Separating these two cost categories enables you to monitor the performance of your business more effectively. This is because the first category is variable, the second is fixed.
The Cost of Sales is a variable expense because it will vary according to sales. If you sell more chairs, you'll need to buy in more raw materials. Separating out these costs allows you to keep an eye on the ratio between Sales and Cost of Sales. The lower you can keep your Cost of Sales in relation to Sales, the more profitable your business is likely to be. For instance, if the price of timber rises markedly because of shortages in the market, you'll notice your Cost of Sales increasing in relation to sales. This should prompt you to take some remedial action such as raising your selling price to compensate for the increased cost of your raw material.
The second category of expenses is referred to as Fixed expenses because the expenses represent the relatively fixed costs of running your office and business premises - your overheads. Whether you manufacture one chair or 1,000 chairs, you still have the costs of keeping your business open. You have to pay rent, electricity, telephone and other office overhead costs. Nevertheless you want to keep an eye on your fixed expenses (or office overheads) as a percentage of total sales. For example, if it costs you $20,000 to run your office, and your sales are $200,000, your fixed expenses represent 10% of sales. If you can increase your sales next year to $300,000 but still keep your office expenses at $20,000, your fixed expenses will now be only 6.67% of sales - a more efficient achievement that will be reflected in your bottom line (your Net Profit figure).
Separating out the fixed expenses also allows you quickly to see if there have been any unusual increases. For example, postage costs may have jumped considerably. The comparative figures (this year's postage expenses versus last year's) give you an opportunity to investigate and remedy any costs getting out of hand.