check Mark for close action
Try AccountingSuite™
for free
No credit card needed
Return to Glossary

Cost of Goods Sold (COGS)

Cost of Goods Sold (COGS): The direct costs associated with producing or delivering a product or service.

Cost of Goods Sold (COGS) refers to the direct costs associated with producing or delivering a product or service. COGS is an important expense for businesses that manufacture or sell products, as it reflects the cost of materials, labor, and overhead necessary to produce and deliver those products.

COGS is typically calculated by adding the cost of all raw materials, direct labor costs, and any overhead costs associated with production. These costs are subtracted from the total revenue generated by the sale of the product or service to determine the gross profit margin.

Examples of direct costs that are included in COGS may include:

  • The cost of raw materials used to produce a product
  • Direct labor costs, such as wages paid to production workers
  • Overhead costs associated with production, such as rent or utility bills for a manufacturing facility
  • Shipping or delivery costs associated with delivering a product to customers

COGS is an important expense for businesses because it directly affects the gross profit margin. A high COGS can indicate that a company is not effectively managing its production costs or that it may be paying too much for raw materials or labor. In contrast, a low COGS can indicate that a company is effectively managing its production costs and may have a competitive advantage over other companies in its industry.

Overall, understanding and effectively managing COGS is essential for businesses that produce or sell products. By closely monitoring COGS and taking steps to manage production costs, businesses can improve profitability and compete more effectively in their industry.