Cost of Goods Sold, or COGS, is the sum of all direct costs incurred in the production of goods or services. This includes the cost of raw materials and components, direct labor and overhead costs. COGS is listed as an expense on a company’s income statement, directly after the sales revenue.
An enterprise’s gross profit is calculated by subtracting the cost of goods sold from its sales revenue. Thus, COGS is key data that helps a business monitor its performance.
COGS is important for the following reasons: