Cost of goods sold

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 revenue to determine gross profit on the income statement.
2. In job order costing, COGS includes direct materials, direct labor, and applied overhead costs associated with specific jobs.
3. COGS only accounts for inventory that has been sold during the period; unsold inventory remains in finished goods.
4. Accurate tracking of COGS is crucial for pricing strategies and profitability analysis.
5. Adjustments to COGS may be required if there are errors or changes in inventory valuation methods.

Review Questions

• What components are included in COGS under job order costing?
• How does COGS affect the calculation of gross profit?
• Why is accurate tracking of COGS important for a business?

Related terms

Direct Materials:

The raw materials that are traceable directly to the manufacturing of a specific product.

Direct Labor:

The labor costs directly associated with workers who produce specific products.

Applied Overhead:

Indirect manufacturing costs allocated to each job based on a predetermined overhead rate.