COGS stands for Cost of Goods Sold. It refers to the direct costs incurred in producing or purchasing the goods that a company sells during a specific period. COGS includes expenses such as the cost of raw materials, labor directly involved in production, manufacturing overhead, and any other costs directly attributable to the production of goods.
Calculating COGS is important for businesses, especially those involved in manufacturing or selling physical products, as it helps determine the profitability of their core operations. By subtracting COGS from total revenue, businesses can calculate their gross profit, which represents the profit earned from selling goods before deducting operating expenses such as selling, general, and administrative expenses.
COGS is typically reported on a company’s income statement and is used to calculate important financial metrics such as gross profit margin, which measures the percentage of revenue that exceeds the cost of goods sold. It is important for businesses to accurately track and manage their COGS to control expenses, optimize pricing strategies, and make informed decisions about inventory management and production processes.