What does the term "cost of goods sold" (COGS) refer to?

The term "cost of goods sold" (COGS) specifically refers to the direct costs associated with the production of goods that a company sells. This includes expenses such as materials, labor, and manufacturing overhead that can be directly attributed to the creation of products. Understanding COGS is vital for determining gross profit, as it reflects the expenses directly tied to the production process, allowing businesses to assess profitability on their sold items effectively.

In a financial context, knowing the COGS helps in budgeting and forecasting, as well as in pricing strategies and inventory management. By accurately calculating COGS, businesses can better understand their financial performance and make informed decisions related to operational efficiency and cost control. This concept is distinct from indirect costs, variable costs related to wages, or costs from investment activities, all of which encompass different facets of business finance.