost of sales ratio corresponds to your projected financial results, use your budget. You can use the ratio for each line item in your budget to generate a detailed report.
Learn the ideal ratios for your business or industry before creating your budget and calculating both the actual and projected cost of sales. These ratios are based on the goods or services you purchase or dispense, and are typically influenced by the local economy and your business model. Knowing your ideal ratios can help you determine whether your budget has accurate projections and when or where your actual results have outliers.
2. Gather the required information
Obtain the necessary data, such as your starting and ending inventory numbers, the total number of purchases, and the prices charged for all products, before you calculate the cost of sales ratio. Additionally, you will need your budget projections because you’ll be calculating these ratios in addition to your actual ratios. Try to use your most recent numbers and data because the more accurate your starting figures are, the more accurate your ratios can be. Before you calculate, gather these documents and data so that you can expedite the following steps.
3. Calculate the cost of sales and total value of sales
Calculate the two elements of cost of sales ratio. Utilizing the profit and inventory statistics, calculate the cost of sales. then utilize your pricing and sales data to determine the total value of sales.
4. Apply the cost of sales ratio formula
By dividing the cost of sales by the total value of sales, one can calculate the cost of sales ratio. Then multiply the result by 100 to get the percentage. It is simpler to read and compare the data when percentages are used instead of whole numbers.
5. Interpret your results
Finding the cost of sales ratio involves doing calculations, but understanding how to interpret your findings is just as crucial. Lower ratios mean you have a higher profit. This means that the products your customers buy are making you more money than you are spending to run the business. In contrast, a higher ratio means a lower profit.
If your calculations result in higher ratios, it may be beneficial to calculate the cost of sale for each line item in your budget. Seeing how each item compares to your projection or ideal ratios enables you to determine where you are deviating from them. You can determine where and why you need to make particular changes to increase profit with a breakdown.
Cost of sales ratio examples
Here are a few examples of cost-of-sales ratio:
Example 1
The cost of sales for Five Star Fashion is $100,000 per quarter. Last quarter, they had $950,000 in total sales. By dividing the cost of sales by the total amount of sales, the company’s financial team can determine the cost of sales ratio.
100,000 / 950,000 = 0.105
After that, they can convert the amount to a percentage by multiplying it by 100.
0.105 x 100 = 10.5
The company has a cost-of-sales ratio of 10.5%.
Example 2
Inventory at Maxs Movie Theater was $10,000 at the start of the quarter. At the end of the quarter, they had $3,000 in inventory on hand after spending $9,000 on inventory items. The theater sold 5,000 units of popcorn at $4. 50 per unit during the quarter.
First, the finance team can calculate the cost of sales.
10,000 + 9,000 – 3,000 = 16,000
Next, they can calculate the total value of sales.
5,000 x 4.50 = 22,500
Next, they can calculate the cost of sales ratio.
16,000 / 22,500 = 0.71
Finally, they can multiply the amount by 100 to convert it to a percentage.
0.71 x 100 = 71
The theater has a cost-of-sales ratio of 71%.
FAQ
How do you calculate cost of sales ratio?
- (Sales cost) multiplied by (Sales value) by 100
- 100,000 / 950,000 = 0.105.
- After that, they can convert the amount to a percentage by multiplying it by 100.
- 0.105 x 100 = 10.5.
- The company has a cost-of-sales ratio of 10.5%.
What is a good cost of sales ratio?
Analysts prefer to see a lower ratio for the price-to-sales ratio. When the ratio is below 1, it means that for every $1 in revenue the company generates, investors are investing less than $1.
