Cost of goods sold (COGS)

Definition

Cost of Goods Sold (COGS) represents the direct costs attributable to the production of goods sold by a company. This amount includes the cost of materials and labor directly used to create the product.

5 Must Know Facts For Your Next Test

1. COGS is subtracted from total revenue to determine gross profit.
2. It includes only direct costs, not indirect expenses like distribution or sales force costs.
3. COGS is reported on the income statement under operating expenses.
4. A lower COGS can indicate efficient production processes and better inventory management.
5. In merchandising businesses, COGS includes the purchase price of goods plus any additional costs necessary to get them ready for sale.

Related terms

Gross Profit:

The difference between total revenue and Cost of Goods Sold (COGS).

Inventory:

Goods available for sale and raw materials used to produce goods available for sale.

Revenue:

The total income generated by sales of goods or services before any expenses are subtracted.