Cost of Goods Sold (COGS)
Cost of Goods Sold (COGS), also referred to as cost of sales, is a financial term that represents the direct cost of producing the goods a company sells. It reflects the money spent on turning raw materials into finished products.
Here's a breakdown:
Direct Costs: COGS includes costs directly tied to making the product, like raw materials, labor, and factory overhead.
Not Included: It excludes indirect expenses like marketing, rent, or administrative costs.
Imagine a bakery: flour, sugar, and eggs for making cookies would be COGS. Rent for the store wouldn't.
COGS is a crucial metric for a company's profitability. Subtracting COGS from sales revenue reveals the gross profit, essentially how much money the company makes after accounting for the direct cost of producing what it sells. By effectively managing COGS, a company can improve its profit margin.
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