Cost of Goods Sold (COGS) represents the direct costs attributable to the production of goods sold by a company. It includes the costs of the materials and labor directly used to create the good. A manufacturer calculating COGS would typically incorporate raw materials, direct labor, and factory overhead. For example, a bakery calculating COGS would include the cost of flour, sugar, and the wages of the bakers directly involved in producing the bread that was sold during the accounting period.
Understanding and accurately calculating COGS is critical for managerial decision-making. It allows businesses to determine profitability on individual products or services, enabling informed pricing strategies and identifying areas for cost reduction. Accurate COGS data is also crucial for preparing accurate income statements, which are essential for investors and creditors to assess a companys financial performance. Historically, efficient COGS management has been a key indicator of a company’s operational efficiency and competitive advantage.
