Cost of Goods Sold (COGS)
A financial metric that represents the direct costs linked to the production of the goods sold by a company.
This figure includes the cost of the materials and labor used to create the product but excludes indirect expenses such as sales and marketing. COGS is critical in calculating a company's gross profit; it is subtracted from revenue to determine the gross profit margin. For a manufacturing company, COGS includes costs associated with the production process, such as raw materials, direct labor, and manufacturing overhead tied to production. In a retail or wholesale business, COGS is the purchase price of the inventory sold during the period, including any additional costs necessary to get the inventory ready for sale.
The proper management and analysis of COGS is vital for businesses to price their products effectively, manage expenses, and maximize profitability. This metric is reflected in the income statement and provides key information into a company's production process efficiency and overall financial health.
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