Cost of Sales (CoS): What is it and How to Lower it?

The cost of sales (CoS) is one of the most important financial metrics for any business. It represents the total expenses involved in producing goods or delivering services.

Understanding your CoS is critical because it directly impacts gross profit, pricing strategy, and overall financial health. Accurately tracking this figure also helps uncover inefficiencies and monitor cash flow. 

In this guide, we’ll explain how to calculate cost of sales, and provide case studies relevant to the Malaysian business landscape. We’ll also provide tips for tracking, calculating, and reporting CoS by using tools like QuickBooks—so you can have greater visibility and control over your costs. 

Key takeaways

• Cost of Sales (CoS) measures the direct costs of producing goods or delivering services.
• CoS differs from operating expenses and must be tracked separately for accurate reporting.
• In Malaysia, SST (Sales and Service Tax) directly impacts CoS for both goods and services.
• The standard CoS formula is: Opening Inventory + Purchases – Closing Inventory.
• Reducing CoS can significantly improve profit margins.
• Common mistakes include misclassifying expenses, ignoring inventory changes, and poor record-keeping.
• QuickBooks accounting software helps automate CoS tracking and deliver real-time insights for better decisions.

What is cost of sales?

The cost of sales meaning is fairly straightforward—it refers to the direct costs associated with producing goods or delivering services sold by a business. These include expenses such as raw materials, labour, and other production-related overheads that directly contribute to generating revenue.

Unlike total expenses, which capture every cost in a business, CoS focuses only on what’s required to create the product or service you sell. This makes it a crucial metric for measuring profitability, managing margins, and setting the right pricing strategy.

By understanding and monitoring your CoS, you can uncover inefficiencies and make smarter decisions about production and pricing.

Is CoS the same as COGS?

Cost of sales vs cost of goods sold is a common area of confusion. You’ll often see the terms cost of sales (CoS) and cost of goods sold (COGS) used interchangeably, and while they are closely related, there’s a subtle difference.

• COGS is most commonly used by businesses that sell physical products, such as retailers or restaurants. It covers direct costs like raw materials, inventory, and production expenses.
• CoS is a broader term that can apply to both product and service-based businesses. In addition to physical goods, it may also include costs tied to delivering services (such as labour, travel, or project-specific expenses).

In short, COGS is typically product-focused, while CoS can be applied across industries, including services like construction, security, or consulting.

How does CoS differentiate from operating expenses?

The cost of sales (CoS) captures the direct costs of producing a product or delivering a service—things like raw materials, manufacturing, and labour tied specifically to sales.

Operating expenses (OPEX), on the other hand, are the indirect costs of running a business. These expenses don’t directly contribute to creating a product or service but are still essential for day-to-day operations. Examples include rent, utilities, office supplies, marketing, and administrative salaries.

In short:

• CoS: Direct production costs
• OPEX: Indirect operating costs

The formula for calculating cost of sales

The standard cost of sales formula is:

CoS = Opening Inventory + Purchases during the period - Closing Inventory

Here’s what each component means:

• Opening inventory: The value of stock or materials your business has at the start of the accounting period.
• Purchases during the period: The cost of additional inventory or materials bought throughout the accounting period.
• Closing inventory: The value of the stock that remains unsold at the end of the accounting period.

This calculation ensures you only capture the inventory that was actually used to generate sales during the period. As a result, it provides a more accurate picture of the true costs behind each sale and helps you evaluate profitability with greater precision.

Understanding tax in Malaysia (SST) for CoS

In Malaysia, the Sales and Service Tax (SST) replaced the Goods and Services Tax (GST) in 2018, with expanded rules introduced in July 2025. SST directly impacts the cost of sales because it applies to the goods and services businesses produce, import, or sell.

The SST is divided into two parts:

1. Sales tax: Charged on imported and locally manufactured goods at the point of import or first sale.
2. Service tax: Charged on a wide range of taxable services, such as logistics, telecommunications, professional services, food and beverage, and digital platforms.

For goods, the Sales Tax is applied at different rates depending on product classification under Malaysia’s Harmonised System (HS) code:

What is the service tax in Malaysia? 

Service tax is the second component of Malaysia’s Sales and Service Tax (SST) system. It applies to specific taxable services provided within Malaysia and directly affects the cost structure for service-based businesses.

Key points to know:

• Flat rate: As of July 1, 2025, all taxable services are subject to a uniform 8% service tax.
• Scope of services: Applies broadly to industries such as:
• Food and beverage services (restaurants, cafes, catering)
• Logistics, warehousing, courier, and transport services
• Telecommunications and digital platforms (including streaming services)
• Professional services (legal, accounting, consulting)
• Financial services (brokerage, underwriting)
• Leasing and rental (excluding car rentals)
• Beauty, wellness, personal care, and entertainment venues (like karaoke)
• Registration requirement: Service providers with annual taxable turnover above RM500,000 must register, except for food and beverage operators who register at RM1.5 million. Certain providers (like credit card services or forwarding agents) must register regardless of turnover.
• Impact on CoS: Service providers must charge 8% on taxable invoices, which raises the cost of delivering services and affects overall pricing strategies.

The Malaysian Sales & Service Tax (SST) official site has further information regarding tax requirements.

What is the sales tax in Malaysia? 

Sales tax is one part of Malaysia’s Sales and Service Tax (SST) system. It applies to both imported and locally manufactured goods, and is charged at a single stage—either at import or the first sale by the manufacturer.

Key points to know:

• Single-stage tax: Charged only once, not at every step of the supply chain.
• When applied: Collected at customs clearance for imports, or at the first sale of locally manufactured goods.
• Standard rates:
• 5%: For non-essential and processed goods (e.g., building materials, mid-tier electronics, processed foods, tires).
• 10%: For luxury or discretionary goods (e.g., designer clothing, premium electronics, cosmetics, alcohol, vehicles).
• Specific rates: For selected items such as petroleum products.
• Exemptions: Essentials such as live animals, fresh food items, medicines, books, and certain agricultural inputs remain tax-free.
• Impact on CoS: Businesses need to account for Sales Tax in their pricing and purchasing strategies, as it directly increases the cost of producing or selling goods.

Examples of CoS

In this section, we’ll provide some cost of sales examples to show you how the formula works in practice:

Example 1: Cafe in Kuala Lumpur

This example focuses on a cafe in Kuala Lumpur that sells specialty coffee. The figures for a given month are:

• Opening inventory: RM8,000 worth of coffee beans, milk, and supplies in stock at the start of the month
• Purchases during the period: RM5,000 worth of additional beans and fresh ingredients purchased during the month
• Closing inventory: RM3,000 worth of stock left over at the end of the month

Applying the formula:

CoS = Opening Inventory + Purchases – Closing Inventory

CoS = RM8,000 + RM5,000 – RM3,000

CoS = RM10,000

This means it costs the cafe RM10,000 to produce its sales for the month. To stay profitable, the selling price of its drinks and food must cover this cost and leave enough margin for overheads (like rent, utilities, and staff wages) as well as profit.

Example 2: Electronics store in Penang

Let’s look at a small electronics shop in Penang that sells smartphones and accessories. The figures for a given quarter are:

• Opening inventory: RM120,000 worth of phones and accessories in stock at the start of the quarter
• Purchases during the period: RM80,000 worth of additional stock purchased from suppliers
• Closing inventory: RM50,000 worth of unsold items remaining at the end of the quarter

Applying the formula:

CoS = Opening Inventory + Purchases – Closing Inventory

CoS = RM120,000 + RM80,000 – RM50,000

CoS = RM150,000

This means the electronics shop incurred RM150,000 in costs directly tied to sales for that quarter. To stay profitable, the shop must price its products to cover this CoS, plus operating expenses such as rent, utilities, staff wages, and marketing.

How to lower your cost of sales 

Reducing your CoS can strengthen profit margins and make your business more competitive. Here are practical strategies to consider:

• Streamline processes: Review your production or service workflows to eliminate unnecessary steps and reduce waste. For example, adopting lean inventory management can help avoid overstocking while ensuring resources are used efficiently.
• Improve productivity: Invest in training, staff development, or better tools to help employees work more effectively. Higher productivity means more output with the same level of resources, which lowers per-unit costs.
• Utilise technology where needed: Automation tools like QuickBooks can simplify accounting, track expenses, and generate accurate reports. Beyond finance, technology such as POS systems, project management tools, or supply chain software can reduce errors and speed up operations.
• Focus on revenue over profit: Shifting attention to revenue growth can indirectly reduce CoS as economies of scale kick in. Higher sales volumes often mean lower costs per unit, which improves margins even if total expenses rise.

Additional strategies businesses in Malaysia often consider include:

• Negotiating with suppliers to secure better pricing or bulk discounts.
• Sourcing locally to reduce import costs and taxes.
• Monitoring tax obligations (like SST) to avoid penalties that can inflate overall costs.

Calculating cost of sales for different types of businesses

Different businesses can have different approaches to calculating their cost of sales, depending on their industry and how they operate. In this section, we’ll provide guidance on how to find cost of sales across different commercial settings:

Retail businesses

Retail businesses in Malaysia calculate CoS using the standard inventory formula, since they buy finished goods for resale rather than producing them:

CoS = Opening Inventory + Purchases – Closing Inventory

This formula ensures that only the goods actually sold during the accounting period are included in the cost calculation.

Example:

A clothing retailer in Kuala Lumpur begins the quarter with RM50,000 worth of stock. During the quarter, it purchases an additional RM30,000 in new inventory. At the end of the period, RM20,000 worth of stock remains unsold.

CoS = 50,000 + 30,000 – 20,000

CoS = RM60,000

This means the retailer spent RM60,000 on the goods it sold during the quarter. The selling prices of those clothes must cover this CoS, plus operating expenses like rent, utilities, and staff wages, to ensure profitability.

Manufacturing businesses

Manufacturing businesses in Malaysia calculate CoS differently from retailers because they must account for the cost of production. This includes raw materials, direct labour, and overhead expenses related to running the factory.

The cost of sales formula formula is:

CoS = Raw Materials + Direct Labour + Manufacturing Overhead – Closing Inventory

This approach captures all the direct costs that go into producing finished goods.

Example:

A furniture manufacturer in Penang records the following costs for a given month:

• Raw materials (timber, screws, varnish): RM40,000
• Direct labour (factory staff wages): RM25,000
• Manufacturing overhead (factory rent, electricity, machine maintenance): RM15,000
• Closing inventory (unsold furniture): RM20,000

CoS = 40,000 + 25,000 + 15,000 – 20,000

CoS = RM60,000

This means it cost the manufacturer RM60,000 to produce the goods sold that month. These costs must be reflected in the pricing strategy to ensure margins remain profitable after other operating expenses and taxes.

Service-based businesses

For Malaysian service providers, the CoS focuses on the direct costs of delivering the service, since there are no physical products or inventory involved. This typically includes labour costs and any materials or subcontractor expenses directly tied to serving clients.

The formula is:

CoS = Direct Labour + Materials/Subcontractor Costs

Example 1: Consulting firm

A consulting company in Kuala Lumpur pays RM30,000 in staff wages for the month and spends RM5,000 on specialised software licenses required to deliver projects.

CoS = 30,000 + 5,000

CoS = RM35,000

Example 2: Construction contractor

A small contractor in Johor hires subcontractors for RM50,000 and purchases RM20,000 worth of materials for a building project.

CoS = 50,000 + 20,000

CoS = RM70,000

In both cases, the CoS reflects only the direct costs required to deliver the service. Overheads like office rent, utilities, and marketing are excluded, as they are considered operating expenses.

Common mistakes in calculating cost of sales

When calculating CoS, even small mistakes can distort results and affect profitability analysis. Here are some common errors Malaysian businesses make and how to avoid them:

• Including operating expenses: Rent, utilities, and marketing are operating costs, not CoS. Keep them separate to avoid inflating your cost figures.
• Forgetting to account for both opening and closing inventory: Skipping either value leads to inaccurate calculations. Always track what stock you started with and what’s left over.
• Overlooking damaged or obsolete stock: Unsellable items should be excluded from closing inventory, or they’ll make your CoS look lower than it really is.
• Misclassifying wages: Only wages directly tied to production or service delivery (e.g., factory staff, consultants, subcontractors) should be included in CoS. Administrative or management salaries belong in operating expenses.
• Not tracking purchases accurately: Failing to record new inventory or material purchases promptly can throw off CoS calculations. Using accounting software like QuickBooks helps to avoid this.
• Mixing up CoS with COGS terminology: Some businesses use the terms interchangeably, but service providers should calculate CoS differently from product sellers.

Cost of sales and profit margins

The cost of sales plays a central role in determining profitability. By keeping CoS under control, Malaysian businesses can set more competitive prices, manage margins more effectively, and strengthen long-term financial health.

Tracking CoS allows businesses to:

• Adjust pricing: Ensure selling prices cover direct costs while leaving room for profit.
• Refine sales strategies: Focus on products or services with stronger margins.
• Control costs: Identify areas where expenses can be reduced without affecting quality.

Example: Small reduction, big impact

A bakery in Kuala Lumpur records monthly revenue of RM50,000 with a CoS of RM30,000.

Gross profit = RM50,000 – RM30,000 = RM20,000

If the bakery reduces its CoS by just RM2,000—for example, by negotiating better prices with flour suppliers—the numbers shift:

New CoS = RM28,000

New gross profit = RM50,000 – RM28,000 = RM22,000

That’s a 10% increase in profit margin from a small change in costs. Over time, consistent savings like this can make a major difference to overall profitability.

How accounting software helps with cost of sales

Calculating CoS can be complex, with multiple moving parts that need to be tracked carefully. Accounting software simplifies this process by automating calculations and giving businesses clearer insights into their financial health.

Here are some of the ways a software solution like QuickBooks can help:

• Ensure accurate CoS reporting: Automatically track inventory levels and direct expenses in real time, so your CoS figures are always up to date and precise.
• Reduce the risk of human error: Eliminate manual data entry and complex spreadsheet calculations, which lowers the chance of mistakes.
• Insights into CoS trends: Generate reports that highlight cost fluctuations, seasonal changes, or areas where expenses are increasing. This helps you spot inefficiencies early.
• Better decision making: Use accurate CoS data to guide pricing strategies, inventory management, and cost-control measures that directly impact profitability.

By using accounting software, businesses gain:

• Efficiency: Automated tracking and reporting save hours of manual work.
• Time savings: Teams can spend less time crunching numbers and more time focusing on strategy.
• Improved financial accuracy: Reliable data ensures that decisions are based on facts, not guesswork.

Track your cost of sales with QuickBooks

Not all accounting software is created equal. QuickBooks Online offers powerful features that go beyond basic bookkeeping, helping Malaysian businesses automate and simplify their CoS tracking.

With QuickBooks Online, you can manage inventory seamlessly, access real-time financial reporting, use intuitive dashboards, and much more. 

Get started with QuickBooks today and take control of your cost of sales.