## 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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### What is the Cost of Sales Adjustment (COSA)?

The cosa is an adjustment to the cost of sales to reflect the current costs of inventory at the time of sale. This adjustment is necessary because historical costs do not always match current costs.

### Why must a COSA be made?

A cosa must be made to ensure that the cost of sales is calculated based on the current cost of inventory. This ensures that the match between current revenues and costs is accurate.

### What is the big idea behind COSA?

The big idea behind the cost of sales adjustment (cosa) is ensuring that all costs are calculated based on current costs. Only in this way can accurate revenue-cost matches be made to determine profitability.

### What are the components of COSA?

The components of cosa include the historical cost of closing stock, the historical cost of opening stock, and the average index number. Each of these components is necessary to accurately calculate the current cost of sales.

### What formula is used to calculate cosa?

The formula used to calculate cosa is: cosa = (historical cost of closing stock – historical cost of opening stock) average index number index number appropriate to closing stock index number appropriate to opening stock

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