Short definition: Cost of goods sold (COGS) refers to the direct costs incurred in producing or purchasing the goods sold by a company.
Explanation: It includes the cost of raw materials, direct labor costs, and manufacturing overhead. For merchandising businesses, COGS represents the purchase price of goods. COGS is a crucial component of the income statement and directly affects a company’s gross profit margin.
Example: For a manufacturing company, COGS would include the cost of raw materials, wages paid to factory workers, and the cost of running the factory. For a retailer, COGS would simply be the purchase price of the goods sold.
Additional information (optional): COGS is calculated differently for manufacturing, retail, and service businesses. It’s important to understand the specific calculation method for your industry to accurately assess a company’s profitability.