Cost of Goods Sold (COGS) represents the direct costs attributable to the production of goods sold by a company. This calculation encompasses the expenses of materials and labor directly involved in creating the products offered to consumers. For instance, if a bakery sells bread, COGS would include the cost of flour, yeast, and the baker’s wages.
Understanding this metric is crucial for determining a company’s profitability, efficiency, and overall financial health. By subtracting it from revenue, analysts can derive gross profit, which offers insights into a companys ability to manage its production costs. Historically, accurate COGS tracking has been a cornerstone of sound financial management, enabling businesses to make informed decisions regarding pricing, inventory control, and operational improvements.
