Cost of Goods Sold (COGS) refers to the direct costs a business incurs to produce or acquire the products it sells during a specific period.
This includes expenses such as raw materials, wages for staff directly involved in production, and other costs tied to manufacturing or purchasing goods. COGS does not include indirect costs like distribution, marketing, or administration. It is a vital accounting measure, as it is subtracted from revenue to determine gross profit. Understanding COGS helps businesses set pricing, manage profitability, and make informed financial decisions.
Accurate calculation of COGS is also essential for tax reporting and financial analysis.