The cost of goods sold (COGS) is the cost incurred by a business in producing or acquiring the goods that it sells. This includes the cost of raw materials, direct labor, and manufacturing overhead associated with the production of goods.
COGS is an important financial metric that reflects the direct costs of producing and selling a product. It is typically subtracted from the revenue generated by sales to determine gross profit.
To calculate COGS, a business must add up the cost of all materials and labor directly involved in producing the goods sold. This may include the cost of purchasing or producing raw materials, the cost of labor directly involved in production, and other expenses such as freight and shipping costs. Any expenses not directly associated with producing goods, such as administrative or marketing expenses, are not included in COGS.
COGS is an important metric for businesses to track as it provides insight into the efficiency of their production processes and the profitability of their products. By monitoring changes in COGS over time, businesses can identify cost-saving opportunities, optimize their pricing strategies, and make informed decisions about their product offerings.