Cost of Goods Sold (COGS) refers to the direct costs of producing or acquiring products that a company sells during a specific period. These costs typically include raw materials, labor, and manufacturing expenses.

What is "Cost of Goods Sold (COGS)" meaning?

COGS is an important metric for businesses to calculate gross profit. It helps businesses understand the direct costs involved in creating a product or service, providing insight into profitability before operating expenses are considered.

Example

"A company reports $10,000 in sales and $6,000 in COGS, meaning their gross profit is $4,000 for the period."

How is "Cost of Goods Sold (COGS)" used in business?

In business, COGS is used to calculate gross profit, which can be a critical indicator of a company’s financial health. By minimizing COGS, companies can improve their bottom line.

Pro Tip

To calculate COGS, use the formula: Beginning Inventory + Purchases During the Period – Ending Inventory. Monitoring COGS is key to maintaining profit margins.