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Cost of Goods Sold (COGS)
Definition
Cost of Goods Sold is the direct cost of producing goods or services, including materials, labor, and manufacturing overhead.
Explanation
COGS includes raw materials, direct labor, and manufacturing overhead directly tied to production. It excludes indirect expenses like marketing, rent, and administrative costs. COGS is subtracted from revenue to calculate gross profit.
Managing COGS effectively is crucial for profitability. Reducing COGS through better sourcing, automation, or efficiency improvements directly increases gross profit.
Example
A furniture maker selling a table for $1,000 with $400 in wood, $200 in labor, and $100 in hardware has a COGS of $700 and gross profit of $300.