The CCA technique, cost of sales are to be calculated on the basis of 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. Sale is current revenue and out of the costs, all operating expenses are current costs. The case of inventories, certain adjustments will have to be made, known as the cost of sales adjustment.
Cost of Sales Adjustment (COSA) Formula
Cost of sales adjustment can be calculated with the help of 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
This has been explained in the following example.
Example
Calculate the Cost of sales adjustment (COSA) from the following:
Historical Cost
Index Number
$
$
Opening Stock
52,000
100
Purchases
2,20,000
110
(Average)
Total goods
2,72,000
Less: Closing Stock
72,000
120
Cost of sales
2,00,000
Solution
COSA = (72,000 – 52,000) – 110 (72,000 / 120 – 52,000 / 120)
= 20,000 – 110 (600 – 520)
= 20,000 – 8,800
=$11,200
Cost of sales adjustment can also be calculated as under:
COSA = Current cost of sales – Historical cost of sales
= 2,11,200 – 2,00,000
= $11,200
