Cost of Goods Sold (COGS) refers to the direct costs incurred by a company in producing the goods or services that it sells. It includes all expenses directly related to the production of the items sold during a specific period.
The components of COGS typically include:
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Direct Materials : The cost of raw materials or components used in the production process.
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Direct Labor : The wages and benefits paid to employees directly involved in the manufacturing or production process.
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Manufacturing Overhead : Indirect costs associated with production, such as utilities, factory rent, depreciation of machinery, and other overhead expenses directly related to the production process.
COGS is an essential metric in calculating a company's gross profit. It is deducted from the company's total revenue to determine gross profit, which reflects the profitability of a company's core business operations before considering other expenses such as selling, general, and administrative expenses.
