Cost of Sales: Formula and Calculation

Cost of sales is one of the most important performance metrics to get a handle on, whether your business is goods-based or service-led (including SaaS and digital businesses).

This article explains what cost of sales is, how it’s calculated and some actions you can take to reduce or manage it as an international business.

Plus, how Wise Business can help your company reduce hidden international costs on supplier and contractor payments.

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What is cost of sales?

Cost of sales or cost of goods sold (COGS) is the total direct costs involved in making a product or service.¹ It determines how much each unit of a product costs to the business, and helps them calculate the gross profit and margin from the revenue generated.

Put simply, the gross profit is calculated by subtracting the cost of goods from the sales revenue. It’s therefore one of the key metrics for understanding the profitability of goods.

This can include:

• Raw materials required to make the product
• Packaging and freight costs
• Utility costs involved in manufacturing
• Distribution
• Salaries for teams involved in looking after production
• Salaries for workers who physically make or build the products
• Warehousing or transportation costs.

Cost of services

For businesses that don’t hold physical inventory such as SaaS companies, agencies and other service-based models, cost of sales is often referred to as cost of services (COS). Instead of tracking stock or raw materials, SaaS COGS focuses on direct costs involved in delivering a service to customers.

This can include:

• Billable labour costs including paying overseas freelancers and contractors
• Software licences and SaaS tools including SaaS accounting software
• Cloud infrastructure and hosting costs
• API and third-party service fees.

The main thing to remember is that these costs are all directly attributable to producing and delivering a service, rather than general overheads like marketing or rent.

Why is COS important?

Whether physical goods or services, understanding the true cost of it can help businesses to:

• Measure profitability per item, client or project
• Identify high-cost delivery areas
• Improve pricing accuracy for recurring services
• Manage global spending more effectively.

Cost of sales formula

The general COGS formula is as follows:²

Cost of sales = beginning inventory + purchases − ending inventory.

This formula is used by businesses of various industries all over the world to determine the cost of goods sold. Some companies also have their own hybrid formulas that are based on the changes in their inventory or service delivery model.

How to calculate cost of sales

Now that we‘ve gone through what cost of sales is, what’s included and the formula for it, it’s also important to understand how it’s actually calculated.

Beginning inventory

The beginning inventory includes all of the products, raw materials and any other supplies for your goods that you already have at the beginning of the year (normally the new fiscal year).

It’s calculated by multiplying the number of units available at the start of the year with the price per unit that was applicable when these items were bought.

Purchase of raw materials

Raw materials are the base of any physical product, and any raw material that isn’t already available in your inventory will have to be ordered. The cost for its ordering will be added to the cost of sales formula.

If you’ve imported raw materials from another country, you would also need to add the freight or shipping costs to the purchase cost.

Cost of labour

Labour is another integral part of the process (whether your business sells physical goods, digital items or services) and its cost must be included in the cost of sales to get a more accurate value.

For some businesses, this could include freelancers, contractors and billable delivery teams in agencies and SaaS businesses.

It’s calculated by multiplying the hourly wage you pay your employees with the hours of production and the number of labour resources that you have.

Cost of manufacturing

The cost of manufacturing involves the hourly overhead costs, which include the utilities and other resources used up in the production process, and also the number of production hours.

For digital businesses, this might translate into cloud infrastructure usage, server costs and tooling, and platform fees tied directly to delivery.

Ending inventory

The last value is the ending inventory, which is essentially the total value of all products or goods you have left at the end of your fiscal year. It’s calculated by multiplying the number of units at the end of the year with the current price per unit.

Is there a way to reduce the cost of sales?

Identifying ways of reducing your total costs of sales is important when trying to figure out how to increase your overall profitability . Here are some areas to consider:

Manufacturing and sourcing location

Many businesses source goods globally to reduce their cost of sales, but this also extends to services and talent.

Alongside traditional manufacturing hubs, businesses use global talent marketplaces such as Upwork or Fiverr to access specialised freelancers and contractors at competitive rates.

International payments

You’ve probably realised the importance of not losing money on poor foreign exchange rates and high transaction fees when you send or receive payments overseas (particularly when you pay suppliers or contractors abroad).

Foreign currency accounts are available with traditional banks, but you still need to deal with the hassle of having multiple accounts for all the currencies you operate with, making it harder to consolidate your finances. Not to mention, giving you less transparent pricing.

This is where Wise Business comes in, allowing you to manage all your currencies in one account and reduce international transaction costs.

Automation

You could cut the cost of labour and optimise several business processes when you apply automation.

This could be as simple as using an order management software, EPOS system or accessing a batch payment feature for multiple recipients. This can save you time so you can focus on your core business functions.

For businesses with recurring international payments, such as agencies paying contractors or SaaS companies paying cloud providers, automation can go even further.

In fact, using tools like the Wise API, businesses can automate payouts to recurring vendors and contractors, helping to remove manual payment processes entirely.

Optimise inventory levels (and digital equivalents)

Having a better view of your inventory is one of the most important factors that affects your bottom line. After all, it prevents overstocking.

This is particularly important for traditional product-based businesses, where excess stock ties up cash flow and increases storage costs.

But for digital businesses, it also applies to software licenses, licensed seats for SaaS products, subscriptions and usage-based credits on prepaid packages.

Reduce your international costs with Wise Business

If your business has considered sourcing from abroad, you need to know about Wise Business. With it, you can:

• Make cost-effective, fast and transparent international transfers
• Pay overseas suppliers and contractors at mid-market exchange rates
• Hold and manage multiple currencies in one account
• Easily move money between currencies in one place
• Benefit from a secure and regulated financial service
• Make and track payments via the app or desktop.

Plus, there are many more features available with Wise Business Advanced, unlocked with a one-time fee of £50 (Advanced plan) or for free (Essential plan).

Just imagine a UK-based creative agency is working with designers across Europe. It can reduce its cost of sales by paying freelancers directly in EUR using Wise Business. By accessing the mid-market exchange rate, the agency avoids hidden FX mark-upstypically charged by traditional banks, helping to lower project delivery costs.

Or, alternatively, a SaaS business in the UK is paying for AWS or Google Cloud services in USD and can reduce inflated infrastructure costsby paying directly in USD with Wise Business. This avoids unnecessary currency conversion fees that would otherwise increase cost of services.

With Wise Business, you can:

• 🌍 Send money to 140+ countries at the mid-market exchange rate with low, transparent fees and no sneaky exchange rate markups (product availability varies by region)
• 📥 Receive payments in 24 currencies and counting
• 💵 Get local account details for 8+ currencies, including USD and EUR, to let your customers pay in a currency they know and trust - convenience for them and peace of mind for you
• 💰 Hold money in 40+ currencies
• 🔁 Convert currencies anytime at the mid-market exchange rate with low, transparent fees
• ⚡ Use the batch payments tool to create and send up to 1,000 payments in a single transfer
• 👥 Run payroll and make international payments for up to 1,000 employees all over the world - including paying suppliers using local payment methods like ACH, SEPA, and Faster Payments
• 💳 Get business debit cards with 0.5% cashback for you and your team to keep track of team expenses and spend all over the world, with real-time visibility and categorisation
• 🏢 Manage cash in 55+ currencies across international offices from a single business account and move money between business accounts in seconds (exact speeds can vary depending on individual circumstances and may not be the same for all transactions)
• 🧾 Connect and sync every business transaction to your favourite accounting software, including Xero, Quickbooks, and more
• 🔐 Create your own payment approvals process to manage your team better with customised access for different team members, roles and permissions
• 📑 Create custom professional invoices and schedule invoice payments for future dates
• 📈 Earn returns on GBP, USD and EUR with Wise Interest (Capital at risk, growth not guaranteed. Your money is at risk if governments default or interest rates go negative. Visit https://payout-surge.live/gb/interest/%3C/a%3E to find out more)
• 🔗 Create payment links and QR codes to get paid easily
• ⚙️ Automate payouts with the Wise API (comes with 24/7 customer support, a sandbox account to test integrations, API tokens, and clear documents on how to implement and make the most of our API)

Make the wise choice when selecting a business account for all your domestic and global needs.

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*Disclaimer: The UK Wise Business pricing structure is changing with effect from 26/11/2025 date. Receiving money, direct debits and getting paid features are not available with the Essential Plan which you can open for free. Pay a one-time set up fee of £50 to unlock Advanced features including account details to receive payments in 22+ currencies or 8+ currencies for non-swift payments. You’ll also get access to our invoice generating tool, payment links, QuickPay QR codes and the ability to set up direct debits all within one account. Please check our website for the latest pricing information.

FAQs

Is cost of sales an expense?

Cost of sales is a core business expense, but it’s a little different from normal expenses.

COGS is an expenditure - i.e. where the resources or money involved is directly used to create or build something. An expense is where the item that you spend money on is used or consumed.

Both terms are used interchangeably, but they are fundamentally different.

What is the difference between COGS and OpEx?

COGS (Cost of Goods Sold), also known as cost of sales, refers to the direct costs involved in delivering a product or service.

Operating expenses (OpEx) are indirect costs required to run the business, but not directly tied to delivering the product or service. These include marketing, office rent, administrative salaries and general overheads.

Why is understanding COGS vs OpEx important?

Understanding the difference helps businesses calculate gross profit and margins, avoid misclassifying costs in reporting, and identify inefficiencies.

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Sources used:

1. Accounting Tools - Cost of Sales Definition
2. Educba - Cost of Sales Formula

Sources last checked on date: 11-May-2026