Cost of Goods Sold (COGS)

Cost of Goods Sold (COGS) is the direct costs associated with producing a good or providing a service.

Cost of Goods Sold (COGS) is a financial metric used to track the costs incurred to produce the goods or services that have been sold. It includes raw materials, labor and any overhead expenses associated with the production of the goods. COGS does not include indirect expenses such as distribution costs and marketing expenses.

In other words, COGS represents the actual costs of the items that have been sold by a company. COGS is then subtracted from the company's total sales revenue to calculate its gross profit.

For example, a manufacturer may use COGS to keep track of the direct costs associated with producing the products it sells. It would include the cost of materials, labor costs, and overhead costs associated with producing the product.

Let's assume that a clothing company purchases fabric and supplies for $1,000 to make a certain number of jackets. Additionally, they pay $2,000 in labour costs to sew the jackets. In this case, the company’s COGS would be $3,000.

If the company were to sell these jackets for $10,000, its gross profit would be $7,000 ($10,000 in sales - $3,000 in COGS). The company can then use this gross profit to cover its indirect expenses such as marketing, distribution and other general expenses.

Knowing the COGS also helps the company understand the cost of goods they need to produce in order to break-even or to make a certain profit. For example, if the company needs to make a profit of $5,000, they need to sell the jackets for at least $8,000 ($3,000 in COGS + $5,000 in profit).

Understanding COGS is a key part of accounting for a business, and is critical for helping businesses understand their costs and figure out strategies for pricing their products.

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