Definition
In current cost accounting (CCA), the cost of sales is calculated based on the cost of replacing the goods at the time they are sold. The important principle is that current costs must be matched with current revenues.
Sales are current revenues and, out of the costs, all operating expenses are current costs. In the case of inventories, certain adjustments must be made, which is referred to as the cost of sales adjustment (COSA).
Cost of Sales Adjustment Formula
COSA can be calculated using the following formula:
where
- C = Historical cost of closing stock
- O = Historical cost of opening stock
- Ia = Average Index number
- Ic = Index number appropriate to closing stock
- Io = Index number appropriate to opening stock
Example
Calculate the cost of sales adjustment (COSA) using the following information:
| Historical Cost | Index Number | |
| $ | $ | |
| Opening Stock | 52,000 | 100 |
| Purchases | 220,000 | 110 |
| (Average) | ||
| Total Goods | 272,000 | |
| Less: Closing Stock | 72,000 | 120 |
| Cost of Sales | 200,000 |
Solution
To solve this, start with the COSA formula mentioned above and substitute in the correct values from the table above. In particular:
COSA = (72,000 – 52,000) – 110 (72,000 / 120 – 52,000 / 120)
= 20,000 – 110 (600 – 520)
= 20,000 – 8,800
=$11,200
Another approach is to calculate COSA as follows:
COSA = Current cost of sales – Historical cost of sales
= 2,11,200 – 2,00,000
= $11,200
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