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Classification of expenses within cost of sales
The allocation of expenses to the cost of sales
involves judgement. The allocation to the cost of
goods sold should be consistent with the manner
in which costs are allocated to inventory . The cost of
goods sold should include all costs of goods purchased,
the cost of conversion and other costs incurred
in making goods available for sale.
The costs of materials, labour and production directly
associated with producing goods or providing services
are included in the cost of sales. The cost of sales
will include the costs of inefficient production
such as the costs of idle capacity, production variances
and price variances, and impairment charges in respect
of inventory and of PPE used in the production of
goods or delivery of services. The entity's gross
margin will therefore reflect the costs of production
that cannot be recovered from sales [IAS2R.38].
Other costs are included in the cost of sales to
the extent that they are involved in bringing goods
to their location and condition ready to be sold.
Non-production overheads such as development costs
may be attributable to the cost of goods sold .
The costs of services provided will consist primarily
of personnel directly engaged in providing the service,
including supervisory personnel and attributable
overheads.
Distribution costs that are excluded from the cost
of sales include selling and marketing expenses.
These costs should include advertising costs, payroll
costs for the sales and marketing function, and
the cost of transporting finished goods .
Administrative expenses should include bad debts,
the amortisation of goodwill (negative goodwill),
research and development costs and the cost of central
functions, such as legal and finance, which are
not directly involved in the production of goods
and the provision of services to customers. Administrative
expenses are excluded from the cost of sales.
The basis of classification of expenses should
be applied consistently each period.
Recognition
The costs of production incurred in a period will
either be included in the income statement to reflect
the cost of goods sold, or deferred as raw materials,
inventory work in progress or finished goods. Deferral
of costs to future periods should occur only when
such costs meet the definition of an asset. An example
of deferral is the costs incurred in producing goods
that have not been sold by period end. Such costs
should be deferred as inventories in accordance
with the guidance on inventories .
Costs, which qualify to be deferred when first
incurred, should be recognised in cost of sales
when the asset they are associated with is sold
or impaired.
Contract expense recognised in accordance with
the guidance on long-term contracts should also
be included in cost of sales .
Measurement
Expenses should be included in cost of sales at
cost unless the expense was permitted or required
to be included in the financial statements on another
basis. Cost is the fair value of the consideration
given for the materials or services used in the
production of goods or provision of services .
Disclosure
Cost of sales should be presented as a separate
line item on the face of the income statement when
the functional analysis of expenditures is chosen
for the format of the income statement . A natural analysis
of expenses should also be given in the notes to
the financial statements [IAS1R.93]. A separate
disclosure of changes in inventories is not required.
A mixture of functional and natural analyses cannot
be used in the income statement .
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