What is Cost of Goods Sold?
Cost of Goods Sold (COGS) is a fundamental accounting metric that represents the direct costs associated with the production or acquisition of goods that a company sells during a specific accounting period. It encompasses various expenses directly tied to the manufacturing or purchase of products, such as raw materials, labor, and manufacturing overhead costs. COGS is a pivotal component of a company’s income statement, reflecting the costs incurred in creating the goods sold and serving as a crucial indicator of a company’s operational efficiency and profitability. Essentially, COGS is subtracted from the total revenue (Sales) to calculate the gross profit, providing insight into the profitability of a company’s core business activities.
Geeky takeaway:
- Cost of Goods Sold (COGS) refers to a direct cost incurred to produce goods and services.
- Cost of Goods Sold (COGS) includes the cost of raw materials, labor charges, and any factory overhead like factory rent.
- Cost of Goods Sold (COGS) helps to calculate the gross profit of the business when subtracted from the total sale revenue of the business.
- Higher Cost of Goods Sold indicates low profit margin and vice versa.
Table of Content
- Why is Cost of Goods Sold Important?
- Purpose of Cost of Goods Sold
- Formula to Calculate Cost of Goods Sold
- Benefits of COGS
- Limitations of COGS
- Accounting Methods for COGS
- Impact of Inventory Method on COGS
- Difference between Cost of Goods Sold and Cost of Sales
- Cost of Revenue vs. COGS
- Operating Expenses vs. COGS
- Frequently Asked Questions (FAQs)
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